British headline inflation rises but there is more to the data than meets the eye

The Office of National Statistics has released the latest inflation data for the month of February in the U.K. the headline rate of CPI inflation has risen to 4.4 % and a number of papers are congratulating the Chancellor George Osborne for having opted for austerity in the light of the numbers.

But once one delves a little further into the data a different picture quickly emerges.

First, the headline numbers use an index that does not separate out the VAT tax and increases in it from the numbers . Once you do that and use a VAT tax adjusted index, the CPIY that strips out the government induced indirect  tax rises the inflation index comes in at 2.8 % instead of at 4.4 %.

Second a good part of the rise in inflation month to month , some 30 % of it occurred in the clothing, shoes  and furniture trade sector where the bias of the post Christmas January sales distort the data. Since prices are unusually low during January the rebound in February after the sales shows up in the February data as inflation.

In addition, the rise in energy costs also accounted for  26 % of the overall rise, here principally expressed in the food sector which is 11% of the index and in the transport sector roughly the same weight.Since energy costs are largely cartel influenced it makes no sense to crunch the economy in response  to their increase. So contrary to the headlines the current price situation should give no particular support to the Osborne take on the British budget.

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About haroldchorneyeconomist

I am Professor of political economy at Concordia university in Montréal, Québec, Canada. I received my B.A.Hons (econ.&poli sci) from the University of Manitoba. I also completed my M.A. degree in economics there. Went on to spend two years at the London School of Economics as a Ph.D. student in economics and then completed my Ph.D. in political economy at the University of Toronto. Was named a John W.Dafoe fellow, a CMHC fellow and a Canada Council fellow. I also was named a Woodrow Wilson fellow in 1968 after completing my first class honours undergraduate degree. Worked as an economist in the area of education, labour economics and as the senior economist with the Manitoba Housing and Renewal Corporation for the Government of Manitoba from 1972 to 1978. I also have worked as an economic consultant for MDT socio-economic consultants and have been consulted on urban planning, health policy, linguistic duality and public sector finance questions by the governments of Manitoba, Saskatchewan,the cities of Regina and Saskatoon, Ontario and the Federal government of Canada. I have also been consulted by senior leaders of the British Labour party, MPs from the Progressive Conservative party, the Liberal party and the New Democrats on economic policy questions. Members of the Government of France under the Presidency of Francois Mitterand discussed my work on public sector deficits. I have also run for elected office at the municipal level. I first began to write about quantitative easing as a useful policy option during the early 1980s.
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