Inflation: Keep calm and carry on camping

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While the media headlines continue to focus on the ongoing political turbulence, today’s inflation figures signal that the headwinds facing the consumer are intensifying.

Highest CPI since June 2013

Using the UK consumer price index (CPI), the annual rise in the price of consumer goods and services accelerated from 2.7% in April to 2.9% in May. The latter represents the highest rate of consumer price inflation since June 2013. During the three-year period 2014-2016, UK CPI averaged just 0.7% y/y. This favourable inflationary environment, coupled with a return of above inflation pay rises, contributed to what has been dubbed the consumer sweet spot.

CPI rising faster than earnings

CPI 2However, 2017 is becoming a more challenging environment for the consumer, with multi-year benefit freezes beginning and inflation accelerating away from the Bank of England’s 2% MPC target. Furthermore, CPI is rising at a faster rate than average earnings which means that pay growth is falling in real terms. This will erode disposable incomes and put pressure on consumer-sensitive sectors within the economy.

Recreation and culture saw steepest rise

The pick-up in inflationary pressures in May was broad-based, with 7 of the 12 broad categories posting higher rates of inflation in May. Recreation and culture saw the steepest rise, with its annual inflation rate more than doubling to 2.3% between April and May.  Clothing & footwear prices increased by 3.1% y/y with the clothing element up 3.6% y/y. Meanwhile the inflation rate for children’s clothing is running at almost double that (7%).

Food and energy prices up

Food and energy bills are also on the rise, with food prices up 2.5% y/y – its fastest pace since November 2013. Energy bills (electricity & gas etc) increased by 4.5% y/y in May – the largest increase in 2 ½ years. Within this category electricity bills jumped to 7.7% y/y.

CPICost of pizza & quiche up 11%

Sterling’s depreciation is a major factor behind the price rises in many consumer goods items. Consumer goods inflation is currently running at 2.9% y/y – its highest rate in more than 5 years. Some food items have recorded double-digit price rises e.g pizza & quiche (+11.4%) and fish (+10.5%). Those with a sweet tooth will have noticed the jump in sugar (+15%) and chocolate prices (+5.8%). But even the price of staples such as bread (+5.5%), butter (+4.5%) and milk (+2.8%) are recording significant price rises. Mobile phones have also seen hefty increases up 16.7% y/y with jewellery prices 6.7% higher than they were in May 2016.

Childcare up over 3%

The rise in consumer goods is feeding through into the cost of consumer services too.  A range of services have inflation rates above the 2.9% headline CPI rate.  These include: Transport services (+7.2%), retirement homes for the elderly (+5.2%) and child care (+3.4%).

2017 to be tough year for consumers

2017 is shaping up to be a tough year for the consumer with price rises across the board and particularly on essentials such as food and energy bills. The squeeze on household finances is set to intensify further, which will likely lead to consumers reigning back on discretionary spending and big-ticket items.

Package holiday costs on the rise

The family holiday is one area that can be economised on. The cost of package holidays has increased by 1.6% y/y.  Furthermore the purchasing power of the pound in your pocket is buying less and less abroad due to exchange rate moves.

Staycations become more attractive?

With sterling weakening further over the last week, the staycation market is likely to feature more prominently this summer.  Not least given that camping equipment prices have fallen by 4.5% y/y. Carry on camping!

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