Category Archives: Latest UK inflation data

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).

Latest UK inflation data – May 2016

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

The latest inflation data published today shows no change in CPI (0.3%) but a slight rise in RPI to 1.4% (from 1.3%). Bar the quirky March figures which were distorted by Easter, CPI has been stuck around 0.3% in 2016.

This latest month saw rises in transport costs (diesel), hotels, insurance and telecoms prices balanced by declines in food ones, clothes and computer games. The supermarket price war continues with new lows for the prices of pork, sausages, chicken, as well as certain vegetables such as potatoes, broccoli and carrots. Overall goods prices have declined -1.8% over the last year whilst services have risen 2.6%.

The low inflation psyche

The Producer Prices Index is -0.7% confirming that cost of goods produced continues to decline, despite the recent falls in the value of Sterling (down almost 20% since the high about two years ago). This says something about the lower commodity prices but also something about the psyche of a number of British businesses that are reticent to raise prices in this apparently low inflation world. Many are therefore seeking to contain costs and keep prices stable.

There are however businesses – especially in certain service areas – that feel they have enough power to raise prices. For example, you can see this in: hotels (+4.7%), insurance (+8.8%), recreation/cultural events (+4.2%), telecoms (+2.9%), and domestic/household services (+3.7%) to name just a few sectors.

Future inflation and Brexit

With the continued depressed world demand due to the overhang from the financial crisis, a reasonable scenario is probably one of continued low inflation. That being said, it is important to remember that should oil prices be maintained (or rise) there will come a point this autumn when rising petrol prices start adding positively to CPI and we will see it edge up towards 1%.

The now more likely prospect of Brexit could also add to inflationary pressures. If the polls are correct and we vote to leave on 23 June, many think that the pound could decline significantly. Although exchange rate changes take a time to feed through to inflation, they usually do and sometimes in a strong way, so CPI above 2% in 2017 is now probably more likely.

Longer term though, the implications of Brexit on inflation are much more difficult to predict and a return to lower inflation levels is possible. The Euro itself may well come under pressure, especially if referendum votes are called in other countries such as France, Netherland and Czech Republic. The pound may then recover as a paradoxical safe haven from a potentially crumbling European empire. In addition, some seem to think that Brexit could cause the housing market to decline – again a deflationary pressure – especially on RPI which factors in house prices more directly.

The latest set of ONS data can be found here.

Latest UK inflation data – April 2016

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

The latest data appears to show a decline of UK inflation back to near-zero levels. CPI fell from 0.5% to 0.3% in April 2016. However, as ever, the headlines do not tell the full story.

Inflation has been very gradually picking up since autumn 2015. March showed a sharp rise, and arguably ahead of the trend. However as we pointed out last month, that rise was largely spurious and related to two aspects of inflation that are quite volatile because of the way that the ONS measure them, i.e. airfares and clothing.

ONS look at airfares on just one day in the month so the timing of holidays, such as Easter, has a profound effect on the monthly stats. That is why it appears that airfares have fallen sharply in April and not because of any fundamental reduction in Ryanair’s pricing. Clothing inflation is also based on specific items that can often significantly vary in pricing due to sales and the effects of substitutions, as new lines become available.

Inflation primarily remains low because the combined effects the decline in import commodity prices (especially oil) and competition amongst food retailers. Indeed the Bank of England pointed out last week that the impact of lower energy prices have not been fully reflected in CPI, as it only monitors variable rate gas tariffs and not the fixed rate contracts which most gas companies have reduced the most. Therefore it might be argued that inflation is closer to zero than CPI currently shows.

RPI more truly reflects real inflation

However there are many issues with the way CPI is calculated that actually result in it probably under-estimating inflation. Far from experiencing no inflation, many people (especially younger ones) are experiencing inflation that is not reflected in the CPI numbers. The average consumer thinks inflation is currently running at 1.7% (Barclays Basix data in BoE report).

