UPDATE: Listen to Pete Comley talk about the latest figures on Share Radio:
The headline CPI inflation rate appears to have shot up to 1% today (from 0.6% last month). Although inflation is rising, this figure is ahead of the real rise of inflation in the UK. This is because a half of the rise was down to a somewhat spurious rise in clothing prices. A better estimate of CPI today is probably 0.8% ie excluding clothing.
Clothing prices are a big problem for the ONS. The short duration of fashion lines and frequent sales make measuring real changes in clothing fraught with problems. Trying to do like-for-like comparisons on a monthly basis often appears to show wild changes that then get reversed the following period. Furthermore, the high variability in unit pricing also means that using traditional means and ratios to calculate indices often over-estimate price changes. For example, RPI which uses this method reckons clothes have increased 50% in the last five years. In contrast CPI, which uses geometric means, often underestimate inflation on clothes and indeed CPI thinks there has been zero clothes inflation since 2008! Neither is right with the truth lies somewhere in between. (See this article on the different methods of calculation of inflation indices).
The above being said, UK inflation is now trending upwards. Short term, over the coming months, this will be primarily driven by higher petrol prices. Assuming global oil prices continue to tick higher and the pound lower, we could well see average unleaded petrol back in the range 120p-130p by Xmas. That would be a rise of 20-25% over last year and alone will add maybe 0.7% to CPI taking it to above 1.5% by December (and RPI to 2.5%-3%).
2017 will bring a number of other price rises that stand to push CPI to around 3% (and RPI to 4%). These are primarily effects of the declining value of sterling which some predict could fall further to maybe $1.1 = £1, €1=£1. The lower value of the pound has already increased factory input prices by 7.2% this month and is starting to affect factory gate prices (up 1.2% – the highest level for 3 years).
Currently food prices are still declining in the UK – down 2.4% in the latest data. However much of the food we consume is imported or has aspects that are affected by international commodity prices. Unilever’s attempt to raise their prices by 10% last week in Tesco has probably marked the start of a change in trend for food prices. Add to that likely sharp rises in gas and electricity prices and it would not be surprising to see goods inflation rise to above 2.5% in 2017. When this figure is then combined with service inflation of 3.0%-3.5% will take CPI to the 3% level hinted at by Mark Carney recently.
However what needs to be remembered is that this will more than likely be a fairly short-term blip. The declines in the pound will eventually abate and indeed once the uncertainty over Brexit is finally removed, sterling may well climb back above its current level. Add to that, the forces of global deflation are still with us – namely demographics and technological innovation. Therefore CPI may well return to near zero levels again by 2019.
The full ONS data can be found here.