Category Archives: Latest UK inflation data

Latest UK inflation data – March 2017

Inflation appeared largely unchanged today with CPIH (and CPI) remaining at 2.3% and RPI declining slightly to 3.1%.

There were two main reasons why inflation did not continue increasing. The first is the early timing of Easter in 2016, which has impacted some of the year-on-year comparisons. In particular, air fares were significantly higher in 2016 than in 2017 due to this factor and it also affected some other services. Secondly, the temporary drop in crude oil prices in February fed through to lower petrol prices in March 2017. This contrasts to the previous year when they had started to rise from their extreme lows in January/February 2016.

The above said, positive inflation was apparent in every single one of the categories that ONS measure – the first time this has happened for nearly three years. The impact of the recent rises in input prices (17.9%) and factory gate prices (3.6%) is now feeding through to the retail world. Goods inflation rose sharply to 2.5% (1.9%) and it exceeded service inflation for the first time in 5 years.

The rise in goods inflation was partly as a result of genuine rises in categories such as food. Food prices normally decline between February and March, but they increased this year. Rises were seen fairly broadly across the food sector and mainly reflects higher import prices.

However some of the increase in goods prices are probably erroneous and will fall out the calculation next month. For example, the sharp rises in alcohol and tobacco prices have more to do the with timing of the ONS data collection and the budget this year vs last year. In addition, the highly volatile ONS clothing and footwear index saw a rise this month which may well be reversed in April.

Therefore predicting next month’s inflation figure is going to be tricky. On the positive side, there are hikes in council tax and gas/electricity prices to factor in, as well as higher air fares over Easter. But this will be balanced out by reversals in the erroneous factors this month such as the apparent budget rises and clothing gyrations. In addition, this time last year, petrol prices rose sharply, whilst they are declining in 2017. The best guess is that inflation will remain around the same level or decline very slightly in April.

Indeed looking at the inflation stats elsewhere in Europe, shows that February numbers marked a high point and levels have come down a little for most countries. But the future path for UK and worldwide inflation very much depends a lot on crude oil and other commodity prices. Since the big decline in nearly all commodity prices in 2014/5, they have stabilised at historically low levels. If the next move in commodities was upwards, it would trigger a significant burst in worldwide inflation.

The full ONS analysis can be found here.

Latest UK inflation data – February 2017

UPDATE: Listen to Pete Comley talk about the latest inflation figures on Share Radio:


Today saw the introduction of the new headline inflation measure of CPIH. I have blogged about this in detail over the last few days (here and here) and so this bulletin will initially focus on the general inflation trends of CPI before returning to CPIH.

The UK now has three measures of inflation being used by different stakeholders, RPI, CPI and now CPIH:

Inflation trends

There was a steep rise in inflation today with CPI going up 0.5% to 2.3% and RPI by 0.6% to 3.2%. These are the highest inflation levels we have seen in the UK for two and half years and above the Bank of England’s inflation target of 2%.

The main “driver” (no pun intended) for the increasing rate was car fuel prices which continued to rise in February and are now nearly 20p higher than this time last year. However, there were also rises across a number of other goods which follow on from the higher factory gate prices that have been seen in recent months. Input prices rose 19% in the latest period (a combination of the Brexit devaluation and higher commodity prices) and factory gate prices by 3.7%.

This means that goods inflation in CPI is now running at nearly 2% – having been largely negative for the last few years. Examples of goods with significant price rises over the last 12 months include: fish, coffee, many fruits and vegetables (from Iceberg lettuce to potatoes to grapes), laptops/tablets, cameras, and new cars.

Core inflation is up to 2% – its highest level since June 2014. The trend for inflation is that will probably carry on going up, but next month may see a decline in the speed of the rise with CPI/CPIH rising to around 2.5%. Thereafter once the electricity and council tax price rises kick in during April, we’ll likely see another leg up for inflation.

The above said, a lot depends on the global price of crude oil, as this quickly feeds into petrol prices. It has slipped back recently and this may temper increasing inflation over the next few months.


