UK inflation slidepack February 2013

UK Consumer Price Inflation

February 2013 Update

Issued 14th

February 2013

Richard Ramsey

Chief Economist Northern Ireland

[email protected]

UK Inflation SummaryThe annual rate of UK consumer price inflation (CPI) remained unchanged in January 2013 at 2.7% for the 4thconsecutive month. UK CPI has now been above the 2% Bank of England target for 38 months in a row. Meanwhile the Retail Price Index (RPI) inflation measure saw its annual inflation rate accelerate to 3.3% in January 2013.

UK CPI has exceeded the Bank of England’s Monetary Policy Committee (MPC) of 2% in 58 out of 65 months since the credit crunch began (August 2007). During this time, the Governor of the Bank of England (BoE) has written 13 ‘Dear Chancellor Letters’ (a 14th letter was written in April 2007 before the credit crunch), to 3 different Chancellors, explaining why CPI has deviated from the 2% target by more than one percentage point.

Since August 2007, UK CPI has increased cumulatively by 18.8%. This compares with a rise in average earnings of just over 10%. Meanwhile, the inflation rates of other categories of consumer spending have increased at a much faster rate. Utility bills (electricity, gas & other fuels) increased by 60% between August 2007 and January 2013. Over the same time period food has risen by 35% and Transport Fuels & Lubricants (i.e. petrol & diesel) have risen by 40%.

Inflation has been more pronounced in the UK than in the Eurozone. Indeed, since the credit crunch began, the UK has experienced the largest increases in consumer prices within the EU‐27, outside of Eastern Europe. Conversely, the Republic of Ireland (RoI) has become the poster child of low inflation within Europe and is the only EU‐27 economy not to experience a double‐digit rise in consumer prices since August 2007.

Since the credit crunch began (August 2007), the UK has experienced a cumulative rise in consumer prices 7.5 times greater than that of the RoI (+2.5%). The divergence is even starker when comparing some items of consumer spending. For example, UK food prices have risen by 35% since August 2007, whereas RoI food prices in November 2012 (latest data available) were no higher than they were when the credit crunch began.

The BoE’s latest Quarterly Inflation Report (Feb‐13) projected a peak in CPI of around 3.2% in mid‐2013. This would require the existing Governor, or his successor Mark Carney, to pen another ‘Dear Chancellor Letter’. The BoE also expects UK CPI to remain above the 2% target until 2016. If this comes to pass, this would represent 10 consecutive years of a CPI (annual average) overshoot. 2005 was the last year that CPI averaged at or below the 2% target.

UK Consumer Prices: CPI Summary Table

CPI by main categoriesJanuary 2013

% Y/YJanuary 2013

% M/M% Change Since August 2007*

Food & non‐alcoholic beverages 4.2 0.1 34.4

Alcohol & Tobacco 8.5 4.3 37.5

Clothing & Footwear 0.2 ‐5.4 ‐13.7

Housing & household services (includes water & fuel)

3.5 ‐0.1 30.2

Furniture & Household Equipment 0.8 ‐2.3 16.8

Health 2.2 0.2 16.5

Transport 1.3 ‐0.6 23.4

Communication 3.5 1.0 12.9

Recreation & Culture 0.5 ‐0.1 3.6

Education 19.7 0.0 71.1

Restaurants & Hotels 3.2 0.0 18.7

Miscellaneous Goods & Services 1.4 ‐0.7 13.3

Overall CPI 2.7 ‐0.5 18.8

UK CPI Inflation by Sub‐Category

Source: ONS, * August 2007 marks the beginning of the credit crunch

UK CPI has exceeded the MPC’s 2% target in 58 out of 65 months since the credit crunch began (August 2007)

UK CPI vs RPIX

3.3

2.7

0

1

2

3

4

5

6

Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11 Jan-13

RPIX UK CPI

Old RPIX Target

New CPI Target

RPI & RPIX both hit 3.3% y/y in January 2013. RPI has averaged 3.1% over the last 4 years

UK RPI vs RPIX

-2

-1

0

1

2

3

4

5

6

7


RPIX RPI

Source: ONS, RPIX Excludes Mortgage Interest Payments

Annual rate of RPI inflation accelerates in January. CPI & CPIY remain unchanged while core CPI inflation rate eases

UK Inflation - CPI, Core CPI, CPIY and RPI

2.7

3.3

2.3

-3

-2

-1

0

1

2

3

4

5

6

7

Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13

% Y/Y

CPI CPIY MPC Target RPI Core CPI

Source: ONS; CPIY excludes indirect taxation e.g. VAT; Core CPI excludes Energy, Food, Alcohol & Tobacco

UK inflation still rising at a faster rate than earnings and prolonging the income squeeze

UK Average Weekly Earnings & CPI Inflation

1.4%

2.7%

0

1

2

3

4

5

6

Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13

%

Ave Weekly Earnings 3m Y/Y % (Excl. Bonuses) CPI Y/Y

Source: ONS

Income squeeze

Does not include taxes or changes to benefits

The annual rate of energy & food inflation has eased markedly since peaks in 2008 & 2009 but it’s the cumulative impact…

