Category Archives: Latest UK inflation data

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:

CPI

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

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.

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.