ONS were lucky that on the day they switched the headline measure to CPIH that it came out the same number as CPI. Therefore criticism (see here) of their methods have been more limited than it might have been. However our analysis (see here) clearly indicates that as time goes by and the UK inflation rate rises, there is going to be a greater disparity between the two measures. CPIH may even be 0.3% lower than CPI by the end of the year.

If by then, the government has decided to switch the inflation measure used for benefits and pensions to CPIH, it could start to have an effect on living standards. Although some benefits are temporarily frozen, many are not. Those related to disability, carers, maternity and pensioners are still all being index linked to an inflation measure (CPI today).

Indexation of state pensions might also be reduced by CPIH. The Triple Lock on pensions ensures they rise by the minimum of 2.5%, earnings (currently 2.3%) and inflation (2.3% today). The Bank of England predict that CPI will rise to nearly 3% by the year end and so next time pensions get revised (in November), it will probably be by the rate of inflation. However should there have been a switch to CPIH by then, pensioners may well get less.

The latest report from the ONS can be found here and the data tables that include RPI here.

Latest UK inflation data – January 2017

UPDATE: Listen to Pete talk about the latest data on Share Radio: . . .

Headline inflation rose to 1.8% CPI and 2.6% RPI – their highest levels in over two years. The main reason for the rise was related to motor fuel being 17% more expensive in 2017 than a year before. Last January when Brent crude was around $30 a barrel, petrol and diesel cost around 102p/litre. Roll on a year and crude is above $55/barrel and petrol averaged 118p and diesel 124p (source: FleetNews)

CPI also increased because food prices did not fall as much as they did in 2016 – indeed next month we may well see food prices rise for the first time in nearly three years. This has little to do with the media headlines of crop failures in Spain, but is more a reflection of increased costs related to higher crude oil prices impacting global food production.

Inflation in January might well have been higher had it not been for the two proverbial ONS problem areas of clothing and airfares. This time ONS reckoned that clothing had declined more than last year and the aberrantly high airfares enhancing last month’s headline figure disappeared. The combined effect was probably to suppress CPI was 0.1% or more, i.e the true level was more like the 1.9% most analysts expected.

Inflation rises coming

Inflation is undoubtedly heading higher as we are seeing continued rises in food prices. Fish seems to be a good bellwether here – probably because its price is particularly affected both by higher oil prices in running trawlers and by sterling’s depreciation (as we import most of the fish we eat). Fish prices are up 3.1% year-on-year. That compares to them falling for the last two years – they declined 4.1% last January.

We also have a raft of gas and electricity price rises about to hit the market. Npower are increasing their electricity costs by 15% and gas by 5% on 16th March, for example. Most other utilies are following suit.

Add to that the latest Producer Prices Index shows factory gate prices rising at 3.5% and manufacturing material input prices by 20%+ mainly due to oil and metal commodity prices. The latter is the highest level seen since 2008.

The Bank of England’s latest Inflation Report is predicting CPI will be 1% higher by this time next year and will remain in the range of 2-3% for the best part of the next three years. However how much inflation persists probably depends a lot on what happens to crude oil prices. Should the current rebound trend start to falter, inflation will probably come back down. Interestingly, there is no sign yet of service inflation starting to rise along with goods inflation and core inflation remains steady at 1.6%.

Inflation: an international perspective

Most people think that inflation is primarily affected by  specific UK factors. Interestingly it is highly correlated around the globe in developed nations – mainly because it is so strongly influenced in the short-term by global commodity prices. The latest data from the EU shows inflation taking off markedly. Across the whole EU, it has risen 1.2% in the space of two months to now stand at 1.8%. There are estimates that it may have risen to around 3% in Spain in January for example.

The trend is similar in the US too. The latest data (December 2016) shows it rising to 2.1% (from 0.8% last July). The January data (due soon) will undoubtedly show another rise confirming that the rising trend is very much an international one within developed markets.


