Latest UK inflation data – July 2016

UPDATE: Listen to Pete Comley talk about the latest figures on Share Radio:

CPI inflation showed a slight rise today to 0.6% CPI. We are seeing the first signs of the Brexit devaluation of sterling on UK prices. For example, petrol prices went up – despite a decline in dollar oil prices. Wine costs also edged higher. July saw the smallest decline in food prices we’d seen for two years.

The full ONS report can be found here.

What the producer price index is telling us

The producer price index is clearly indicating the impact Brexit will have over the coming year. For the first time in two years, import costs rose. Overall input prices are up 4.3% and food was up over 10% in July. These rises have yet to be passed through. Indeed overall goods price inflation is still negative (-1.4%) but I suspect we’ll see it positive by the year end and with it, CPI inflation back towards maybe 1.5%.

A key factor is what happens to global oil prices. Last year, the autumn and winter saw marked declines in oil, but this year the opposite may well happen. If that was to occur, CPI inflation could well reach the target 2% by early next year.


The other interesting factor to emerge today was the sharp rise in RPI to 1.9% (from 1.6%). The difference between it and CPI is now the largest we’ve seen for 6 years.

RPI is always higher due to the so-called formula effect. This arithmetic trick effectively massages down the inflation rate of CPI – you can see the effect particularly on goods which CPI still estimates as declining but RPI now measures as almost rising. You can read more about the formula effect here.

The other big difference between the two is that RPI includes the impact of house price rises, whilst CPI ignores it. Indeed the greater variance between the two seen this month is primarily due to house prices. The latest ONS data shows nationwide house prices up by 8.7% which is adding markedly to the RPI estimate of overall inflation.

The importance of RPI

Despite the ONS’s/the government’s attempts to suppress usage RPI, it still gets used in a number of key places. The key one is to calculate the interest rate of inflation-linked government debt. Today also saw it being used to fix rail fare rises for next year (at 1.9%).

However the one that probably has the biggest impact on any millennial is its impact of student debt. Student debts now rise by somewhere between RPI and RPI +3% depending on how much you earn. Each year the rate from September is set on the previous March’s RPI (1.6%). That means students will see a sudden jump in interest rates in a few weeks to up to 4.6%. However more importantly is what is going to happen to them this time next year. My guess is that we may see RPI at around 3.5% by next March, making the interest rate up to 6.5% next year (and headed higher).

Not only does this seem an unfair rate of interest in a near-zero interest rate world, it is just impossible to pay back for the average student. A quick calculation shows that a student (with an average £40k debt) will need to earn nearly £50k a year to pay back the interest alone at 6.5%. Given that the average lifetime salary of a graduate is estimated to be just £35-40k, this means virtually all students will start to enter a debt spiral of ever higher debts and interest payments.