Tag: #inflation

ICAEW chart of the week: Quarterly GDP over three years

Our chart this week looks at how quarterly GDP has risen from £610.3bn in the first quarter of 2022 to £738.6bn in the first quarter of 2025.

A step chart showing the change in quarterly GDP over the last three years. Left hand column: Quarterly GDP in 2022 of £610.3bn. Step 1: Inflation (GDP deflator) +£108.0bn or +17.7%. Step 4: Economic growth +£20.3bn or +2.8%. Right hand column: Quarterly GDP in 2025 Q1 of £738.6bn. Shaded box in the middle of the chart for steps 2 and 3 which are a breakdown of step 4. Step 2: Population growth +£23.7bn or +3.3bn. Step 3: Per capita economic growth -£3.4bn or -0.5%. 30 May 2025. Chart by Martin Wheatcroft FCA. Design by Sunday. Source: ONS, 'GDP first quarterly estimate, UK: Jan-Mar 2025'.

According to the Office for National Statistics (ONS), GDP was £738.6bn in the quarter from January to March 2025, £128.3bn or 21.0% higher than the £610.3bn reported for the same quarter three years ago.

Our chart of the week illustrates how quarterly GDP was £108.0bn or +17.7% higher in the first quarter of 2025 compared with the same quarter in 2022 as a result of inflation (using the GDP deflator measure) while economic growth contributed a further £20.3bn or +2.8%. 

The chart also breaks down economic growth over the past three years between a contribution from there being more people of £23.7bn or +3.3% and a decline in economic activity per person of £3.4bn or -0.5%.

Not shown on the chart are the changes by year, which comprised annual inflation of +8.2%, +4.1% and +4.5% and annual economic growth of +0.8%, +0.7% and +1.3% in 2022/23, 2023/24 and 2024/25 respectively, with the latter split between annual population growth of +1.2%, +1.1% and +1.0%, and annual per capita economic growth of -0.4%, -0.4% and +0.3%. 

Also not shown in the chart is economic growth over the last four quarters, which was +0.5%, +0.0%, +0.1% and +0.7% between the first and second quarters of 2024, the second and third quarters, the third and fourth quarters, and the fourth quarter of 2024 and the first quarter of 2025 respectively. These comprised quarterly population growth of +0.3%, +0.2%, +0.2% and +0.2% and quarterly per capita economic growth of +0.2%, -0.2%, -0.1% and +0.5%.

Lower levels of net inward migration are expected to reduce the rate of population growth over the next three years to closer to 0.5% a year, which means that growing the economy faster than inflation will depend on our ability to improve productivity and hence increase real economic activity per person. 

In theory, that should be eminently possible given how per capita economic growth averaged 2.4% per year for the 50 years before the financial crisis. Unfortunately, with per capita growth averaging just 0.6% a year over the past decade, productivity will need to increase significantly if we are to turn the situation around over the coming decade.

The good news is that a 21% increase in GDP means tax receipts should be that much higher. The bad news is that public spending has been going up, too.

This chart was originally published by ICAEW.

ICAEW chart of the week: End of the first quarter (century)

Our chart this week marks the end of the first fiscal quarter of the 21st century on 31 March 2025 by comparing it with the previous four quarters in the 20th century.

A five column chart showing changes in the public sector net debt to GDP ratio from 1 April 1900 to 31 March 2025 by quarter century. 1900s Q1: Borrowing of +£7bn or +184% of GDP less debt inflated away of -42% of GDP = +142% of GDP. 1900s Q2: +£18bn or +210% of GDP - 182% of GDP = +28% of GDP. 1900s Q3: +£26bn or +48% of GDP - 203% of GDP = -155% of GDP. 1900s Q4: +£301bn or +72% of GDP - 88% of GDP = -16% of GDP. 2000s Q1: +£2,461bn or +130% of GDP - 66% of GDP = +64% of GDP. 9 May 2025. Chart by Martin Wheatcroft FCA. Design by Sunday. Sources: Bank of England, 'Historical public finances database'; OBR, 'Public finances databank'.

