ICAEW chart of the week: Consumer price inflation

Our chart illustrates how ‘core inflation’, energy price rises, and food, alcohol and tobacco price inflation contributed to a lower than expected fall in the overall rate of inflation in April 2023.

Column chart breaking down annual CPI from Jan 2022 through April 2023 between energy prices (8% of index), food, alcohol and tobacco (16% of index) and core inflation (76% of index).

CPI all items - 5.5%, 6.2%, 7.0%, 9.0%, 9.1%, 9.4%, 10.1%, 9.9%, 10.1%, 11.1%, 10.7%, 10.5%, 10.1%, 10.4%, 10.1%, 8.7%.

Energy prices - 23.2%, 22.7%, 27.6%, 52.1%, 52.8%, 57.3%, 57.8%, 52.0%, 49.6%, 59.0%, 55.6%, 52.8%, 52.8%, 51.2%, 49.0%, 40.5%, 10.8%.

Food, alcohol and tobacco - 4.0%, 4.6%, 5.6%, 6.0%, 7.5%, 8.2%, 10.4%, 10.8%, 11.8%, 13.2%, 12.7%, 12.9%, 13.2%, 14.3%, 15.0%, 16.0%.

Core inflation - 4.4%, 5.2%, 5.7%, 6.2%, 5.9%, 5.8%, 6.2%, 6.3%, 6.5%, 6.5%, 6.3%, 6.4%, 5.8%, 6.2%, 6.2%, 6.8%.

The annual rate of consumer price inflation (CPI) fell from 10.1% in March 2023 to 8.7% in April 2023, but this fall was not considered very good news by economists, policymakers or the financial markets. 

The response to April’s inflation statistics has been dramatic, with financial markets now predicting that the Bank of England could increase its base interest rate to as much as 5.5%, instead of sticking at the 4.5% rate announced in May that many commentators had previously suggested might be the peak needed to bring inflation under control.

The reasons why there are these concerns can be illustrated by our chart this week, which analyses CPI into three component sub-indices: energy price inflation, food, alcohol and tobacco, and core inflation. Our chart highlights how core inflation and the annual rate of food, alcohol and tobacco price rises both unexpectedly increased in April 2023, partially offsetting the anticipated slowdown in energy price inflation as the huge rises in domestic energy costs that took effect in April 2022 fell out of the year-on-year comparison. 

Energy price inflation, comprising both domestic energy and fuels such as petrol and diesel, currently represent just 8% of the overall consumer price inflation index, but the rises over the past 15 months have been so large they have contributed significantly to the overall headline CPI rate. Annual energy price inflation in January 2022 was already high at 23.2% as the constrained energy supply drove prices high while the global economy started to recover from the pandemic. This was followed by 22.7% in February 2022 and 27.2% in the year to March 2022, before jumping to 52.1% in April 2022. The annual rate of increase in energy prices remained high over the following months rising to 52.8%, 57.3% then 57.8% in July, 52.0%, 49.6% to a peak of 59.0% in October. The rate of increase decelerated to 55.6%, 52.8% and then 51.2% in January, to 49.0% and 40.5% in February and March 2023, before dropping to 10.8% in April 2023 when compared with the higher base of April 2022.

Food, alcohol and tobacco prices represent about 16% of the CPI index and were 4.0% higher than a year previously in January 2022. Since then the annual rate of increase has gradually increased each month, to 4.6%, 5.6% and then 6.0% in April 2022, to 7.5%, 8.2% and 10.4% in July 2022, and then to 10.8%, 11.8% and 13.2% in October 2022. The annual rate of increase moderated to 12.7% and 12.9% in November and December, before returning to 13.2% in January 2023. The annual rate of price increases accelerated to 14.3% in February, 15.0% in March and to 16.0% in April.

Not shown in the chart is the sub-subindex of food and non-alcoholic beverages, which was running at 19.1% in the year to March 2023 and 19.0% in the year to April 2023, with the jump in April coming from alcohol and tobacco prices, which rose from 5.3% in March to 9.1% in April.

Perhaps more worrying than the jump in alcohol and tobacco prices is what is happening to ‘core inflation’, which is defined as CPI excluding energy, food, alcohol and tobacco. Representing just over three quarters (76%) of consumer spending, annual core inflation was running at 4.4% in January last year, rising to 5.2%, 5.7% and then 6.2% in April 2022, 5.9%, 5.8% then 6.2% in July, 6.3%, 6.5% then 6.5% in October, 6.3%, 6.4% then 5.8% in January, 6.2%, 6.2% and then 6.8% in April 2023.

