WHY DID INFLATION FALL, AND WILL THE DECLINE CONTINUE?

THE EASTER EFFECT
This year we will have the latest Easter since 1996. Bank holiday Easter Monday falls on 25 April, while last year it was on 5 April. Prices in the run up to Easter tend to increase. “As is well known retailers tend to push up prices in the two weeks ahead of Easter (and other holidays), in order to institute the ostensible sharp discounts over holiday weekends,” said Marc Ostwald of Monument Securities. Last year’s Easter was close enough to March to affect its inflation figures, while this year’s Easter will primarily influence the April numbers. “The later timing of Easter compared to last year played a key role in this drop [in inflation],” added Vicky Redwood of Capital Economics.

VALUE ADDED TAX
January’s 2.5 per cent rise in VAT increased prices by 0.76 per cent, the Office for National Statistics (ONS) said yesterday. While this was far more than last year’s “pass-through” of 0.4 per cent, a change in the way the ONS weighs some sectors in its statistics affected the change. From next January the VAT effect falls out of the year-on-year statistics. The pass through was higher than expected, offering some comfort to inflation doves, yet Henderson’s Simon Ward warns otherwise. “This blows apart the claim that inflation would be close to the target but for the VAT hike, based on the misleading ‘CPI at constant tax rates’ measure, which assumes that tax changes are passed on in full,” Ward said.

OTHER TAXES AND DUTIES
Some new duties introduced by chancellor George Osborne came into effect on 23 March. These were not counted by the March figures, however, as the Office for National Statistics bases much of its data on one “index day” during the month. Last month this was 15 March – before the extra duties came into effect. The duties will therefore be counted in next month’s inflation figures. However, last April there was also a 0.6 per cent monthly increase in prices, attributed to some extra duties in the final Labour budget – so the annual rate of inflation may not be boosted so much this month. Duties typically bolstered by chancellors are on alcohol and tobacco.