UPDATE: Listen to Pete talk about the latest data on Share Radio:
Headline inflation rose to 1.8% CPI and 2.6% RPI – their highest levels in over two years. The main reason for the rise was related to motor fuel being 17% more expensive in 2017 than a year before. Last January when Brent crude was around $30 a barrel, petrol and diesel cost around 102p/litre. Roll on a year and crude is above $55/barrel and petrol averaged 118p and diesel 124p (source: FleetNews)
CPI also increased because food prices did not fall as much as they did in 2016 – indeed next month we may well see food prices rise for the first time in nearly three years. This has little to do with the media headlines of crop failures in Spain, but is more a reflection of increased costs related to higher crude oil prices impacting global food production.
Inflation in January might well have been higher had it not been for the two proverbial ONS problem areas of clothing and airfares. This time ONS reckoned that clothing had declined more than last year and the aberrantly high airfares enhancing last month’s headline figure disappeared. The combined effect was probably to suppress CPI was 0.1% or more, i.e the true level was more like the 1.9% most analysts expected.
Inflation rises coming
Inflation is undoubtedly heading higher as we are seeing continued rises in food prices. Fish seems to be a good bellwether here – probably because its price is particularly affected both by higher oil prices in running trawlers and by sterling’s depreciation (as we import most of the fish we eat). Fish prices are up 3.1% year-on-year. That compares to them falling for the last two years – they declined 4.1% last January.
We also have a raft of gas and electricity price rises about to hit the market. Npower are increasing their electricity costs by 15% and gas by 5% on 16th March, for example. Most other utilies are following suit.
Add to that the latest Producer Prices Index shows factory gate prices rising at 3.5% and manufacturing material input prices by 20%+ mainly due to oil and metal commodity prices. The latter is the highest level seen since 2008.
The Bank of England’s latest Inflation Report is predicting CPI will be 1% higher by this time next year and will remain in the range of 2-3% for the best part of the next three years. However how much inflation persists probably depends a lot on what happens to crude oil prices. Should the current rebound trend start to falter, inflation will probably come back down. Interestingly, there is no sign yet of service inflation starting to rise along with goods inflation and core inflation remains steady at 1.6%.
Inflation: an international perspective
Most people think that inflation is primarily affected by specific UK factors. Interestingly it is highly correlated around the globe in developed nations – mainly because it is so strongly influenced in the short-term by global commodity prices. The latest data from the EU shows inflation taking off markedly. Across the whole EU, it has risen 1.2% in the space of two months to now stand at 1.8%. There are estimates that it may have risen to around 3% in Spain in January for example.
The trend is similar in the US too. The latest data (December 2016) shows it rising to 2.1% (from 0.8% last July). The January data (due soon) will undoubtedly show another rise confirming that the rising trend is very much an international one within developed markets.
Finally, next month’s inflation figures will see the ONS switch to using CPIH as their main benchmark measure. This is in spite of the many problems and flaws with the measure (see here) and the fact that it is still does not have the credentials of a “national statistic”. In the short term, it will act to raise the headline figure a little as the Owner Occupier’s Housing costs element it includes is currently running at 2.5%. For example in January 2017, CPIH was 2.0% compared to just 1.8% for CPI. More on this next month…
The full ONS statistics can be found here.