UK Inflation Rate and Graphs

UK cpi-inflation-89-19

Current UK Inflation Rate

  • CPI inflation rate:  1.5% (headline rate) CPI – D7G7 at ONS
  • (page updated 18 Dec 2019)

UK-cpi-inflation-2007-19

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

uk-inflation-1970-19

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.

1970s Inflation

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.

UK inflation-wages-2006-19

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

UK cpi-inflation-89-19

  • 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)

Read moreUK Inflation Rate and Graphs

Economic Growth UK

Economic growth measures the change in real GDP (national income adjusted for inflation; ONS call it chained volume measure of GDP) Since the end of the great recession (2008 – 2009) the UK economy has grown in fits and starts. It has been a relatively weak economic recovery compared to previous recessions. 2019 has seen …

Read moreEconomic Growth UK

UK Bond Yields Explained

us-bond-yields

UK bond yields are the rate of interest received by those holding Government bonds.

Governments sell bonds (via the Debt Management Office DMO) to fund their budget deficits. Bonds are a way for the government to borrow – a bit like the government taking out a loan.

Government bonds are frequently traded on bond markets. Therefore, their market price may be quite different to the original price set by the government.

Example. A government may sell a 10 year, £1,000 bond at 5% interest. This means every year the government will pay £50 to the holder of this bond.

  • If demand for government bonds rose, this £1,000 bond would increase in price as investors pushed up the market price.
  • But, the government still pay £50 a year interest until maturity. If the market price of the bond rises to say £2,000, the interest rate (yield) is now 2.5% (50/2000)
  • Therefore higher demand for bonds leads to lower bond yields.
  • Conversely, if people sell bonds, this pushes up the bond yield (e.g. what happened in Greece)

How change in price of a bond changes the effective yield

bond-yield-price

Recent UK Bond Yields

UK-10-year-bond

Source: Bank of England – 10-year bond yields

Read moreUK Bond Yields Explained

UK Housing Market

A look at the main UK housing market data.

  1. House prices
  2. Affordability of housing
  3. Interest rates
  4. Supply of housing

House price inflation

house-price-inflation-91-

Nationwide data

  • Annual house price inflation running at 5.3% in Q1 2016
  • London showed strongest housing market with prices rising more than other areas.
  • Price of a typical home is £198,564 (Q1 2016)

UK House prices in past few decades

nominal-UK-house-prices-91-

  • In 1969, average house prices were: £4,312
  • In 1975, average house prices were: £10,388.
  • In 1980, average house prices were: £22,676
  • In 2016, average house prices are: £198,564.

Read moreUK Housing Market

Savings ratio UK

  • Definition of Household savings ratio: The percentage of disposable income that is saved. (1)
  • Total savings = Disposable income – Household consumption

UK Saving Ratio

  • Latest UK household savings ratio: Q1 2017 = 1.7% (July 2017)
  • By contrast the average savings ratio in the past 54 years is 9.2% of disposable income.

2017 has seen a dramatic fall in the UK savings ratio to a record low. This fall in the savings ratio has been caused by

  • Fall in real wages
  • Depreciation in Sterling post-Brexit – pushing up cost of living and contributing to fall in real wages
  • To maintain spending, consumers have borrowed and dipped into savings
  • Temporary factors (high tax payments on dividends)

saving-ratio-since-2006

 

UK Saving ratio. Source: National income accounts Q4 NRJS dataset

NRJS = Households + NPISH (Non Profit Institutions Serving Households)

Saving ratio and base interest rates

saving-ratio-interest-rate

In theory, lower interest rates reduce the incentive to save. But, the interest rate is only one of many factors influencing decisions to save. The most important factor is the state of the economy. In 2009, we saw a rapid rise in the saving rate because of the recession – despite interest rates cut to zero.

Read moreSavings ratio UK

UK Balance of Payments

The balance of payments is the record of a country’s transactions / trade with the rest of the world.

The balance of payments consists of:

  1. Current Account (trade in goods, services + investment incomes + transfers)
  2. Capital Account / Financial Account (capital and financial flows, net investment, portfolio investment)
  3. Errors and omissions. It is hard to collect all data so some is missed out.

In theory there should be a balancing between capital and current / financial account. If there is a current account deficit, there should be a surplus on the capital / financial account.