UK CPI Inflation Year-on-Year

4.2%4.5%

-0.7%

-20%

-10%

0%

10%

20%

30%

40%

50%

Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13

Food & Non-Alcoholic Beverages Electricity Gas & Other FuelsTransport Fuels & Lubricants

Source: ONS

Since Aug-07 CPI has risen by almost 19% which compares with a rise in average earnings of just over 10%

Cumulative % Change in UK Consumer Prices since 'Credit Crunch' began (Aug 07 to Jan 13)

18.8%

0%

10%

20%

30%

40%

50%

60%

70%

Food &Non-

AlcoholicBeverages

Food ElectricityGas &OtherFuels

TransportFuels &

Lubricants

TransportServices

Total CPI AverageEarnings*

Source: ONS, *Average Earnings as of November 2012

International Consumer Price Inflation

Comparisons

Inflation has been more pronounced in the UK than in the Eurozone…

UK CPI vs Eurozone HICP

-1

0

1

2

3

4

5

6


Y/Y %

UK CPI EZ 17 HICP

…and even more pronounced relative to the Republic of Ireland

UK CPI vs ROI HICP

-4

-3

-2

-1

1

2

3

4

5

6

7


% Y/Y

UK CPI ROI HICP

The RoI has gone from having the highest annual rates of inflation to the lowest

Consumer Price Inflation (HICP) year-on-year

-4

-3

-2

-1

0

1

2

3

4

5

6


%

EZ UK RoI

Ireland has become the poster child of low inflation with the UK experiencing the highest rises outside of Eastern Europe

EU-27 Cumulative % Rise in Consumer Prices (HICP) since August 2007 to December 2012 / January 2013*

0% 5% 10% 15% 20% 25% 30% 35% 40%

Romania Hungary

Lithuania Estonia

Latvia Bulgaria Poland

UK Greece Finland

Slovakia Italy

Slovenia Cyprus

LuxembourgEU 27 Spain

Belgium Czech Republic

Austria Denmark

MaltaNetherlands

SwedenEZ

Portugal France

Germany Ireland

Source: ONS, CSO, *January 2013 only for EZ & UK, all others December

The UK has experienced a cumulative rise in consumer prices 7.5 times greater than the RoI since August 2007

CPI by main categoriesUK January 2013

% Y/YRoI December 2012 % Y/Y

UK % Change Since August

2007

RoI* % Change Since August

2007

Food & non‐alcoholic beverages 4.2 1.6 34.4 1.1

Alcohol & Tobacco 8.5 2.8 37.5 11.6

Clothing & Footwear 0.2 ‐0.8 ‐13.7 ‐22.2

Housing & household services (includes water & fuel)

3.5 4.3 30.2 5.9

Furniture & Household Equipment 0.8 ‐2.8 16.8 ‐13.1

Health 2.2 0.2 16.5 13.6

Transport 1.3 3.6 23.4 6.7

Communication 3.5 ‐5.4 12.9 ‐1.1

Recreation & Culture 0.5 ‐0.7 3.6 ‐2.7

Education 19.7 4.8 71.1 37.1

Restaurants & Hotels 3.2 1.6 18.7 ‐1.2

Miscellaneous Goods & Services 1.4 3.3 13.3 15.8

Overall CPI 2.7 1.7 18.8 2.5

UK & RoI CPI Inflation by Sub‐Category

Source: ONS & CSO using HICP measure, *RoI is up to Dec‐12 not Jan‐13 as with the UK

UK Food & Drink prices have risen by over 1/3rd since the credit crunch whereas in RoI the figure is just 1%

UK (NI) & RoI CPI Inflation Levels (HICP) (August 2007 = 100)

+34.4%

+1.1%

+18.8%

+2.5%

90

100

110

120

130

140

Aug-07 Sep-08 Oct-09 Nov-10 Dec-11 Jan-13

UK Food & Drink RoI Food & DrinkUK All Items CPI RoI All Items CPINo Change in Prices

Source: ONS, CSO Ireland & UB Calculations, RoI figures up to Dec-12

After Hungary, the UK has posted the largest rise in food & drink prices (& the RoI the least) within the EU-27 since Aug-07

EU 27 Cumulative % Rise in Food & Drink Prices August 2007 to December 2012 (HICP)

0% 5% 10% 15% 20% 25% 30% 35% 40%

HungaryUK

MaltaLatvia

LithuaniaEstonia

RomaniaPoland

BulgariaFinland

Czech RepublicSloveniaDenmark

CyprusSlovakia

AustriaBelgium

EU 27Luxembourg

SwedenGermany

NetherlandsItalyEZ

GreeceFranceSpain

PortugalIreland Source: ONS, CSO & Eurostat

€

Food prices in the Republic of Ireland were no higher in Nov 2012 than they were when the credit crunch began

UK v RoI Cumulative % Change in Consumer Prices since 'Credit Crunch' began (Aug 2007 to Nov 2012)

