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.