The Chancellor would happily swap the UK’s current annual economic growth rate with its inflation rate. While GDP growth remains sluggish and below the rates being experienced in most other EU countries, the converse is true for inflation.
UK inflation moves up a gear
UK consumer price inflation moved up a gear last month with the annual rate of CPI accelerating from 2.6% in July to 2.9% for August – back to the level it was in May. The latter represented the highest rate of inflation since June 2013. August’s inflation rate was stronger than analysts had been expecting.
Meanwhile, the new CPIH measure of inflation (which includes owner-occupiers’ housing costs) returned to its May reading of 2.7% y/y having slipped to 2.6% in June and July. The biggest inflationary surprise came with the Core CPI. This is used as a barometer of underlying inflationary pressures as it strips out food, tobacco and energy which are viewed as volatile. Core-CPI inflation jumped from 2.4% y/y in July to 2.7% y/y in August – its highest reading since December 2011.
Rate rises on the cards?
Recently the Bank of England has been stepping up its warnings that financial markets are underestimating the potential for rate rises. The market view the Bank of England is referring to is that interest rates will remain at 0.25% until the end of 2018 and will not rise above 0.5% until 2021. Today’s stronger than expected inflation figures, notably the core-CPI rate, may make the markets rethink this interest rates outlook. Indeed, sterling has been given a boost this morning on the currency markets. The MPC is expected to keep interest rates on hold this Thursday and despite the warnings, it looks likely that CPI inflation will return to its 2% target without the need for an increase in Bank Rate during 2018.
Fuel prices on the up
Sterling’s post-EU referendum slide is largely responsible for the pick-up in inflation. However, the recent rebound in the global oil price has pushed up fuel prices. CPI inflation encompasses both consumer goods and services. Consumer goods (food, fuel, clothes etc) CPI accelerated to 3.1% y/y in August – its steepest rise since April 2012. Back in June 2016 the price of consumer goods was falling at an annual rate of 1.6% y/y. Meanwhile consumer services prices rose by 2.7% y/y last month (which compares with 2.8% back in June 2016).
Clothing and footwear inflation accelerates to record high
Rising clothing prices contributed the most to the change in the annual inflation rate between July and August. Clothing and footwear prices increased by 2.4% m/m between July and August. Meanwhile the annual rise in clothing and footwear prices accelerated to 4.6% y/y – a record high. Clothing on its own recorded a 5.1% y/y rise in August with petrol and coffee prices increasing by the same amount. Household appliances saw prices rise by 6.8% y/y. Meanwhile electricity prices were 9% higher in August relative to the same month last year. Food price rises eased to a 4-month low of 2.3% y/y in August. However, this softening could prove just temporary with food producers / retailers expected to pass on price rises to consumers in the months ahead.
CPI to breach 3%
Overall, CPI inflation is expected to breach 3% in the near term before falling back towards 2% in the next 12 months or so. In the meantime, households will continue to feel a squeeze on their living standards as average earnings will not keep up with inflation. Recently there has been talk of breaking the public sector pay cap (1% p.a.). While there may be instances of some public sector pay awards exceeding 1% p.a. they are expected to remain well below the current inflation rate of 2.9%. Given that consumer spending accounts for around two-thirds of economic activity in the UK, inflation will have to move down a gear and productivity / wages will have to move up a gear if economic growth is to improve significantly.
10 years on from the credit crunch
A decade on from the beginning of the credit crunch many households find themselves in the midst of a cost of living crunch. So what has happened to the price of consumer goods and services over the last ten years (August 2007 – August 2017)? While clothing and footwear has recently posted record rates of inflation, the prices in August 2017 are still almost 10% lower than they were 10 years ago. Overall CPI increased by 27% over the same period while average earnings have increased by around 20%. Other categories of consumer spending have seen much higher cumulative price rises. For example, food prices have risen by close to one-third while electricity and gas bills have increased by two-thirds. Alcohol and tobacco prices have increased by 59% in 10 years while Transport services (air, rail fares etc) have increased by 82%.