Finally, next month’s inflation figures will see the ONS switch to using CPIH as their main benchmark measure. This is in spite of the many problems and flaws with the measure (see here) and the fact that it is still does not have the credentials of a “national statistic”. In the short term, it will act to raise the headline figure a little as the Owner Occupier’s Housing costs element it includes is currently running at 2.5%. For example in January 2017, CPIH was 2.0% compared to just 1.8% for CPI. More on this next month…

The full ONS statistics can be found here.

Latest UK inflation data – December 2016

CPI inflation rose today to 1.6% (RPI 2.5%) – their highest rates in over two years. There are two key forces behind this as we’ve noted before:
– petrol prices have been increasing and are significantly higher than a year ago
– food prices have started to increase.

The apparent increase in December to 1.6% is probably slightly ahead of the true rate (1.5%?) due to ONS recording markedly higher air fares in December. ONS consistently struggle to measure them and they are subject to a high degree of volatility – this time probably exaggerating CPI.

The full ONS data can be found here.


There has been much in the media again recently of the impact of Brexit on UK prices. This time it is the proposed 20% price increase of the children’s chocolate bar Freddo from 25p to 30p – see here. The manufacturers say the rise is due to the increased commodity price of cocoa. There is certainly an element of truth in this and I suspect when the decision to increase its price was taken – possibly early last autumn – sterling cocoa prices were at a three year high, in part because the Brexit devaluation.

shareradioHowever much has happened since then and because of good harvests in West Africa, cocoa prices have plummeted 30% even in sterling terms since their peaks last summer. Therefore the recent rise in Freddo’s price is possibly more questionable in this light. Listen to my discussion about it on Share Radio here:

Inflation expert Pete Comley explains soaring Freddo prices

/podcasts/inflation-expert-pete-comley-explains-soaring-fre . . .

Latest UK inflation data – November 2016

UPDATE: Listen to Pete talk about the figures on Share Radio:

CPI inflation picked up to 1.2% today and RPI to 2.2%. (Incidentally, these were exactly our predictions last month).
predictionWhat is driving inflation higher is a combination of rising oil prices and the impact of the fall in the price of sterling. ONS also talk of changes in the prices of clothing and airfares, but as we’ve discussed many times, these are both items that ONS struggle to measure accurately and so appear volatile. The changes in both of these are mere noise in the data.


What is most important currently in determining the UK inflation rate is the price of petrol. This time last year, global crude oil prices headed below $30 a barrel and petrol prices here in the UK towards £1/litre. This year the opposite trend is in place. Yesterday crude prices hit their highest since July 2015 and despite the recent pick up in Sterling, this is going to continue to feed through to higher petrol prices in the New Year. As the table below shows, unleaded petrol may be in the range 118p-120p a litre in January – some 15-18% higher than the previous year – that will add 0.7% to the UK inflation on its own.

Unleaded petrol prices: 2015 2016 Difference
September 111p 111p 0
October 109p 113p +4p
November 107p 116p +9p
December 103p 114p +11p
January 102p 118p-120p? +16-18p

Source: FleetNews


The decreasing value of Sterling is now beginning to have an impact on inflation too. Input prices for companies are up 12.9% in the last year and the prices they charge for goods leaving factories are up 2.3%. Goods inflation in CPI went positive for the first time in two years and stood at 0.2% In November. ONS highlight a few items such as computers – up 3.2% in a month and also evidence of Unilever’s increases in bleach and cleaning products. Other imported household goods (e.g. leather sofas) are higher as are some core food prices such as bread and dairy products.


Despite the media focus on the rise of UK inflation being an effect of Brexit, it is primarily part of a global inflationary trend driven by commodity prices. Declining oil prices in 2015 sent a deflationary shock across the world. That is now unwinding as crude prices recover. The recent rises in the inflation rate in the UK mirror those in many other European countries including Baltic ones, Spain/Portugal, Germany/Austria and Switzerland. (The pattern is also the same in the US and China too).


