UK Consumer Price Inflation

UK Consumer Price Inflation

November 2013 Update

Issued 20th

November 2013

Richard Ramsey

Chief Economist Northern Ireland

[email protected]

Twitter @UB_Economics

mailto:[email protected]

UK Inflation SummaryThe annual rate of UK consumer price inflation (CPI) fell by 0.5 percentage points to 2.2% in October 2013. UK CPI has now been above the 2% Bank of England target in 67 of the 74 months since the credit crunch began (Aug‐2007). Meanwhile the Retail Price Index (RPI) inflation measure saw its annual inflation rate decelerate to 2.6% in Oct‐13.

The UK’s annual rate of CPI inflation (2.2%) compares with 1.0% for the United States, 0.7% for the Eurozone and ‐0.1% for the Republic of Ireland.

Since August 2007, UK CPI has increased cumulatively by 21.2%. This compares with a rise in average earnings of 11%. Meanwhile, the inflation rates of other categories of consumer spending have increased at a much faster rate. Utility bills (electricity, gas & other fuels) increased by 61% between August 2007 and October 2013. Over the same time period food has risen by 37% and Transport Fuels & Lubricants (i.e. petrol & diesel) have risen by 39%.

Inflation has been more pronounced in the UK than in the Eurozone. Indeed, since the credit crunch began, the UK has experienced the largest increases in consumer prices within the EU‐27, outside of Eastern Europe. Conversely, the Republic of Ireland (RoI) has become the poster child of low inflation within Europe and is the only EU‐27 economy not to experience a double‐digit rise in consumer prices since August 2007.

Since the credit crunch began (August 2007), the UK has experienced a cumulative rise in consumer prices 7 times greater than that of the RoI (+2.9%). The divergence is even starker when comparing some items of consumer spending. For example, UK food prices have risen by 37% since August 2007, whereas RoI food prices in October 2013 were no higher than they were when the credit crunch began.

The BoE’s latest Quarterly Inflation Report (Nov‐13) projects the annual rate of CPI to be 2.2% at the 2‐year target horizon assuming monetary policy settings remain constant. The BoE also expects UK CPI to remain above the 2% target until 2016 (assuming no change in policy). If this comes to pass, this would represent 10 consecutive years of a CPI (annual average) overshoot. 2005 was the last year that CPI averaged at or below the 2% target.

UK Consumer Prices: CPI Summary Table

CPI by main categoriesOctober 2013

% Y/YOctober 2013

% M/M% Change Since August 2007*

Food & non‐alcoholic beverages 3.9 0.1 36.3

Alcohol & Tobacco 5.4 0.3 41.2

Clothing & Footwear 1.0 1.0 ‐7.1

Housing & household services (includes water & fuel)

4.1 0.0 32.1

Furniture & Household Equipment 1.0 ‐0.4 19.3

Health 2.6 ‐0.2 19.1

Transport ‐0.3 ‐1.5 24.2

Communication 2.7 0.3 15.2

Recreation & Culture 0.7 0.2 4.5

Education 10.3 8.2 88.6

Restaurants & Hotels 2.8 0.2 21.3

Miscellaneous Goods & Services 0.7 ‐0.2 14.3

Overall CPI 2.2 0.1 21.2

UK CPI Inflation by Sub‐Category

Source: ONS, * August 2007 marks the beginning of the credit crunch

UK CPI has exceeded the MPC’s 2% target in 67 out of 74 months since the credit crunch began (August 2007)

UK CPI vs RPIX

2.7

2.2

0

1

2

3

4

5

6

Oct-01 Oct-03 Oct-05 Oct-07 Oct-09 Oct-11 Oct-13

RPIX UK CPI

Old RPIX Target

New CPI Target

The annual rate of RPI & RPIX inflation in October 2013 fell to its lowest rate in 13 months

UK RPI vs RPIX

-3

-2

-1

0

1

2

3

4

5

6

7


RPIX RPI

Source: ONS, RPIX Excludes Mortgage Interest Payments

All measures of inflation ease significantly in October with Core CPI dipping below 2% for the first time since Nov-09

UK Inflation - CPI, Core CPI, CPIY and RPI

2.22.32.6

1.7

-3

-2

-1

0

1

2

3

4

5

6

7

Oct-08 Oct-09 Oct-10 Oct-11 Oct-12 Oct-13

% Y/Y

CPI CPIY MPC Target RPI Core CPI

Source: ONS; CPIY excludes indirect taxation e.g. VAT; Core CPI excludes Energy, Food, Alcohol & Tobacco

