Archive for the ‘Consumer Price Index’ Category
Monday, July 19th, 2010
The UK is suffering far higher inflation than most people expected at this stage of the economic cycle. Our inflation is well above that in the US and EU. What are the reasons for this and what implications can we expect?
Roger Bootle has tackled this question in an article in the Telegraph.
He believes that one-off factors have been the main influence on inflation, including the fall in the value of the pound, and putting VAT back up to 17.5%. But he poses the question as to why those that have this view have been expecting inflation to fall and it hasn’t.
He suggests three possible explanations. Perhaps the excess capacity in the economy which we are expecting to force inflation down, doesn’t in fact exist. However, why should this affect us and not the US and eurozone? Also, the fact that we have 8% unemployment would suggest that there is evidence of excess capacity.
The second explanation is that even if there is excess capacity, there is some reason at work which is stopping it from reducing inflation. He suggests that one possible answer is that as firms face a fall in demand they are pushing up prices in order to maintain profits. Firms are perhaps desperate to maintain cash flow especially as banks are reluctant to lend at the moment.
His third possible explanation is that expectations of future inflation have become dislodged. The fact that inflation has been above target for so long, the Bank of England has resorted to Quantitative Easing, and the dark possibility that the government is quite happy with higher inflation as it reduces real debt levels are all possible contributors. However, Bootle does not accept this explanation, particularly as wage growth is relatively subdued.
He points out that in 2007-08 the pound fell by around 25% and given the importance of the traded sector of the economy, the direct effects of this alone would raise the price level by about 8%, irrespective of other knock-on and second-round effects, especially on wages.
He concludes that the implications for inflation are “decidedly favourable”.
Tags: excess capacity, expectations, Inflation, Pricing, sterling
Posted in Consumer Price Index, Inflation, sterling, unemployment | No Comments »
Tuesday, May 18th, 2010
CPI annual inflation which is targeted by the government at 2.0%, rose to 3.7% in April from 3.4% in March according to figures released this morning by the Office for National Statistics.
The largest pressures on prices came from clothing and footwear which rose by 2.2% and was particularly fuelled by increases in the price of women’s clothing; widespread increases in food prices which went up by 2.6% overall, much of which was blamed on the closure of European airspace due to volcanic ash from Iceland (the country, not the retailer); and, a 2.1% hike in alcohol and tobacco prices due to higher duty imposed in the last Budget.
The recent trend in inflation can be seen in the graphic below.
 Annual Inflation rates: 12 month percentage chage Source: ONS The Retail Price Index, which is used as a guide in agreeing some national wage settlements, actually rose to 5.3% in April, which was the highest figure since July 1991 and compares with 4.4% in March. Not only was this affected by the same elements which caused CPI to rise, there was also an additional upward pressure from housing costs. This was particularly due to mortgage interest costs. Although these only rose by 0.6% in April this year, this compares with a 7.7% decrease a year ago as a result of the reduction in Bank rate from 1.0% to 0.5%.
It is these year-on-year comparisons which make interpreting inflation figures quite tricky. Even if mortgage interest costs had fallen slightly this year, there would still have been an inflationary impetus as they fell by such a large amount 12 months ago.
RPIX inflation, which measures the RPI minus mortgage interest payments, was 5.4% in April compared to 4.8% in March. And, compared to the EU, UK inflation rates are well ahead. Latest comparable figures for March show an EU average of 1.9%, compared to the UK’s rate of 3.4%. This comparative difference will offset some of the gains from the decline in the value of sterling, as UK exporters try to compete in EU markets.
Tags: CPI, EU, Inflation, RPI, RPIX, sterling
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Wednesday, April 21st, 2010
So, inflation is still on the rise. The government’s target measure of CPI rose from 3.0% in February to 3.4% in March.
This was mainly due to the cost of gas and petrol prices and a spike in food prices. A weak level of sterling is coupling with very high prices for oil and other commodities, and on top of that poor weather in Spain has added to food prices. Also, there may be a knock-on effect on food prices as a result of the UK becoming a no-fly zone over the past week – with dwindling supplies of some foods in the shops.
