UK inflation slowdown

Data issued by the Office for National Statistics (ONS) this week revealed inflation in the UK is unchanged at 2.4% over the 12 months to the end of June 2018.

Before the announcement analysts expected UK inflation, measured by the Consumer Price Index (CPI), to increase to 2.6% as demonstrated in the chart below. Given a backdrop of higher global oil prices they thought increased prices at the petrol pumps would push the series upwards.

Source: 19 July 2018, Bloomberg

Although the forecasts for a higher number proved wide of the mark, analysts were not wrong on petrol prices. They did in fact push the index up but there were offsetting factors helping to counteract this effect. For example, food & drink, clothing & footwear, furniture and products and services around recreation all fell. Analysts say good weather and the World Cup kept consumers out of the department stores; a likely short-lived phenomenon (at least from a sporting perspective).

The bar chart below shows the inflation effects by category. We should point out that the data taken from the ONS uses prices which include housing costs (CPIH), whereas CPI, which we quote, does not. Nevertheless, the table containing the expanded range of categories is useful to show how prices are fluctuating in different areas of the economy. Some of these price changes affect us personally, some not. We should also mention that the impact of rising oil prices is recognised under the category ‘transport costs’.

Source: 19 July 2018, Office for National Statistics

From a consumer’s point of view, a slowdown in inflation is a positive. Especially with wage growth no longer languishing below the inflation rate. Spending power in real terms, after taking account of inflation, is no longer being eroded.

The figures on inflation have further divided opinion on whether the Bank of England should raise rates in August from their current level of 0.50%. At the last Monetary Policy Committee (MPC) meeting the panel voted by a majority of 6-3 to maintain the rate at 0.5%. Expectations of an August hike have now slipped from 89% to 78%, However, this continues to suggest a rate rise is more likely than not.

The ‘Doves’ of the economy, who favour low interest rates as a way of promoting economic growth feel now is not the time to hike interest rates. With recent figures showing sluggish wage growth and tame inflation, they feel the MPC should not take risks by putting rates up now. The Hawks however, are gathering strength, observing a healthy labour market where unemployment is at its lowest level since 1975 (4.2%).

The MPC will meet again on 2nd August 2018 to decide on interest rates.