A better estimate of inflation is thus provided by the 1.3% RPI. It does not involve clever statistical wizardry called geometric means which will always lower reported inflation by up to 1%. RPI also includes the impact of house prices. According to ONS stats today, house prices are up 9%. Curiously even RPI does not include this full impact and is assuming just 6.8%, so even RPI may be underestimating inflation.

Outlook for inflation

Next month, and longer term, inflation is likely to continue to slowly head back up from here, no matter which measure is used. Assuming crude oil prices stabilise around $50, the steep decline in oil price in the second half of 2015 will be falling out of the calculation this autumn. There is also beginning to be clear evidence of food price war having cut prices to about as low as they are going to get – there were very few new lows for key basket items this month – just chicken and white sliced loaves. Furthermore, service inflation is running at 2.4%. Prices rose sharply last month for cultural events and restaurant/hotel prices have picked up too – possibly the impact of the minimum wage rises.

The full ONS report can be found here.

Latest UK inflation data – March 2016

UPDATE: Listen to Pete Comley talk about the latest inflation stats:

The UK inflation figures published today showed the first clear evidence that inflation is starting to pick up in the UK now. CPI rose to 0.5% (from 0.3%) and RPI was at 1.6% (was 1.3%).

Having said that, part of the rise this month was due to spurious reasons related to two of ONS’s most volatile elements in its calculation – namely clothing and airfares. The earliness of Easter made it look like all airfares had risen by an amazing 23%. Also clothing went up 1% this month – as it often does in March – but very unusually it did not this time last year, and so because of the relative nature of the CPI calculation, this makes inflation appear higher.

However there were other reasons why inflation picked up. Service prices rose by 2.8%, with particular rises this month for restaurant/café prices. Add to that, the relative rise in petrol prices was more this month than the same time last year.

However absolute pump prices are still lower than 2015 and this is helping keep inflation rates down. But the biggest drag on inflation is the continued food price war by the supermarkets. Food is down 2.7% in the latest year. This month supermarkets seem to be competing to offer the great British breakfast at a bargain price. The total cost of a traditional fry-up of eggs, bacon, sausages, toast and spread is down over 11% in the last two months alone. Sunday roasts (topside beef, potatoes, carrots and broccoli) were also down over 5% in the same period.

The five reasons the inflation rate will continue increasing

However the winds of change are starting to blow for worldwide inflation levels. The UK core inflation rate was up to 1.5% (from 1.2%). The US is seeing a similar rise – core inflation now 2.3% and up 0.5% in the last 6 months. Sweden also published inflation levels today of 0.8% (up from 0.4%).

There are five reasons why we are starting to see inflation pick up in the UK and why CPI will probably rise to well above 1% by the year end.

  1. The first is that oil prices appear to be increasing. If these gains can be maintained, petrol and gas prices will rise. Therefore rather than helping keep inflation rates down, the effect of commodities will go into reverse and add significantly to CPI by the latter part of the year.
  2. The supermarket price war has been so vicious over the last two years that is must be a limit on how much further prices can be reduced. There is beginning to be pressure building for supermarkets such as Tesco and Morrisons to return to profitability. Interestingly Sainsburys has just dropped its Price Match guarantee. Add to that the recent weakness of sterling which has made imports more expensive. All of this suggests that days of food deflation may soon be coming to an end.
  3. The government may well be trying to boost inflation because of their need to reduce the real value of its debts. This April (i.e. in next month’s data) will see the effect of sharp rises in Council tax (3.6%), stamp duty, NHS dentist fees (5%), prescriptions (2.4%), air passenger duty (3%) and of course the rise in the minimum wage for over 25s by 7.5%. In addition many others have also recently raised prices e.g. stamps, water rates and mobile charges to name just three.
  4. Average weekly earnings are growing at 2.2% in the latest ONS data (January data, without bonuses). That together with the rises in minimum wages are going to add to UK inflationary pressure as businesses try to maintain their profit margins. We are already seeing evidence of this in certain service sectors such as restaurants.
  5. Finally QE in Europe and Japan continues to increase the world’s money supply and there is even talk now of helicopter money being seriously considered. Interestingly the UK M4 money supply also turned positive over the last two months – now 2% – the highest level in nearly 3 years. Although much of these money is going into asset price inflation (e.g. house prices), some will inevitably trickle down into consumer prices too.