UK Current Account

The UK has had a persistent current account deficit in the past 15 years. This is caused largely by the deficit in trade in goods, and recently a deterioration in investment incomes.

  • In Q1 2016, the UK current account deficit was £32.6 billion (6.9% of GDP)
  • In 2015, as a whole – the UK’s current account deficit was £96.2 billion (5.2% of GDP) at current market prices. This is relatively high, especially given stage of the economic cycle. The deficit for 2015 Q4 at 7.2% was the highest on record.

UK-current-account-from-2001

Source: ONS Balance of Payments Current account as % of GDP

Read moreUK Balance of Payments

Investment in UK – Business and Public Sector

 

UK-business-investment-80-15

Total UK Business investment since 1980, slow recovery from 2009. (seasonally adjusted.)

Business investment in past ten years

UK-business-investment-05-15

Source: ONS NPEN

From 2007 to 2010 we see a 22% fall in private sector business investment. This was the result of

  • Banking crisis – banks didn’t want to lend
  • Fall in consumer confidence
  • Recession, which caused firms to hold bank from investment

Recovery in business investment since 2010

  • From a low basis and 20% fall
  • Helped by low interest rates making investment more attractive, but availability of funds a bigger problem than the cost of borrowing.
  • Business investment has fallen behind past trend growth in value of business investment.
  • Still volatile and uncertain, e.g falls in 2014 and the end of 2015

Factors influencing future investment levels

  • Despite low interest rates, banks are maintaining strict lending criteria and rationing finance. Many small and medium sized firms still state finance is difficult to come by.
  • Prospects for economic recovery are poor. The Bank of England’s latest inflation report painted a gloomy picture of an economy struggling to post positive economic growth.
  • Fall in inflation rate and possible deflationary pressures
  • Uncertainties over Britain’s place in Europe.
  • Euro-zone debt crisis and EU recession also weigh heavily on UK investment decisions.
  • Future of interest rates. Will interest rates rise to increase the cost of borrowing.

Read moreInvestment in UK – Business and Public Sector

Finding economic stats and data at ONS and Bank of England

 

Quick links for main economic statistics

My page with graphsMain ONS datasetUseful direct links
Economic growthNational income accReal GDP | % quarterly
Inflationinflation seriesCPI annual %
UnemploymentLabour market ILO %
Current account b of ppnbpC.A % GDP
Budget deficitpsf at ONS | psf at HM TPSNB % GDP
Public sector debtpsf at ONSPSND % GDP
Labour productivityprdy datasetlab. prod. % change
Saving RatioNat.l inc. acc: J3household savings %
Business investmentBusiness investment
Housing marketNationwide datahouse price index ONS
UK wage growth average earnings S.A % change
Industrial + manuf outputindustrial productionindex of output

Bank of England data
UK Bond yieldsBank of England 10 year bond yields
Exchange ratesSterling exchange rate
Money supply (BM4 at B of E)

Other data

Readers Questions: I’m pretty good at finding data at FRED. But I have no luck finding what I want at ONS. Do you have a post on that? Or some guidelines that might help me? Would be great!

It’s a good question. I’ve spent the past four years finding my way around the ONS database and website (and updating links the last time they changed URLs). I’ve spent many hours looking for certain statistics. The good news is that nearly all the important ones are there, if you dig hard enough. Though some data like exchange rates, bond yields, interest rates and money supply you will need Bank of England database.

Sometimes it’s frustrating because all you want is the % change in real GDP, and you have to wade through statistics on S.A Output in fishing and forestry.

A few points.

  1. If you get stuck, ONS have been very helpful in pointing out to me the relevant page. So it might be worth using the contact page, if you do get stuck
  2. Sometimes, the hardest thing is knowing where to find a statistic. For example, finding the savings ratio was difficult, because it’s not intuitive you need to look in National accounts – Household sector – saving ratio
  3. In some cases, other sources of data are better, e.g. for housing I still think Nationwide is better than the ONS, though the ONS seem to be giving housing more importance.
  4. It’s also worth checking out:

Tips on getting data

I subscribe to the ONS RSS feed so I can see when new publications come out.

Read moreFinding economic stats and data at ONS and Bank of England

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