The RPI measure of inflation was 4.4% in March, up from 3.7% in February. This was affected by the same factors as the CPI but also a rise in mortgage interest payments. RPIX inflation, which excludes mortgage interest payments, was up to 4.8% in March from 4.2% in February. The recent trend can be seen in the graphic below.
 Source: ONS The latest comparable figures for CPI inflation show that the UK rate of 3.0% in February was far higher than the 1.4% for the EU as a whole.
What then are the consequences of this continued rise in prices?
Firstly, savers are suffering. Real interest rates are actually negative at the moment, and according to the Moneyfacts website the average no-notice account after tax and inflation is standing at a very enticing minus 2.82%.
Secondly, there could be an impact on wages and employment. Wage growth has been very restrained in the private sector but many wage settlements take RPI into account. With some economists suggesting that RPI could rise as high as 5%, this is likely to put some pressure on wage settlements. Given the delicate nature of the recovery this could well have a major impact on employment.
Finally, how is the Bank of England going to react? There will certainly be pressure on the MPC to raise interest rates although the governor of the Bank of England, Mervyn King, has maintained that he expects inflation to full back towards its target level over the coming months. A hike in interest rates will doubtless damage the recovery. However, the measure for core inflation, which removes the more volatile items in the measure, only rose from 2.9% to 3% last month, so perhaps pressures are not as great as they seem.
Tags: Bank of England, core inflation, CPI, Inflation, Interest rates, MPC, RPI, RPIX, savings, wage rates
Posted in Bank of England, Consumer Price Index, Earnings, Employment, Inflation, Interest rates, Monetary Policy Committee, sterling | No Comments »
Wednesday, February 17th, 2010
The Consumer Prices Index (CPI) rose to 3.5% in January from 2.9% in December. According to the Office of National Statistics (ONS) this is the second largest ever increase in the annual inflation rate between two months. It follows on from the record increase of 1.0% in the annual inflation rate between November and December.
The reason for the increase was due to the restoration of the VAT rate in January to 17.5% and the increase in the price of petrol. This time last year petrol was 86.3p a litre and has now risen to 110.9p per litre. There was also an increase in some food prices with cauliflowers rising in price by 59.7%.
Because the CPI deviated more than 1% from its official target rate of 2.0%, the governor of the Bank of England was forced to write a letter of explanation to the Chancellor. In this, Mervyn King wrote that the committee saw this as a “temporary deviation”. He said: “Although it is likely to remain high over the next few months, inflation is more likely than not to fall back to the target in the second half of this year, as the short-run factors wane and the influence of spare capacity builds.”
The RPI measure of inflation, which is often quoted in wage negotiations, rose from 2.4% in December to 3.7% in January. The largest upward contribution to this change came from housing. This is because mortgage interest payments rose this year but had fallen significantly a year ago, when the majority of lenders passed on the decline in Bank rate which fell from 3.0% to 2.0%. This is the highest RPI figure since October 2008 and is the first time that RPI has exceeded the CPI figure since August 2008.
 Source: ONS The RPIX measure, which excludes mortgage interest payments, rose from 3.8% in December to 4.6% in January. And, what is particularly of interest, is that underlying inflation which excludes more volatile elements such as food and fuel, rose from 2.8% to 3.1%. This suggests that there are underlying pressures on prices, which could partly be due to the weakness of sterling, which is pushing up import prices.
UK inflation can be very difficult to budge and when looking at the December figures the UK CPI inflation rate stood at 2.9% compared to only 1.4% in the EU as a whole.
There are big implications of this jump in inflation for savers. Moneyfacts, who are experts in personal finance, suggest that with a typical savings account offering instant withdrawal only offering 0.73% in interest, basic rate taxpayers are losing the equivalent of 2.92% a year, and higher rate taxpayers are losing 3.06%.
Although the Bank feels that inflation will be back below target in the coming months, this could be upset by attempts to rectify the budget deficit after the election. Many City economists now believe that VAT will be raised to 20%, which will have a large inflationary impact if it comes to pass.
