UK Inflation posts a warning as it rises above target

by Shaun Richards

Today has brought something of an inflation warning for the UK as we note this from earlier.

The Consumer Prices Index (CPI) rose by 2.1% in the 12 months to May 2021, up from 1.5% to April; on a monthly basis, CPI rose by 0.6% in May 2021, compared with little change in May 2020.

The first thing to note is the monthly increase of 0.6% which means that we have now gone 0.3%, and 0.6% twice which is a signal of acceleration in inflation. That is I think more significant than the 2.1% reading although it does have significance for the Bank of England. If you heard a loud sigh of relief from Threadneedle Street this morning it will have been from Governor Andrew Bailey who now looks to be clear of the phase when he had to write an explanatory letter for inflation being more than 1% below target. However it does present a problem because this afternoon the Bank will but another £1.15 billion of UK bonds to boost UK inflation. That is now somewhat awkward when it is boosting inflation which is above target.

Continuing the theme of inflation above target there are these two variants of the inflation measure.

The annual rate for CPI excluding indirect taxes, CPIY, is 3.8%, up from 3.2% last month…….The annual rate for CPI at constant tax rates, CPI-CT, is 3.8%, up from 3.2% last month.

I point this out continuing the Bank of England theme because they have been keen on using such variants in the past when they fit their views. So I will leave it to your imagination whether they will be pointing this out! As a matter of fact UK inflation would be quite a bit above target without the temporary tax cuts. Maybe not the full amount as these things are not always fully passed on but it would be over 3%.

What is driving the move?

The biggest factor was transport.

where prices rose by 0.3% between April and May 2021, compared with a fall of 1.0% between the same two months of 2020. The effect was principally from motor fuels, with the price of petrol rising by 1.7 pence per litre this year, compared with a fall of 2.8 pence per litre a year ago as prices reached a four year low of 106.2 pence per litre in May 2020. Similarly, diesel prices rose by 1.5 pence per litre this year,

Next comes two categories which have proven very difficult to measure over time.

There was also a large upward contribution of 0.15 percentage points from recreation and culture, where prices rose by 1.2% between April and May 2021, compared with a fall of 0.1% between the same two months a year ago.

This is because the main movers here were computer games and music ( downloads and CDs) where this happens.

It is equally likely to be a result of the CDs, DVDs, music downloads and computer game downloads in the relevant bestseller charts. Price movements for these items can often be relatively large depending on the composition of these charts.

That is not well explained. Essentially prices are high when in the charts but are then discounted heavily and that is not easy to capture properly in an inflation measure. That principle applies to the next category where the advent of ever more fashion clothing with newer retailers like Primark reacting fast means prices can go from (relatively) top dollar to being discounted very quickly.

The rise this year has been influenced by a fall in the amount of discounting recorded in the dataset between April and May,

So with that warning we have this.

Clothing and footwear contributed 0.13 percentage points to the change in the CPIH 12-month inflation rate. Prices, overall, rose by 2.3% between April and May this year, compared with a smaller rise of 0.3% between the same two months a year ago

The Trend

The moves in producer prices have been harbingers of the consumer inflation rise and the beat goes on.

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The headline rate of output prices showed positive growth of 4.6% on the year to May 2021, up from positive growth of 4.0% in April 2021.

The headline rate of input prices showed positive growth of 10.7% on the year to May 2021, up from positive growth of 10.0% in April 2021; this is the highest the rate has been since September 2011.

Some of the move is the result of the plunge in oil prices last year.

Petroleum products had the highest annual growth rate of any component of output prices in May 2021, at 67.0%

However if we bring things up to date we see that right now the price of crude oil is rising again. Yesterday for example the price of a barrel of Brent Crude Oil went above US $74 yesterday for the first time since April 2019. As we look around we see some things going the other way as Lumber for example has fallen back somewhat after the surges we saw in previous weeks and months. But in terms of the overall picture the 1.1% monthly rise in UK input inflation continues the 2021 trend of it being around 1% every month. So as Hard-Fi put it.

Pressure, Pressure, Pressure
Feel the pressure

Housing Costs

This area continues to be quite a problem. So let me start with what is officially claimed to be the most comprehensive measure of UK inflation.

The Consumer Prices Index including owner occupiers’ housing costs (CPIH) rose by 2.1% in the 12 months to May 2021, up from 1.6% to April…….On a monthly basis, CPIH rose by 0.5% in May 2021, compared with little change in May 2020.

It’s problem is the bit which is claimed to make it so comprehensive.

The OOH component annual rate is 1.5%, up from 1.4% last month. ( OOH = Owner-Occupiers Housing )

There are probably amoeba on Jupiter smelling a rat here because the issue of rising house prices has been in the news everywhere. Indeed it has been official policy to pump them up via the Stamp Duty Cut for example. Even the official house price series illustrates that.

UK average house prices increased by 8.9% over the year to April 2021, down from 9.9% in March 2021.

Average house prices increased over the year in England to £268,000 (8.9%), in Wales to £185,000 (15.6%), in Scotland to £161,000 (6.3%) and in Northern Ireland to £149,000 (6.0%).

So if we take a broad sweep we see that house price rises of 10% or so become the much more friendly 1.5% or so via the use of Imputed Rents. They assume owners pay themselves rents in a methodology which is going spectacularly wrong all around the world right now. It is amazing that it has not been questioned more. There is a British spin to this because our official statisticians have so little faith in the reliability of the rental data they collect they “smooth” it. This means that the number above is really last years rents rather than May’s.


We are receiving something of an inflation warning in the UK as we note that we have nudged above the 2% target and would be above 3% without the indirect tax cuts. Another way of putting this is to replace the fantasy imputed rents in the official measure CPIH with a something which is paid which is house prices. Doing so gives a 3.5% reading if you use current house prices.

The irony is this means that our past measure of inflation the Retail Price Index is giving a better guide to the state of play.

The all items RPI annual rate is 3.3%, up from 2.9% last month……..The annual rate for RPIX, the all items RPI excluding mortgage interest payments (MIPs), is 3.4%, up from 3.2% last month.

If we take an international perspective we can be grateful that for once we are not at the front of the pack. Why is the US at 5%.If we put aside different measures.  Looking into it the rise in the price of “Gasoline” is much more marked there due to lower taxes as it is up 56%. Also used car prices have surged (29.7%) and that is different to our experience. Yes we have a marked monthly rise ( 1.2% in May) but it only has a weight of 0.12% so the impact is minor. Also the stronger period for the UK Pound £ has helped this year.

Meanwhile perhaps Scotland has given us a clue about what might happen when the Stamp Duty Cut full expires.

The slowdown in house price growth in Scotland may have been driven by the end of the Land and Buildings Transaction Tax holiday on 31 March 2021.


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