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.