Fraser Nelson Fraser Nelson

Inflation down, Osborne up

David Cameron is back on holidays again, this time to Cornwall. He missed a trick. His economic recovery is making the pound strong and, ergo, the continent cheap for British holidaymakers. This also makes imports cheaper which has, in turn, cut UK inflation to 1.6 per cent in July – down from 1.9 per cent in June. This will be deeply annoying for Ed Miliband, as it interferes with his ‘cost of living crisis’ narrative. This had more potency when inflation was high (see the graph above) but it becomes that much harder to push the line now. Especially when inflation is expected to trot along near the target of 2 per cent until the election.

Of course, the measure that most of us grew up with calling ‘inflation’ – the RPI index – is almost a full percentage point higher. But at 2.5 per cent even that is at the target set by the last government. Encouragingly, rail fares are linked to today’s RPI index so it has come down just in time.

Michael Saunders at Citi expects CPI to average 1.7 per cent this year, but RPI to be higher at 3.3 per cent – his take here (pdf). If the Labour Party was functioning properly, it would today argue that inflation, on its own, doesn’t decide much: happiness or misery depends on whether the average wage is rising faster or slower than that inflation. If you adjust the official earnings by CPI and RPI, you see that it will be 2020 before the average salary is back to its pre-crash levels (below).

Screen Shot 2014-08-19 at 12.06.10

And if HM Treasury was functioning properly, it would counter that this doesn’t tell the full story.

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