The above said, we still live in a generally low inflation world which is a result of the overhang of the 2008 financial crisis and demographic pressures. Inflation will continue to rise short-term due to the oil price change but this is unlikely to herald a long-term change in global inflation rates (unless governments start printing massive amounts of money, of course).


Finally, last week saw the Bank of England publish its quarterly survey of consumer inflation perceptions. As we saw in the last report in August, the consumer is fairly convinced that UK inflation is running higher than the official CPI rate. Their average estimates (2.3%) were very close to the RPI rate of 2.2% in November (as they were at 1.8% in August). The reasons why RPI probably more accurately reflects UK inflation are explored here.

The full ONS report this month can be found here.

Latest UK inflation data – October 2016

UPDATE: Listen to Pete Comley talk about the latest data on share radio:

Contrary to some economists predictions, inflation did not appear to rise in October. However as I pointed out last month, the CPI index had got ahead of itself. 1% was not a true reflection on inflation in September because of problems in the way ONS calculate clothing prices.

In a similar way, clothing has acted as a negative influence on inflation this month, whose correct CPI value is probably now more like 1%. It was also held back by declines in some gaming/toy prices – another volatile element. Balanced against this, petrol prices were up, in contrast to last year when they declined. Unusually furniture costs went up in October, although longer summer sales than normal are partly to blame for this apparent rise.

Food prices generally as still exerting a strong negative effect on the inflation rate (-2.4%). Many vegetables are still being used in supermarket price wars with the prices of everything from broccoli to cabbage and mushrooms reaching record low levels for recent times. That said, it is interesting that fish prices were sharply up this month – the UK imports more than two-thirds of the fish we consume. As an example, BirdsEye last week were trying to increase fish finger prices by 12%.

Future inflation

Today’s data shows evidence that inflation is going to rise in the future though. This can be found in the Producer Prices Index. Input prices rose 12% in the latest year and by 4.6% in October alone. Factory gate prices are now rising (+2.1%). This is backed up by a series of announcements in the media over high profile increases such as Typhoo teabags, Marmite, crisps and Persil. Apple has increased its computers by 10% too.

The pass-through of changing exchange rates is complex and highly variable. For example, the decline of the pound from $1.7 to $1.5 in 2014 had little impact on UK prices. But I feel this time may be different. The recent declines in the value of sterling come after a general decline in the last few years and could be ‘the straw that breaks the camel’s back’ for many companies. Add to that, Brexit is a great excuse to justify hiking prices this time. Usually exchange rate changes often go unnoticed by consumers and so can be difficult to use as an argument for price rises.

The other factor that is going to weigh heavily on the headline inflation rate in the coming months is petrol prices. Last December they declined to just 103p a litre. This year that figure is probably going to be more like 117p ie 13% higher. The impact on the index will be even greater as last year prices were declining and this year they are increasing. Given all this, there is a strong likelihood of seeing CPI in excess of 1.5% in the December data (and 2.5%+ for RPI).


In the wake of Trump’s victory last Thursday, ONS published (buried??) news of their plan to replace CPI with CPIH as their headline measure in March 2017. This could be a very unwise move on a number of grounds:

  1. CPIH has been a measure that has been shrouded in controversy since it was launched. ONS had so much difficulty with it, they had to withdraw it as a designated statistic in 2014 and to this day, it has not regained that status.
  2. The H in CPIH stands for housing. However the elements included in it and how they are calculated do not correspond with what the public would expect from an inflation statistic including “housing”. Firstly it excludes house prices completely. Secondly instead of measuring housing expenses directly (such as mortgage costs, building insurance, maintenance, etc) as people experience them, it uses a complex alternative measure based on rental equivalence. Thirdly, despite arguing it is not possible to cost housing items directly, it then has just added in council tax as a complete exception to this rule, making CPIH even more of a mess.
  3. The relationship between CPI and CPIH is complex. However for the last two years it has been about 0.3% higher than CPI. If this persisted, it is unlikely that government would want to use it either as a measure of their success in controlling inflation nor to index pensions and benefits (as it could result in higher expenditure). Linked to that, it would make it more difficult for the Bank of England to meet its 2% target.

