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News - 15 August 2007
Inflationary vegetable

Sofas send inflation tumbling, broccoli may force it back up!

Inflation fell last month to 1.9% (CPI) or 3.8% (RPI) depending on which measure you use. Bizarrely the price of broccoli may force it back up next month.

Furniture stores slashed the cost of big ticket purchases last month, setting off a chain reaction which saw the inflation rate fal below the psychologically important 2% mark.

Together with steeply declining food and petrol prices, the record 10% furniture discount helped send inflation to 1.9%.

In June, a record rise in furniture prices was a key factor in increasing inflation. The previous spike in the sector's prices, in March, was the main driver as the consumer price index (CPI) rose to a 10-year high of 3.1%, forcing the Bank's governor, Mervyn King, to write an explanatory letter to Gordon Brown, who was chancellor at the time (see earlier story in knowledgebase).

Furniture prices have always gone up in pre-sale periods such as Easter, summer and the new year, but this year the trend has become more marked as five increases in interest rates from the Bank over 12 months forced

The Office for National Statistics did warn that there could be an increase in food prices as a result of the floods later in the year, with cauliflower, cabbages and broccoli most likely to be affected. Furniture prices might also rise slightly in the coming months, it added.

But further downward pressure on inflation came from the latest round of cuts in electricity and gas prices, a key factor pulling inflation down from its March peak.

The other key method of measuring inflation, the retail price index (RPI) also fell sharply, to 3.8% from 4.4%. This is important because the RPI forms the basis of many wage settlements. Average earnings in the UK, including bonuses, increased by 3.3% over the last three-month period, the slowest rate in four years.  

Read related items on:
Bank of England
Brown, Gordon

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