Category Archives: Latest UK inflation data

Latest UK inflation data – November 2016

UPDATE: Listen to Pete talk about the figures on Share Radio: https://ws.sharethis.com/podcasts/what-is-driving-the-increase-in-inflation-13-dec-16/

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.

THE IMPACT OF THE OIL PRICE

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

STERLING DEVALUATION

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.

GLOBAL INFLATION

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).

euro-inflation

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).

INFLATION EXPECTATIONS (=RPI)

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:

https://www.shareradio.co.uk/podcasts/why-did-the-inflation-rate-fall-unexpectedly-last-month-15-nov-16/PodcastPlayer

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).

CPIH

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.

RPI

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).

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.