Latest UK inflation data – March 2016

UPDATE: Listen to Pete Comley talk about the latest inflation stats:

The UK inflation figures published today showed the first clear evidence that inflation is starting to pick up in the UK now. CPI rose to 0.5% (from 0.3%) and RPI was at 1.6% (was 1.3%).

Having said that, part of the rise this month was due to spurious reasons related to two of ONS’s most volatile elements in its calculation – namely clothing and airfares. The earliness of Easter made it look like all airfares had risen by an amazing 23%. Also clothing went up 1% this month – as it often does in March – but very unusually it did not this time last year, and so because of the relative nature of the CPI calculation, this makes inflation appear higher.

However there were other reasons why inflation picked up. Service prices rose by 2.8%, with particular rises this month for restaurant/café prices. Add to that, the relative rise in petrol prices was more this month than the same time last year.

However absolute pump prices are still lower than 2015 and this is helping keep inflation rates down. But the biggest drag on inflation is the continued food price war by the supermarkets. Food is down 2.7% in the latest year. This month supermarkets seem to be competing to offer the great British breakfast at a bargain price. The total cost of a traditional fry-up of eggs, bacon, sausages, toast and spread is down over 11% in the last two months alone. Sunday roasts (topside beef, potatoes, carrots and broccoli) were also down over 5% in the same period.

The five reasons the inflation rate will continue increasing

However the winds of change are starting to blow for worldwide inflation levels. The UK core inflation rate was up to 1.5% (from 1.2%). The US is seeing a similar rise – core inflation now 2.3% and up 0.5% in the last 6 months. Sweden also published inflation levels today of 0.8% (up from 0.4%).

There are five reasons why we are starting to see inflation pick up in the UK and why CPI will probably rise to well above 1% by the year end.

  1. The first is that oil prices appear to be increasing. If these gains can be maintained, petrol and gas prices will rise. Therefore rather than helping keep inflation rates down, the effect of commodities will go into reverse and add significantly to CPI by the latter part of the year.
  2. The supermarket price war has been so vicious over the last two years that is must be a limit on how much further prices can be reduced. There is beginning to be pressure building for supermarkets such as Tesco and Morrisons to return to profitability. Interestingly Sainsburys has just dropped its Price Match guarantee. Add to that the recent weakness of sterling which has made imports more expensive. All of this suggests that days of food deflation may soon be coming to an end.
  3. The government may well be trying to boost inflation because of their need to reduce the real value of its debts. This April (i.e. in next month’s data) will see the effect of sharp rises in Council tax (3.6%), stamp duty, NHS dentist fees (5%), prescriptions (2.4%), air passenger duty (3%) and of course the rise in the minimum wage for over 25s by 7.5%. In addition many others have also recently raised prices e.g. stamps, water rates and mobile charges to name just three.
  4. Average weekly earnings are growing at 2.2% in the latest ONS data (January data, without bonuses). That together with the rises in minimum wages are going to add to UK inflationary pressure as businesses try to maintain their profit margins. We are already seeing evidence of this in certain service sectors such as restaurants.
  5. Finally QE in Europe and Japan continues to increase the world’s money supply and there is even talk now of helicopter money being seriously considered. Interestingly the UK M4 money supply also turned positive over the last two months – now 2% – the highest level in nearly 3 years. Although much of these money is going into asset price inflation (e.g. house prices), some will inevitably trickle down into consumer prices too.

In conclusion, the days of near-zero inflation rates are drawing to close (for the time-being anyway). Expect CPI inflation back towards the 2% target in 2017.

The full ONS stats can be found here.