UK inflation still rising at a much faster rate than earnings and therefore prolonging the income squeeze

UK Average Weekly Earnings & CPI Inflation

0.8%

2.2%

0

1

2

3

4

5

6


%

Ave Weekly Earnings 3m Y/Y % (Excl. Bonuses) CPI Y/Y

Source: ONS

Income squeeze

Does not include taxes or changes to benefits

NICE Decade

Energy & food inflation has eased markedly since 2008 & 2009 but it’s the cumulative impact that is doing the damage…

UK CPI Inflation Year-on-Year

4.0%

7.7%

-4.2%

-20%

-10%

0%

10%

20%

30%

40%

50%

Oct-05 Oct-06 Oct-07 Oct-08 Oct-09 Oct-10 Oct-11 Oct-12 Oct-13

Food & Non-Alcoholic Beverages Electricity Gas & Other FuelsTransport Fuels & Lubricants

Source: ONS

Since Aug-07 CPI has risen by 21% which compares with a rise in average earnings of just 11%

Cumulative % Change in UK Consumer Prices since 'Credit Crunch' began (Aug 07 to Oct 13)

21.2%

0%

10%

20%

30%

40%

50%

60%

70%

Food &Non-

AlcoholicBeverages

Food ElectricityGas & Other

Fuels

TransportFuels &

Lubricants

TransportServices

Hotels &Restaurants

Total CPI AverageEarnings*

International Consumer Price Inflation

Comparisons

Inflation has been more pronounced in the UK than in the Eurozone…

UK CPI vs Eurozone HICP

2.2

0.7

-1

0

1

2

3

4

5

6


Y/Y %

UK CPI EZ HICP

…and even more pronounced relative to the Republic of Ireland

UK CPI vs RoI HICP

2.2

-0.1

-4

-3

-2

-1

1

2

3

4

5

6

7


% Y/Y

UK CPI ROI HICP

The RoI has gone from having the highest annual rates of inflation to the lowest

Consumer Price Inflation (HICP) year-on-year

0.7

2.2

-0.1

-4

-3

-2

-1

0

1

2

3

4

5

6


%

EZ UK RoI

Ireland has become the poster child of low inflation with the UK experiencing the highest rises outside of Eastern Europe

EU-28 Cumulative % Rise in Consumer Prices (HICP) August 2007 to October 2013

21.2%

12.7%12.7%

2.9%

0% 5% 10% 15% 20% 25% 30% 35% 40%

RomaniaHungaryEstonia

LithuaniaLatvia

BulgariaUK

PolandCroatiaFinland

SloveniaGreece

LuxembourgSlovakia

ItalyCyprus

Czech RepublicMalta

AustriaBelgium

SpainDenmark

NetherlandsEZ

EU 28SwedenFrance

PortugalGermany

IrelandSource: ONS & Eurostat

€

The UK has experienced a cumulative rise in consumer prices 7 times greater than the RoI since August 2007

CPI by main categoriesUK October 2013 % Y/Y

RoI October 2013 % Y/Y

UK % Change Since August

2007*

RoI % Change Since August

2007*

Food & non‐alcoholic beverages 3.9 0.1 36.3 0.5

Alcohol & Tobacco 5.4 5.3 41.2 18.4

Clothing & Footwear 1.0 ‐4.1 ‐7.1 ‐24.3

Housing & household services (includes water & fuel)

4.1 3.0 32.1 9.0

Furniture & Household Equipment 1.0 ‐4.0 19.3 ‐16.6

Health 2.6 0.6 19.1 14.3

Transport ‐0.3 ‐3.5 24.2 5.3

Communication 2.7 ‐3.8 15.2 ‐2.9

Recreation & Culture 0.7 0.0 4.5 ‐2.8

Education 10.3 4.7 88.6 43.2

Restaurants & Hotels 2.8 1.7 21.3 0.5

Miscellaneous Goods & Services 0.7 ‐1.5 14.3 13.4

Overall CPI 2.2 ‐0.1 21.2 2.9

UK & RoI CPI Inflation by Sub‐Category

Source: ONS & CSO using HICP measure, * denotes when credit crunch officially began

UK Food & Drink prices have risen by 36% since the credit crunch started whereas in RoI they are almost unchanged

UK (NI) & RoI Consumer Price Inflation Levels (August 2007 = 100)

+36.3%

+0.5%

+21.2%

+2.9%

90

100

110

120

130

140


UK Food & Drink RoI Food & DrinkUK All Items CPI RoI All Items CPI

Source: ONS, Eurostat HICP inflation & UB Calculations

After Hungary, the UK has posted the largest rise in food & drink prices (& the RoI the least) within the EU-28 since Aug-07

