Our final chart of 2022 shows how spending on Christmas is expected to fall significantly this year as the cost-of-living crisis takes its toll on family finances.
PwC’s annual pre-Christmas survey indicates that spending on Christmas was expected to be below pre-pandemic levels, with average spending of £412 in December 2019 (before the pandemic) increasing to £426 in December 2021, before falling to £393 this Christmas.
The chart takes inflation into account to provide an illustration of what has happened to average spending in real terms. Excluding December 2020, when Christmas was cancelled for many of us, average spending would have been £23 higher if it had kept pace with inflation of 5.5% over the two years between 2019 and 2021, implying spending was expected to be £9 lower last Christmas than it had been before the pandemic.
The effect is even more marked this year, when keeping pace with consumer price inflation of 10.7% would lead to an extra £23 being spent compared with last Christmas. In this year’s survey, respondents expected to spend much less than in previous years, with an implied reduction of £79 or 17% after taking account of inflation.
We have used the overall CPI index as of November of each year presented in the chart, but in practice inflation runs at different rates for each element of spending. Food and non-alcoholic beverage inflation is currently running at over 16% meaning Christmas dinner is likely to cost even more this year, which for many is likely to offset any real terms ‘savings’ on alcohol where inflation is running at just over 4%.
According to PwC, 50% of spending on Christmas presents was expected to be completed around or before Black Friday in November, while 44% was planned for early to mid-December and 6% to be bought in the last week before Christmas or later. PwC also reports that the majority of Christmas present buying is now done online, with 55% ordered for delivery, 10% through click and collect, and just over a third to be purchased in-store.
Irrespective of how inflation is calculated, what is clear is that there is a substantial reduction in spending on Christmas festivities in 2022. This highlights how household finances are under significant pressure as we come to the end of the third year of the pandemic.
The ICAEW chart of the week is taking a break over the Christmas period and will return in 2023 with new charts on diverse subjects.
The latest migration statistics for the year to June 2022 come with a health warning from the ONS that its ‘experimental and provisional’ numbers for people movements during a pandemic may not be representative of long-term trends.
On 24 November 2022 the Office for National Statistics (ONS) published its latest ‘experimental’ statistics on net migration, provisionally reporting that net long-term migration to the UK amounted to 504,000 in the year to June 2022. This compares with estimates for net inward migration of 173,000 in the year to June 2021 and 88,000 in the year to June 2020.
This is equivalent to approximately 0.7% of the UK’s total population and is more than double the net inward migration assumption of 237,000 for the same period used by the ONS in its most recent principal long-term projection for the UK population.
The ONS cautions that the middle of a pandemic may not be representative of long-term trends, given possible pent up demand following restrictions in movements in the previous two years.
The ONS also points out the large jump in the number of non-EU students coming to study in the UK, which boosts immigration numbers in the current year. This should in theory reverse in three to four years’ time when many (but not all) of these students return to their home countries or move elsewhere.
Non-EU
As the chart illustrates, immigration from countries outside the EU in the year to June 2022 comprised 151,000 people coming to work in the UK, 277,000 coming to study, 138,000 under settlement schemes and a further 138,000 coming for other reasons. Around 195,000 people from outside the EU were estimated to have left during the year, giving a net inward migration number for non-EU citizens of 509,000. This compares with 157,000 during the year ended 30 June 2021 and 51,000 in the year before that.
The numbers from outside the EU coming to work has increased from 92,000 in the year to June 2021 and 81,000 in the year to June 2020, offsetting some of the reduction in those coming from the EU to work. Those coming to study have increased by an even greater proportion (from 143,000 and 136,000 in the preceding two years respectively), although this may represent pent-up demand from the pandemic when it was much more difficult for students wishing to start courses in the UK. However, the ONS does comment that the new graduate visa that permits students to stay and work in the UK for up to three years after completing their studies may have encouraged more students to come.
The 138,000 arriving under settlement schemes in the year to June 2022 included an estimated 89,000 Ukrainians who were resettled in the UK under the Ukrainian scheme, approximately 21,000 Afghans under the Afghan resettlement scheme and an estimated 28,000 of the 76,000 Hong Kong residents granted British national overseas (BNO) visas during the year.
