Good news at the petrol pumps tempered with an increase to UK Car Insurance

A rise in summer sales and falling petrol prices in the UK have failed to banish

worries over the threat of inflation after official figures showed that the Consumer Prices Index (CPI) benchmark had fallen from 3.4 per cent to 3.2 per cent during June. This was thanks largely to record price cutting by retailers eager to get consumers through the shop door, and a 2.6 pence drop in petrol costs.

However, the figure does remain comfortably above the Bank of England's 2 per cent target. Core' Consumer Prices Index rose from 2.9 per cent to 3.1 per cent, excluding food and energy costs, which remain volatile.

UK motorists may be seeing good news at the petrol stations, but the data revealed a 36 per cent rise in the cost of car insurance compared to June's figures a year ago. This was due to a record 5.7 per cent rise in premiums over the month.

There were a number of factors that helped to push up basic inflation, which included a steep rise in the price of airfares to European and long-haul destinations. Prices for flights to South Africa had doubles in cost due to the country staging the World Cup.

The debate amongst the Bank of England's Monetary Policy Committee (MPC) will only have intensified thanks to the underlying price pressures, despite a fall in the overall inflation rate.

The Monetary Policy Committee's 2 per cent CPI benchmark target has been met with some ease, staying around 3 per cent or higher throughout 2010. Inflation is expected to rise again though, when VAT is increased to 20 per cent in January 2011.

Simon Hayes, Barclays Capital chief economist believes the pressure for a rise from rate setters was probably going to increase. He said, "The resilience of inflation seems set to remain a thorn in the side of the Monetary Policy Committee. If CPI inflation remains well above the 2 per cent target for the next 18 months, as in our forecast, it will be difficult for the Monetary Policy Committee not to respond with a hike in the policy rate. So long as the committee remains concerned about downside risks to growth, from consumer and business reactions to fiscal consolidation and demand from overseas, we expect policy forbearance to continue."

Good news at the petrol pumps tempered with an increase to UK Car Insurance

By: Rochelle Martinez

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