If the ONS wish to improve on the EU’s invention of HICP (which we call CPI) in this post-Brexit world, they might be far better to revert to the British measure of RPI. Although it too has its issues (see here), it generally more accurately reflects inflation as experienced by consumers as it is usually higher than CPI (due to its simpler method of calculation) and it already weights in housing costs and house prices.

The latest ONS data can be found here.

Latest UK inflation data – September 2016

UPDATE: Listen to Pete Comley talk about the latest figures on Share Radio:

The headline CPI inflation rate appears to have shot up to 1% today (from 0.6% last month). Although inflation is rising, this figure is ahead of the real rise of inflation in the UK. This is because a half of the rise was down to a somewhat spurious rise in clothing prices. A better estimate of CPI today is probably 0.8% ie excluding clothing.

Clothing prices are a big problem for the ONS. The short duration of fashion lines and frequent sales make measuring real changes in clothing fraught with problems. Trying to do like-for-like comparisons on a monthly basis often appears to show wild changes that then get reversed the following period. Furthermore, the high variability in unit pricing also means that using traditional means and ratios to calculate indices often over-estimate price changes. For example, RPI which uses this method reckons clothes have increased 50% in the last five years. In contrast CPI, which uses geometric means, often underestimate inflation on clothes and indeed CPI thinks there has been zero clothes inflation since 2008! Neither is right with the truth lies somewhere in between. (See this article on the different methods of calculation of inflation indices).

The above being said, UK inflation is now trending upwards. Short term, over the coming months, this will be primarily driven by higher petrol prices. Assuming global oil prices continue to tick higher and the pound lower, we could well see average unleaded petrol back in the range 120p-130p by Xmas. That would be a rise of 20-25% over last year and alone will add maybe 0.7% to CPI taking it to above 1.5% by December (and RPI to 2.5%-3%).

2017 will bring a number of other price rises that stand to push CPI to around 3% (and RPI to 4%). These are primarily effects of the declining value of sterling which some predict could fall further to maybe $1.1 = £1, €1=£1. The lower value of the pound has already increased factory input prices by 7.2% this month and is starting to affect factory gate prices (up 1.2% – the highest level for 3 years).

Currently food prices are still declining in the UK – down 2.4% in the latest data. However much of the food we consume is imported or has aspects that are affected by international commodity prices. Unilever’s attempt to raise their prices by 10% last week in Tesco has probably marked the start of a change in trend for food prices. Add to that likely sharp rises in gas and electricity prices and it would not be surprising to see goods inflation rise to above 2.5% in 2017. When this figure is then combined with service inflation of 3.0%-3.5% will take CPI to the 3% level hinted at by Mark Carney recently.

However what needs to be remembered is that this will more than likely be a fairly short-term blip. The declines in the pound will eventually abate and indeed once the uncertainty over Brexit is finally removed, sterling may well climb back above its current level. Add to that, the forces of global deflation are still with us – namely demographics and technological innovation. Therefore CPI may well return to near zero levels again by 2019.

The full ONS data can be found here.

Latest UK inflation data – August 2016

Due to holidays, this month’s analysis will be limited.
CPI = 0.6% (no change)
RPI = 1.8% (down from 1.9%)

According to the ONS these changes were due to:

The main upward contributors to change in the rate were rising food prices and air fares, and a smaller fall in the price of motor fuels than a year ago.

These upward pressures were offset by falls in hotel accommodation prices, in addition to smaller rises in the prices of alcohol, and clothing and footwear than a year ago.

The full ONS report can be found here.

Latest UK inflation data – July 2016

UPDATE: Listen to Pete Comley talk about the latest figures on Share Radio:

CPI inflation showed a slight rise today to 0.6% CPI. We are seeing the first signs of the Brexit devaluation of sterling on UK prices. For example, petrol prices went up – despite a decline in dollar oil prices. Wine costs also edged higher. July saw the smallest decline in food prices we’d seen for two years.

The full ONS report can be found here.

