Category Archives: Latest UK inflation data

Latest UK inflation data – August 2015

The August inflation figures continue to show CPI inflation around zero. Goods inflation is -2%. There are continued downward effects due to reductions in petrol and diesel prices this month (-2.4p and -6.2p respectively). Clothes also went up less in August than last year –though that is partly an artefact of them falling less in the sales earlier this summer.

The reason we did not see negative CPI was mainly due to balancing effects of service inflation; up 2.3% on the year. In addition, furniture prices were higher this month, as were the costs of miscellaneous goods and services – both possibly a reflection of the housing market pick up since the election?

The gap between CPI and RPI

Despite the decline in CPI, RPI nudged higher this month to 1.1%. Indeed the gap between CPI and RPI has widened to its largest in over four years. The increase in the gap is mainly down the different weights used in RPI and CPI. RPI items are weighted by surveys of average people’s expenditure. CPI uses a value model which therefore puts more emphasis on the expenditure of the rich. Therefore this month, as clothes went up less than normal, this lowered CPI (as the rich spend more on clothes). Conversely the furniture price rises caused RPI to go up more due to the higher weights in that model.

More broadly though, the big difference between RPI and CPI is mainly driven by the inclusion of housing in RPI – house inflation is 9% according the Halifax. In addition, CPI uses a statistic averaging method that also causes the inflation rate to appear lower – see discussion about geometric means here.

Outlook for inflation

Next month’s CPI will more than likely be negative – possibly as low as -0.2%. This is due to the continued decline in petrol prices and the British Gas’s recent decision to reduce their prices by 5%. Add to that the continued strength of the pound has had a marked impact on producer prices. Producer input prices are down nearly 14% and their costs of products produced down -1.8% and these will continue to feed through to the costs of goods in the coming months.

That said, this deflation is going to be a temporary blip. We are probably going to see price indices rise significantly in the end of the year. This is because the declines in petrol prices and food prices which peaked in January 2015 will fall out of the equation. Average wage growth of 2.8% may also start to bear down on prices. Therefore it is most likely that CPI will be above 1% in January 2016 and RPI above 2%. They will probably continue to rise towards target by the end of 2016, but this may well be tempered by a continued strength of sterling – especially if rates do finally rise.

The full ONS stats can be found here.

Latest inflation data – July 2015

The July inflation figures show that UK prices have remained almost static for over a year now, i.e. the CPI index is actually below the level seen in April 2014 (and RPI is just 1% higher).

In terms of specifics, there is relatively little to note in the latest figures. July is traditionally a month when prices fall and this year was no exception – overall prices down 0.2%. However last year they appeared to decline more due to some anomalies in the timing of the clothes sales in May/June which helped prices decline -0.3% in July 2014. This falling out of the equation is mainly why inflation appeared to slightly tick up in July 2015.

July 2015 saw further declines in dairy prices (and many cows being herded into supermarkets to make that point). Milk prices were down 1p to just 43p/pint on average and the prices of eggs and spreads were down to new lows to. The supermarket price war also hotted up on the vegetable front with shops competing to offer the lowest prices for such things as potatoes, broccoli, lettuce and tomatoes as well as other categories such as sugar.

Overall CPI inflation was near zero because balanced against these were other rises. Airfares rose more this July than last year. Prices for computer games also rose and we saw declines in bank account charges witnessed in 2014 fall out of the calculation. Overall it should be noted that the cost of services is still rising above the inflation target as edged higher to 2.4% in July and underlying inflation is 1.2%.

In addition house prices increased 5.7%. These are completely ignored in the CPI index calculation. Indeed that is in part why the RPI measure of inflation was significantly higher at 1% (though calculation differences account for the bulk of the difference – see here).