March 2025 marked the end of the first fiscal quarter of the 21st century, comprising the 25 financial years from 2000/01 to 2024/25. Our chart this week takes a look at how it compares with the previous four quarters in the 20th century.

Our chart starts with the first quarter of the 20th century that started on 1 April 1900 and ended on 31 March 1925 – the comparative period a century ago. Public sector net debt increased by £7bn (from just under £1bn to just under £8bn) and by 142 percentage points of GDP (from 33% of GDP to 175% of GDP) over the 25 years. 

As the chart illustrates, the increase in the net debt to GDP ratio reflected an increase in the numerator from borrowing of 184% of GDP, partially offset by 42% of GDP from the ‘inflating away’ effect of economic growth and inflation on the denominator. 

Almost all of the borrowing in the first quarter a century ago was incurred to finance the First World War, while the severe contraction in the UK economy after the war (partly because of the global ‘Spanish flu’ influenza pandemic) meant that the erosion of net debt as a share of GDP from economic growth and inflation was just 42% instead of the 84% it had been in the first 20 years of the century.

Around £15bn of the £18bn or 210% of GDP that was borrowed during the second quarter of the 20th century was during the Second World War years from 1940/41 to 1945/46. This was substantially offset by strong economic growth during the quarter (especially in the five years up to 1949/50 as the nation emerged from the war) that saw debt ‘inflated away’ by 182% of GDP. The consequence was an increase of just 28 percentage points in net debt as a share of GDP to 203% of GDP on 31 March 1950.

The third quarter of the 20th century saw the government borrow a further £26bn, resulting in net debt doubling to £52bn on 31 March 1975. However, net debt fell as a share of GDP by 155 percentage points to 48% of GDP, with borrowing of 48% of GDP being more than offset by a 203-percentage point reduction from economic growth and inflation increasing the denominator in the net debt/GDP ratio.

The last quarter of the 20th century saw a further reduction in the ratio of net debt to GDP of 16 percentage points, from higher borrowing of £301bn or 72% of GDP being offset by an 88% of GDP inflating away effect of economic growth and inflation. Net debt reached £353bn on 31 March 2000, equivalent to 32% of GDP.

The first quarter of the 21st century, based on provisional numbers for the year ended 31 March 2025, saw net debt/GDP increase by 64 percentage points, with £2,461bn or 130% of GDP borrowed over the past 25 years, taking net debt to £2,814bn and net debt/GDP to 96% of GDP after reflecting a 66% of GDP inflating away effect from economic growth and inflation.

One positive from these comparisons is that at least the latest quarter was not as bad as the comparative quarter a century ago. However, for a period of peacetime we still managed to borrow approaching ‘warlike’ sums to fund the costs of a financial crisis, a pandemic (although the comparative period had one of those too) and an energy crisis that all combined to increase public sector net debt massively. Meanwhile, lower levels of economic growth than in the second half of the 20th century mean that we have not inflated debt away as quickly as we might hope.

As we start the second quarter of the 21st century, the hope is that we can avoid wars, boost economic growth, control spending to keep borrowing under control and – at the same time – increase the speed at which debt is inflated away. Doing so will be essential if we are to move the public finances back onto a sustainable path.

ICAEW chart of the week: Inflation jump

Our chart this week looks at how the jump in annual inflation from 1.7% in September to 2.3% in October was driven by higher energy bills.

Side-by-side step charts comparing the components of inflation for two overlapping periods. Visually each bar is weighted to its contribution to the inflation to the index. 12 months to Sep 2024: core inflation +3.2%, food prices +1.9%, alcohol and tobacco +4.9% and energy prices -16.9% = CPI all items 1.7%. 12 months to Oct 2024: core inflation +3.3%, food prices +1.9%, alcohol and tobacco +5.3% and energy prices -10.1% = CPI all items 2.3%.

Our chart of the week illustrates how the annual rate of consumer price inflation (CPI) has changed between September and October 2024. 