EU-28 Cumulative % Rise in Food & Drink Prices August 2007 to October 2013 (HICP)

36%

14.3%14.2%

0.5%

0% 5% 10% 15% 20% 25% 30% 35% 40%

HungaryUK

MaltaEstonia

LithuaniaLatvia

PolandRomania

FinlandSlovenia

Czech RepublicBulgariaCroatia

SlovakiaCyprusAustria

BelgiumDenmark

LuxembourgSweden

GermanyItalyEZ

EU 28Netherlands

GreeceFranceSpain

PortugalIreland

Source: ONS & Eurostat

€

Food prices in the RoI were no higher in October 2013 than they were when the credit crunch began!

UK v RoI Cumulative % Change in Consumer Prices since 'Credit Crunch' began (Aug 2007 to Oct 2013)

21.2%

2.9%

0%

10%

20%

30%

40%

50%

60%

70%

Food & Non-Alcoholic

Beverages

Food ElectricityGas & Other

Fuels

TransportFuels &

Lubricants

TransportServices

Hotels &Restaurants

All CPI

UK RoI

Consumers in the RoI have benefited from almost no Hotel & Restaurant inflation over the last 6 years too

EU-28 Cumulative % Rise in Hotel & Restaurant Prices August 2007 to October 2013 (HICP)

21%

14.5%

12%

0.5%

0% 5% 10% 15% 20% 25% 30% 35%

BulgariaRomania

EstoniaHungary

LithuaniaPolandFinland

SlovakiaUK

LuxemboDenmarkSlovenia

AustriaNetherlaSweden

CzechEU 28

CyprusGermany

MaltaBelgiumPortugal

EZLatvia

ItalyCroatiaGreeceFranceSpain

IrelandSource: ONS & Eurostat

€

Northern Ireland’s tourist industry has experienced fierce price competition from its nearest competitor

UK (NI) & RoI Hotel & Restaurant CPI Levels (August 2007 = 100)

+21.1%

+0.5%

90

100

110

120

130

Jul-07 Oct-08 Jan-10 Apr-11 Jul-12 Oct-13

UK RoI No Change

Source: ONS, Eurostat HICP inflation & UB Calculations

Consumers in the RoI have seen energy inflation below that in the EZ & half of that in the UK

Cumulative % Rise in Electricity, Gas & Other Fuels Prices August 2007 to October 2013 (HICP)

61%

35%35%

29%

0% 20% 40% 60% 80% 100% 120%

GreeceLatviaMalta

LithuaniaEstonia

UKFinland

SpainCyprusCroatia

SloveniaRomania

PolandPortugalBelgium

Czech RepublicFrance

EZEU 28

HungaryGermany

IrelandItaly

DenmarkLuxembourg

BulgariaAustria

SlovakiaSweden

Netherlands Source: ONS & Eurostat

€

Greece has seen prices more than double as hiking electricity bills was a measure to raise household taxation revenue

UK Oil, Petrol & Diesel Prices

Petrol & diesel prices have fallen from their recent highs

UK Fuel Prices - Pence per litre (Weekly)

85.4p

129.9p

148.0p

137.5p

60

70

80

90

100

110

120

130

140

150

160

Nov-04 May-06 Nov-07 May-09 Nov-10 May-12 Nov-13

Pence

Petrol DieselSource: ONS

**Note Northern Ireland Prices are traditionally the highest of all UK regions**

Filling up an average family car with petrol or diesel has fallen by 7-8% relative to last April’s peak

UK Fuel Prices - Tank* of Petrol / Diesel (*60 Litres)

£51.3

£77.9

£88.8

£82.5

30

40

50

60

70

80

90

100

Nov-05 Nov-06 Nov-07 Nov-08 Nov-09 Nov-10 Nov-11 Nov-12 Nov-13

£

Petrol Diesel Source: ONS


'Credit Crunch' begins

June Budget 2010

Filling up some vehicles still costs well over £100

UK Tank of Diesel Prices

£58.5

£88.8

£82.5

£78.7

£118

£110

£91.4

£138

£127.8

40

60

80

100

120

140

160

Nov-05 Nov-06 Nov-07 Nov-08 Nov-09 Nov-10 Nov-11 Nov-12 Nov-13

£

Diesel Toyota Hilux / Nissan Navarra 80L Toyota Land Cruiser 93L

Source: DECC & UB Calculations

It cost < £30 for a tank of fuel 20 years ago

UK Fuel Prices - Tank* of Petrol / Diesel (*based on 60 Litres, monthly prices)

