UK inflation is starting to slip – but not as fast as many would like. This morning the Office of National Statistics confirmed the Consumer Prices Index (CPI) 12-month rate was 3.0% in January, unchanged from December. Core inflation, which strips out more volatile price swings, rose 2.7% – more than expected.
The largest downward push to January’s inflation figure came from slowing petrol and diesel price inflation says the ONS.
While statistically correct, any ‘feel-good’ factor will have been lost on most car and van owners. Both petrol and diesel are up around 4-5p a litre since October. Diesel was up 1.5p to 125p a litre while unleaded petrol climbed 1.3p to 122p a litre, according to RAC Fuel Watch data.
“Both petrol and diesel,” said RAC spokesperson Simon Williams last month, “are now at their highest points for more than three years which is bound to be making a dent in household budgets.”
But in time for half-term, a rash of oil companies have now slashed prices – so quite a long tail to the price cuts.
Higher entertainment inflation may be short-lived
The biggest upward inflation kick to prices in January came from recreational, cultural goods and services said the ONS, “in particular, admissions to attractions such as zoos and gardens, for which prices fell by less than they did a year ago”. These take a 12% total weighting of the overall ‘basket’.
James Smith of ING bank doesn’t expect this to continue. “Given that much of the recreation category (things like computers and TVs) is fairly sterling-sensitive, we wouldn’t expect this resilience to last."
That’s because the sharp fall in the pound after the Brexit vote has now more-or-less fed through to consumer prices and the rate of pass-through is starting to ease he says. "The recent sterling strength will only accelerate this process.”
There was a stamp on the brakes from factory goods price inflation claimed ONS’ senior statistician James Tucker, “with food prices falling in January. The growth in the cost of raw materials also slowed, with the prices of some imported materials falling”.
Still too high overall...
Roll back a month and the rate of UK inflation hit a six-month high of 3.1% in November. Self-evidently UK inflation has remained at 3% for two months in a row.
But higher shop import prices, following the dramatic depreciation of the pound since the Brexit referendum, continue to make a deep impact (especially where price hikes are most obvious – in supermarket aisles and on fuel station forecourts).
“As these effects begin to diminish,” the Bank of England said last week, “inflation is expected to fall, but the recent rise in oil prices means that fall is more gradual in the near term than projected in November. Alongside that, wage growth appears to be picking up, suggesting building domestic cost pressures.”
...and wages still lag
Policy makers, yes, are looking hard at wage growth. James Smith from ING agrees that news on this front "has been more positive of late and suggests that pay may be starting to respond to skills shortages and a tighter jobs market".
But the hard statistical reality is that UK inflation still remains well ahead of wages (up +2.4% in the three months to November – new wage growth stats arrive next week).
Also, the UK's massive service industry – around 80% of the economy – saw a purchasing managers' index slump in January, culminating in a 16-month low confidence reading. Many British workers remain in low paid jobs in this sector.
"Growth was reportedly curtailed by the loss of existing clients and lingering concerns surrounding the UK’s exit from the EU," said the IHS Markit study.
Don’t rely on any rate respite
If UK inflation is statistically on a downward drift it gives the Bank of England more ‘wiggle’ to keep interest rates on hold for longer says Suren Thiru, head of economics at the British Chambers of Commerce – despite the hawkish tone of the latest BoE inflation report.
But Ben Brettell, senior economist at Hargreaves Lansdown, says most UK household budgets have been given little slack from today’s ONS numbers – inflation has been above target for 12 straight months, he reminds.
“Economists have been expecting inflation to gradually fall back to the 2% target over the coming year or so, starting today with a drop to 2.9%. But in fact the rate remained at 3.0%, with price rises driven by clothing, footwear and recreational goods and services.”
Brettell says this must add weight for higher interest rates, sooner, not later. “Indeed Bank of England policymakers said last week they’ll try and bring inflation back to target more quickly than previously expected, which means rates could rise."