The big picture – deflation

However the big picture is still one of a lot of deflationary forces impacting on UK prices. The primary ones being:

  • Declining commodity indices. Crude oil has declined to half its price of a year ago. In addition many other commodities, including food, are significantly lower. The broad CRB commodity index is down 15% year-on-year.
  • The increased strength of sterling. It’s trade weighted index is up 8% over one year and 16% over the last two years. These reductions in the cost of raw materials (down 12% year-on-year) are helping factory gate prices decline – down -1.6%.

The effect of the latter should not be under-estimated. Indeed increasing strength of the Japanese Yen was one of the main causes of stagnant prices in Japan in the 90s and 00s. See here.

Furthermore the devaluation of the Chinese Renminbi may also cause a further deflationary force to supress prices in the coming years.

Outlook for inflation

The outlook for CPI inflation over the next few months is that we will most likely continue to see near-zero levels of inflation. We may well dip in negative territory as the price of petrol starts to come back down again on the back of the sub $50 Brent oil price. (Bizarrely ONS recorded higher petrol prices in July. That will be reversed in August.)

But this is going to be a temporary blip. We are probably going to see price indices rise significantly in the late autumn and early next year. This is because the declines in petrol prices and food prices which peaked in January will fall out of the equation. Average wage growth of 2.8% may also start to bear down on prices. Therefore it is most likely that CPI will be above 1% in January 2016 and RPI above 2%. They will probably continue to rise towards target by the end of 2016, but this may well be tempered by a continued strength of sterling – especially if rates do finally rise.

The full ONS stats can be found here.

Latest UK inflation data – June 2015

UPDATE: Listen to Pete Comley discuss the June inflation figures on Share Radio with Simon Rose:

Audioboom140715

The latest CPI inflation numbers published today show the UK dropping back into deflation today – albeit by a small amount (-0.04%). The main reason for the slight decline versus last month’s data is again mainly related to blips in the data, i.e.

  • Clothes costs were down as sales kicked in during June – but they didn’t in the data last year, as the sales were slightly later in 2014.
  • Airfares went up, but less than last year, so the net effect is to lower CPI.

On top of the above, food prices continued to decline. The supermarket price war seems to have been lowering prices these last few months on staples such as bread, margarines and spreads, eggs and tea-bags.

However the big picture for why we appear to have deflation (as measured by CPI) is related lower global commodity prices and the strengthening pound.

With regard to sterling’s trade weighted index, it is up 6% in the last year and 17% over the last two years and is now risen to a level last seen in 2008. This is not only lowering the costs of imports but also that of items manufactured in the UK. The cost of goods in the UK declined -2.0% in the last year.

In contrast, UK services continue to rise at 2.2%. Indeed average wages are up nearly 3% in the latest data and this is predominantly in service sectors with the highest rises seen in retail, restaurants/hotels, business services and construction. It therefore remains to be seen what impact the Chancellor’s proposed increase to £9 of the National Living Wage is going to have on future inflation. I suspect it will stoke service inflation longer-term. Indeed this fact cannot have escaped the government’s mind when they proposed this increase. Every rise in salaries increases the tax take and makes the UK’s every growing debt burden easier to pay back. This clever ruse is being paid for by companies in the short-term. However they will be forced to raise prices to pay for it and so it will stoke inflation. That in itself will then prompt higher wage settlements elsewhere, again helping with the debts.

Over coming few months, I expect inflation will remain around the same level and may even be negative again (as measured by CPI). This is because oil prices have come down and petrol may well fall at the pumps back towards 110p a litre by end of the summer.

However longer-term, inflation will start to pick up again when we reach the autumn. The steep declines in food and petrol prices mainly started last September. When they begin to fall out of the calculation (October report onwards), we will start to see CPI pick up. It may well be above 1% by the start of 2016 and probably around 2% by the end of next year.

Add to that, these are inflation numbers as measured by CPI. They completely ignore house prices and owner occupier costs. In addition, they use a method of calculation that ensures that the numbers will always appear lower than true inflation as experienced by consumers – see here for a discussion. The UK’s old measure of inflation has neither of these flaws. RPI currently stands at 1% (not zero). Moreover it is probably set to rise to near 3% by the end of next year.

