August 17, 2023 - 10:00am
Is Britain now an inflation nation? The ONS released the consumer price data for July this week and the papers are playing up the news, claiming, with a contented sigh, that we are “through the worst of it”. Yet, as has become typical with British economic data over the past few years, this is a simplistic reading.
The good news is that inflation has continued to come down, falling from an annualised rate of 7.3% in June to 6.4% in July. The bad news is that this was mostly driven by falling energy costs and core inflation, while attempts to measure price growth with the cyclical components removed (energy, food, alcohol) remained the same this month as last at an annualised rate of 6.4%.
This means that more interest rate hikes are not off the table. The Bank of England will have predicted falling energy costs, but the real number it will be looking at when setting policy is core inflation. This is because, while interest rates do not have any immediate impact on the price of energy, they can induce a fall in demand for the types of services that make up the core inflation basket.
Perhaps it is worth stepping back here and looking at what inflation has meant for households in concrete terms. This will help us understand what core inflation is and what is driving it, but it will also give us a sense of how the inflation has affected people over time.
The first datapoint we should look at in this regard is the “households” component of CPI. This is the component of CPI that impacts consumers through the costs associated with maintaining a household. The headline numbers tell us that the cost increases associated with running a household have fallen, but when we drill down a different picture emerges.
The only reason that the cost of running a household has eased is because energy inflation has slowed down. The energy price shock that we felt in our bills last year is now petering out (though costs do remain very high). But the cost of basically everything else associated with running a household is rising at a faster and a faster rate with every passing month. There is a steady march upwards in the cost of water, sewage, council tax, rent, and the other general costs of owning a home.
What the data is telling us is that in April of 2022 households saw a very sharp rise in their energy bills. Then, in the second phase of the inflation, we saw a gradual squeezing on everyday spending as bills mounted for basically everything associated with running a household. This cost pressure is still growing, and the Bank of England is no doubt watching it closely.
But these are not the only pressures on households. To get a sense of the other cost pressures we should look at the components of CPI as a whole. When we do this, we see that the costs of food, alcohol, clothing, furniture, and transport are easing. These costs jumped together with the energy shock, as the energy costs for firms and producers were passed through to consumers. Yet all is not well among the more service-based components. Recreational activities, restaurants, pubs, hotels, and similar services are all seeing a continued — and accelerating — rise in prices.
This gives us some sense as to why the cost-of-living crisis continues to worsen even as the inflation numbers ease. While we may have acclimatised ourselves to the high energy and food prices, there is still a relentless push on costs in the form of higher bills and higher prices when we try to have a meal out or a drink. Unless something changes, we will have to live with this as if it were a permanent loss of living standards in Britain.
Philip Pilkington is a macroeconomist and investment professional, and the author of The Reformation in Economics
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SubscribeI have always thought that “Cost of Living” means the relationship between inflation and wage growth. So one needs to look at wage and price growth together (indeed they influence each other – higher wages mean higher prices mean higher wage demands etc).
June Wage growth – 8.2% YoY
June inflation – 7.9% YoY
July Wage Growth – ?
July inflation – 6.8%
So the “cost of living crisis” is easing as people are now on average seeing higher pay increases than price increases.
I think the commentariat* are over pessimistic about Britain’s economy – although God knows there could be more shocks waiting round the corner.
*The bleakness of the commentators outlook is explained by their various motivations: some are Remainers blaming Brexit for our economic woes, some are Labour supporters looking to oust the government, some are Lockdown-sceptics blaming the pandemic response for Britain’s woes, some are disgruntled Boris supporters blaming his ousting for Britain’s woes, some are disgruntled Liz Truss supporters claiming that her policies would have solved the problems and some are just the usual saturnine purveyors of the dismal science. Whenever I read a piece of economic analysis, I try to work out which category the author falls into.
Hides quite a bit of unevenness though doesn’t it MM. Finance and Business sector pulling up the wage growth with 9-10%. Public sector well behind the average. Different views of course on the fairness of either but that’s debate for another Article perhaps. Main point being the average stats don’t tell us how people will react.
Furthermore the unevenness going to hit those with loans and mortgages further yet as interest rates v likely to rise further due to the wage growth. And one suspects the interest rate rises for mortgages still a bit of a delayed fuse for those with fixed terms coming to end next 12mths. So some key sectors of our populace are going to feel it much more than others.
Nonetheless your point about Commentators tendency to interpret with a bias v valid. Our collective ‘woes’ are not as bad as can be conveyed by 24hr media cycle, but perhaps that means we can’t use those woes sometimes to suggest we are powerless to deal with fundamental problems either.
Hides quite a bit of unevenness though doesn’t it MM. Finance and Business sector pulling up the wage growth with 9-10%. Public sector well behind the average. Different views of course on the fairness of either but that’s debate for another Article perhaps. Main point being the average stats don’t tell us how people will react.