In conclusion, the days of near-zero inflation rates are drawing to close (for the time-being anyway). Expect CPI inflation back towards the 2% target in 2017.

The full ONS stats can be found here.

Latest UK inflation data – February 2016

UPDATE: Here is Pete talking about the latest figures on ShareRadio:

The UK inflation figures published today showed little difference to those last month with CPI remaining at 0.3% and RPI 1.3%. Underlying inflation was still 1.2%.

They reflect the continued effect of the declining oil price which reduced petrol/diesel prices by 7.3% over the year and that of food price by -2.3%. Farmers have been particularly badly hit with dairy and meat prices down significantly versus 12 months ago. Competition in supermarkets remains a factor with sugar being the latest target – average price per kilo now only 61p (vs 80p a year ago and £1 a year before that).

Having said that, there is some evidence of food prices stabilising. Moreover should the Brent Crude price manage to break through the downtrend back towards $50, then petrol prices might rise sharply stoking inflation rates towards 1% CPI again. However should the recent rise fail and we return towards $20-$30 a barrel, then inflation may well head back towards zero again in the coming months.

Effects of QE and Helicopter Money

There has been a lot of discussion about further QE and even some form of ‘helicopter money’ being deployed – for example here in WSJ. The belief is that this would stoke inflation rates – which is after all probably the primary purpose of those advocating it (so as to reduce the real value of the world’s debts). However, our analysis of monetary expansion over the recent decades (here), shows that most of it has been creating asset price inflation but not consumer inflation. The same may well happen with helicopter money and its effects on the inflation rate may well be limited. It is fighting against a bigger trend of excessive supply over demand caused by demographic changes – see here.

A new UK inflation measure: HII

Finally, I would advise all readers to look at the latest ONS discussions about the UK inflation measures – see here and here. They are proposing the following:

  1. Discontinuation of RPIJ – the measure that attempted to replicate RPI but using the potentially flawed Jevons/geometric mean method. (See here for the problems with Jevons.)
  2. Improvement of the CPIH method and potential adoption of it as the main UK inflation measure.
  3. Potential creation of a new index called the Household Inflation Index (HII).

The HII is particularly interesting. At last the ONS is recognising that there are indeed two functions for inflation statistics and that they probably need separate measures. Ones such as CPI are probably useful for the Bank of England to use for monetary policy and for international comparisons but they just don’t reflect inflation as experienced by the average household in the UK.
ONS has promised to follow up by this summer investigating creating a HII inflation index along the lines of that proposed by the Royal Statistical Society last year – see paper here. The key benefits of HII over CPI would be:

  1. It would be household weighted and not expenditure weighted i.e. not biased heavily to the consumption of the rich. It would also allow for easier analysis by different household types.
  2. It would include interest payment costs which, although a major (and variable) part of many people’s expenditure, are ignored by CPI. This would include not just mortgages but also loans for other purposes such as cars, student loans and even Wonga.
  3. It would include some measure of house price inflation – again left out of CPI.
  4. It would correctly weight insurance costs – which currently are significantly under-represented due to cost of claims being deducted from premiums when determining the weight. This is key as insurance premiums are currently roaring ahead at 8% pa and this is not being correctly reflected in CPI.
  5. Finally the objective of HII would be at least to create an inflation that has credibility again in a way that RPI used to have.

Inflation Matters supports the development of HII, as it has the potential to rectify many of the issues with CPI. However we fear that it will adopt geometric means (Jevons method) as the underlying method of calculation thereby still underestimating inflation in many consumers’ minds. Furthermore, it should probably also have at its heart web scraping of prices as there is some evidence that this data can be more accurate – see latest experiments by Adobe and their Digital Price Index.

The full ONS stats can be found here.

