Anoraks had no shortage of inflation data to get their teeth into today.  There was the usual raft of monthly consumer price and producer price indices (e.g. RPI, CPI, PPI), plus the latest house price inflation figures for both the UK and Northern Ireland (Q1 2017).

Consumer Prices

2015 and 2016 represented something of a ‘consumer sweet spot’.  This period was characterised by low or no inflation and falling food, motor fuel and energy bills. Meanwhile pay increases returned with even modest pay rises exceeding inflation. As a result, disposable incomes in real terms (i.e. after inflation) increased. As we advance through 2017 it is increasingly evident that the sweet spot is turning sour. The annual rate of consumer price inflation (CPI) has accelerated from 0.3% in April 2016 to 2.7% in April 2017. The latest reading marks the fastest rise in consumer prices since September 2013. Alternatively, using the new CPI measure including housing costs (CPIH), prices have increased from 0.7% y/y to 2.6% y/y (the highest rate since June 2013).

The inflationary pressures are broad-based across the basket of consumer goods and services. However, the main contributor to the increase in the annual CPIH rate from 2.3% in March to 2.6% in April was air fares. Due to the timing of Easter (falling in April this year rather than March last year) air fares jumped by almost 19% month-on-month in April.  This took the annual rate to 6.8% year-on-year. Increases in Vehicle Excise Duty also pushed up prices within the Transport category (+6.2% y/y). Outside of transport, electricity prices jumped 2.5% m/m with prices up 3.5% y/y. Meanwhile food prices are rising at their fastest rate in more than 3 years (+1.8% y/y) and the price of clothes recorded its biggest monthly jump in 6 years, with a rise of 1.1% between March and April (2.7% y/y).

Looking ahead, we can expect consumer price inflation to move closer towards 3%. In recent months, the combination of falling oil prices coupled with a strengthening in sterling has seen the price of petrol and diesel fall back at the forecourts. Indeed, prices fell by 1.5% between March and April, although this still represents an increase of 11.5% y/y; down from the recent peak of 19.4% y/y in February.

Significantly, inflation is expected to outpace wage growth for the next year or so.  After that, inflationary pressures, particularly those stemming from the weakness of sterling, are expected to fade.

Producer Prices

Producers have borne the brunt of sterling’s weakness that followed the EU referendum result last June. Manufacturers enjoyed falling input costs (on a year-on-year basis) continuously between November 2013 and June 2016. Since then, prices have been increasing, with double-digit rates of inflation from October 2016 to April 2017. However, the annual pace of input cost inflation has eased from January’s peak of 19.9% to 16.6% last month. rude oil has increased by almost 47% over the last 12 months with imported metals (+26.5%) and home food materials (+25.6%) posting hefty rises. The increase in home food materials represented the steepest increase since July 2008. Manufacturers are passing on some of these costs to their customers. Factory gate inflation remained unchanged in April at 3.6% y/y.

House Prices

Following an unprecedented house price correction (-57%) between Q3 2007 and Q1 2013, Northern Ireland house prices have been on the rise. However, the latest figures for Q1 2017 reveal the first quarterly decline in 4 years – a period that witnessed a 28% cumulative rise in house prices.

Northern Ireland’s standardised house price fell by 0.8% q/q to £124,007 in the first quarter. This follows a marginal rise (+0.2%) in Q4 2016. Despite this decline, local house prices are still 4.3% above the corresponding period a year ago. This was broadly in line with the UK average (+4.1%) and compares with an annual average of 6.5% for 2016. Northern Ireland’s standardised house price remains 45% below the Q3 2007’s “freak peak” and back to where they were in late 2005.

The Semi-Detached market was the only property type not to post quarterly price falls in Q1 with prices in this category remaining unchanged. Apartments saw the steepest quarterly drop (-4.5%) followed by Terrace (-0.7%) and Detached (-0.6%). The overall fall in house prices conceals a divergence between new dwellings and the second-hand or existing homes.  New dwellings fell by 4.5% q/q in Q1 2017 but this followed an increase of one-third in just over 3 years. Meanwhile prices of the existing or resale market have been broadly flat for the last two quarters, rising by 0.2% in the latest survey.

Northern Ireland’s annual rate of house price growth has halved from 8.7% in Q4 2014 to 4.3% in Q1 2017.  This was always going to happen with the larger gains occurring at the start of the house price recovery. We can expect to see the rate of house price growth slow to around 2-3% y/y in the next 12 months or so.