What the producer price index is telling us

The producer price index is clearly indicating the impact Brexit will have over the coming year. For the first time in two years, import costs rose. Overall input prices are up 4.3% and food was up over 10% in July. These rises have yet to be passed through. Indeed overall goods price inflation is still negative (-1.4%) but I suspect we’ll see it positive by the year end and with it, CPI inflation back towards maybe 1.5%.

A key factor is what happens to global oil prices. Last year, the autumn and winter saw marked declines in oil, but this year the opposite may well happen. If that was to occur, CPI inflation could well reach the target 2% by early next year.


The other interesting factor to emerge today was the sharp rise in RPI to 1.9% (from 1.6%). The difference between it and CPI is now the largest we’ve seen for 6 years.

RPI is always higher due to the so-called formula effect. This arithmetic trick effectively massages down the inflation rate of CPI – you can see the effect particularly on goods which CPI still estimates as declining but RPI now measures as almost rising. You can read more about the formula effect here.

The other big difference between the two is that RPI includes the impact of house price rises, whilst CPI ignores it. Indeed the greater variance between the two seen this month is primarily due to house prices. The latest ONS data shows nationwide house prices up by 8.7% which is adding markedly to the RPI estimate of overall inflation.

The importance of RPI

Despite the ONS’s/the government’s attempts to suppress usage RPI, it still gets used in a number of key places. The key one is to calculate the interest rate of inflation-linked government debt. Today also saw it being used to fix rail fare rises for next year (at 1.9%).

However the one that probably has the biggest impact on any millennial is its impact of student debt. Student debts now rise by somewhere between RPI and RPI +3% depending on how much you earn. Each year the rate from September is set on the previous March’s RPI (1.6%). That means students will see a sudden jump in interest rates in a few weeks to up to 4.6%. However more importantly is what is going to happen to them this time next year. My guess is that we may see RPI at around 3.5% by next March, making the interest rate up to 6.5% next year (and headed higher).

Not only does this seem an unfair rate of interest in a near-zero interest rate world, it is just impossible to pay back for the average student. A quick calculation shows that a student (with an average £40k debt) will need to earn nearly £50k a year to pay back the interest alone at 6.5%. Given that the average lifetime salary of a graduate is estimated to be just £35-40k, this means virtually all students will start to enter a debt spiral of ever higher debts and interest payments.

Latest UK inflation data – June 2016

UPDATE: Listen to Pete Comley talk about the latest figures on Share Radio:

Inflation data showed a slight rise today to 0.5% CPI and 1.6% RPI. This largely returns it to where it was in March. The primary driver according ONS was a rise in airfares, motor fuels and computer games. The 11% rise in airfares in June might be a temporary blip caused by the Euro championship (or it might be an effect of rising oil prices and the decline in the pound seen even before Brexit). Balanced against this be have been some small declines in accommodation prices (again possibly a Euro effect as people stayed at home more to watch the football) and some declines in furniture costs.

However the biggest drag on prices in the UK remains that world commodity prices. For example, UK food prices are down -2.9% year-on-year and petrol now averages 111p/litre vs 117p a year ago (even though it rose 2% in the latest month). More specifically within food, the largest declines are for vegetables and dairy products (both more than 6% cheaper than a year ago.) Overall goods inflation remains strongly negative (-1.6%) and this is what has kept the overall inflation level low in the last year or so.

The full ONS data can be found here.

The impact of Brexit on CPI (simple model)

A key thing to remember is that the data published today was collected before the Brexit vote and so does not show the impact of the most recent declines of the pound since June 24th.

There is much talk about the effect of the decline in the value of the pound is going to have on the inflation rate. Some commentators have even predicted inflation might go back up towards 5%. This seems unlikely – at least based solely on the current exchange rate – and I expect that the true impact will be much smaller.

If you go back and examine the falls/rises in the value of the pound over the last three decades, you’ll find that there is in fact quite a poor relationship between exchange rate and inflation. Some economists (John Mills for example), even argue that there is no relationship at all. The Bank of England published a report last November which clearly highlighted that the impact of changing exchange rates on inflation very much depends on what is causing the currency change. For example if it is demand-side shock, the inflation rate may not be affected that much.