Latest UK inflation data – January 2016

Here Pete talk about the latest figures on Share Radio:

The latest inflation figures show a rise in UK inflation rates with CPI now 0.3% (0.2%) and RPI 1.3% (1.2%). However in reality prices fell in January by 0.6%. The paradoxical rise in the annual CPI comes about because prices dropped less this January than they did at the same time last year. For example petrol/diesel was down -2%, but it dropped -7% in January 2015. The same pattern was seen for food and clothes. In addition, alcohol prices that normally bounce up in January did so more than last year too.

Prices may well have risen more in January had it not been for an unusual -0.8% monthly decline in service prices. Some of this was related to declines in telecoms prices and accommodation but the biggest contributor was airfares. ONS published some dubiously high rises in December, which have now been sorted out and possibly too far in the opposite direction. Airfares therefore appear to have declined 36% off the back of these calculations. Although airfares have only about 1% weight in the CPI index, such large declines do drag it down. Without it CPI would probably have been at least 0.4%.

New CPI weights

January also sees ONS bring in a new set of weights for CPI. This year sees a continuation of their recent trend of giving less weight to the goods people buy and more to services. This makes sense as service inflation is rising at 2.3% and people are having to spend more on it. However it is worth thinking what the compound effect is. Over the last 5 years, the weight of all services in CPI have increased from 44.1% to nearly 48.3%. Next year may well see them about 50% for the first time ever. That higher weight for services will help increase published inflation levels – see comments below.

As the above chart shows, the biggest declines in weights have been for food and fuel. In contrast, weights have increased for holidays, recreation, transport costs, healthcare and rent.

Future inflation rate

But the big question for inflation watchers from today’s data is where might inflation go in the coming months and be by the end of the year. In answering this question, it is key to consider some of the factors that drive the headline rate. The most important are probably:

  1. Changes in commodities prices such as oil and food. This can influence the rate very quickly and markedly for a period of time (or at least until the changes finally drop out of the calculation).
  2. Certain specific items. Things such as clothes and airfares can cause ONS lots of headaches to measure. They often exhibit volatile changes that frequently reverse the next month and can often be ignored.
  3. Government controlled prices. These often increase the rate of inflation e.g. above inflation train price rises, education , etc.
  4. The sterling trade weighted index. This often has a longer term effect on inflation, as pass through is slow.
  5. The economy. When the economy is growing, labour is tight and wages are rising fast, this inevitably spills over into price rises. The converse is also true.

Given the above analysis, the most important influence on CPI going forward is what happens to oil prices and whether the recent stock market declines then results in some form of global recession. There has been a marked change in the consensus in last few months. Many commentators now seem to think that oil may continue its downtrend (to $20?) as might stock prices. Whether the latter then triggers a recession probably depends a lot on what happens to banks and the debt markets. Either way, the chances of more competitive devaluations pushing down the prices of imported goods has increased.

I therefore am forced to switch my view that inflation might be back up to 1% by April. It may well rise in February a little, but oil prices may well force it lower again. However it must be remembered that there will come a point when oil declines stop influencing the headline inflation rate. For example if Brent crude declines to $20 (from $34 today), that is likely to merely reduce petrol prices from 102p->95p. It is very unlikely to decline any further due to the bulk of the remaining cost being fixed tax and retailer charges. Thereafter, to quote the singer Yazz, the only way is up. This, together with underlying service inflation at 2.3% may well cause inflation to return towards 2% again but probably not this year now.

The full ONS stats can be found here.

Latest UK inflation data – December 2015

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

The December inflation figures showed CPI inflation creeping slightly higher again at 0.2% as we anticipated. The main drivers for the slightly higher rate this month were continued increases in services such as restaurants/hotel costs, an spurious rise in airfares, and a lesser decline in petrol prices than was witnessed at the same time last year.

Food retailer competition continues to drag down the UK inflation rate. In December there was fierce competition on alcohol prices and in other food areas (cauliflower being the key one apparently). The prices of many agricultural commodity products are still declining in supermarkets e.g. butter, sugar, flour, milk etc. Some clothes retailers also commenced sales earlier dragging down the prices of some key garments.

