Shoppers will increasingly have noticed that the price of their groceries and the cost of filling up at the forecourt have been on the rise. Last month UK consumer price inflation, using the CPI measure, rose by 3% y/y. This represents the fastest rate of increase since April 2012. Inflationary pressures are more marked within consumer goods (+3.2% y/y) rather than services (+2.7% y/y). Meanwhile the most comprehensive measure of inflation, the CPIH index which includes owner occupiers’ housing costs along with Council Tax (or rates in NI), nudged higher to 2.8% y/y in September.
CPI inflation continues to rise at a faster rate than UK average earnings. The latter is currently running at 2.1% y/y. As a result, disposable incomes are falling in real terms. However, the squeeze is even more acute for those reliant on working-age benefits. Normally September’s inflation figures would be used to uprate working-age benefits by the same amount the following April. But the UK government has frozen most benefits (e.g. child benefit, working family tax credits) in cash terms from April 2015 to March 2020. According to the Institute for Fiscal Studies (IFS), the benefits squeeze will take £450 per annum on average from 10.5 million UK households. Higher rates of inflation will therefore impact harder on poorer households. Northern Ireland will be disproportionately impacted due to its higher reliance on benefits and its lower income households. Meanwhile under the “triple lock” guarantee, the basic state pension will rise by a rate equal to September’s CPI rate, earnings growth or 2.5%, whichever is highest. On this occasion this will be by 3%.
The main contributors to the increase in September’s CPI were rising prices for food, motor fuel and recreational goods. Food prices accelerated towards a four-year high of 3.4%. It is worth remembering that UK consumers enjoyed three consecutive years of falling food prices in 2014 (-0.2%), 2015 (-2.8%) and 2016 (-2.8%). Some of the food items recording the steepest rises in prices in September 2017 included: Butter (+21%), Fish (+13.6%), Pizza & quiche (+11.5%), Bread (+5.4%) and Chocolate (+4.9%).
Petrol and diesel prices have been on the rise in recent months and saw annual increases of 6.3% and 6.0% respectively last month. Finally, consumer prices within the recreation and culture category increased by 2.6% y/y in September – the highest rate since January 2010. Within this category it is noted that the price of books increased by almost 14% y/y and the cost of attending concerts, cinemas and the theatre rose by 5.2% over the same period. Incidentally, 5.2% is also the current inflation rate for domestic energy bills (electricity & gas etc).
The recent pick-up in UK inflation has been accompanied by rising expectations that the Bank of England will begin raising interest rates as early as next month. Indeed, financial markets view an increase from 0.25% to 0.5% as more likely than not. That said, the Bank of England has looked through above-target inflation before. A move in November is by no means a slam dunk. Consumer price inflation should fall back towards the MPC’s 2% target in 2018 even without a rate increase. Don’t be surprised if we are still waiting for the first interest rate hike since 2007 in the New Year