In the year to September 2024, core inflation – being CPI excluding the more volatile price rises of food, alcohol and tobacco, and energy – was 3.2%, while food prices were 1.9% higher than a year previously, alcohol and tobacco were 4.9% higher and energy prices were 16.9% lower. On a weighted basis these contributed 2.5%, 0.2%, 0.2% and -1.2% respectively to the overall CPI index.

This contrasts with the year to October 2024, where core inflation was 3.3%, food price inflation was 1.9%, alcohol and tobacco prices were up 5.3%, and energy prices were down 10.1%, contributing 2.6%, 0.2%, 0.2% and -0.7% to the annual rise in the CPI all items index.

In moving to the latest set of statistics, price changes during October 2023 are dropped from the annual rate and those for October 2024 are added. This results in a very different picture for energy prices, as a fall in domestic electricity and gas prices in October 2023 was replaced by an increase in the domestic energy price cap in October 2024. This caused energy prices overall to fall by a smaller amount in the year to October than they did in the year to September.

After weighting the different components of the CPI index, the 0.6 percentage point change in the annual rate of inflation reflected a 0.1 percentage point contribution from core inflation, close to zero from food inflation, 0.015 percentage points from higher alcohol and tobacco prices, and a 0.5 percentage point contribution resulting from a lower annual rate of fall in energy prices. 

Despite the slight uptick in the annual core inflation rate in October 2024 to 3.3%, it is still significantly lower than the 5.7% rate it was in October 2023, providing some encouragement to the Bank of England to reduce interest rates still further during 2025.

However, the concern for monetary policymakers before they decide to cut rates again will be the potential upward pressures on inflation from measures in the Autumn Budget 2024. The course they chart will be affected by how these and other economic factors (both domestic and international) play out over the course of the next six months or so.

This chart was originally published by ICAEW.

ICAEW chart of the week: Prime Minister’s salary

My chart for ICAEW this week illustrates how PM Keir Starmer’s £172,153 official salary entitlement would have been £305,770 if prime ministerial pay had kept pace with inflation since 2009.

Column chart showing the Prime Minister's actual salary, official salary and official salary extrapolated in line with inflation on 1 April between 2009 and 2024. See text for numbers. 26 Sep 2024. Chart by Martin Wheatcroft FCA. Design by Sunday. Sources: House of Commons research briefings; ICAEW calculations. (c) ICAEW 2024.

Prime ministerial pay has been in the news quite a lot in recent weeks for a range of reasons, leading our chart of the week to look at how the prime minister’s salary has evolved over the last 15 years.

As the chart illustrates, former PM Gordon Brown was entitled to a salary of £197,689 and had an actual salary of £193,885 on 1 April 2009, significantly higher than today’s current official salary of £172,153 or the actual salary of £166,786 taken by current PM Keir Starmer. This is despite cumulative inflation of 55% (3.0% a year on average) or an increase in MP base pay of 41% (2.3% a year) over the past 15 years.

The reasons for these reductions in prime ministerial salary are primarily the result of a voluntary pay cut to £150,000 taken by Gordon Brown in the run up to the May 2010 election, and a further cut of 5% to £142,500 adopted by incoming PM David Cameron. 

Cameron maintained his pay at this level for the duration of his first term in office, converting his voluntary decision into a permanent change in 2012 (backdated to 2011) in how much he and his successors have been entitled to receive. The chart shows how Cameron accepted a pay rise following the 2015 general election, taking him from a salary of £142,500 on 1 April 2012 out of an official entitlement of £142,545 to £150,402 on 1 April 2016 out of £152,532.

Subsequent prime ministers have also exercised pay restraint by restricting increases in ministerial pay, or in not taking all of the increases to which they were entitled. As a consequence, Theresa May concluded her period as prime minister in 2019 on a salary of £154,908 out of an official salary of £158,754, while Boris Johnson and Liz Truss were on annual salaries of £159,584 in 2022, short of their full entitlement of £164,951.

