UPDATE: Listen to Pete Comley discuss the June inflation figures on Share Radio with Simon Rose:
The latest CPI inflation numbers published today show the UK dropping back into deflation today – albeit by a small amount (-0.04%). The main reason for the slight decline versus last month’s data is again mainly related to blips in the data, i.e.
- Clothes costs were down as sales kicked in during June – but they didn’t in the data last year, as the sales were slightly later in 2014.
- Airfares went up, but less than last year, so the net effect is to lower CPI.
On top of the above, food prices continued to decline. The supermarket price war seems to have been lowering prices these last few months on staples such as bread, margarines and spreads, eggs and tea-bags.
However the big picture for why we appear to have deflation (as measured by CPI) is related lower global commodity prices and the strengthening pound.
With regard to sterling’s trade weighted index, it is up 6% in the last year and 17% over the last two years and is now risen to a level last seen in 2008. This is not only lowering the costs of imports but also that of items manufactured in the UK. The cost of goods in the UK declined -2.0% in the last year.
In contrast, UK services continue to rise at 2.2%. Indeed average wages are up nearly 3% in the latest data and this is predominantly in service sectors with the highest rises seen in retail, restaurants/hotels, business services and construction. It therefore remains to be seen what impact the Chancellor’s proposed increase to £9 of the National Living Wage is going to have on future inflation. I suspect it will stoke service inflation longer-term. Indeed this fact cannot have escaped the government’s mind when they proposed this increase. Every rise in salaries increases the tax take and makes the UK’s every growing debt burden easier to pay back. This clever ruse is being paid for by companies in the short-term. However they will be forced to raise prices to pay for it and so it will stoke inflation. That in itself will then prompt higher wage settlements elsewhere, again helping with the debts.
Over coming few months, I expect inflation will remain around the same level and may even be negative again (as measured by CPI). This is because oil prices have come down and petrol may well fall at the pumps back towards 110p a litre by end of the summer.
However longer-term, inflation will start to pick up again when we reach the autumn. The steep declines in food and petrol prices mainly started last September. When they begin to fall out of the calculation (October report onwards), we will start to see CPI pick up. It may well be above 1% by the start of 2016 and probably around 2% by the end of next year.
Add to that, these are inflation numbers as measured by CPI. They completely ignore house prices and owner occupier costs. In addition, they use a method of calculation that ensures that the numbers will always appear lower than true inflation as experienced by consumers – see here for a discussion. The UK’s old measure of inflation has neither of these flaws. RPI currently stands at 1% (not zero). Moreover it is probably set to rise to near 3% by the end of next year.
More details on the latest numbers can be found in the full ONS report.