Tags: Bank of England, CPI, Inflation, MPC, RPI, RPIX, savings, sterling, underlying inflation, VAT
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Thursday, February 11th, 2010
“The UK economy has continued to bump along the bottom, but a gradual recovery in output may now be in prospect.” This was the view of Mervyn King, governor of the Bank of England, in launching the Bank’s quarterly Inflation Report.
The Bank said that the strength of the recovery is “highly uncertain” and “the pace of recovery is somewhat less strong than three months ago.” The current forecast is that Gross Domestic Product could rise to 3.2% by the second quarter of 2011, although this is well down on the earlier prediction of a 4.0% rise.
The Report also said that: “At home, the tailwinds of an enormous policy stimulus and the depreciation of sterling are meeting the headwinds created by the balance sheet adjustment of the damaged banking system. Spare capacity will press down on inflation in the medium term. But the near-term outlook is for inflation to rise further.”
 The Bank said that growth will be slower than anticipated. In fact, the Bank is predicting that January’s inflation figure will rise above 3.0%, whilst maintaining that this is only temporary, the result of the increase in VAT back up to 17.5% and a rise in petrol prices. However, it is predicted that inflation will thereafter fall back fairly rapidly below the 2% target rate, and would fall as low as 0.9%. It is thought that inflation could remain below the target rate for several years.
This probably means that we will not expect any increase in interest rates for some time, with the present rate being maintained at 0.5%, giving the temporary nature of the rise in inflation and the precarious nature of the economy recovery. Mr King left open the prospect of more quantitative easing and said that more purchases may be necessary to keep inflation on track.
Tags: Bank of England, CPI, economic growth, Inflation, target 2.0
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Friday, February 5th, 2010
The Bank of England decided yesterday that they would call a halt to their experimental, not to say unprecedented, policy of quantitative easing (QE). QE was started in March 2009 and over the following months the Bank bought up £200bn of gilts in the open market from banks and financial institutions. This was aimed at preventing the economy falling into an even deeper recession and pushing increased liquidity into the economy via bank lending.
Has it been successful? It is always difficult to know. How bad would it have been without it? A couple of days ago a think tank, the National Institute of Economic and Social Research estimated that QE had increased output by 0.5% in 2009 and would contribute an additional 1.0% growth this year.
 Quantitative easing and interest rates both put on hold.
In making their decision to suspend QE the Bank’s Monetary Policy Committee (MPC) decided that: “…this stock of past purchases, together with the low level of Bank Rate, would continue to impart a substantial monetary stimulus to the economy for some time to come.” The MPC also said that: “…further purchases would be made should the outlook warrant them.”
The MPC is torn between the fact that GDP only increased by 0.1% in the final quarter of 2009 and may require further stimulation. Yet, CPI inflation rose to 2.9% in December, above the 2% target. However, on balance the MPC decided that: “…the scale and persistence of the fall in output means that a substantial margin of under-utilised resources is likely to remain for some time to come. That is likely to mean that inflation will fall below the target for a period.”
The Committee continued to leave interest rates at their historic low of 0.5%.
Tags: Bank of England, CPI, gdp growth, Interest rates, Monetary Policy Committee, quantitative easing
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Tuesday, January 19th, 2010
CPI annual inflation which is targeted by the government, rose to 2.9% in December 2009 from 1.9% in November. This increase of 1.0% was the largest ever increase in the annual rate between two months.
Why was the increase so large, especially considering that the consensus amongst City economists was for a rise to 2.6%? The basic reason is not so much about what happened this year but what happened last year. We have to remember that we are looking at an increase based on the figures for the previous year, and what happened to prices in December 2008 was exceptional.
There were three main contributing reasons. Firstly, the standard rate of VAT was cut from 17.5% to 15.0% in December 2008. Secondly, there were sharp falls in the price of oil and thirdly, there were, unusually, pre-Christmas sales that month as a result of the economic downturn. Taken together, these events led to the CPI falling by 0.4% between November and December 2008. This means that the increase of 0.6% in the CPI between November and December 2009, together with the previous year’s fall, generated the 1.0% upturn in the index. In fact, a monthly increase of 0.6% in the CPI between two months is not in itself so untypical.