18.8%

-10%

0%

10%

20%

30%

40%

50%

60%

Food & Non-Alcoholic

Beverages

Food ElectricityGas & Other

Fuels

TransportFuels &

Lubricants

TransportServices

All CPI

UK RoISource: ONS & Eurostat

UK Oil, Petrol & Diesel Prices

The rise in petrol prices is squeezing disposable incomes

UK Fuel Prices - Pence per litre (Weekly)

135.6p

85.4p

143.0p

148.0p

60

70

80

90

100

110

120

130

140

150

160

Feb-04 Aug-05 Feb-07 Aug-08 Feb-10 Aug-11 Feb-13

Petrol Diesel

59% rise

Source: ONS

**Note Northern Ireland Prices are traditionally the highest of all UK regions**

Filling up an average family car with diesel now costs over £85. One of the side-effects of a weak currency

UK Fuel Prices - Tank* of Petrol / Diesel (*60 Litres)

£51.3

£81.3

£88.8£85.8

30

40

50

60

70

80

90

100

Feb-05 Feb-06 Feb-07 Feb-08 Feb-09 Feb-10 Feb-11 Feb-12 Feb-13

£

Petrol Tank Diesel Tank

59% rise

Source: ONS


It cost just £28 for a tank of fuel 20 years agoUK Fuel Prices - Tank* of Petrol / Diesel

(*based on 60 Litres, monthly prices)

20

30

40

50

60

70

80

90

100

Jan-91 Sep-94 May-98 Jan-02 Sep-05 May-09 Jan-13

£

Petrol Diesel Source: DECC


Remember it is the price of oil in sterling that matters

Price of Brent Crude Oil in Dollars & SterlingWeekly

0

20

40

60

80

100

120

140

160

Feb-06 Feb-07 Feb-08 Feb-09 Feb-10 Feb-11 Feb-12 Feb-13

£/$ pb

£pb $pb

Source: Bloomberg

It was £12.50 for a barrel of Brent crude 20 years ago. Now it is £75pb

Price of Brent Crude Oil in Dollars & SterlingWeekly

£75.2

$118.9

0

20

40

60

80

100

120

140

160

Feb-91 Oct-94 Jun-98 Feb-02 Oct-05 Jun-09 Feb-13

£/$ pb

£pb $pb

Source: Bloomberg

Forecourt petrol prices will broadly follow oil price (in £)

Brent Crude Oil (in £) versus UK Petrol Prices

0

10

20

30

40

50

60

70

80

90

Oct-03 Jul-05 May-07 Mar-09 Jan-11 Nov-12

Brent Crude £pb

40

60

80

100

120

140

160Pence per Litre

Brent Crude £pb (LHS) Petrol Prices Pence Per Litre (RHS)

Source: Bloomberg & DECC

UK Inflation Forecasts

Probability of an inflation overshoot has risen significantly since the last Quarterly Inflation Report (Nov 2012)

Probability of an inflation overshoot based on market interest rate expectations has risen throughout the forecast period

Probability of CPI rising above 2% has risen significantly relative to November forecast throughout the forecast period

Source: BoE QIR February 2013 Chart 5.5

The Bank of England expects UK inflation to remain above its 2% target throughout the forecast period

Marginal CPI undershoot of 2% target in 2 yrs time 1.9%


CPI inflation projection based on constant nominal interest rates at 0.5% and £375 billion asset purchases

(February 2013)(November 2012)

Overshoot of 2% target in 2 years time with a peak of

@3.2% in mid-2013

Source: BoE QIR February 2013


@3.2% in mid-2013




CPI inflation projection based on constant nominal interest rates at 0.5% and £375 billion asset purchases

(February 2013)(November 2012)


@3.2% in mid-2013



@3.2% in mid-2013


BoE expects UK inflation to remain above its 2% target until 2016 (i.e. 10 years of an annual average CPI overshoot)

CPI inflation projection based on market interest rate expectations & £375 billion asset purchases

3 years of an overshoot








CPI inflation set to average 2.7% in 2013 & 2.1% next year. RPI even higher at 3.4% in 2013 & 2.9% in 2014

UK Consumer Price InflationCore CPI excludes Energy, Food Alcohol & Tobacco

-2-1012345678

Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14

Y/Y %

CPI RPI MPC Target Core

Forecasts

Annual Growth CPI Core CPI RPI2011 4.5% 3.2% 5.2%2012 2.8% 2.3% 3.2%2013 2.7% 1.8% 3.4%2014 2.1% 1.4% 2.9%

Source: ONS & RBS Forecasts

…with FBTE inflation averaging over 5% in 2013 & 4% in 2014

UK Consumer Price Inflation *FBTE includes Food, Beverages, Tobacco & Energy

-3

0

3

6

9

12

15

18

Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14

Y/Y %

CPI RPI FBTE (CPI)

Forecasts

Annual Growth CPI FBTE RPI2011 4.5% 8.4% 5.2%2012 2.8% 4.3% 3.2%2013 2.7% 5.1% 3.4%2014 2.1% 4.2% 2.9%

Source: ONS & RBS

Slide 32

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Economy & Finance

UK inflation slidepack February 2013