Rishi Sunak concluded his period as prime minister on an official salary of £172,153 from 1 April 2024 onwards, being the amount to which Sir Keir Starmer is entitled to claim if he wanted. However, the politics of accepting pay rises is difficult – perhaps now more than ever – and so Keir Starmer has stuck with the £166,786 actual salary that his predecessor was on before the 2024 general election.

Our chart illustrates how the prime minister’s official salary has eroded in value over the last 15 years by calculating how it would have risen to £219,800 on 1 April 2012, £232,000 on 1 April 2016, £247,720 on 1 April 2019, £266,020 on 1 April 2022 and £305,770 this year if it had increased in line consumer price inflation instead. 

There are arguments for using other indexes for this comparison, such as public sector pay, which if used would have led to an official salary of £299,060 on 1 April 2024 ; average GDP per capita, perhaps a better measure of national economic performance, would have resulted in an official salary of £301,530. Linking to overall average pay would have led to an official salary of £311,990 today, while maintaining its value in comparison with pay in the private sector would have delivered a potential pay packet for the PM of £334,360.

The requirement for successive prime ministers to approve their own pay has led to the opposite of what you might think would happen. Instead of raising their salary ever higher because they have the power to do so, political choices and pressures have led them instead to cut or freeze their pay at different points over the last 15 years, resulting in a significant erosion in prime ministerial pay in that time.

These choices have led to the UK paying its head of government substantially less than comparable leaders such as Australian PM Anthony Albanese’s annual salary of A$607,500 (£311,500), German Chancellor Olaf Scholz’s €348,300 (£290,250) or Canadian PM Justin Trudeau’s C$408,200 (£226,800). 

Ironically, it might be the prime minister (and his successors) who could benefit most of all of our public servants by taking the power to set his own pay away and giving it to an independent pay review body instead.

This chart was originally published by ICAEW.

ICAEW chart of the week: Inflation (again)

My chart for ICAEW this week shows that while headline inflation slowed to 2.3% in April, a core inflation figure of 3.9% means the fight against inflation is far from over.

Inflation (again) ICAEW chart of the week Step chart combined with five individual line graphs under each step. Annual CPI: Apr 2023 to Apr 2024 Core inflation +3.9% (height = 3.0%) Food prices +2.8% (height = 0.3%) Alcohol & tobacco +8.1% (height = 0.3%) Energy -16.7% (height = -1.3%) =CPI all items +2.3% (height 2.3%) Core inflation line graph: gradual slope downwards from +6.8% to +3.9%. Food prices line graph: steep slope downwards from +19.3% to +2.8%. Alcohol & tobacco line graph: flattish line from +9.1% which then rises, falls and rises before falling to +8.1%. Energy prices line graph: sharply falling line with a couple of zig zags upwards and then a final fall - from +10.8% to -16.7%. CPI all times - a gradual fall (with bumps) from +8.7% tp +2.3%.23 May 2024. Chart by Martin Wheatcroft FCA. Design by Sunday. Source: ONS, 'Consumer price inflation, UK: Apr 2024'. © 2024.

We return to the topic of consumer price inflation (CPI) this week following the news that it has returned to within its target range of 2% plus or minus 1% for the first time since July 2021. 

Our chart illustrates how a 16.7% fall in energy prices between April 2023 and April 2024, have partially offset core inflation of 3.9%, food price rises of 2.8% and alcohol and tobacco prices rises of 8.1%, to result in annual CPI of 2.3%.

It also shows how each of these components of inflation have changed over the last 12 months. Core inflation has slowed from an annual rate of 6.8% in April 2023 to 3.9% in April 2024, food price inflation from 19.3% to 2.8%, and alcohol and tobacco price inflation from 9.1% to 8.1%. Meanwhile, energy prices have fallen over the last year with the annual rate of change going from +10.8% in April 2023 to -16.7% in April 2024.