Not so obvious from the headline data is the continued rise in service prices (up 2.9% year-on-year) and their growing disparity with the decline in the cost of goods (down 2.1%). The difference between the two has grown higher than has been seen for a long time. Underlying inflation excluding seasonal food and energy costs is also increasing and now at 1.4%.

However everything is set to change with the release of next month’s data. The rapid decline in petrol prices at the turn of 2015 will fall out of the calculation. Although fuel prices are lower today than a year ago (102p vs 107p, according to Fleet News), that compares to the 12p difference seen in December over the same time period.

Our prediction is that CPI will rise to 0.5% in the January data and rise to 1% by the time the April data is published. The corresponding RPI figures being 1.5% and 2% respectively.

The full ONS stats can be found here.

Latest UK inflation data – November 2015

Listen to Pete Comley talk about the data on Share Radio:


The November inflation figures showed CPI inflation slightly higher at 0.1% – about what we predicted last month. However this is another month where the change in the inflation rate says more about what was happening last November that currently. A year ago prices declined sharply in November – a combination of petrol and food declines. This year they declined too (especially petrol and wine/spirits), but not as much.
Balanced against these declines we saw increases in services – up 2.4% overall. Particularly the rise in Insurance Premium Tax from 6% to 9.5% also pushed up inflation slightly. November saw another month of clothes price gyrations. They fell in November having risen in October. However it should be noted that over the last year, the CPI clothing index has remained unchanged, implying that the price changes we are seeing probably tell us more about issues with the way ONS measure clothes prices than inflation per se.


RPI went back up to 1.1% from 0.7%. The rise is not that significant and the usual 1% differential between CPI and RPI has now been restored. RPI is higher than CPI because it includes house price rises (6%), rents (3%) and is not subject to the so-called formula effect. Read more about the differences here.

Inflation outlook

The outlook for CPI next month is that it may well decline again back below zero. This is because the recent fall in crude oil is feeding through to petrol pump prices. In addition, retailers smarting from the decreased footfall this Christmas have been heavily discounting. However as we’ve saying for a while now, everything will change when we see the January inflation figures (published in Feb). The big falls in petrol last January will then fall out of the equation and CPI will probably be back to 0.5% (and RPI 1.5%). These figures are not as high as we were predicting a few months ago and this reflects the recent plunge in the price of crude oil.

Impact of lower oil prices

The current period of near zero price rises is an example of good deflation where the costs of goods go down due to reduced commodity prices. You can see the major impact the decline in oil prices since 2014 has had on the consumer. In early 2014, the average household spend over £100 a month on motor fuels. That will now have declined to less than £80 giving them a windfall of potentially £300 a year. The latest ONS survey indicates that most of this is probably going on luxuries such as new cars, air travel, eating out and short breaks, home improvements and furniture.

The full ONS inflation stats can be found here.

Latest UK inflation data – October 2015

Listen to Pete Comley talk about the data on Share Radio:

CPI inflation remained at -0.1% in October – the first time prices have been negative two months in a row since this index was created in 1996. RPI declined to 0.7%.

Reasons for deflation

The key driver for low inflation remains the decline in petrol prices (linked to world crude prices). Petrol was 109p in mid-October this year compared with 127p last year.  In addition food prices have also dropped over the previous 12 months with some further falls seen in October. For example, the cost of diary spreads was lower, as were certain meats like lamb and sausages, wine, seasonal vegetables including carrots and fruit such as grapes.

ONS also claimed that there was also “downward price pressures for university tuition fees”. This was not quite correct as most students know. More correctly ONS should have been pointing out that the rise in fees to £9000 has now worked its way through nearly all three years of degree stduents, and is no longer exerting such a strong positive impact on inflation – it has been adding up to 0.3% to the headline rate since 2012.

