Inflation decreased very slightly last month but is still above the government’s target of 2%.
While July saw petrol prices fall it also saw the highest increase of food prices for two years, maintaining the cost of living well above the Bank of England’s target. The Consumer Prices Index fell from 3.2% to 3.1% meeting expectations but meant that Governor Mervyn King had to send an open letter to the Chancellor to explain the high inflation level. Mervyn King has sent seven such letters since April 2007.
The CPI rate has remained above 3% throughout 2010 due to the hike in the VAT rate in January as well as rising food costs. The Russian drought is likely to maintain pressure on food inflation over the coming months.
Ultimately the UK is continuing to recover from the recession but has not met the targets of the Bank of England. The revised targets see the economy expected to grow by 2.5% rather than 3.4% and VAT likely to remain above 2% until the end of next year.