UK Inflation Rate and Graphs

Current UK Inflation Rate

  • CPI inflation rate:  2.6% (headline rate) CPI – D7G7 at ONS
  • (page updated 18 July 2017)

UK inflation- 2017

Other measures of inflation

Cost push inflationary factors

In 2017, UK has seen a rise in cost-push inflationary pressures. This has caused a spike in inflation, despite relatively weak economic growth. Cost push inflationary factors have come from:

  • Devaluation in Sterling. This makes imports more expensive and has fed through into higher input prices for manufacturers.
  • Rise in petrol prices in early part of 2017

What is causing low inflation?

Despite temporary cost-push inflationary factors, underlying inflationary pressures remain muted.

  • 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 very low rates of inflation.
  • Supermarket price wars, with big chains, such as Tesco and Sainsbury attempting to maintain market share from Pound Shops and discounters like Lidl
  • Fiscal austerity – many government departments still seeing spending squeezed. In particular public sector pay restraint of 1% has reduced real wages for public sector workers.
  • Private sector wage growth still weak.
  • Negative output gap, with real GDP still around 10-15% below pre-crisis trend rate

Historic inflation

UK inflation post-war

The current UK inflation rate compares favourable to much of the post-war period. The 1970s frequently saw double digit inflation (due to global inflationary pressures from rising oil prices + wage growth). In 2017, the annual CPI is just above the inflation target of 2%.

See also: more historical graphs of inflation

Inflation since 1990

inflation

  • Inflation rose over 8% in the late 1980s due to the Lawson boom, which was a period of unsustainable economic growth.
  • Inflation was low in the period 1992 to 2007. This was a period known as the ‘great moderation’
  • The inflation of 2008 and 2012 was due to cost-push factors (devaluation and rising commodity prices)

Inflation and interest rates

inflation-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.

Inflation and wages

  • Real wages = nominal wages – inflation.
  • Usually, during a period of economic growth – wage growth is higher than inflation, this leads to positive real wage growth.
  • During the economic recession of 2009-13 – we had a prolonged period of negative real wage growth. Wages rising at a slower rate than inflation.
  • The end of 2014 saw the first signs of renewed wage growth and positive real wage growth.

uk-real-wages-07-17

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-cpih-cpi-ct-monthly-inflation

CPI-CT was lower than CPI during 2010 because of 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.

CPI and CPIH

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.

cpi-cpih-inflation

CPI and RPI

RPI is still published by the ONS, but it is no longer designated as a national statistic.

CPI-RPI-inflation

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

Producer inflation

producer-inflation

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-vs-inflation

Unemployment and Inflation

Historical Inflation

UK inflation since 1918

UK inflation 1918-2011

Note the period of deflation in the 1920s / 30s

The highest periods of inflation were:

  • During the two world wars
  • 1970s inflation

historical-inflation-1860

Inflation more volatile in the nineteenth century.

UK Money Supply

Notes and coins is known as a narrow money supply (old measure M0)

notes-coins-m4-inflation

 

 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.

m4-money-supply

click to enlarge-  Source: Money databases at Bank of England | see also Money supply and inflation

Fall in M4 Lending – helps to explain why Bank of England didn’t increase interest rates during 2011 – despite high headline inflation.

EU Inflation

uk-eu27-inflationFurther reading: European deflation

Further Reading on Inflation

5 thoughts on “UK Inflation Rate and Graphs

  1. Including tuition fees gives a false impression. If they were not paid by students/parents they would be paid by taxpayers. The real issue is whether the introduction of fees increases quality and/or efficiency in education.

    The hike in fees will be offset by reduced taxes (at some time).

    1. If only we had maintained the levels between 1983-89; i.e. keeping inflation at a similar level to GDP we wouldn’t be where we are now!
      Wether growth is sustainable or not, you can’t have infinite growth in a finite system, fact!

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