This Is Guernsey

LAST WEEK our retail prices index, the measure of inflation in Guernsey, was released. It showed that RPI for the 12 months ending 31 December remained the same as the previous quarter at 4.9%.

This figure is of concern to some people in the island. So I decided to look a little deeper into the calculation.

Our RPI is worked out based on a change in the price of items in a shopping basket of goods and services that most of us consume.

In order to put our RPI figure into context, comparisons should be made with elsewhere.

Global inflation as measured at the end of November, the last available data period, was 4.8%.

This figure was a full 2% higher than the previous year and shows clearly that prices have been rising much faster in most other places around the world than here in Guernsey.

In fact, prices accelerated in 80% of countries where tracking data is available.

Yet despite this, prices are rising at less than 5% as measured globally, which is a far cry from the double-digit price increases which high energy costs, in particular, helped fuel back in the 1970s.

From our experiences here in the island, the price of housing, and in particular the cost of borrowing on mortgages, often has the largest effect on RPI.

The largest category weighting of around 40% is applied to housing costs and because we have one of the highest levels of home ownership in the western world, we are significantly affected by changes in interest rates.

As a result of a lower base rate, the housing group fell by 1% during the last quarter.

This is material and as further cuts in the rate are anticipated over the next two quarters, further reductions might be expected.

The main inflation threats therefore continue to rest with food and oil. Over the last 12 months the global food index has risen by a staggering 50% and oil by nearly 80%.

Much of the surge in raw material prices in recent years reflects the fact that most did not foresee the pace of growth in emerging markets.

That said, I anticipate that the rate of increase in commodity prices will slow significantly this year and as a result the biggest driver of recent global price pressure will weaken and inflation will consequently fall.

As I have shown, we are surprisingly closely linked to global inflation index.

We have limited in-island tools available to combat price rises in most areas and it will be conditions elsewhere which will primarily dictate our rate.