More details on the latest numbers can be found in the full ONS report.

Latest UK inflation data – May 2015

The latest UK inflation data published this morning shows annual CPI inflation at 0.1% and RPI at 1%. Both are increases over the last month. However it should be remembered that this result was expected as prices dropped slightly last May and those falls dropped out of the index today. In contrast this May, they rose 0.2% – partly an effect of rising petrol prices (now 121p – up from 115p in Feb), some food price rises (eg diary spreads) and some quirks due to the timing of Easter affecting the cost of flights.

But the latest figures provide some support to the view that we have seen a low in inflation and the direction is now higher – see graph below. Certainly as the year progresses the falls in food and fuel prices will gradually drop out of the calculation. Furthermore, underlying inflation is 1.1% and services inflation is up to 2.3% again. It is prices of things like restaurants/hotels and education that are still pushing service inflation upwards.

cpi trend

These figures are also consistent with the trends in Europe where inflation was also up a similar amount to 0.3% in May. Indeed Germany’s own inflation stats out this morning, show it rising at 0.7% year-on-year now.

You can read the full ONS report here.

Latest UK inflation data – May 2015

The latest CPI inflation shows deflation of -0.1%. This is the first time there has been any recorded deflation since 1960 (note CPI only goes back to 1996, but ONS have projected it back to 1960). The main reason for the apparent decline says more about price changes a year ago than it does about recent ones.

In fact the latest month-on-month change since March 2015 is an increase in prices by 0.2%. Anyone who has bought petrol or shopped in a supermarket will have noticed the gradual rises e.g. petrol was 114p in April vs 112p in March (and just 108p in February).

In particular what has fallen out of the stats this month are some apparent rises seen in airfares. I say “apparent” as ONS collect that type of data at a fixed time each month and last year it was over Easter, when prices rose. Easter was earlier this year (6th vs 20th April), so the headline decline in prices is probably largely a methodological quirk.

Many goods have declined in price over the last 12 months but some are up eg tobacco (+6.4%).  Overall services are still rising at 2% according to CPI. In particular new car sales (+2.4%)  and maintenance (+2.5%) are contributing to continued inflation as is a number of other areas such as recreation and culture (+2.8%), train fares (+2.5%), education costs (+10%), accommodation services (+3.8%).

But remember that CPI excludes virtually costs related to housing. Today the latest data showed UK house prices up nearly 10%. That is partly why RPI (which includes them) is still nearly 1%. See article here for differences between CPI and RPI.

The big picture for inflation is today’s numbers will probably mark their low point. Last May we saw a decline in prices – we are not going to see that this time. Commodity prices are rising again and this will feed through to the stats. I would not be at all surprised to see CPI back to 0.2% or more next month. It will probably be 1% by Christmas and Mark Carney last week said he expected it would be above 2% within 2 years. Enjoy the brief period of deflation whilst it lasts.

The above said, I don’t think we’ll need to wait another 55 years for deflation again. See here for why.

More details on the latest numbers can be found in the full ONS report.

march2015_2

Latest UK inflation data – April 2015

The latest inflation figures today show that average prices were unchanged again in March as measured by CPI. However the average very much hides a game of two halves.

What is causing CPI to be so low is the impact of declining energy and food commodity prices together with a supermarket price war. Although petrol prices rose a few pence last month, they are still 14% lower than a year ago. Food overall is down 3.2%. Both of these are contributing to making CPI almost 1% lower than it would otherwise be.

However it is the goods vs services split that reveals most about what is going on with UK prices. Goods are down 2.1% while services are up 2.4%. Below are some examples of the price rises we are seeing in services. Some are in regulated areas, where governments have an interest in helping stoke inflation – see discussion here. However most of them are in discretionary areas and it is possible that some companies are taking advantage of the increased spending power caused by lower food and fuel prices to increase their charges.

