By Jason Theodorou
Consumer price inflation slowed in July, but has remained far above the government's 2% target — forcing the Bank of England to publish a third open letter in 2010, to explain why inflation remains above its target.
The Office for National Statistics reported on Tuesday that the consumer price index rose by 3.1% in the year to July, down from 3.2% in June. This represents the lowest rate since February, but represents the eighth month that it has gone beyond the Bank's 2% target.
Bank of England Governor Mervyn King is expected to blame one-time factors, including a rise in sales tax for January. He has repeated the central bank's forecast that the inflation rate will fall below target within two years in his letter to Treasury chief George Osborne.
Andrew Goodwin, senior economic advisor to the Ernst & Young Item Club consultancy, said: 'The Governor will not be able to play down these figures.
Were it not for January's VAT rise, inflation would most likely be below target'.
Under the Bank's direction, Governor Mervyn King will be required to write an open letter to the government when inflation rises 1% above, or below, target. He must then write a new letter, if inflation remains over one percentage point away from target in the following three months.
King is expected to write further letters this year, warning last week that inflation would remain above target until the end of 2011. King has previously written letters which blamed one-off factors for inflation remaining above target, including a January 1 rise in value-added tax, and a jump in oil prices.
The ONS said that the biggest impact on CPI inflation in July came from transport costs, including the prices of second-hand cars and fuel. Falling prices for petrol, clothing, footwear and furniture have helped to ease consumer price inflation, despite a 0.7% rise in food prices between the months of June and July.