The ONS does not give a full breakdown of the other reasons why people are coming to the UK, which principally relate to those joining family, those planning to stay temporarily but for longer than a year, refugees granted asylum during the year and any other reason not classified by the ONS. The numbers exclude 35,000 people that arrived by small boats during the period, although those who are granted asylum will show up in the statistics in subsequent periods.
EU
Inward migration from the EU has gone into reverse since the ending of free movement on 31 December 2020, with net outward migration of 51,000 for the year to June 2022 compared with net inward migration of 12,000 and 26,000 in the two preceding years.
As the chart illustrates, the 88,000 people coming from the EU to work, 71,000 to study and 65,000 coming for other reasons – a total of 224,000 people – were more than offset by the 275,000 who left the UK. Those coming to the UK include Irish citizens who do not need visas to live and work in the UK, in addition those coming from other EU countries who now need to apply for visas before they can come to live and work in the UK.
UK
There was a net inflow of 46,000 UK citizens, as an estimated 136,000 who returned home exceeded the estimate of 90,000 who emigrated from the UK. Of those coming back to the UK, 47,000 came to work, 8,000 to join family and 81,000 for other reasons. This compares with net inflows of 4,000 and 11,000 in the two preceding years.
Health warnings
The ONS provides a range of health warnings for this data set, labelling the numbers as ‘experimental and provisional’, as well as relating to an unusual year for international migration. The numbers were affected by the coronavirus pandemic, the settlement schemes for Ukrainians, Afghans and Hong Kong residents, and by the ending in the preceding year of free movement for EU citizens wishing to come to the UK and for UK citizens to live and work in the EU.
From an economic perspective, Chancellor Jeremy Hunt will no doubt be pleased at the additional workers that have arrived in the UK at a time of labour shortages, as well as the success of the university sector in attracting international students, some of whom are likely to stay at the end of their courses to work. Many of those arriving to join family or for other reasons will also join the workforce, further helping to grow economic activity.
With a national workforce that would shrink otherwise and many businesses calling for more freedom to recruit from overseas, the Chancellor may well be hoping for higher levels of migration to continue – even if some of his ministerial colleagues are likely to be less than positive about this possibility.
My chart this week illustrates how home broadband capabilities have been improving in recent years, although still far short of ambitions to provide ultrafast speeds to most households across the UK.
Ofcom recently published its latest data on UK home broadband performance, highlighting how nearly nine in ten (87%) of UK households take a home fixed broadband service.
Based on data as of March 2022, Ofcom reports that connection speeds have continued to improve, with the median average download speed of UK home broadband connections increasing by 18% to 59.4 megabits per second (Mbit/s or Mbps) over the year to March 2022. Over the same period the median average upload speed increased by 9% to 10.7 Mbit/s.
The chart illustrates how speeds have improved since November 2018, when 16% of households had average 24-hour download speeds of 10 Mbit/s or less, 27% had ‘high-speed’ connections (over 10 Mbit/s up to 30 Mbit/s), 41% had superfast broadband (over 30 Mbit/s up to 100 Mbit/s), 15% had extra-superfast broadband (over 100 Mbit/s up to 300 Mbit/s) and just 1% had ultrafast connections over 300 Mbit/s. Overall this meant 43% of households were on what used to be considered high-speed or slower connections and 57% were on superfast or ultrafast connections.
By March 2022, households on slower connections below 10 Mbit/s (mostly legacy ADSL) had fallen to 4% and high-speed connections (10-30 Mbit/s) had fallen to 13%, a drop of 26 percentage points in the proportion of households with high-speed or slower broadband to 17%. The proportion on superfast or higher speeds had increased to 83%, with 58% on superfast (30-100 Mbit/s), 18% on extra-superfast (100-300 Mbit/s) and 7% on ultrafast connections in excess of 300 Mbit/s.
With broadband increasing in popularity, future charts are likely to feature the proportion of gigabit or hyperfast connections of more than 1,000 Mbit/s, while the number of households on less than 30 Mbit/s – now accepted to be too slow for most purposes – should continue to fall as those households upgrade to faster services.
The challenge for Ofcom is in how to improve both rural connectivity and performance, with median average peak-time downloads of 39.4 Mbit/s in rural areas compared with 62.1 Mbit/s in urban areas.