  • 10% Education
  • 5% Transport (especially planes)
  • 3% Hotels
  • 3% Recreation and culture
  • 3% Domestic services
  • 3% Gardening
  • 3% Hospital services
  • 2% Restaurants
  • 2% Car repairs
  • 2% Papers/magazines

In addition to the above, it should be remembered that tax rises have increased tobacco costs by 8% and house prices also rose 8% – although this is excluded from CPI (see discussion here).

Indeed underlying inflation, although declining, is still 1% and it is quite likely that inflation in the UK will be heading back towards 2% by mid-2016 when the recent commodity price drop out of the calculation early next year. Inflation is not dead yet in the UK as some politicians might want to suggest. Having said that, the outlook for inflation for the rest of the century could well be subdued – see discussion here.

More details on the numbers can be found in the full ONS report.

wages

Latest UK inflation data – March 2015

The latest UK inflation stats published today show it falling to zero, i.e. implying that the average cost of things are the same as in February 2014. Moreover some commentators are claiming that with inflation ‘the lowest on record’ we are wealthier (as wages are exceeding inflation). The actual data does not support these claims that well. As ever with statistics, the true picture is more complicated.

Firstly, let’s look at the inflation rate.  It is CPI that has declined to 0%. The old measure of RPI, which is arguably more accurate (see here), is showing an increase of 1% still. The difference here is mainly the statistical slight of hand in CPI which lowers CPI significantly because of the way it averages the numbers together (see here). It also leaves out house prices, which have gone up markedly in 2014 (see here).

Moreover even when you did deeper into CPI, you find that the underlying inflation rate (without volatile elements like food and fuel) is 1.2% and service sector inflation is running at 2.4% within CPI. (The service sector includes things like train and plane fares and insurance, for example).

Add to that many manufacturers are playing tricks with packaging and reducing the quantity sold in a process called shrinkflation – the latest one to emerge being the reduction in the amount of tea in PG Tips teabags the other week.

What is making the inflation rate look lower currently are probably one-off changes in commodity prices which are working their way through the system. The halving of the oil price over the last six months, has reduced petrol prices by 17%. That alone has shaved more than a half a percent off the CPI inflation rate. Food prices are down over 3% on an annual basis. This mainly is an effect of reductions in commodity prices for things such as dairy products, cereals and even chocolate. It is also being magnified in the UK by increased competition between retailers.  But the key thing to remember here is that these are not long term trends. This time next year, when those decreases fall out of the calculation, it is more than likely that inflation will spike up again towards 2% CPI and 3% RPI.

The first key take out of all this is that prices are not as static as the headlines might lead you to believe. For the most part are still going up and this will become clear as we start 2016.

The second key point being made is a comparison between wages and inflation which is implying we are all getting richer. Although as I pointed out on Share Radio last month, the average household has seen their bills for petrol and food potentially fall £100 a month.  Moreover the latest quarterly wages data for Nov-Jan shows wages growing at 1.6%. Therefore we are getting better off, no?

Probably not. Wages are a lagging indicator. We get wage rises (if we are lucky) but once a year. Most of that 1.6% statistic is a result of wage rises that took place earlier in 2014 (and even late 2013). What is interesting is that average basic wages have actually been static in the last three months. Average weekly basic earnings were £456 in October 2014. In January 2015 (latest published data), they are £457. It remains to be seen what average wage rises will be at the end of 2015, but I’m guessing that most people will be lucky to get a pay rise at all, as employers will point to CPI at 0% and decide not to pay one.

Meanwhile, although some items in the shopping basket have gone down (e.g. food and fuel), others have gone up (e.g. train/plane fares, insurance, etc.) and the latter will more than balance out the former as a whole in 2015 (especially when you use RPI as a less biased benchmark).