These components of the inflation index combine to see CPI slow from an annual rate of 8.7% in April 2023 to 2.3% for the 12 months to April 2024, positive news for the Bank of England. It has spent the last few years writing letters to the Chancellor, explaining why inflation is off target and the actions the Bank is taking to bring inflation back on target.

The challenge for the Bank of England’s Monetary Policy Committee is when to take the foot off the brake and start cutting interest rates. The indications are that this won’t be in June as some had hoped, with policymakers concerned about the persistence of services inflation (5.9% in the year to April 2024, a component of core inflation not shown in the chart) and the level of wage rises (5.7% in the year to March 2024), neither of which are consistent with inflation staying within its target range. 

This chart was originally published by ICAEW.

ICAEW chart of the week: Retail sales

My chart for ICAEW this week looks at how retail sales have increased by 19.5% over the past five years, comprising a 1.4% fall in volumes and a 21.2% increase in prices.

Double step chart: Years to Feb 2020, 2021, 2022, 2023 and 2024 = Five years to Feb 2024. Retail sales ICAEW chart of the week Prices up (orange) Prices down (purple) Volumes up (teal) Volumes down (green) Top step chart: prices +1.0%, -1.1%, +7.8%, +9.6%, +2.6% = +21.2% Bottom step chart: volumes -0.2%, -3.3%, +7.0%, -4.2%, -0.3% = -1.4% Total retail sales in the horizontal axes descriptions: Year to Feb 2020 +0.8%, Year to Feb 2021 -4.4%, Year to Feb 2022 +15.4%, Year to Feb 2023 +5.0%, Year to Feb 2024 +2.3% = Five years to Feb 2024 +19.5% 27 Mar 2024. Chart by Martin Wheatcroft FCA. Design by Sunday. Sources: ONS, 'Retail sales, Great Britain: Feb 2024 (seasonally adjusted)'; ICAEW calculations. (c) ICAEW 2024

The latest statistics from the Office for National Statistics (ONS) up to February 2024 highlight how retail sales in Great Britain (England, Wales and Scotland) have been on a rollercoaster ride over the past five years as the pandemic, then the cost-of-living crisis, battered the economy.

As our chart of the week illustrates, changes in retail sales can be split between volumes and prices, with growth in retail sales of 19.5% over the five years to February 2024 consisting of a 1.4% fall in volumes and a 21.2% increase in prices.

Our chart also shows how retail sales have increased by year, starting with a 0.8% increase in retail sales in the year to February 2020 (from a 0.2% fall in volumes and a 1% increase in prices) before the first pandemic lockdown the following month. That first year of the pandemic to February 2021 resulted in a 4.4% decline in sales (a 3.3% fall in volumes and a 1.1% reduction in prices) as we cut back on spending, followed by a massive 15.4% jump in retail sales in the year to February 2022 (7% from higher volumes and 7.8% from higher prices) as the nation emerged and started to spend heavily.

The cost-of-living crisis was behind a 5% increase in retail sales in the year to February 2023, as although prices rose 9.6% as inflation accelerated, households cut back on what they bought in response to drive a 4.2% fall in retail volumes.

Retail sales were up by a more modest 2.3% in the year to February 2024, comprising a 0.3% fall in volumes and a 2.6% increase in prices as inflation moderated.

Evening out the ups and downs gives an average increase in retail sales of 3.6% a year over the last five years, comprising an average fall of 0.3% a year in volumes and an average increase of 3.9% in prices.

This is not as positive a picture for retail business as the numbers might imply. Although it appears that retailers are selling slightly less overall at much higher prices, our chart doesn’t reflect the substantial increases many have seen in their input costs over the same period.

For more ICAEW analysis on the economy, click here.

This chart was originally published by ICAEW.

ICAEW chart of the week: Core inflation

The Bank of England Monetary Policy Committee held interest rates constant at its latest meeting, despite CPI falling to 3.4% in February and core inflation dropping to 4.5%.