Furthermore the unevenness going to hit those with loans and mortgages further yet as interest rates v likely to rise further due to the wage growth. And one suspects the interest rate rises for mortgages still a bit of a delayed fuse for those with fixed terms coming to end next 12mths. So some key sectors of our populace are going to feel it much more than others.
Nonetheless your point about Commentators tendency to interpret with a bias v valid. Our collective ‘woes’ are not as bad as can be conveyed by 24hr media cycle, but perhaps that means we can’t use those woes sometimes to suggest we are powerless to deal with fundamental problems either.
I have always thought that “Cost of Living” means the relationship between inflation and wage growth. So one needs to look at wage and price growth together (indeed they influence each other – higher wages mean higher prices mean higher wage demands etc).
June Wage growth – 8.2% YoY
June inflation – 7.9% YoY
July Wage Growth – ?
July inflation – 6.8%
So the “cost of living crisis” is easing as people are now on average seeing higher pay increases than price increases.
I think the commentariat* are over pessimistic about Britain’s economy – although God knows there could be more shocks waiting round the corner.
*The bleakness of the commentators outlook is explained by their various motivations: some are Remainers blaming Brexit for our economic woes, some are Labour supporters looking to oust the government, some are Lockdown-sceptics blaming the pandemic response for Britain’s woes, some are disgruntled Boris supporters blaming his ousting for Britain’s woes, some are disgruntled Liz Truss supporters claiming that her policies would have solved the problems and some are just the usual saturnine purveyors of the dismal science. Whenever I read a piece of economic analysis, I try to work out which category the author falls into.
Thanks to Philip Pilkington for this. I now have a better understanding of the gap between “headline” inflation and non-cyclical inflation. People often feel that the headline rate of inflation understates what they are experiencing. In the past, that has been because government statisticians had a notional “basket of goods” that the typical citizen consumes, and changed the composition of the basket as consumer habits changed. The problem there is that people often stop consuming an item because it has become too expensive, but they still aspire to consume it. By removing such items from the “basket”, replacing them with cheap alternatives, government statisticians can pretend that inflation is under control. But this is clearly not the reason for the present mis-match, since “water, sewage, council tax, rent” have in common that there is no viable “cheap” alternative.
You need to factor in ‘hedonic’ deflation. The statisticians rate the increased price but ‘improvements’ in the IPhone 97 compared to the 96 as cancelling each other out, negating any inflationary effect. Whereas for 99% of consumers the only relevant issue is it costs more.
Then there is the continual emphasis on consumer goods. The elderly have already bought their white goods, most of their clothes and largely don’t take holidays nor buy new cars. Their experienced rate of inflation is different – and usually several percent higher.
Agreed, I always thought that was a bit of a con. If you were paying £50 a month for your old broadband, and then had fibre installed which is twice the speed (not accurate figures, just an example) even though your internet is still costing £50 a month according to the inflation statistics they’ll class that as a 50% reduction in living costs
It’s what happens when government statistics meet corporate marketing.
It’s what happens when government statistics meet corporate marketing.
Agreed, I always thought that was a bit of a con. If you were paying £50 a month for your old broadband, and then had fibre installed which is twice the speed (not accurate figures, just an example) even though your internet is still costing £50 a month according to the inflation statistics they’ll class that as a 50% reduction in living costs
You need to factor in ‘hedonic’ deflation. The statisticians rate the increased price but ‘improvements’ in the IPhone 97 compared to the 96 as cancelling each other out, negating any inflationary effect. Whereas for 99% of consumers the only relevant issue is it costs more.
Then there is the continual emphasis on consumer goods. The elderly have already bought their white goods, most of their clothes and largely don’t take holidays nor buy new cars. Their experienced rate of inflation is different – and usually several percent higher.
Thanks to Philip Pilkington for this. I now have a better understanding of the gap between “headline” inflation and non-cyclical inflation. People often feel that the headline rate of inflation understates what they are experiencing. In the past, that has been because government statisticians had a notional “basket of goods” that the typical citizen consumes, and changed the composition of the basket as consumer habits changed. The problem there is that people often stop consuming an item because it has become too expensive, but they still aspire to consume it. By removing such items from the “basket”, replacing them with cheap alternatives, government statisticians can pretend that inflation is under control. But this is clearly not the reason for the present mis-match, since “water, sewage, council tax, rent” have in common that there is no viable “cheap” alternative.
There are some companies we need to boycott because they have price gouged – Heinz, Coca-Cola, Kraft…
There are some companies we need to boycott because they have price gouged – Heinz, Coca-Cola, Kraft…
More people + the same amount of stuff = higher prices