Current UK Inflation Rate
- CPI inflation rate: 2.6% (headline rate) CPI – D7G7 at ONS
- (page updated 18 July 2017)
Other measures of inflation
- (CPIH) CPI including owner occupiers’ housing costs – 2.6% (CPIH – L550)
- Factory gate prices (Output prices) 3.3% June 2017 (output prices) ONS
- See: 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
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 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
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.
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 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 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.
Further reading: European deflation
Further Reading on Inflation
- Definition of inflation
- Costs of inflation
- Causes of inflation
- Inflation Targeting – pros and cons
- Core inflation
- Cost push inflation
- Different types of inflation
- Methods to control inflation