UPDATE: Listen to Pete Comley talk about the latest inflation figures on Share Radio:
Today saw the introduction of the new headline inflation measure of CPIH. I have blogged about this in detail over the last few days (here and here) and so this bulletin will initially focus on the general inflation trends of CPI before returning to CPIH.
The UK now has three measures of inflation being used by different stakeholders, RPI, CPI and now CPIH:
There was a steep rise in inflation today with CPI going up 0.5% to 2.3% and RPI by 0.6% to 3.2%. These are the highest inflation levels we have seen in the UK for two and half years and above the Bank of England’s inflation target of 2%.
The main “driver” (no pun intended) for the increasing rate was car fuel prices which continued to rise in February and are now nearly 20p higher than this time last year. However, there were also rises across a number of other goods which follow on from the higher factory gate prices that have been seen in recent months. Input prices rose 19% in the latest period (a combination of the Brexit devaluation and higher commodity prices) and factory gate prices by 3.7%.
This means that goods inflation in CPI is now running at nearly 2% – having been largely negative for the last few years. Examples of goods with significant price rises over the last 12 months include: fish, coffee, many fruits and vegetables (from Iceberg lettuce to potatoes to grapes), laptops/tablets, cameras, and new cars.
Core inflation is up to 2% – its highest level since June 2014. The trend for inflation is that will probably carry on going up, but next month may see a decline in the speed of the rise with CPI/CPIH rising to around 2.5%. Thereafter once the electricity and council tax price rises kick in during April, we’ll likely see another leg up for inflation.
The above said, a lot depends on the global price of crude oil, as this quickly feeds into petrol prices. It has slipped back recently and this may temper increasing inflation over the next few months.
ONS were lucky that on the day they switched the headline measure to CPIH that it came out the same number as CPI. Therefore criticism (see here) of their methods have been more limited than it might have been. However our analysis (see here) clearly indicates that as time goes by and the UK inflation rate rises, there is going to be a greater disparity between the two measures. CPIH may even be 0.3% lower than CPI by the end of the year.
If by then, the government has decided to switch the inflation measure used for benefits and pensions to CPIH, it could start to have an effect on living standards. Although some benefits are temporarily frozen, many are not. Those related to disability, carers, maternity and pensioners are still all being index linked to an inflation measure (CPI today).
Indexation of state pensions might also be reduced by CPIH. The Triple Lock on pensions ensures they rise by the minimum of 2.5%, earnings (currently 2.3%) and inflation (2.3% today). The Bank of England predict that CPI will rise to nearly 3% by the year end and so next time pensions get revised (in November), it will probably be by the rate of inflation. However should there have been a switch to CPIH by then, pensioners may well get less.