The latest UK inflation stats published today show it falling to zero, i.e. implying that the average cost of things are the same as in February 2014. Moreover some commentators are claiming that with inflation ‘the lowest on record’ we are wealthier (as wages are exceeding inflation). The actual data does not support these claims that well. As ever with statistics, the true picture is more complicated.
Firstly, let’s look at the inflation rate. It is CPI that has declined to 0%. The old measure of RPI, which is arguably more accurate (see here), is showing an increase of 1% still. The difference here is mainly the statistical slight of hand in CPI which lowers CPI significantly because of the way it averages the numbers together (see here). It also leaves out house prices, which have gone up markedly in 2014 (see here).
Moreover even when you did deeper into CPI, you find that the underlying inflation rate (without volatile elements like food and fuel) is 1.2% and service sector inflation is running at 2.4% within CPI. (The service sector includes things like train and plane fares and insurance, for example).
Add to that many manufacturers are playing tricks with packaging and reducing the quantity sold in a process called shrinkflation – the latest one to emerge being the reduction in the amount of tea in PG Tips teabags the other week.
What is making the inflation rate look lower currently are probably one-off changes in commodity prices which are working their way through the system. The halving of the oil price over the last six months, has reduced petrol prices by 17%. That alone has shaved more than a half a percent off the CPI inflation rate. Food prices are down over 3% on an annual basis. This mainly is an effect of reductions in commodity prices for things such as dairy products, cereals and even chocolate. It is also being magnified in the UK by increased competition between retailers. But the key thing to remember here is that these are not long term trends. This time next year, when those decreases fall out of the calculation, it is more than likely that inflation will spike up again towards 2% CPI and 3% RPI.
The first key take out of all this is that prices are not as static as the headlines might lead you to believe. For the most part are still going up and this will become clear as we start 2016.
The second key point being made is a comparison between wages and inflation which is implying we are all getting richer. Although as I pointed out on Share Radio last month, the average household has seen their bills for petrol and food potentially fall £100 a month. Moreover the latest quarterly wages data for Nov-Jan shows wages growing at 1.6%. Therefore we are getting better off, no?
Probably not. Wages are a lagging indicator. We get wage rises (if we are lucky) but once a year. Most of that 1.6% statistic is a result of wage rises that took place earlier in 2014 (and even late 2013). What is interesting is that average basic wages have actually been static in the last three months. Average weekly basic earnings were £456 in October 2014. In January 2015 (latest published data), they are £457. It remains to be seen what average wage rises will be at the end of 2015, but I’m guessing that most people will be lucky to get a pay rise at all, as employers will point to CPI at 0% and decide not to pay one.
Meanwhile, although some items in the shopping basket have gone down (e.g. food and fuel), others have gone up (e.g. train/plane fares, insurance, etc.) and the latter will more than balance out the former as a whole in 2015 (especially when you use RPI as a less biased benchmark).
The second key take out is that it would be nice if we all ended up better off in 2015, but the final statistics at the year end (and long after the election spin) are likely to show that unfortunately we are not.
More details on the numbers can be found in the full ONS report.