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Wednesday, May 24, 2023

Behind the headline figures

It seems rather bizarre to be celebrating inflation at 8.7%, but at least it is no longer in double figures. The New Statesman however, sounds a cautionary note. The headline figure is misleading and offers no relief whatsoever to most families.

The magazine says that prices across the economy are still rising far more quickly than wages, and they are not doing so in the even manner suggested by the headline CPI rate:

The annual rate of inflation on food is still 19.1 per cent, down just 0.1 per cent from last month. In some shops – such as Lidl, where the same goods cost 24.9 per cent more than they did last year – prices are growing more than four times as fast as wages (which are up 5.8 per cent in a year).

To be absolutely clear, falling inflation does not mean prices are falling, but that they are rising slightly less quickly. For goods and services to become more affordable, inflation would have to fall below wage growth for a sustained period. This is unlikely to happen because unemployment is rising, and falling headline inflation could give employers more of an excuse to reduce or reject workers’ pay rises. At 8.7 per cent, inflation is still more than four times the Bank of England’s target. Workers across the economy are still becoming poorer at a very concerning rate.

Rishi Sunak promised at the start of the year to “halve inflation” and the latest headline inflation figure takes him some way towards that target. However, the main reason it’s lower is mathematical: CPI is a measure of how much prices have grown in the last year, and the biggest single element in recent price rises – the 54 per cent hike in everyone’s energy bill that occurred when Ofgem raised the price cap in April 2022 – is now more than a year in the past. The Prime Minister’s contribution to the fall in inflation has been to experience time passing, and then take credit for it.

This underscores just how mediocre the promise to halve inflation was in the first place: it was an offer of an economy in which the purchasing power of your income dwindles rapidly, but your impoverishment is slightly less aggressive than it was under the previous administration.

The headline figure also conceals a more disturbing trend. The prices of some goods and services, such as energy and food, can rise and fall rapidly, distorting the headline number, so “core” inflation – price rises in the less volatile parts of the index – is seen as a more stable representation of the overall temperature of the economy. Core inflation has not peaked: it rose from 6.2 per cent to 6.8 per cent in April, the highest level since March 1992.

A stubborn rate of core inflation may mean that the Bank of England is forced to raise interest rates still further, putting more pressure on low-income families who increasingly use debt to buy essentials, and homeowners who are remortgaging at much higher rates. Financial markets expect rates to peak at 4.75 per cent, which would mean they are likely to rise once more this year.
At the same time, the freezing of tax thresholds means that many middle earners such as nurses and teachers are being pushed into higher tax brackets. This squeezes their income wiping out reliefs such as child benefit and leaving precious little extra to compete with the racing prices in supermarkets.

Andy Bruce of Reuters believes that the UK has the highest rate of food inflation in Western Europe, as illustrated by this graph:


He has also set out some inflation figures April 2022 to April 2023 for some key items:

Sugar +47%
Olive oil +46%
Car insurance: +41%
Eggs +37%
Natural gas +37%
Sauce/condiments +34%
Milk +34%
Small electrical hh appliances: +32%
Frozen veg +31%
Cheese +31%
Sausages +28%
Pasta +28%
Pork +27%
Non-fiction books +27%
Potatoes +25%

It is pretty scary stuff, and shows that we are a long way from escaping this cost of living crisis.
# posted by Peter Black : 12:06 PM
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