Inflation: The worst is not yet over for consumers – falling inflation is not the same as falling prices
That inflation of 10.5% should be essentially good news speaks volumes for the economic turmoil of the last year.
A second consecutive monthly fall from October’s high of 11.1% suggests price rises may have peaked and the descent towards less corrosive rates, perhaps below 6% by the middle of the year, has begun.
Some of this will be down to economic gravity, as increases that were gathering pace at the turn of last year, and accelerated with the Russian invasion of Ukraine in February, are lapped by this year’s figures.
If inflation has peaked, however, it does not mean the worst is over for consumers; falling inflation is not the same as falling prices. It is only the rate of increase that is slowing.
A fall in diesel and petrol prices, albeit from historic highs, brought the greatest downward pressure on consumer price index (CPI) inflation, with year-on-year inflation to December falling to 6.9% from a June peak of 15.2%.
That is good for drivers at the pump and for the economy more widely, reducing the cost of supplying goods as almost nothing in the UK moves without seeing the back of a lorry.
Falling fuel costs have not been enough to curb food prices, up 16.8% in the run-up to Christmas, a faster rate than in November and the highest since 1977 by Office of National Statistics calculation.
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Inflation down from ‘a high peak’
All the primary factors in global inflation – war, energy and post-Covid supply chains – coalesce in food production, pushing up the cost of feed, fuel and fertiliser.
That makes pricier grocery bills inevitable and has a disproportionate impact on the least well-off, for whom food is a greater proportion of spending.
The best argument for higher wages
Many of them will work in the public sector, where high inflation will remain employees’ best argument for higher wage settlements, and the government’s primary justification for denying them.
Immigration minister Robert Jenrick told Sky News on Wednesday that increasing wage offers would “be the very worst thing we could do”, a comment unlikely to ease industrial relations or win approval from economists.
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While ministers argue increasing public sector wages will cause a “wage-price spiral”, in which higher pay increases costs that businesses pass on to consumers, thus embedding inflation just as it starts to fall, plenty of economists disagree.
Many argue public sector pay is not inflationary because there is no onward cost to the consumer of a teacher or nurse’s time, but to the taxpayer, with the government able to adjust its spending accordingly. Increasing state employee pay may even deliver economic benefits, with more spending and a greater tax take.
With real-term pay falling 3.8% in November, and even private sector pay settlements of 7.2% on average well short of inflation, there is no sign yet of an upward spiral.
There is one cautionary figure in the latest data, however.
Core services inflation is still rising, up to 6.8%, a sign perhaps that higher private sector wages in a largely domestic market are beginning to stick.
Peaked or not, the Bank of England will not need an excuse to increase interest rates when it meets next month.
Prices in the UK rose even faster than expected last month, reaching the highest level in 18 months, according to official figures.
Inflation hit 3.8% in July, data from the Office for National Statistics (ONS) showed.
Not since January 2024 have prices risen as fast.
It’s up from 3.6% in June and is anticipated to reach 4% by the end of the year.
Economists polled by Reuters had only been expecting a 3.6% rise.
More unwelcome news is contained elsewhere in the ONS’s data.
Train tickets
Another metric of inflation used by government to set rail fare rises, the retail price index, came in at 4.8%.
It means train tickets could go up 5.8% next year, depending on how the government calculate the increase.
This year, the rise was one percentage point above the retail price index measure of inflation.
These regulated fares account for about half of rail journeys.
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Inflation up by more than expected
Why?
Inflation rose so much due to higher transport costs, mostly from air fares due to the school holidays, as well as from fuel and food.
Petrol and diesel were more expensive in July this year compared to last, which made journeys pricier.
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Coffee, orange juice, meat and chocolate were among the items with the highest price rises, the ONS said. It contributed to food inflation of 4.9%.
What does it mean for interest rates?
Another measure of inflation that’s closely watched by rate setters at the Bank of England rose above expectations.
Core inflation – which measures price rises without volatile food and energy costs – rose to 3.8%. It had been forecast to remain at 3.7%.
It’s not good news for interest rates and for anyone looking to refix their mortgage, as the Bank’s target for inflation is 2%.
Whether or not there’ll be another cut this year is hotly debated, but at present, traders expect no more this year, according to data from the London Stock Exchange Group (LSEG).
Economists at Capital Economics anticipate a cut in November, while the National Institute of Economic and Social Research (NIESR) expect one more by the end of the year.
Analysts at Pantheon Macroeconomics forecast no change in the base interest rate.
Political response
Responding to the news, Chancellor Rachel Reeves said:
“We have taken the decisions needed to stabilise the public finances, and we’re a long way from the double-digit inflation we saw under the previous government, but there’s more to do to ease the cost of living.”
Shadow chancellor and Conservative Mel Stride said, “Labour’s choices to tax jobs and ramp up borrowing are pushing up costs and stoking inflation. And the Chancellor is gearing up to do it all over again in the autumn.”
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