UPDATE: Listen to Pete talk about the figures on Share Radio: https://ws.sharethis.com/podcasts/what-is-driving-the-increase-in-inflation-13-dec-16/
CPI inflation picked up to 1.2% today and RPI to 2.2%. (Incidentally, these were exactly our predictions last month).
What is driving inflation higher is a combination of rising oil prices and the impact of the fall in the price of sterling. ONS also talk of changes in the prices of clothing and airfares, but as we’ve discussed many times, these are both items that ONS struggle to measure accurately and so appear volatile. The changes in both of these are mere noise in the data.
THE IMPACT OF THE OIL PRICE
What is most important currently in determining the UK inflation rate is the price of petrol. This time last year, global crude oil prices headed below $30 a barrel and petrol prices here in the UK towards £1/litre. This year the opposite trend is in place. Yesterday crude prices hit their highest since July 2015 and despite the recent pick up in Sterling, this is going to continue to feed through to higher petrol prices in the New Year. As the table below shows, unleaded petrol may be in the range 118p-120p a litre in January – some 15-18% higher than the previous year – that will add 0.7% to the UK inflation on its own.
|Unleaded petrol prices:||2015||2016||Difference|
The decreasing value of Sterling is now beginning to have an impact on inflation too. Input prices for companies are up 12.9% in the last year and the prices they charge for goods leaving factories are up 2.3%. Goods inflation in CPI went positive for the first time in two years and stood at 0.2% In November. ONS highlight a few items such as computers – up 3.2% in a month and also evidence of Unilever’s increases in bleach and cleaning products. Other imported household goods (e.g. leather sofas) are higher as are some core food prices such as bread and dairy products.
Despite the media focus on the rise of UK inflation being an effect of Brexit, it is primarily part of a global inflationary trend driven by commodity prices. Declining oil prices in 2015 sent a deflationary shock across the world. That is now unwinding as crude prices recover. The recent rises in the inflation rate in the UK mirror those in many other European countries including Baltic ones, Spain/Portugal, Germany/Austria and Switzerland. (The pattern is also the same in the US and China too).
The above said, we still live in a generally low inflation world which is a result of the overhang of the 2008 financial crisis and demographic pressures. Inflation will continue to rise short-term due to the oil price change but this is unlikely to herald a long-term change in global inflation rates (unless governments start printing massive amounts of money, of course).
INFLATION EXPECTATIONS (=RPI)
Finally, last week saw the Bank of England publish its quarterly survey of consumer inflation perceptions. As we saw in the last report in August, the consumer is fairly convinced that UK inflation is running higher than the official CPI rate. Their average estimates (2.3%) were very close to the RPI rate of 2.2% in November (as they were at 1.8% in August). The reasons why RPI probably more accurately reflects UK inflation are explored here.
The full ONS report this month can be found here.