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.
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.
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%.
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.
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.
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.
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%.
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.
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.
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.
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.
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.
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.
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.
My chart this week illustrates the slowing rate of inflation and how it should fall further once a big surge in prices between February and April 2022 falls out of the year-on-year comparison.
The Office for National Statistics (ONS) reported that the annual rate of consumer price inflation (CPI) was 10.1% in January 2023, falling from 10.5% last month and down from a peak of 11.1% in October 2022, but much higher than the 5.5% annual rate of inflation for the year to January 2022.
Our chart breaks down annual inflation over the past two years to January 2023 into quarters, highlighting how inflation is likely to fall quite rapidly over the next three months as the big surge in prices following Russia’s invasion of Ukraine last year falls out of the year-on-year comparison.
Reported inflation this time last year was 5.5% for the year to January 2022. This can be broken down into quarterly rises (annualised) of 4.3% in the three months to April 2021, 4.4% in the quarter to July 2021, 8.7% in the quarter to October 2021 and 4.5% in the three months to January 2022. Inflation in that period was well above the Bank of England’s target range of 1% to 3%, as supply constraints drove prices higher as the domestic and global economies started to recover from the depths of the pandemic.
Reported inflation for the year to January 2023 of 10.1% can be broken down into quarterly rises (annualised) of 19.1% in the quarter to April 2022, 8.6% in the quarter to July 2022, 12.5% in the quarter to October 2022 and 0.8% in the three months to January 2023. The sharp jump in prices in the period from February to April 2022 was driven by a rapid rise in energy prices following Russia’s invasion of Ukraine that added to existing inflationary pressures, turbo charging the rate of inflation. Since then, prices across the economy have risen rapidly, although with wholesale energy prices retreating from their peak recently, the overall rate of price rises has slowed down significantly in the last quarter.
The chart also shows how the consumer price inflation index (the CPI Index) increased from 109.0 in January 2021 to 114.9 in January 2022 and to 126.4 in January 2023.
The chart doesn’t show the intermediate annual rates of inflation, although these can be calculated using the geometric average of the preceding four quarters. The annual rate increased from 5.5% in January 2022 to 9.0% in April 2022, then to 10.1% in July 2022 before reaching a peak of 11.1% in October 2022, following which it fell to 10.1% in January 2022.
Successively dropping quarters from the previous year out of the year-on-year comparison and replacing them with price rises over the most recent quarter saw inflation rise as quarterly rises (annualised) of 4.3% fell out to be replaced by 19.1%, 4.4% by 8.6%, and 8.7% by 12.5%, before inflation fell over the last three months as 4.5% was replaced by 0.8%.
These ‘base effects’ mean that most commentators expect a sharp slowdown in the annual inflation rate over the next nine months as monthly and quarterly price rises over that time should be much lower than the comparatives falling out of the year-on-year calculation. The biggest fall is expected over the next three months, as even with a sizeable rise in domestic energy prices expected in the month of April 2023 as government support is withdrawn, price rises are expected to be much lower than the 19.1% annualised rate seen in the quarter to April 2022.
While the medicine of higher interest rates is no doubt playing a key part in restraining prices from rising as fast as they did last year, the Bank of England knows that arithmetic should be the biggest contributor to inflation coming down over the course of 2023.
Inflation is believed to have peaked last quarter before being forecast to fall significantly over the course of 2023. We hope.
Our first chart of 2023 is on the prospects for consumer price inflation (CPI) over the course of the coming year, based on the latest forecasts for inflation from the Office for Budget Responsibility (OBR) that were released on 21 December 2022.
The OBR’s calculations suggest that CPI should come down significantly over the next four quarters to reach 3.8% by the end of the year, ‘only’ 0.8% above the Bank of England target range of 1% to 3%. The return of inflation to more moderate levels should help stabilise an economy that is currently in a pretty bad place, although it is important to understand that prices will still be rising, just at a slower pace than they have been over the course of the past year.
The chart illustrates how inflation started to rise in 2021, from a below-target 0.6% in Q1, to 2.1% in Q2, then 2.8% in Q3, before jumping to 4.9% at the end of 2021. The Russian invasion of Ukraine in the first quarter of 2022 and its consequences for global energy prices drove the inflation rate even higher, to 6.2% in Q1, 9.2% in Q2 and 10% in Q3, before rising to a forecast peak of 11.1% in Q4 of 2022. The OBR then goes on to forecast that the rate of price increases experienced by consumers will moderate in the coming year, down to 10.2% in Q1, 8.9% in Q2, 6.9% and then 3.8% in the fourth quarter of 2023.
Of course, economic forecasts of this nature are inherently uncertain, especially given the role that volatile energy prices play, both in their own right but also as a cost input to many other products and services. For consumers, the withdrawal of the Energy Price Guarantee will mean energy bills are likely to rise significantly in the second quarter despite falling wholesale prices.
The chart does not extend into 2024, when the forecasts are even more uncertain than for the current year. The OBR suggests that inflation could turn negative during 2024 (Q1: 2.5%; Q2: 0.4%; Q3: -0.2%; Q4: -0.1%) and 2025 (Q1: -0.1%; Q2: -0.6%; Q3: -1.1%; Q4: -1.3%), before heading back to target in 2026 (Q1: -1.0%; Q2: -0.4%; Q3: 0.9%; Q4: 1.2%). Deflation brings with it a whole different set of economic challenges to be faced but, fortunately, forecasts are less accurate the further into the future they go. The hope is that the Bank of England will be able to time its switch in monetary policy actions from countering inflation to countering deflation just right in order to avoid this potential outcome.
Either way, the prospect of inflation coming down over the coming year is a positive amid an otherwise very bleak economic picture for the UK as we begin 2023.
My chart this week looks at how the benchmark percentage used to determine the rise in the state pension and many welfare benefits from next April reached 10.1% in September 2022.
The ICAEW chart of the week is on consumer price inflation, illustrating how the CPI index rose from 106.1 in September 2018 to 108.5 in September 2019, 109.1 in September 2020, 112.4 in September 2021 and 123.8 in September 2022. According to the Office for National Statistics (ONS), this meant that annual consumer price inflation was 1.7%, 0.5%, 3.1% and 10.1% for each of the four years to September 2022.
The percentage increase in the consumer price inflation index to each September is an important number as it is used to uprate most welfare benefits from the following April. In addition, under the triple-lock formula that has just been recommitted to by the government, it will be used to uprate the state pension in place of the statutory requirement for a rise in line with average earnings, which in September 2022 was 5.5%.
There has been speculation that the Chancellor of the Exchequer might try to restrict the uprating of welfare benefits (other than the state pension) to below inflation in order to meet his fiscal objectives. However, there is significant political pressure not to do so during a cost-of-living crisis that means many households are already struggling to pay their bills, even before the large rise in energy prices this month.
In theory, the sharp upward slope in the index over the last year provides some hope for both consumers and the Bank of England, as price increases from a year earlier fall out of the index, at least from November onwards given the energy price guarantee that means domestic energy prices should be flat for the following six months. With petrol and diesel prices appearing to moderate, and the ‘medicine’ of higher interest rates starting to take effect, the hope is that prices will rise less rapidly than they have this year, and so cause the annual rate of inflation to fall in the first half of next year.
Having said that, if recent events have taught us anything it is that our ability to predict the future is far from perfect.
