The path of UK inflation and the way that it has been higher than it should be if you allow for our economic circumstances has been one of the main themes of this blog over the nearly three years that I have been posting. As I look at the news in the media I see more and more consequences of this being reported. It is with a rather grim humour that I see reports of the consequences of higher inflation from organisations such as the BBC who told us that there would not be any.
An economic consequence: Real Wages have fallen
A direct impact of this inflationary episode has been the way that it has exceeded wage growth over this period. This means that UK consumption and domestic demand have been weakened as wage earners find themselves drip by drip becoming poorer in real terms. If we add this to the fact that consumers have a natural tendency to deleverage by such actions as repaying debts we get a strong reason for why our economic performance has been so disappointing over this period.
Food banks have become an increasing feature of UK life
One of the components of the rise in inflation has been a rise in food prices over this period. This has meant that more and more are finding it difficult to feed themselves and are increasingly having to turn to food banks to help.
Trussell Trust figures released this week show that food banks fed 128,697 people nationwide in the last financial year, compared to 61,468 in 2010-11: an increase of 109%. Many of those helped were families struggling as a result of rising food and fuel prices combined with static incomes, high unemployment and changes to benefits
Without that extra spending in the economy, the MPC thought that inflation would
be more likely in the medium term to undershoot the target.
On Monday15th October 2012, the price of ULSP (unleaded petrol) was 138.3p/litre, this is 0.1p higher than the previous week. The price for ULSD (diesel) was 143.2p/litre, this is 0.2p higher than the previous week.
The price of ULSP is 3.9p higher, with the price of ULSD 3.5p higher than in the equivalent week in 2011
Scottish Power announced plans to raise its prices by a claimed average of 7% only yesterday. This made it the fourth of the six main energy companies to raise their prices. So we can expect upwards pressure on inflation from this in the coming months. It is also interesting that the price rises come in front of the period of expected highest consumption as winter approaches. The weights in inflation indices are fixed for the year so they are unlikely to allow for this. Those who read their economics text books may be musing the consequences of allowing a market to be driven by oligopolies and mostly foreign-owned ones at that.
Today’s numbers are an improvement
Let us start with the better news
The Consumer Prices Index (CPI) annual inflation stands at 2.2 per cent in September 2012, down from 2.5 per cent in August. This is the slowest rate of inflation since November 2009, when it was 1.9 per cent
The Retail Prices Index (RPI) annual inflation stands at 2.6 per cent in September 2012, down from 2.9 per cent in August
So an improvement in both measures but if we look at why we see something troubling if we consider the announced rises in many utility bills.
By far the largest downward pressure to the change in the RPI came as a result of September 2011’s utility bill rises falling out of the index calculation
It was also a strong influence in the fall of the CPI and was a downward influence of approximately 0.4%. You may note that this is twice the amount it fell by on a month on month basis compared to the same period in 2011.
They should have been better
If you were to go back to mainstream media output in the early part of the year you will see that they were promising inflation back to and below target right now. As our economy has underperformed then the let’s copy the Bank of England view line should have us well below target now. Why now? This was the period where inflation surged to an annual rate of 5.2% on the CPI measure. Instead we have found ourselves doing better but not a lot as you can see from the figures below.
The CPI rose by 0.4 per cent between August and September this year compared with a rise of 0.6 per cent a year ago.
October will be harder
If we look at the figures for last year we see that the “base effect” I have just discussed will fall away as the month on month increase was only 0.1% as opposed to the 0.6% for September. Added to this we know that there will be some upward pressure of which so far this month we have seen some evidence in the petrol and diesel prices I quoted above. Also there will be an impact from the rise in university tuition fees.
So we see from today’s numbers that whilst the UK’s inflation performance has improved it has done so by less than it should have done. Whilst the future is always uncertain the facts we do know such as planned price rises and “base effects” suggest that this is the low for the series for now. If we look at the UK’s poor economic performance in 2012 and late where the last three quarters for economic growth have gone -0.4%,-0.3% and then -0.4% this is a shocking effort which has driven the fall in real wages that has had effects which have echoed around our economy. One of these has been the rise in the use of food banks in the UK.
Next week I will be attending a seminar/conference on the planned changes to the RPI which I expect to involve it being somewhat neutered. If readers have any thoughts on this please let me know. Otherwise let me welcome you all to my new location.