The ‘hyperinflationary’ increase in broadband speeds over recent years suggests that there is a case for redefining the ‘currency’ of broadband speed, given that ‘high-speed’ connections are now commonly accepted to be too slow for practical usage, ‘superfast’ describes a basic level of internet service and ‘ultrafast’ connections are no longer the fastest speeds available.
GDP statistics have become much more exciting, with low but steady growth in per capita GDP before the pandemic giving way to large swings as the economy adjusts to a major shock.
GDP for the fourth quarter of 2021 was calculated to be £596bn by the ONS in its first estimate of this statistic measuring economic activity in the UK, bringing the provisional estimate for the full year to £2,318bn for the 2021 calendar year. On a per capita basis, this was equivalent to approximately £8,820 per person for the fourth quarter and £34,330 per person for the year.
The ICAEW chart of the week looks at how quarterly GDP has changed in real-terms over the past few years on a seasonally adjusted basis – demonstrating how boring GDP statistical releases were in the ‘before times’. Then, a relatively steady average per capita increase of approximately 0.3% each quarter reflected the low but steady level of economic growth that has been seen since the financial crisis. The arrival of the pandemic has seen all that change, with a collapse in GDP during the last half of 2020, followed by a stop-and-start recovery over the past few quarters, with provisional GDP estimate growing by 0.9% in the fourth quarter – faster than the pre-pandemic years, but slower than the revised 1.0% reported for Q3 and the 5.5% rise in Q2 of 2021.
The change in real-terms quarterly GDP per head in 2020 and 2021 illustrated by the chart were -2.7%, -19.5%, +17.4%, +1.3% and -1.3%, +5.5%, +1.0%, +0.9% respectively. It is, of course, always important to note that the statistics reported by the ONS are subject to frequent revision, especially when trying to count up the trillions of transactions entered into each quarter in a large and complex economy like the UK’s. The population estimates used for calculating per capita amounts are also likely to be revised, in particular once the results of the 2021 census are finalised in a few months’ time.
Despite the recovery in the last three quarters, GDP and GDP per capita remained below their peaks in the third quarter of 2019 and more significantly below the trend the economy was on.
With rapidly rising inflation, supply chain disruptions and uncertainty regarding how society will transition from a coronavirus pandemic to an endemic, the likelihood is that quarterly GDP releases are likely to continue to be observed with some excitement by economists (and the rest of us) for some time to come.
As 2021 draws to a close, our chart this week looks back on a rocky couple of years for UK international trade which has endured Brexit complications and the global COVID-19 pandemic.
Our chart of the week illustrates how Brexit and COVID-19 have combined to create a rocky couple of years for UK exports and imports of goods and services, reflecting the trials and tribulations of the Brexit process as well as the impact of the coronavirus pandemic on trade since the first lockdown last year.
The monthly trade total (exports + imports) increased from £92bn (£45bn + £47bn) in October 2014 to a peak of £123bn (£57bn + £65bn) in March 2019 at the height of Brexit ‘no deal’ preparations before falling back to £113bn (£54bn + £59bn) the following month before peaking again at £122bn (£61bn + £62bn) in October 2020 ahead of the end of the transition period. Following the introduction of new trading arrangements and the run-down of inventories, trade fell to a low of £86bn (£47bn + £39bn) in May 2020 during the first lockdown before recovering to £111bn (£52bn + £59bn) in December 2020. Trade fell back to £93bn (£45bn + £48bn) in January 2020 before growing back to £104bn (£51bn + £53bn) in July 2021 where it has appeared to stabilise with similar monthly totals in September and October 2021.
The chart provides only a hint of the challenges that have faced both importers and exporters over the past couple of years as they have had to navigate new trading arrangements with our European neighbours just as the pandemic has caused massive disruption across the planet. Imports and exports to EU countries have both fallen, but the EU still remains the UK’s principal trading partner, comprising almost half of the UK’s trade in goods for example.
The stabilisation in trade flows in the last few months for which statistics are available may be a hopeful sign, but with greater customs checks on the imports of goods from the UK coming into force in January, and the continuing evolution of the pandemic, the position is still very uncertain.
This is our last chart of the week for 2021 and so we would like to take this opportunity to wish you all the best for a safe and enjoyable Christmas break and for a healthy and prosperous 2022. We look forward to seeing you again in the new year.
