ONS Report Highest Inflation Since 2013

Retail

The first inflation report to use the new CPIH measure instead of the CPI shows annual price growth at its highest level since September 2013.

The CPIH extends the Consumer Price Index in order to include owner-occupier housing costs and will be used as the headline inflation statistic from now on. For the most part, there isn’t a huge deviance between the two measures, with the CPI having been an average of 0.2% higher than the CPIH for the past decade.

Both measures recorded the same rate of price growth in the year to February 2017 at 2.3%, a fairly sharp jump from 1.9% (CPIH) and 1.8% (CPI) for the year to January.

The biggest contributor to the change in the CPIH between January and February was the increase in transport costs, most notably motor fuel prices, which went up by 1.2% over the month.

This continues a trend that we’ve seen for the past few months that had been highlighted in a recent study from the Resolution Foundation. They found that, due to the overwhelming effect of transport costs on the overall inflation rate, effective price growth was highest for higher income families.

The ONS explained that a large driving force behind the recent increase in transport costs is the increase in oil prices, influenced by the falling value of the pound since the EU referendum.

“Fuel prices tend to reflect movements in global oil prices and part of the increase in oil prices during 2016 to date can be explained by depreciation of sterling against the US dollar.”

Food prices had an upward effect on the CPIH for the first time since 2014, the ONS reported.

“There has been a sustained period of deflation of food prices since mid-2014, during which the 12-month rate was often lower than negative 3.0%. Although the increase in price of 0.3% between February 2016 and February 2017 is small, this equates to a 0.02 percentage points upward contribution to the 12-month rate.”

Other increases came from certain items within the recreation and culture category – most notably, the price of personal computers went up by 2.3% over the month, compared to a 5.1% drop the year before.

This means that inflation has officially surpassed the Bank of England’s target of 2%, strengthening the case for a sooner-than-expected interest rate hike. A rate hike tends to incentivise saving rather than spending, ultimately having a dampening effect on inflation and keeping prices in check.

At a recent meeting, the Bank’s Monetary Policy Committee voted 8-1 to keep the base rate at 0.25%, but the minutes suggested that a hike and/or other policy action may be on the cards reasonably soon.

“With inflation rising sharply, and only mixed evidence on slowing activity domestically, some members noted that it would take relatively little further upside news on the prospects for activity or inflation for them to consider that a more immediate reduction in policy support might be warranted.”

However, others noted that other, independent signs of relative softness in the economy (including stunted wage growth) are likely to put off any rate hike until late 2018.

James Smith at ING said: “Whilst this surge in inflation may raise a few eyebrows on the MPC, it’s what this means for consumers that really counts. We suspect that concerns about surging inflation will be gradually outweighed by the slower growth backdrop. We don’t expect any change in Bank rate before the end of 2018.”

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