Line chart: Core inflation ICAEW chart of the week CPI (purple) - line Core inflation (orange) - line Bank of England target range - shaded area Annual inflation rates for the years to Dec 2022 to Feb 2024: CPI: 10.5%, 10.1%, 10.4%, 8.7%, 8.7%, 7.9%, 6.8%, 6.7%, 6.7%, 4.6%, 3.9%, 4.0%, 4.0%, 3.4% (just above the Bank of England target range). Core inflation: 6.4%, 5.8%, 6.2%, 6.8%, 7.1%, 6.9%, 6.9% (crossing over CPI and back again), 6.2%, 6.1% (crossing over CPI), 5.7%, 5.1%, 5.1%, 5.1%, 4.5%. Bank of England target range: shaded area across the chart between 1.0% and 3.0% with 2.0% solid line through the middle. 21 Mar 2024. Chart by Martin Wheatcroft FCA. Design by Sunday. Source: ONS, 'Consumer price inflation, UK: Feb 2024'. (c) ICAEW 2024

The Office for National Statistics reported its latest estimates for inflation on Wednesday 20 March 2024, with both annual consumer price inflation (CPI) and annual consumer price inflation excluding food, alcohol, tobacco and energy (core inflation) in February falling by 0.6 percentage points to 3.4% and 4.5% respectively.

Our chart this week illustrates how CPI fell from 10.5% in the year to December 2022 to 4% in December 2023 and to 3.4% in February 2024, a rapid decline in the headline measure. This contrasts with the annual rate of core inflation, which increased from 6.4% in December 2022 to a peak of 7.1% in May 2023, before declining more gradually to 5.1% in December 2023 and to 4.5% in February 2024.

Annual food price inflation (5% in February 2024), alcohol and tobacco (11.9%), and energy prices (-13.8%) are of course many of the prices that we as consumers notice the most – what we buy in the supermarket, off-licence, at the fuel pump, or pay to heat and power our homes. However, food, alcohol, tobacco and energy prices are often very volatile and so core inflation allows us to understand what is happening to the (generally less volatile) prices of the other 78% of the things we buy as measured by the CPI Index. 

The drop in core inflation to 4.5% is a positive sign for the Monetary Policy Committee, even if it didn’t reduce interest rates at its most recent meeting on Thursday 21 March 2024. The headline measure of CPI is coming down, and is expected to fall further over the next few months as large food price increases a year ago drop out of the annual comparison, a factor that won’t affect core inflation directly.

Policymakers are expected to remain cautious about cutting interest rates for several more months, as they will want to see how inflationary the scheduled increases in April of 9.8% in the minimum wage, 8.5% in the state pension and 6.7% in universal credit and other welfare benefits will be. Salaries are a significant input cost for the majority of businesses and it is likely that many will seek to pass on higher salary costs to their customers, while higher spending by pensioners and those in receipt of benefits could start to push up prices again just at the point that the Bank of England hopes to have brought inflation under control. 

While there is likely to be much celebration and declaration of victory once the headline CPI measure drops into the target range over the next few months, how long it takes to bring down core inflation to within the target range is likely to be a better indicator of whether inflation has actually been tamed.

For more ICAEW analysis on the economy, click here.

This chart was originally published by ICAEW.

ICAEW chart of the week: Wage inflation

My chart for ICAEW this week takes a look at how average earnings have risen over the last decade and how they compare with the headline rate of inflation.

Triple column chart vertically above each other: Wage inflation ICAEW chart of the week Each chart goes from Jan 2015 to Jan 2024 (10 columns) Top chart: Average earnings net of CPI (orange) +1.1%, +2.5%, -0.1%, -0.4%, +2.0%, +1.3%, +3.6%, -0.4%, -3.9%, +1.5% Middle chart: Average earnings (purple) +1.4%, +2.8%, +1.7%, +2.6%, +3.8%, +3.1%, +4.3%, +5.1%, +6.2%, +5.5% Bottom chart: CPI (blue) +0.3%, +0.3%, +1.8%, +3.0%, +1.8%, +1.8%, 0.7%, +5.5%, +10.1%, +4.0% 14 Mar 2024. Chart by Martin Wheatcroft FCA. Design by Sunday. Source: ONS, 'Consumer price inflation', 'Labour Force Survey, average weekly earnings (including bonuses)'. (C) ICAEW 2024

According to the Office for National Statistics (ONS), average weekly earnings including bonuses on a seasonally adjusted basis increased by 5.5% between January 2023 and January 2024 to £672 (equivalent to £2,912 per month). This is 1.5 percentage points higher than the rate of consumer price inflation (CPI) over the same 12-month period of 4.0%.

