Inflation eases but won’t melt away

Using the UK consumer price index (CPI), the annual rise in the price of consumer goods and services eased from 2.9% in May to 2.6% in June. This unexpected easing marked the first fall in the annual inflation rate since October 2016 and perhaps reduces the likelihood that more members of the MPC will vote for an interest rate hike in the near future. That has been how financial markets have interpreted this morning’s figures, with sterling losing around one cent against the euro and the US dollar immediately after the inflation release.

Motorists will have noticed falling pump prices in the forecourts in recent months. Petrol and diesel prices experienced their fourth successive monthly decrease in June. The annual rate of petrol (3.8%) and diesel (4.7%) price inflation both eased to 9-month lows. These declines contributed most to the fall in the annual rate of CPI inflation between May and June.

While an easing in the rate of inflation is welcome, it doesn’t change the big picture for the consumer. With average earnings (2.0% y/y) rising at a lower rate than CPI, real wages (inflation adjusted) are falling. Furthermore, inflation will continue to erode the purchasing power of welfare benefits, many of which have been frozen. Therefore, the cost of living squeeze will continue for the next 12-18 months. This is likely to be felt most acutely in Northern Ireland. According to a report by the Resolution Foundation (The Living Standards Audit 2017), Northern Ireland households recorded the weakest annual real income growth of all the UK regions in Q1 2017.

Food price inflation accelerates in June

Petrol and dieselMotorists will welcome the savings attained each time they fill up their tanks with fuel. However, these gains will be required to offset price rises elsewhere. Shoppers are only too aware of food price rises or ‘shrinkflation’ (i.e. smaller product size / quantity). Food price inflation accelerated marginally to 2.6% y/y in June. This represents the steepest price increases since November 2013. Various individual food items recorded some of the largest year-on-year price increases within the CPI basket of goods and services.

These include:

  • Fresh or chilled fish +19.3% y/y
  • Fish +12.6% y/y (highest since March 2011)
  • Yoghurt +10.1% y/y
  • Butter +7.7% y/y
  • Breakfast cereals +4.7% y/y

Inflationary pressures remain within other necessities & vices

Energy bills saw their annual rate of increase ease from 4.5% in May to 4.2% last month. This was largely due to the marked slowdown in domestic home heating oil price rises from almost 22% in May to 10.7% in June. Electricity bills increased by 7.7% y/y; unchanged relative to May. Meanwhile gas prices also remained unchanged month-on-month, falling by 0.5% y/y. Insurance costs were 5.6% higher in June relative to a year ago, with motor vehicle insurance almost 11% higher year-on-year. Child care costs (+3.4%) and care for the elderly (+5.4%) saw annual price rises well above the headline inflation rate. Some people may view beer, coffee and tobacco as essentials. These items saw annual price increases:

  • Beer: 7.5% (the largest increase since March 2012)
  • Coffee 7.4%
  • Tobacco: 6.1%

Discretionary spending areas posting strong rates of inflation too

The cost of living squeeze is likely to see consumers rein back on discretionary spending (e.g. holidays, retail, eating out, home furnishings etc). Many these non-essential spending categories are seeing prices rise at a significant rate. Some of this is a direct result of a fall in sterling and rising import costs passed on partially or fully to the consumer. A selection of the annual inflation rates for discretionary spending items is highlighted below:

  • Mobile telephone equipment +25%
  • Clocks & watches +6.4%
  • Household furniture +6.3%
  • Washing machines, cookers & fridges 5-6%
  • Hotel accommodation +4.7%
  • Fast food & takeaway +3.2%
  • Clothing +3.0%
  • Package holidays +1.9%

Ice-cream prices cool

Overall, whilst CPI has eased slightly, the reality is that consumers should expect inflation to continue to outstrip wages for the foreseeable. In the meantime, one small sweetener as we enjoy the sunshine is that ice-cream prices and soft drink prices are 2-3% lower than they were last year.

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