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.