While this might seem positive for the theoretical ‘average’ worker, this follows a 6.2% increase in the preceding year to January 2023, 3.9 percentage points lower than the corresponding 10.1% increase in consumer prices.

Our chart this week takes these numbers back a decade, with CPI of 0.3%, 0.3%, 1.8%, 3.0%, 1.8%, 1.8%, 0.7%, 5.5%, 10.1% and 4.0% respectively in the years from January 2015 through to January 2024. Average earnings increased by 1.4%, 2.8%, 1.7%, 2.6%, 3.8%, 3.1%, 4.3%, 5.1%, 6.2% and 5.5% respectively over the same period, giving rise to net differences of +1.1%, +2.5%, -0.1%, -0.4%, +2.0%, +1.3%, +1.3%, +3.6%, -0.4%, -3.9% and +1.5%.

Overall, wages have increased faster than inflation over the last decade, up 43.2% compared with a 32.8% increase in the CPI Index, equivalent to average rises of 3.7% a year and 2.9% a year respectively – or a net 0.8 percentage point a year improvement in average wages over CPI.

Private sector wages have risen faster at 45.7% over ten years (3.8% a year on average), while public sector wages have gone up by 33.7% (2.9% a year on average), only marginally ahead of CPI (by 0.07% a year). Of course, averages are just that and individual and household experiences will differ significantly.

This comparison would not be approved of by the statistical authorities, who prefer the consumer prices including housing (CPIH) measure of inflation to headline CPI. However, CPIH was up 31.7% over the past decade to January 2024 (or 2.8% a year on average), so while the numbers might have been slightly different in individual years if we had used CPIH in the chart, the increase in average wages over 10 years is only slightly better – by 1.1% in total or 0.1% a year on average.

Assuming inflation falls to below 2% later this year as predicted, the picture for the coming year is likely to show a significant positive variance for earnings, especially given the 9.8% increase in the minimum wage scheduled for April. This should have the effect of pushing up average earnings, unless something very surprising happens to wages further up the income scale.

For more ICAEW analysis on the economy, click here.

This chart was originally published by ICAEW.

ICAEW chart of the week: Inflation

My chart for ICAEW this week illustrates how core inflation has only dropped from 6.3% in December 2022 to 5.1% in December 2023, even as the headline rate has come down from 10.5% to 4.0%.

Two step charts under the title 'Inflation'. Step chart 1: 2022 (12 months to Dec 2022) Core inflation +6.3% (corresponding to 5.0% in height) + Food prices +16.8% (height 1.8%) + Alcohol & tobacco +3.7% (height 0.2%) + Energy prices +52.8% (height 3.5%) = CPI all items +10.5% (height 10.5%) Step chart 2: 2023 (12 months to Dec 2023) Core inflation +5.51% (height 4.0%) + Food prices +8.0% (height 0.9%) + Alcohol & tobacco +12.9% (height 0.5%) + Energy prices -17.3% (height -1.4%) = CPI all items +4.0% (height 4.0%) 18 Jan 2024. Chart by Martin Wheatcroft FCA. Design by Sunday. Source: ONS, 'Consumer price inflation, UK: Dec 2023'. (c) ICAEW 2024

On 17 January 2023, the Office for National Statistics (ONS) published its latest consumer price inflation (CPI) statistics for the 12 months to December 2023, reporting that headline inflation has fallen to an annual rate of 4.0% compared with 10.5% a year earlier – a more than halving of the annual rate of price growth.