20

30

40

50

60

70

80

90

100

Nov-91 Jul-95 Mar-99 Nov-02 Jul-06 Mar-10 Nov-13

£

Petrol Diesel Source: DECC


Price of Brent Crude Oil in Dollars & SterlingWeekly

£67.3

$108.5

0

20

40

60

80

100

120

140

160

Nov-06 Jan-08 Mar-09 May-10 Jul-11 Sep-12 Nov-13

£/$ pb

£pb $pb

Source: Bloomberg

Remember it is the price of oil in sterling that matters

Price of Brent Crude Oil in Dollars & SterlingWeekly

£67.3

$108.5

0

20

40

60

80

100

120

140

160

Nov-91 Jul-95 Mar-99 Nov-02 Jul-06 Mar-10 Nov-13

£/$ pb

£pb $pb

Source: Bloomberg

It was £12.50 for a barrel of Brent crude just over 20 years ago. Now it is £67pb having hit £80pb last year

Forecourt petrol prices will broadly follow oil price (in £)

Brent Crude Oil (in £pb) versus UK Petrol Prices

0

10

20

30

40

50

60

70

80

90

Oct-05 Dec-06 Feb-08 Apr-09 May-10 Jul-11 Sep-12 Nov-13

Brent Crude £pb

40

60

80

100

120

140

160Pence per Litre

Brent Crude £pb (LHS) Petrol Prices Pence Per Litre (RHS)

Source: Bloomberg & DECC

Domestic heating oil has fallen by 9% since Feb-13 peak but prices still up 84% in 6 years

UK Price of Domestic Heating Oil per 1,000 Litres

£688

£630

£342

200

300

400

500

600

700

Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 Sep-12 Sep-13

£

Source: ONS

Electricity and gas prices have also posted significant rises since the credit crunch began (Aug-2007)

UK Electricity, Gas & Other Fuels CPI Levels Index August 2007 = 100

80

100

120

140

160

180

200

220

Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 Sep-12 Sep-13

Index

Gas Electricity Liquid Fuels No Change

Source: ONS CPI & UB Calculations

+46%

+76%

+84%

UK Inflation Forecasts

Probability of an inflation overshoot has fallen significantly since the last Quarterly Inflation Report (Aug 2013)

Probability of an inflation overshoot based on market interest rate expectations has fallen throughout the forecast period

Probability of CPI rising above 2% has fallen significantly relative to August forecast throughout the forecast period

Source: BoE QIR November 2013 Chart 5.4

Probability of an inflation overshoot based on market interest rate expectations has fallen throughout the forecast period

Probability of CPI rising above 2% has fallen significantly relative to August forecast throughout the forecast period

Source: BoE QIR November 2013 Chart 5.4

CPI inflation projection based on constant nominal interest rates at 0.5% and £375 billion asset purchases

(November 2013)(August 2013)

Source: BoE QIR November 2013

2.2% in 2 years time & 2.1% in 3 years time

Overshoot at 2-yr horizon











Overshoot at 2-yr horizon

BoE expects CPI to remain above its 2% target until 2016 (i.e. 10 years of an annual average CPI overshoot)

CPI inflation set to average 2.4% in 2014 & 2.2% in 2015. RPI even higher at 2.8% in 2014 & 2.6% in 2015

UK Consumer Price InflationCore CPI excludes Energy, Food Alcohol & Tobacco

-2-1012345678

Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15

Y/Y %

CPI RPI MPC Target Core

Forecasts

Annual Growth CPI Core CPI RPI2011 4.5% 3.2% 5.2%2012 2.8% 2.3% 3.2%2013 2.6% 2.1% 3.1%2014 2.4% 1.6% 2.8%2015 2.2% 1.8% 2.6%

Source: ONS & RBS Forecasts

FBTE inflation to average 4.8% in 2014 & 3.3% in 2015 at a time when some welfare benefits capped at 1% p.a

UK Consumer Price Inflation *FBTE includes Food, Beverages, Tobacco & Energy

-3

0

3

6

9

12

15

18

Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15

Y/Y %

CPI RPI FBTE (CPI)

Forecasts

Annual Growth CPI FBTE RPI2011 4.5% 8.4% 5.2%2012 2.8% 4.3% 3.2%2013 2.6% 4.2% 3.1%2014 2.4% 4.8% 2.8%2015 2.2% 3.3% 2.6%

Source: ONS & RBS

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