By excluding more volatile components of the CPI index, core inflation is generally more stable than overall CPI. By hovering within the 5.7% to 6.5% range for the past year, the hope was that core inflation was – while pretty high – at least not out of control. The unexpected rise to 6.8% in April is worrying for the Bank of England, which is concerned that inflation could become embedded into the UK economy at a rate much higher than its 1%-3% mandated target range.

The good news is that planned cuts to domestic energy prices in July, together with other price rises last summer falling out of the year-on-year comparison, should feed through to a much lower headline rate of inflation over the next few months, reducing the pressure on wage settlements and other input costs that are currently driving up prices across the whole economy.

Despite that, the markets believe that further interest rate rises may still be necessary on top of the actions already taken by the Bank of England, potentially risking overtightening that could worsen the cost-of-living crisis and the squeeze on businesses.

This chart was originally published by ICAEW.

ICAEW chart of the week: Food prices

An inflation rate of 10.1% in the year to March 2023 conceals a huge variation in individual price rises, as illustrated by this week’s chart on food prices.

Column chart showing annual inflation for a sample of individual food and non-alcoholic drink items across six different categories, according to the Office for National Statistics prices comparison tool for March 2023.

A horizontal line shows the average food price inflation over that period of +17%.

Each category is ordered from lowest price rise to highest, with only the highest labelled.

Snacks and sweets: 18 items (9 below line, 9 going above) the highest of which is plain biscuits +26%.

Meat and fish: 12 items (7 below, 5 going above), pork chops +28%.

Frozen: 10 items (3 below, 7 going above), chicken nuggets +35%.

Deli and dairy: 30 items (10 below, 1 going to the line, 19 going above), hard cheese +44%.

Store cupboard: 41 items (23 below, 18 going above), olive oil +49%.

Fruit and veg: 28 items (16 below, 12 going above), cucumber +52%.

One of the problems in measuring inflation is that a weighted average of thousands of different prices is very different from our individual experience of inflation. Not only are we unique in terms of the basket of goods and services that we buy, but we also tend to notice some price changes more than others – making our personal experience very different from everyone else’s.

Nowhere is this more pronounced than in our regular trips to the shops to buy groceries, where we can see higher prices both on the shelves and when we come to pay at the till. This can be much more visible to us than bills paid by direct debit, for example, where money just disappears from our bank account and we need to make an effort to work out what is going on.

The Office for National Statistics has recently launched a shopping prices comparison tool that allows you to choose a basket of goods and see how retail prices have increased across different types of purchases: food and drink, clothing and footwear, restaurants and bars, health, household items, recreation and culture, services, and transport. Even there, the prices they quote are averages from many different retail outlets, specific products, and brands – and so won’t exactly match what is happening to your individual basket.

For our chart this week, we have chosen to look at food prices, choosing a basket that in total has increased by 17% over the past year, rising from £422.40 if you had bought everything on the list in March 2022 to £495.43 in March 2023. We have allocated these into six different categories to give a bit more flavour (pun intended) to what is going on.

There is a huge amount of variation between different foodstuffs, with our chart illustrating how in the snacks and sweets category the average price of 200-300g of plain biscuits has increased by 26% (from 98p to £1.24), while in meat and fish, pork loin chops have gone up by 28% (from £6.35 per kg to £8.12 per kg). In the frozen category, chicken nuggets are up 35% (from £1.79 to £2.41), while in deli and dairy, hard cheese has gone up the most on average, by 44% (from £6.92 per kg to £9.98 per kg). Olive oil tops our store cupboard classification, up 49% (from £3.87 to £5.78 on average between 500ml and 1 litre), but the king of food price inflation is the humble cucumber, up a massive 52% over a one year period from 55p to 84p each.

Not highlighted in the chart are the smallest price rises in each category, with peanuts up 5% (from £1.23 to £1.29 for 150-300g), lamb loin chop/steaks up 4% (from £15.49 to £16.13 per kg), frozen vegetable burgers up 11% (£1.99 to £2.21), sliced ham up 9% (£2.41 to £2.64 for 100-200g), low-sugar/non-chocolate breakfast up 6% (£2.08 to £2.20), and sweet potato up a mere 2% (from £1.17 to £1.19 per kg).

The Bank of England continues to tighten the screws on inflation, raising its base rate to 4.5% on 11 May 2023, and the projections are that inflation overall should start to reduce quite rapidly over the next few months. 

However, as ICAEW Economies Director Suren Thiru recently said in a TV interview on BBC Breakfast, inflation is now becoming embedded into the everyday things that we buy. This makes the challenge for the Bank of England to bring inflation back down to its target range of 1% to 3% that much harder.

This chart was originally published by ICAEW.