Current UK Inflation Rate
- CPI inflation rate: 1.5% (headline rate) CPI – D7G7 at ONS
- (page updated 18 Dec 2019)
Other measures of inflation
- (CPIH) CPI including owner occupiers’ housing costs – 1.5% (CPIH – L550)
- RPI – 2.2% (Dec 2019)
- See: Measures of inflation
Cost-push inflationary factors
In 2017, the UK saw a rise in cost-push inflationary pressures. This 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 the early part of 2017.
- Rise in food and recreational goods.
In 2018/19, these cost-push factors have fallen away and weak economic growth has kept inflation below target.
Reasons for low inflation in the UK
- Low worldwide inflationary expectations. Europe is experiencing very low rates of inflation.
- Fall in global inflation rates since 2007.
- Supermarket price wars, with big chains, such as Tesco and Sainsbury attempting to maintain market share from Pound Shops and discounters like Lidl.
- Weaker commodity price growth.
- Fiscal austerity – many government departments still seeing spending squeezed. In particular public sector pay restraint of recent years has reduced real wages for public sector workers.
- Private sector wage growth is still weak. This has limited costs of firms and limited growth in aggregate demand.
- A potential negative output gap, with real GDP still around 10-15% below pre-crisis trend rate.
Inflation trends in the UK
Despite temporary cost-push inflationary factors in 2017, underlying inflationary pressures remain muted – at least compared to the past four decades.
The current UK inflation rate compares favourably to much of the post-war period.
The 1970s frequently saw double-digit inflation. This was due
- Cost-push factors – rapid rise in oil prices
- Rising wages due to powerful trade unions trying to keep up with living costs.
- Lack of independent monetary policy
- Inflation expectations rose
Late 1980s inflation
The inflation of the late 1980s was due to
- Rapid economic growth ‘The Lawson Boom‘ – growth was above the trend rate causing supply shortages
- Rise in house prices fuelling wealth effect
- Lack of independent monetary policy. Policy was partly set by ‘shadowing the D-Mark’ which led to loose monetary policy in late 1980s
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.
In 2017/18, the trend of negative real wage growth resumed.
However, since 2018, wages have started to creep up whilst inflation has fallen.
See more at UK wage growth
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.
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 publishes 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
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