Latest UK inflation data – October 2016

UPDATE: Listen to Pete Comley talk about the latest data on share radio:

Contrary to some economists predictions, inflation did not appear to rise in October. However as I pointed out last month, the CPI index had got ahead of itself. 1% was not a true reflection on inflation in September because of problems in the way ONS calculate clothing prices.

In a similar way, clothing has acted as a negative influence on inflation this month, whose correct CPI value is probably now more like 1%. It was also held back by declines in some gaming/toy prices – another volatile element. Balanced against this, petrol prices were up, in contrast to last year when they declined. Unusually furniture costs went up in October, although longer summer sales than normal are partly to blame for this apparent rise.

Food prices generally as still exerting a strong negative effect on the inflation rate (-2.4%). Many vegetables are still being used in supermarket price wars with the prices of everything from broccoli to cabbage and mushrooms reaching record low levels for recent times. That said, it is interesting that fish prices were sharply up this month – the UK imports more than two-thirds of the fish we consume. As an example, BirdsEye last week were trying to increase fish finger prices by 12%.

Future inflation

Today’s data shows evidence that inflation is going to rise in the future though. This can be found in the Producer Prices Index. Input prices rose 12% in the latest year and by 4.6% in October alone. Factory gate prices are now rising (+2.1%). This is backed up by a series of announcements in the media over high profile increases such as Typhoo teabags, Marmite, crisps and Persil. Apple has increased its computers by 10% too.

The pass-through of changing exchange rates is complex and highly variable. For example, the decline of the pound from $1.7 to $1.5 in 2014 had little impact on UK prices. But I feel this time may be different. The recent declines in the value of sterling come after a general decline in the last few years and could be ‘the straw that breaks the camel’s back’ for many companies. Add to that, Brexit is a great excuse to justify hiking prices this time. Usually exchange rate changes often go unnoticed by consumers and so can be difficult to use as an argument for price rises.

The other factor that is going to weigh heavily on the headline inflation rate in the coming months is petrol prices. Last December they declined to just 103p a litre. This year that figure is probably going to be more like 117p ie 13% higher. The impact on the index will be even greater as last year prices were declining and this year they are increasing. Given all this, there is a strong likelihood of seeing CPI in excess of 1.5% in the December data (and 2.5%+ for RPI).


In the wake of Trump’s victory last Thursday, ONS published (buried??) news of their plan to replace CPI with CPIH as their headline measure in March 2017. This could be a very unwise move on a number of grounds:

  1. CPIH has been a measure that has been shrouded in controversy since it was launched. ONS had so much difficulty with it, they had to withdraw it as a designated statistic in 2014 and to this day, it has not regained that status.
  2. The H in CPIH stands for housing. However the elements included in it and how they are calculated do not correspond with what the public would expect from an inflation statistic including “housing”. Firstly it excludes house prices completely. Secondly instead of measuring housing expenses directly (such as mortgage costs, building insurance, maintenance, etc) as people experience them, it uses a complex alternative measure based on rental equivalence. Thirdly, despite arguing it is not possible to cost housing items directly, it then has just added in council tax as a complete exception to this rule, making CPIH even more of a mess.
  3. The relationship between CPI and CPIH is complex. However for the last two years it has been about 0.3% higher than CPI. If this persisted, it is unlikely that government would want to use it either as a measure of their success in controlling inflation nor to index pensions and benefits (as it could result in higher expenditure). Linked to that, it would make it more difficult for the Bank of England to meet its 2% target.

If the ONS wish to improve on the EU’s invention of HICP (which we call CPI) in this post-Brexit world, they might be far better to revert to the British measure of RPI. Although it too has its issues (see here), it generally more accurately reflects inflation as experienced by consumers as it is usually higher than CPI (due to its simpler method of calculation) and it already weights in housing costs and house prices.

The latest ONS data can be found here.