What’s behind this price inflation rise?
Price inflation is on the rise, with the latest figures showing the official measure now exceeding the Bank of England target.
According to the Office for National Statistics, the Consumer Prices Index (CPI) measure of price inflation rose to 2.1% for the year to April.
Despite being lower than forecast by economists, it represents a rise from the 1.9% reported a month earlier and means the CPI inflation level is now above the Bank of England target of 2%.
Price inflation rose in April mainly due to a short-term and sharp rise in energy prices. This was due to the impact of OFGEM’s price cap on gas and electricity, with prices rising by 10.9% and 9.3% respectively, between March and April this year.
Domestic gas and electricity prices rose during this time because of the response of providers to OFGEM introducing a six-month price cap, which came into force on 1st April.
Another contributing to rising inflation last month was the higher cost of air travel, with the ONS commenting this was the result of the late timing of Easter this year. Airfares rose by 26.4% compared to the same month last year.
Rising energy prices and airfares were partly offset in the official inflation measure by falling prices for computer games and package holidays.
CPI inflation at 2.1% represents the highest reading for this price inflation figure in 2019 to date. It does, however, remain below the 2.2% forecast by economists.
Inflation had risen steadily since the start of the year, when it came in at 1.8% in January, a two-year low for CPI inflation.
The National Institute of Economic and Social Research (NIESR) carried out an analysis of the 131,181 locally-collected goods and services used to calculate the latest price inflation figures and detected a reduction in inflationary pressure.
They found that underlying price inflation fell by 0.2% last month, to 0.5% for the year to April. This figure is calculated by disregarding the 5% of highest and lowest price changes, a calculation method known as the ‘trimmed mean’.
Based on the historical relationship between this current trimmed mean price inflation and figure CPI inflation, it implies that CPI inflation could be 1.7% for the year to April 2020.
Looking at inflation changes on a regional level, they found the highest price rises were in London, at 0.7%, with the lowest increases in the West Midlands, at 0.2%.
Dr Jason Lennard, Senior Economist at the NEISR, said:
Headline CPI inflation increased by 0.2 percentage points to 2.1 per cent in the year to April 2019. Our analysis of more than 130,000 goods and services included in the basket, however, suggests a decline in inflationary pressure.
Our measure of underlying inflation, which excludes extreme price movements, decreased by 0.2 percentage points. Price decreases outnumbered price increases by a margin not seen at this time of year since at least the 1990s.
Underlying inflation fell in every region of the United Kingdom. This suggests that a few volatile items, such as airfares and energy, contributed to the increase this month.
On this basis, we expect CPI inflation to settle just below the Bank of England’s target of 2 per cent in the coming year.
Commenting on the latest inflation statistics, Suren Thiru, Head of Economics at the British Chambers of Commerce, said:
UK inflation moved above the Bank of England’s 2% target for the first time since December 2018, with rising energy prices and higher airfares, placing the largest upward pressure on price growth in April.
Rising inflation alongside slowing wage growth is a concern as it squeezes real household incomes. If this trend continues it could well choke off the recent improvement in consumer spending, a key driver of UK growth. While consumer prices are likely to drift slightly higher in the near term, the outlook for inflation remains relatively subdued with the current pressure on prices largely due to a number of temporary factors, such as rising energy costs. There remains little need for the MPC to raise interest rates anytime soon.
However, the prospect of a messy and disorderly exit from the EU remains a significant risk to the current path for UK inflation. A chaotic departure is likely to result in a marked weakening in sterling, driving materially higher inflation and increasing the cost pressures on consumers and businesses. Against this backdrop, government and parliament must focus on providing a clear path forward on Brexit. They must also do more to address key domestic issues, including the unacceptably high upfront cost of doing business in the UK which continues to maintain the pressure on businesses to raise prices.
It will be interesting to see how these inflation figures develop during the remainder of the year, with the outcome of Brexit likely to influence any significant changes.
Price inflation is the silent killer of wealth over more extended periods, with cash savings especially vulnerable to rising price inflation, which erodes its purchasing power.
It’s important to monitor inflation trends and ensure that you factor future inflation assumptions into your long-term financial planning, to avoid the eroding power of this economic phenomenon.