Inflation: what do the latest data reveal about UK prices?

UK inflation has risen to 3.2%, an increase that partly reflects the government’s Eat Out to Help Out scheme, which lowered the price of dining out last year and is no longer in the data. Sustained price rises and evidence of a tighter labour market create a policy conundrum for the Bank of England.

Inflation has risen to 3.2% according to the latest data from the Office for National Statistics (ONS) released this morning. The previous annual increase of the Consumer Prices Index (CPI) rate was 2% – exactly the number that the Bank of England is charged with hitting. Today’s data make things look very different (Figure 1). Is the sudden surge in inflation something those at Threadneedle Street should react to?

Figure 1: Inflation, percentage change over 12 months

Source: ONS API

The ONS's initial take on the data suggests not. Much of this, they say, is temporary. Since inflation is a measure of the annual change in prices it is impacted by so-called ‘base effects’. What this jargon means is that inflation is being driven by what happened last year, rather than events today: if prices were pushed down last year, and have risen since, then inflation will rise – not because today’s prices are high but because those in the past (the ‘base’) were low. This is exactly what the ONS says is happening: Eat Out to Help Out temporarily slashed prices last year. The end of the scheme saw prices rise, and inflation this month jump.

Hawks will of course see things differently. Looking at the data that underlies the headline numbers there are many categories of goods where temporary effects are less clear. Food prices, for example, are making a significant contribution. Using the underlying ‘micro data’ set out in this paper, and comparing month-on-month prices, various types of food remain the top risers. Hover over the bubbles in Figure 2 below to reveal the top risers.

Figure 2: Top price risers this month

Source: Author’s calculations

Those of us who track inflation closely have reason to cheer this month. With football stadiums re-opening the ONS reports that there are no longer missing items from the CPI basket. The lockdowns meant that many goods—from prices in pubs to cinema tickets—were not possible to collect. The implication was that the amount of underlying micro data that go into the CPI fell drastically; it has now recovered (Figure 3). Inflation is arguably the single most important metric for the UK economy, since it is bound to a policy lever—interest rates—that affects everyone. Measuring inflation on a thinner set of numbers was necessary but uncomfortable.

Figure 3: Number of usable prices in LRPD – by region

Source: Author’s calculations

In deciding what to do with interest rates, the Monetary Policy Committee (MPC) will look closely at data from the labour market. Yesterday, the ONS revealed that vacancies were at an all-time high, with over a million jobs on offer in the UK (Figure 4).

Figure 4: Vacancies (thousands)

Source: ONS API

To fill these jobs, firms may have to start offering higher wages. This would be a welcome relief for many, given the slow pace of wage increases over the past ten years. If it happens, so that price and wage increase become a regular feature of the UK economy, then expect interest rates to rise too.