Current UK Inflation Rate
- CPI inflation rate: 0.5% (headline rate)
- (page updated 15 January, 2015)
What is causing the fall in inflation?
- Lower cost push inflation – falling oil prices
- Other commodity prices also falling, such as metals, food.
- Lower energy prices – gas and electricity
- Low worldwide inflationary expectations. Europe is experiencing deflation and this is keeping inflation low.
- Supermarket price wars, with big chains, such as Tesco and Sainsbury attempting to maintain market share from Pound Shops and discounters like Lidl
- Wage growth still weak, despite early signs of some wage growth.
- Note: RPI inflation is still 1.6%. Also, core inflation stripping out volatile items such as petrol, oil and energy prices is higher than the headline CPI rate.
The current UK inflation rate compares favourable to much of the post-war period. The 1970s frequently saw double digit inflation. In 2014, the annual RPI was 2.2%.
See also: more historical graphs of inflation
CPI and CPIH
- CPIH – 0.6% in the year to Dec 2014
CPIH is a new experimental index from the ONS. It is based on CPI, plus it includes housing costs, such as mortgage interest payments. Owner occupiers cost (OOH) account for 12% of the CPIH weighting. Mortgage interest payments are the biggest part of OOH. Mortgage interest payments average 10% of household expenditure.
Inflation and Interest rates
The Bank of England are responsible for monetary policy. They target an inflation rate of CPI = 2% +/-1. They also take into account economic growth.
Usually, with an inflation rate above 2%, you would expect the Bank of England to increase base rates to reduce inflationary pressures. However, since early 2009, the Bank of England kept base rates close to 0.5%. This is because the Bank of England are worried about the depth of the recession. They argued that the increase in inflation (e.g. during 2011) was due to temporary cost push factors, such as taxes, commodity prices and effects of devaluation. Therefore, they tolerated CPI inflation above target rather than risk a deeper recession.
Now, we are seeing inflation fall.
Inflation and wages
A key factor for determining underlying inflation is wage growth. The end of 2014 saw the first signs of renewed wage growth. However, with inflation falling, it may become harder for workers to maintain these wage increases.
See more at UK wage growth
Inflation excluding the effect of taxes
The ONS publish a measure CPI-CT – this is a measure of inflation at constant taxes, i.e. the effect of an increase in excise duty is taken away from the index. This gives a better guide to underlying inflationary pressure.
CPI-CT was lower than CPI during 2010 because tax increases, such as VAT, increased the headline CPI rate. The fall in CPI during 2011 was partly due to tax increases no longer affecting the price index.
RPI, CPI, CPI-CT
RPI inflation – 1.6% Dec 2014 (no longer ONS stat) but is higher than CPI.
CPI-CT is a measure of inflation at constant taxes. It excludes the effect of changes in VAT or excise duties. For example in 2010, RPI inflation was higher than CPI-CT because of the increase in the rate of VAT.
CPI and RPI
RPI is still published by the ONS, but it is no longer designated as a national statistic.
RPI includes more items, such as housing and mortgage interest rate costs. It is calculated in a different way to CPIH. See: Definitions of CPI, RPI, RPIX
The ONS also publish a new measure RPIJ - which involves a new method of calculating RPI
The producer price index measures the price of manufactured goods as they leave the factory gate.
There is also an input price index which measures cost of raw materials. These are both a guide to future inflationary pressures.
See more at: Input and producer prices
Gap Between RPI and CPI
There is a debate about whether government spending commitments should be calculated through CPI or RPI. Currently benefits are linked to CPI; this means the increase in benefits is generally smaller than if we used the RPI method.
Inflation v Unemployment
Unemployment and Inflation
UK inflation since 1918
Note the period of deflation in the 1920s / 30s
The highest periods of inflation were:
- During the two world wars
- 1970s inflation
Inflation more volatile in the nineteenth century.
UK Money Supply
Notes and coins is known as a narrow money supply (old measure M0)
M4 Money supply
M4 money supply is a measure of notes and coins in circulation, plus bank deposits. It is known as a broad money supply and is a guide to underlying economic activity and bank lending.
Fall in M4 Lending – helps to explain why Bank of England didn’t increase interest rates during 2011 – despite high headline inflation.
Boom and Bust – Inflation in Late 1980s
Record economic growth of 5% a year in the late 1980s, led to a spike in inflation of 10% by 1990. Inflation only fell after higher interest rates and membership of the ERM caused a fall in domestic demand.
Further reading: European deflation