Highlights
Consume prices rose 0.2 percent on the month at the start of the current quarter. The rise was at the upper end of expectations and with base effects quite strongly positive, enough to boost the annual inflation rate by 0.4 percentage points to 1.5 percent. This was the first increase in the annual rate since February.
The importance of the oil market was once again highlighted in the core CPI which delivered a 12-month rate of 1.8 percent, up just a tick from September's pace.
The other main inflation measures performed in similar fashion to the headline CPI although annual changes differ quite markedly. Hence, both the RPI and RPI less mortgage interest payments (RPIX) climbed 0.3 percent from September. However, 12-month RPI inflation jumped 0.6 percentage points to minus 0.8 percent while the comparable RPIX also increased by 0.6 percentage points but to a significantly firmer 1.9 percent.
Amongst the major spending categories, annual inflation rates rose 0.6 percentage points to 2.2 percent in food and drink and 0.3 percentage points to 3.3 percent in household equipment and furniture. Transport inflation spiked 2.3 percentage points higher to 3.5 percent, dominated by changes in oil prices and the efects of a shortage of second hand cars.
The only deceleration of note was in education where inflation dropped 3 percentage points to 5.2 percent.
While slightly firmer than expected, today's data do not alter a generally sluggish underlying inflation picture and certainly the absence of any real cost pressures from the key wages market point to more of the same to come.
Still, looking ahead, the CPI will accelerate at the start of 2010 as the December 2008 cut in VAT is reversed. If fully passed on, this could add about 1.3 percent to the annual rate, and so almost certainly lift the CPI above target. However, the new BOE Inflation Report indicated that the central bank expects this to be just a short-run phenomenon and so immediate policy implications should be slight.
Definition The consumer price index is defined as an average measure of change in the prices of goods and services bought for the purpose of consumption by the vast majority of households in the UK. It is calculated using HICP methodology developed by Eurostat, the European Union's statistical agency. The CPI is the Bank of England's inflation measure.
Why Investor's Care The consumer price index is the most widely followed indicator of inflation. An investor who understands how inflation influences the markets will benefit over those investors that do not understand the impact. In countries such as the UK, where monetary policy decisions rest on the central bank's inflation target, the rate of inflation directly affects all interest rates charged to business and the consumer.
Inflation is an increase in the overall prices of goods and services. The relationship between inflation and interest rates is the key to understanding how indicators such as the CPI influence the markets - and your investments.
Inflation (along with various risks) basically explains how interest rates are set on everything from your mortgage and auto loans to Treasury bills, notes and bonds. As the rate of inflation changes and as expectations on inflation change, the markets adjust interest rates. The effect ripples across stocks, bonds, commodities, and your portfolio, often in a dramatic fashion.
By tracking inflation, whether high or low, rising or falling, investors can anticipate how different types of investments will perform. Over the long run, the bond market will rally (fall) when increases in the CPI are small (large). The equity market rallies with the bond market because low inflation promises low interest rates and is good for profits.
For monetary policy, the Bank of England generally follows the annual change in the consumer price index which is calculated using the European Union's Eurostat methodology so that inflation can be compared across EU member states.