That being said, the Bank estimate that typically a 10% depreciation in sterling might equate to 2-3% increase in non-energy imported goods prices. Given that these account for just under a third of the CPI index, we might be talking about 0.6%-1% gain in the CPI index. However they also note that the so-called “pass-through” of this increase takes place over a few years (though 60% is normally with the first year).

So what effect might the current declines in the pound have on inflation? Many are focusing on the 10% fall since Brexit, but the pound was declining before that. On a trade-weighted basis, the pound is actually down 18% since its peak last August. That equates to about a 1%-1.8% increase in the index of which maybe just over three-quarters of which will occur before the end of 2017. Taking the mid estimate, CPI might be 1.1% higher next year because of the declines so far in the pound i.e. around 1.6%.

However, it is not impossible that the pound may decline still further over the coming year. Some pundits think it may declines a further 20% to say $1.1 = £1. If that happened, we might be talking of CPI increasing to around 2.8% next year.

Alternative inflation model based on commodity prices

The above analysis is arguably a bit too simplistic. That is because the thing that really drives inflation in this country short-term is commodity prices. The correlation is much higher than anything to do with exchange rates as the following chart illustrates.

commodity price vs cpi graph

Therefore a better question to ask to determine future CPI rates is what we think might happen to world commodity prices than what might happen to sterling.

Where is the oil price going? Pessimists think that the recent decline in the oil price might signal the end of the bounce and is oil now headed lower and back below $30/barrel. However probably a more likely scenario, is that this is but a correction and oil prices continue to rise and maybe stabilise in the $50-$70 area.

Other commodities are also showing signs of revival. World food and beverages prices are up 15% in dollar terms in 2016 so far and almost double that in terms of sterling. Even if they remain at current levels, this is going to force supermarkets soon to at last increase food prices. (Food has declined 2.9% in the last 12 months alone).

Predicting future inflation rates is therefore all about determining the value of goods inflation. In contrast, service inflation in this country has varied little over the recent decades and fluctuates in a narrow range between 2.5%-5%. It is currently at 2.8% and could well edge up to 3.0% to 3.5% in 2017, as the minimum wage rises pass through.

On the other hand, CPI goods inflation has had a very wide range from -2.5% to +7.5%. We are currently at the bottom end of it and due a bounce upwards – see graph.

CPI goods inflation

2017 could well see positive goods inflation return. Assuming commodity prices carry on rising, we might see goods inflation between 0.0% to +2.5%.

So combining this with the service inflation scenario, my prediction for 2017 inflation rate based on commodity prices becomes:

Current level

June 2016

2017 inflation:

Lower bound estimate

2017 inflation:

Upper bound estimate

Goods inflation -1.6% 0% 2.5%
Services inflation +2.8% 3% 3.5%
TOTAL CPI +0.5% +1.4% +2.9%

Summary of 2017 CPI prediction

Interestingly these estimates are very similar to those derived from an analysis of exchange rates (range 1.6% – 2.8%). The average of all of the above estimates is around 2.2% CPI for 2017. In other words, inflation could well be back above the 2% target (though its exact amount and trajectory will depend on both what happens to both sterling and oil prices).

The other thing to remember is that it may take a few months before we start to see much of a change in CPI. It is almost certainly going to take a jolt upwards in December, as last year’s oil price declines start to fall out of the calculation. Therefore expect CPI to be 1%+ by year end.

Longer term (the next 2-5 years), the impact of Brexit is even more difficult to predict. Much will depend on how successful the Brexit negotiations are with the EU and probably more importantly what happens to the EU project itself during that time. As I mentioned on Share Radio last month, it is not impossible that sterling could eventually become a safe haven currency if the Euro collapsed. It’s subsequent appreciation could then bring back near-zero inflation again (assuming we’ve not adopted helicopter money by then).