The recent trend can be seen in the graphic below.
 Source: ONS
The largest upward pressure on the CPI in December 2009 was from the transport sector, with fuels and lubricants rising in price by 0.2% on the month, compared with a fall of 6.2% a year ago. There was also upward pressure from clothing and footwear where prices fell between November and December 2009 but fell less than they between the same two months in 2008. However, overall, there was upward pressure on prices from 10 of the 12 divisions which the ONS measures and there were no significant downward pressures.
As far as RPI annual inflation is concerned this rose by 2.1% from 0.3% in November to 2.4% in December 2009. The last time there was a monthly increase of this magnitude was between June and July 1979. The RPI was affected by the same pressures as the CPI as shown above. But, in addition, it was affected by the housing sector. Here, mortgage interest rates which fell significantly between these months in 2008 actually rose in the same period of 2009.
RPIX inflation, which is the RPI excluding mortgage interest payments rose from 2.7% in November to 3.8% in December 2009. At the same time, core inflation, which excludes food, energy, tobacco and alcohol rose by 2.8% on an annualised basis, which again is the fastest growth rate since records began in January 1997.
What of the future? The Bank of England has forecast that the CPI will show a rise of about 2.6% over the first quarter of 2010 and once the change back up in the VAT rate has worked its way through, many economists believe the CPI will fall back. There is also a difference of opinion as to the length of the time lag for the previous falls in the value of sterling to work their way through into higher domestic prices, and if these have been underestimated, we may see more pressure on the CPI in the months ahead.
Finally, disposable incomes increased by 5.2% in the year to the third quarter of 2009, particularly due to the effect of lower mortgage payments. If this goes into spending rather than the running down of existing debt as has been happening, then again we could see a feed through into higher prices.
Tags: core inflation, CPI, disposable income, Inflation, RPI, RPIX, sterling
Posted in Consumer Expenditure, Consumer Price Index, Inflation | No Comments »
Tuesday, December 15th, 2009
The CPI annual inflation rate rose to 1.9% in November following a rise of 1.5% in October. This increase was faster than expected and was mainly due to changes in transport prices, with the largest effect coming from fuels and lubricants. In this category, prices rose by 2.8% between October and November this year but fell by a huge 8.3% twelve months earlier.
According to the ONS there were small upward pressures from clothing and footwear and household and household services, whilst the largest downward pressure came from food and non-alcoholic drinks.
This increase in CPI was the biggest increase since May 2009 and CPI is expected to rise above its 2% target rate in the New Year when VAT is returned to its 17.5% rate from the temporary 15% rate operating at the moment.
The latest trends can be seen in the figure below.
 Source: ONS
Also, in the year to November, RPI inflation was 0.3% compared with a rate of -0.8% in October. According to the ONS such a rise of 1.1% has not been seen since April 1990 when the monthly increase was from 8.1% to 9.4%. Apart from the factors which influenced changes in the CPI there was also upward pressure from housing, mainly from mortgage interest payments which rose this year after falling a year ago.
The RPIX inflation rate, which excludes mortgage interest payments, was 2.7% in November, up from 1.9% in October.
Tags: CPI, Inflation, RPI, RPIX, VAT
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Tuesday, November 17th, 2009
The government’s target measure for inflation, CPI, was 1.5% in October, which was a rise of 0.4 percentage points, from the 1.1% recorded in September.
The main reason for the increase was within the transport sector and came from fuels and lubricants. Somewhat perversely, prices of fuels fell by 0.7% between September and October this year. But because they actually fell even more, by 6.1%, between the same two months a year ago, this led to an inflationary increase. There were also other inflationary increases within this category from the prices of second-hand cars and air transport, where fares increased by 1.5% this year.
There were also upward pressures on CPI from recreation and culture, food and non-alcoholic drinks and communication. The largest downward pressure came from miscellaneous goods and services, mainly banking services, due to reductions in overdraft charges and mortgage arrangement fees.
