Inflation falls – but are any prices actually coming down?

Inflation has fallen – meaning price rises have lost some of their bite – but while economists might smile, is anything actually getting cheaper?

In April prices in the UK were 3% higher than in the same month last year, the latest figures from the Office for National Statistics (ONS) show. That’s the smallest rise since December 2009.

“A drop in UK inflation to 3% is obviously good news for consumers, all the more so in light of the recent UK recession headlines,” said Richard Driver, analyst for foreign exchange firm Caxton FX.

However, others were less convinced of the "good news".

Jason Conibear, director of currency specialists Cambridge Mercantile Group, said while it would be a "great relief" to the Bank of England, it’s a "meagre ray of light in a darkening economic environment".

"Prices are once again moving in the right direction but we will need to see far lower [inflation] over a period of months before consumers come out of their shells," he added.

And some groups will barely notice at all.

"Pensioners are typically the hardest hit of all consumers by inflation. Compared with the majority of people, they spend a much higher proportion of their income on the goods and services that have the fastest rising prices, such as food and fuel," said Vince Smith-Hughes, retirement expert at Prudential.

The biggest price rises faced by Britons were housing costs – gas (15.4% up), electricity (8.1% up) and rent (3.4% up – and food. The largest price rise for food came from meat (up 5.1%) fruit (prices up 3.8%), and sugar, jam, syrups, chocolate and confectionery items (5.2% up).

"The impact of this is that the over-55s are almost £1,000 a year worse off than non-retired consumers. The effect of very low interest rates combined with relatively high inflation is bad news for many pensioners," Smith-Hughes said.

So what – if anything – is actually getting cheaper?

Figures from the ONS show that overall prices in April this year were quite a bit higher than in March. The only reason inflation fell was because prices rose even more at the same time last year and the Consumer Price Index is measured annually.
Between March and April  this year petrol prices rose by 3.2p a litre to reach a record £1.42 a litre. Diesel prices were up 2.1p a litre to reach £1.48 a litre (also a record). Air transport also saw price hikes, as fares rose 7.4% between March and April, the ONS found.

Restaurant prices rose 1%, month on month, alcohol and tobacco prices were up 5.1% thanks to the 2012 Budget, and there were also rises to rents and water bills.

Set against all of that, the only thing that became much cheaper was furniture – with average costs dropping 1.2% between March and April.

But inflation still fell, because this time last year we saw far bigger price hikes on the cost of transport, tobacco and alcohol.

Compared with last year, the only things that actually fell in price were "recreation and culture", according to the ONS.

Books dropped 5.9% in price compared with last year, while equipment for sport and outdoor recreation dropped 0.6% year on year. Audio-visual equipment – such as TVs, DVD players and the like – fell in price by an average of 9.9%.

Month-on-month price rises
Price rises between March and April 2012. Source: ONS

Year-on-year price rises

Price rises between April 2011 and April 2012. Source: ONS

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