Thursday, September 9, 2010

Inflation once again?

The CSO have just released the CPI for August and they figures show a positive overall rate of annual inflation for the first time since December 2008.  An annual deflation rate of –0.2% in July reverted  to an annual inflation rate of +0.1% in August.
However looking at our measure of core inflation, excluding energy and mortgage interest, we see little or no chance in the level of deflation in August.  The rate was –1.72% in July and this has only eased slightly to –1.66% in August.
Core Inflation August
The measure of core inflation included here accounts for 85% of the overall CPI index so is reflective of what it happening to prices in general.  The prices excluded are mortgage interest, which makes up 6.67% of the overall index, and is up 10.0% on the month and 24.4% in the year.  Energy prices make up 7.77% of the index and are up 7.9% on the year.
Mortgage interest is up because our ailing banks are jacking up variable rate mortgages in a bid to raise revenue and offset some of their loss-making tracker rate mortgages.  The huge variation in mortgage interest inflation can be seen here.   In August last rate the annual change was –48.4%.  This year there has been an annual increase of 24.4%.
Mortgage Inflation August
Energy prices are up largely because of increases in excise duty through the introduction of the carbon tax.  This was added to the price of petrol and diesel last December and to the prices of other fuels from the first of May this year.  These are not part of the general price trend in the overall economy.
Energy Inflation August
The increase in mortgage rates has contributed 1.21% to the overall CPI inflation rate.  The increase in energy prices (taxes) has contributed 0.66% to the overall CPI inflation rate.  Subtracting the sum of these from the overall rate of +0.21 gives the core inflation rate used here of –1.66%.
The headline figure of inflation may have turned positive and the 0.7% increase in prices in August may have been the largest monthly increase in prices going back 27 months to May 2008 but it is still too early that consumer prices in general are rising.  Of the 0.7% increase in prices recorded in August, the increases in mortgage interest contributed 0.56% of the increase.  Prices in all other categories were largely unchanged.  It is still a bit early to be singing inflation once again.

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