This contrasts with CPI excluding energy, food, alcohol and tobacco (typically described as core inflation), which was 6.3% and 5.1% in the 12 months to December 2022 and 2023 respectively.

The left-hand side of my chart this week illustrates how core inflation in the 12 months to December 2022 of 6.3% contributed just under 5.0% to the weighted average total inflation rate of 10.5%, with food prices up 16.8%, alcohol and tobacco up 3.7%, and energy prices up 52.8% contributing a further 1.8%, 0.2% and 3.5% respectively.

The right-hand side shows the 12 months to December 2023, where core inflation of 5.1%, food price inflation of 8.0%, alcohol and tobacco inflation of 12.9%, and a fall in energy prices of 17.3% contributed approximately 4.0%, 0.9%, 0.5% and -1.4% respectively to the weighted average total rate of consumer price inflation of 4.0%

The relative weightings may explain why many people feel that inflation is still running faster than the headline rate. Food prices, up 8.0% in the past 12 months, have increased twice as fast as CPI of 4.0%, while alcohol (up 9.6%) and tobacco (up 16.0%) have gone up by even more. These may have been offset by energy prices coming down by 17.3% over the past 12 months, but this may not be perceived as that beneficial given how energy is still significantly more expensive than it was before the cost-of-living crisis started.

For policymakers, the bigger concern will be the stickiness in core inflation, which remains stubbornly higher than the Bank of England’s target for overall CPI of 2.0%. While the expectation is that both core and headline rates will come down further during the course of 2024, the Bank is likely to remain cautious about declaring victory in the fight against inflation despite worries about the effects of high interest rates on the struggling economy.

This chart was originally published by ICAEW.

ICAEW chart of the week: Inflation by month

My chart this week looks at how September’s inflation rate of 6.7% is made up by month, and why a big drop in the annual rate is predicted next month.

Inflation by month Step chart showing monthly inflation from October 2022 to September 2022 adding up to annual inflation of +6.7% for the year to September 2023. Oct 2022 +2.0% Nov 2022 +0.4% Dec 2022 +0.4% Jan 2023 -0.6% Feb 2023 +1.1% Mar 2023 +0.8% Apr 2022 +1.2% May 2023 +0.7% Jun 2023 +0.1% Jul 2023 -0.4% Aug 2023 +0.3% Sep 2023 +0.5% Year to Sep 2023 +6.7% 19 Oct 2023. Chart by Marin Wheatcroft FCA. Design by Sunday. Source: ONS, 'Consumer price inflation, UK: September 2023'.

The Office for National Statistics (ONS) reported on 18 October 2023 that the annual rate of consumer price inflation (CPI) for the year to September 2023 was 6.7%.

Our chart this week illustrates how this is made up of monthly inflation rates from October 2022 through September 2023 of +2.0%, +0.4%, +0.4%, -0.6%, +1.1%, +0.8%, +1.2%, +0.7%, +0.1%, -0.4%, +0.3% and +0.5% respectively.

As well as highlighting how the monthly inflation rate can bounce around from month to month, including a couple of times where prices went down, it shows how a big jump in the consumer prices index of +2.0% in October 2022 is a significant component in the annual rate reported for the year to September 2023.

This provides an insight into what is likely to happen to inflation when it is reported next month. Instead of a large rise in domestic energy prices (a 17% increase in the cost of electricity and a 37% increase in the cost of domestic gas between September and October 2022 according to the ONS) that drove the +2.0% reported a year ago, the expectation is that energy prices will drop between September and October 2023 following Ofgem’s decision to reduce the energy price cap by 7% for the current quarter.

When the +2.0% monthly increase from October 2022 drops out of the index to be replaced by a much smaller monthly increase for October 2023 (or even potentially a monthly decrease), the annual rate of inflation should reduce significantly – potentially to as low as the 5.3% ‘halved’ rate of inflation aspired to by the Prime Minister.

For a broader insight into the UK economy, read ICAEW’s economic update October 2023: where next for interest rates?

This chart was originally published by ICAEW.