The second key take out is that it would be nice if we all ended up better off in 2015, but the final statistics at the year end (and long after the election spin) are likely to show that unfortunately we are not.

More details on the numbers can be found in the full ONS report.

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Live interview about UK inflation data 17 Feb 2015

Pete Comley, author of Inflation Matters, was interviewed on Share Radio on 17 February about why inflation is continuing to fall in the UK and the implications of that for consumers. You can hear the whole interview here (5 mins):

Pete states that inflation is so low primarily because of the decline in prices over the last year in motor fuels (-16.2%) and food prices (-2.8%).

But he notes that what drives the monthly change in the stats (i.e. CPI declining from 0.5% to 0.3%) also depends on what was happening to prices in the same period last year. If there was a big rise in an element a year ago, it would now fall out of the calculation. This can also make the rate appear to decline. For example, beer prices normally rise in January, but they fell this year. Similarly recreation and culture costs also normally decline in January but they did so much more this year (-0.9% in Jan 2015 vs -0.5% in Jan 2014). Both these helped drag down the annual inflation rate along with the prices of petrol and food.

More details on the numbers can be found in the full ONS report.

 

Latest UK inflation data – February 2015

The headlines are full of inflation being the lowest rate on record. Even George Osborne was tweeting about it:

Though true, this is more than a little misleading. Firstly it is referring to CPI which we only started publishing in 1996 (and working out annual changes in 1997). Secondly, it is using CPI which as I have highlighted elsewhere markedly underestimates true UK inflation by at least 1%. If you look at the records of RPI, which more accurately estimates UK inflation, and has records that go back just after World War II, you definitely cannot make this statement.

RPI did fall today quite markedly to 1.1% (from 1.6% last month). However but it has been at that level or lower 43 times since 1947 i.e.

  • April 1949
  • December 1953
  • February-June 1954
  • April-December 1959
  • January-May & August 1960
  • June-July 1963
  • August-September 1999
  • November-December 2001
  • February & May-June 2002
  • December 2008
  • January-November 2009

See Table 37 in ONS report.

Furthermore, if you take a longer term perspective, there have regularly been periods when inflation has been low and below zero. If you examine UK inflation records back to 1264, you will see that the UK goes through cycles of prices rising for a period of a hundred or so years and then remaining stationary or declining for another century. See Inflationary Wave Theory and graph below. Therefore in this context, George Osborne’s comment is very misleading to imply that inflation is at its lowest rate ever.

750 years of UK prices

Latest UK inflation data – January 2015

The December 2014 CPI inflation fell to its lowest since May 2000 at 0.5%. The main reasons for this were:

  • The decrease in the cost of crude oil which has affected both petrol prices (-10.5%) and domestic electricity/gas/fuel costs (-2.1%)
  • The dropping out of the calculation of electricity/gas price rises (+6.4%) in December 2013.
  • A decrease in the cost of food due to a combination of soft commodity price decreases during 2014 and competition amongst UK retailers in December – particularly for vegetables (-7.1%).

Despite this, underlying core inflation (which excludes energy and food/drink) was slightly higher at 1.3% implying that once these commodity price falls have worked through the system, CPI may well rise again. Indeed some sectors of the economy continue to witness significant rises including: education 10%, tobacco 7.7%, books/papers 5.1%, rail fares 3.9%, health insurance 3.8%, recreation/culture 3.6%, wine 3.5%, postal services 3.3%, water/sewage 3.2%, and hospital services 2.6%.

The alternative RPI index, fell to 1.6% from 2.0%. It is higher than CPI primarily because:

  • It includes the effects of housing – house prices rose about 9.5% in 2014 according to ONS. See coverage issues.
  • It uses a different method for averaging prices. See calculation issues. This particularly affects clothing costs which RPI estimated to be rising by 6.4% but CPI said it was declining by 0.4%.

This chart illustrates the CPI and RPI rates since the millennium:

The difference between CPI and RPI

Full details can be found at the ONS website.