Balanced against these negative factors are the continued rise in service inflation +2.2%.  Computer games and consoles were also up. ONS also talk about clothes price rises in October. Again clothes have produced some spurious impacts on inflation. These rises tell us more about the unusual lack of a increase in September than they do about October – this being probably related to slightly different patterns of retailer discounting in 2015.

Worldwide inflation

The UK’s figures mirror those seen in many other developed countries. Inflation is also zero across the EU and in the USA. Indeed the average inflation rate for the G7 for 2015 looks like it will set a record low of around 0.3%. Precise records make it difficult to determine when price rises were last this low in so many developed nations simultaneously but it was probably in the Great Depression.

It is worth noting that inflation is not low everywhere in the world. It is higher in some developing countries, particularly those dependent on commodities such as Russia (16%) and Brazil (10%).

Outlook for inflation

The UK is going to continue to see low inflation rates for at least a few months more. However this will all change when the petrol price declines fall out of the calculation in the January data and CPI might then move closer to 1% again. However the exact levels for CPI for 2016 are difficult to predict, as they very much depend on what happens to crude oil prices. Some technical analysts are predicting further declines to $36. That could lead to petrol going sub £1/litre in the UK and a more persistent period of near-zero inflation.

You can read the full ONS report here.

Latest UK inflation data – September 2015

The September inflation figures showed CPI inflation dipping below zero again (-0.1%) as we predicted last month. This was mainly due to the anticipated reductions in petrol and gas prices. However it was also affected by lower rises in costs of clothes than is normal in September.

RPI witnesses an even steeper decline to 0.8% (from 1.1%) – probably on account of the greater impact that clothing price changes can have on this index, due to the method of calculation. See discussion here.

An unusual September

The latest data are very unusual. September (and August) are usually months when prices rise, no matter what is going on in the economy. One of the drivers for this is retailers returning prices to normal after the summer sales and setting them at full levels in the run up to the Christmas peak. In more recent times, it has also been the period when the regular increases in education fees get reflected in the data.

But this September was different. CPI has never gone down in this month since its inception in 1998. Further, you have to go back as far as 1985 to see RPI decline then (except in the very strange 2008 when house prices were in free fall.) The reason they fell this time is related to global factors of declining oil prices and probably the impact of the China slowdown beginning to be felt e.g. on clothes prices.

Divergence between goods and services grows

September also saw the size of the gap between goods and service inflation reach double its normal level. Since the inception of CPI, service inflation has been on average 2.4% higher than goods inflation. In September 2015, goods inflation stood at -2.4% and service inflation was +2.5%, i.e. nearly 5% difference.

I have discussed the causes of this many times before. Global commodity prices and competitive devaluations are dragging down the price of goods, whilst services are being pushed up by increasing wages, monopolies and government regulation. Take a look at some of the highest rises in services:

  • 9.1% education
  • 4.1% recreation/sport
  • 3.8% domestic and household services
  • 3.7% accommodation
  • 3.5% social protection
  • 3.2% hospital services

The latest data on average weekly earnings show them to be rising at 3.4% (without bonuses) – and this rate is even higher within the private sector. This suggests that service sector price rises may well rise further in the coming year as the slack in the economy tightens and these higher wages drag inflation up again. We also have to factor in the cost of higher pension contributions that many employers are now being forced to pay their staff.

Outlook: The only way is up

I predict that these September stats will mark the long term low for CPI/RPI that we may well not see again for a number of years to come in the UK. Apart from the effects of wages on services alluded to above, the primary reason for this is that gradually the declines of goods prices witnessed over the last year will fall out of the calculation from November onwards.

Next month’s stats will probably show CPI near zero still. Remember petrol has declined another 2p/litre since today’s stats were calculated. However beyond there, the direction of travel is firmly up. When January’s inflation figures are published, it is likely that CPI will be back above 1% and RPI above 2%. What happens during the rest of 2016 may depend a lot on China and whether the UK raises interest rates. Without any negative impacts from those factors, it would not be surprising to see CPI almost back to the 2% target by the end of next year.

The full ONS stats can be found here.