The latest price inflation figures published this morning show the Consumer Prices Index (CPI) measure of price inflation at 4.5% for the year to April 2011.
This means CPI inflation has increased at a faster than expected rate, from 4% in the year to the previous month.
The rate of increase of the Retail Prices Index (RPI) measure of price inflation came down, from 5.3% in March to 5.2% for the year to April.
These changes close the gap between CPI and RPI considerably.
The biggest factors driving the growth of price inflation between March and April were air transport, alcohol and tobacco, and gas.
There were also downward pressures on price inflation, coming from petrol and diesel costs, miscellaneous goods and services, clothing and footwear, and communications.
It is worth noting that the timing of Easter had a big impact on the inflation figures.
In particular, it had a significant influence on certain travel costs. This is because prices for air travel are collected for the inflation figures at various times before the departure date.
Compared to last year, when Easter Sunday fell on 4th April, the figures for air travel were included in the data set this year. This potentially means that the contribution of travel costs to the inflation figures this month give a slightly misleading result for inflation over the course of twelve months.
However, it is also worth noting that core inflation has now reached the highest level since records began in 1997. Core inflation currently stands at 3.7% and is a measure of inflation which excludes certain items subject to volatile price movements, such as food and energy.
What does all of this mean for interest rates and for investors?
Whilst this monthly increase in price inflation is higher than was expected, a single month of inflation figures is unlikely to force policy makers at the Bank of England into rising interest rates suddenly.
The Monetary Policy Committee (MPC) is likely to stick to its long-term view of inflation, which suggests interest rates will remain low so as not to risk damaging fragile economic recovery in the UK. The real test for inflation and monetary policy will come along early next year when the January 2011 VAT increase falls out of the calculation.
With commodity prices incredibly volatile at the moment, inflation is likely to remain volatile as well.
Investors need to consider how they position their portfolios against a backdrop of stubbornly high price inflation and low interest rates, which have the prospect of rising in the future.
Exposing money to asset-backed investments, such as company shares and property, is likely to deliver the best returns in this economic environment, although this strategy is not without risks which must be carefully managed.
Photo credit: Flickr/BethinAZ