 Source: ONS
In the year to October the Retail Prices Index fell by 0.8% which compares with a fall of 1.4% in the previous month. This means an increase of 0.6% and there has not been a greater month increase since July-August 1990.The factors affecting the CPI also affected the RPI, although because of differing methods used to measure the price of new cars in the two indices, the RPI increased by more than the CPI. There was also an upward pressure from house depreciation as house prices are now increasing but were falling at this stage last year.
Also, RPIX inflation, which is RPI minus mortgage interest payments, was 1.9% in October, compared to 1.3% in September.
The latest comparison with the EU as a whole shows a September CPI inflation figure for the UK of 1.1% but an EU figure of 0.3%.
Last week, Mervyn King, governor of the Bank of England said in his quarterly Inflation Report that: “Inflation is likely to rise towards 3% next year as VAT returns to 17.5% and higher commodity prices feed through, before price increases again subside to 1%.”
Tags: CPI, Inflation, RPI, RPIX
Posted in Consumer Price Index, Inflation | No Comments »
Friday, August 7th, 2009
In my blog yesterday I listed some of the positive signs that the economy was showing in terms of house prices, house building and the service sector. Then later in the day the Monetary Policy Committee (MPC) announced that the UK recession “appears to have been deeper than previously thought.”
Not only that, but the MPC thought it necessary to take further action to try to correct the economy’s problems. The committee surprised the markets by announcing that they were to embark on a further round of “quantitative easing” which is akin to printing money and pumping it into the economy. The chancellor had previously agreed in March to allow the Bank of England to pump £150bn into the economy, of which they have used £125bn to date. Now they are to use the remaining £25bn plus a further £25bn to inject another £50bn of funds into our “fragile” economy.
The Governor of the Bank, Mervyn King, wrote in his letter to the chancellor that: “The future evolution of output and inflation will be determined by the balance of two sets of forces. On the one hand, there is a considerable stimulus still working through from the easing in monetary and fiscal policy and the past depreciation of sterling. On the other hand, the need for banks to continue repairing their balance sheets is likely to restrict the availability of credit, and past falls in asset prices and high levels of debt may weigh on spending.”
 The Bank of England is pumping another £50bn into the economy
The Bank will spend this money on the purchase of gilts in the market over the next three months. The British Chambers of Commerce urged the MPC to purchase more company debt rather than government debt. However, one of the effects of purchasing existing government bonds is to push their price up and their yield down. Falling yields make them less attractive to investors and this has helped to revive interest in both equity markets – which have been rising strongly – and the market for corporate bonds. This means that larger companies at least have been finding it easier to raise funds through the markets rather than relying on the banks which are conservatively trying to rebuild their balance sheets.
In fact, earlier this week Dealogic said that £88bn had been raised by companies in the City through new equity and convertible bonds so far this year, which compares favourably with the £118bn raised in the whole of last year. The Bank of England announced a couple of days ago that the money supply during the second quarter was growing at the slowest rate for a decade, although lending rose by 2.7% in the second quarter, up from 1.9% in the previous quarter. So, even though lending is still reasonably tight, the fact that larger firms seem able to raise money in the equity and bond markets, should mean that smaller firms will get a greater share of the limited bank lending which is still available.
Is the Bank of England doing the right thing? If they are looking at the CPI target, then at 1.8% last month it is already below its 2% target and expected to fall further this year. Given the increasing rate of unemployment and the size of the output gap coupled with low increases in earnings, it would look as if the economy could well absorb the increased monetary injection. At the moment the economy appears to be making something of a recovery and the MPC is obviously worried that if further support is not forthcoming, we will experience a “double dip” whereby GDP growth worsens again later in the year. Given that economic observers are equally worried about whether future inflation or deflation is a possibility, it is probably best for the MPC to stimulate the economy now.
Tags: Bank of England, Deflation, gilts, Inflation, Lending, MPC, quantitative easing, recession
Posted in Bank of England, Consumer Price Index, Inflation, Monetary Policy Committee, Money Supply, economic growth | No Comments »
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