Deflation gets closer...

In the opening section of Article 16 I explain the various measures of inflation used in the UK. It might be useful to illustrate the main two definitions with reference to the latest inflation data which was published today. The headlines will be dominated by the Retail Price Index (RPI) which fell to 0% in February on an annual basis compared to 0.1% in January. This is a wide measure of inflation that includes housing costs. The sharp fall in mortgage rates in the last year has driven this measure of inflation to the lowest level in nearly 50 years. However, the annual rate did not turn negative as many commentators had predicted.

The Government's preferred measure is the Consumer Prices Index (CPI) and this actually rose unexpectedly from 3% to 3.2%. As a result the Bank of England's head Mervyn King will have to write again to the Chancellor (Alistair Darling) explaining why inflation is more than one percentage point above the government's own 2% target.

Against this background the FT-SE 100 index has fallen back slightly this morning which is not that surprising as we have seen a strong rebound in the UK equity market in the last few days.

Falling oil prices (revisited)

In parallel with the World's stock markets oil prices continue to slide with UK's Brent crude falling to just over $40/barrel. This is very much a reflection of the strong expectation that the global economy will remain depressed for many months ahead. Any hopes of a speedy recovery have been firmly rebuffed by a series of gloomy economic and corporate stories unveiled this week. The message is now clear that demand for oil will remain weak for the foreseeable future. In response OPEC is desperately trying to reduce the supply of crude oil. Indeed the oil producers' cartel has already acted to reduce production by millions of barrels a day in a vain attempt to underpin prices. However, it is becoming clear that the action taken so far will not be enough to halt the slide. We can expect OPEC to act soon to make further reductions in production levels at their next meeting which takes place on the 15 March.