The squeeze on living standards hasn’t gone away
In recent months an emerging narrative has been that the squeeze on UK living standards has relaxed or even ended. This refers to the pace of annual earnings growth overtaking inflation. However, real earnings growth remains modest at best. Meanwhile the squeeze continues for public sector workers on pay caps (1% p.a.) and households experiencing a multi-year freeze on working-age welfare benefits (until 2020). In light of the fact that the price of necessities including utility bills, motoring costs, rates bills and private sector rents (for Northern Ireland) are all rising at substantial rates and above the headline rate of inflation, it is premature to talk of a meaningful end to the cost of living squeeze.
April saw the pace of annual consumer price inflation, using the consumer price index (CPI), ease for the third month in a row. Last month the annual pace of CPI slowed to 2.4% – a 13-month low. This is closer to, but still above the MPC’s 2% inflation target. Underlying inflation or core CPI, which strips out food, energy alcohol and tobacco, slowed to 2.1%.Meanwhile the ONS’s relatively new inflationary measure including owner occupiers housing costs (including council tax), the so-called CPIH, slowed to a 17-month low of 2.2%.
Inflation lower than expected
Financial markets had expected the headline rate of CPI to remain at 2.5%. The fall in April was partly due to the timing of Easter, which was in April last year and March in 2018. As a result, seasonal air fares fell by almost 8% and provided the largest downward contribution to the change in the CPI annual rate between March and April. Meanwhile price rises in petrol and diesel provided upward inflationary pressure. This looks set to continue with petrol prices rising an additional 3% in the first three weeks of May relative to April. Petrol and diesel prices are currently at their highest levels since mid-October 2010. Overall, the lower than expected headline inflation rate makes it less likely that the Bank of England will raise interest rates in the summer.
Inflation a necessity evil
Consumers will welcome the fact that food price inflation has eased from 3.0% y/y in March to 2.3% y/y – an 8-month low. But it should be remembered that consumers enjoyed three years of falling food prices in 2014-2016. Alongside motoring costs, other necessities and utility bills are rising at a rapid clip. Furthermore, Northern Ireland has experienced more marked inflationary pressures in relation to utility bills relative to its UK counterparts. Electricity bills for both NI and UK rose by almost 9% y/y in April. But NI homeowners have experienced higher heating bills than is captured in the UK CPI figures. UK gas bills rose by just 1.6% y/y. This compares with a rise of almost 9% for NI gas customers. In NI, the proportion of households connected to gas is significantly lower than in Great Britain. As a result, a higher proportion of NI households use domestic home heating oil. The latter has seen price gains of 23% over the last 12-months.
Housing costs outpacing the headline rate of inflation
Domestic rates in Northern Ireland have been raised above the headline rate of inflation with a 4.5% hike for the latest financial year. This is similar to the 4.9% increase for rates and Council Tax in the UK CPI figures. According to the CPI figures, actual rentals for housing rose by just 0.4% y/y in April. Inflationary pressures have been more intense in Northern Ireland’s rental market. According to the Ulster University and Northern Ireland Housing Executive Private Rental Index, average rents in Northern Ireland increased by 4.4% y/y in 2017 with Belfast posting a 7% rise.
Still lacking a real recovery in standard of living
In light of the fact that the price of necessities including utility bills, motoring costs, rates bills and private sector rents (for Northern Ireland) are all rising at substantial rates and above the headline rate of inflation, it is perhaps premature to talk of a meaningful end to the cost of living squeeze. While slower rates of inflation are always welcome, higher wage growth and a more marked pick-up in real disposable incomes are required. Increasing productivity is central to this goal.