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.