My chart this week looks at how the number of employees on UK payrolls has been supported by the furlough scheme, with more people employed in October 2021 than before the pandemic.
Concerns that the end of the furlough scheme in September 2021 would be followed by a sharp rise in unemployment proved to be unfounded, with the flash estimate of the number of people on UK payrolls increasing to 29.4m in October 2021, an increase of 166,000 from the previous month and greater than before the pandemic. This is positive news as it suggests that the majority of the 1.1m still on the furlough scheme when it ended on 30 September 2021 have been able to retain their jobs or have found work elsewhere.
The chart shows how payrolled employees increased gradually before the pandemic from 27.7m in October 2015 to 28.1m in October 2016, 28.5m in October 2017, 28.8m in October 2018 and 29.0m in October 2019, peaking in November 2019 at 29.1m. Numbers fell to 28.9m in February 2020 although on a seasonally adjusted basis the numbers increased slightly. Those in work fell significantly by the end of March 2020 to 22.0m when 6.8m were placed on furlough under the government’s Coronavirus Job Retention Scheme (CJRS) and to 19.7m at the end of April 2020 when 8.8m were on furlough.
Despite the furlough scheme overall payrolled numbers fell during the pandemic from 28.9m in March 2020 (including 6.8m on furlough) to 28.2m in October 2020 (when 2.4m were on furlough) to 28.0m at its lowest in January and February 2021 (when 4.9m and 4.7m were on furlough), before gradually rising to 29.2m in September 2021 (when 1.1m were on furlough) and 29.4m in October 2021 (when no one was on furlough).
Although the flash numbers for October 2021 are provisional and subject to change, they should be sufficiently reliable for policy makers to take some comfort that the furlough scheme has done its job in stabilising the economy and avoiding significant levels of unemployment. However, with the pandemic still not over, there will be concerns about whether growth in employment can be maintained over the coming months.
According to the ONS, the median monthly pay in October 2021 was £2,005, slightly down on the £2,010 reported for September 2021, but an increase of 4.9% compared with the £1,911 calculated for October 2020. The latter compares with consumer price inflation of 4.2% over the same period.
The idea that we might be emerging from the pandemic with higher levels of employment and wages than before it started might have seemed unlikely at the start of the first lockdown. But then at an estimated total cost of £370bn, of which £70bn was for the CJRS, the eye watering sums incurred by the government in getting to this position have been far from insubstantial.
The Institute for Fiscal Studies says that there may be spending cuts in some areas of the Spending Review and Autumn Budget, while the health and social care levy will not be enough to meet spending pressures on the NHS and social care in the medium-term.
The Institute for Fiscal Studies (IFS) has launched its annual Green Budget report, setting out its views on the prospects for the economy and the public finances ahead of the Spending Review and Autumn Budget scheduled for 27 October 2021.
Produced in conjunction with Citi and the Nuffield Foundation, the 427-page report contains detailed chapters on the global and UK economy, the economic and fiscal outlook, the Spending Review, fiscal rules, NHS spending, local government funding in England, tax policies to achieve net zero, and employment and the end of the furlough scheme.
A summary of the key findings in each chapter is set out below, but the key headlines are that COVID has damaged the economy, the fiscal outlook is better than predicted in March but still much worse than pre-pandemic forecasts, and the Chancellor has some very difficult spending choices to make in the Spending Review.
The IFS cautions that the new health and social care levy will not be sufficient to meet medium-term cost pressures and that ‘unprotected budgets’ continue to be under severe strain, with cuts possible if the Chancellor wants to meet his proposed new fiscal rules.
More detailed analysis goes into spending by the NHS and local government and the implications of net zero for tax policy. A final chapter highlights the mismatch between those losing their jobs and vacancies in a very different employment market following the end of the furlough scheme.
Alison Ring, Director for Public Sector and Taxation at ICAEW, commented: “As ever, the IFS have produced one of the most authoritative analyses of the state of the UK public finances, setting out many of the difficult choices facing the Chancellor in the Spending Review and Autumn Budget.
“The challenge for the Chancellor will be how to address severe spending pressures across central and local government and deliver on ‘levelling up’ and ‘net zero’, at the same time as repairing the public balance sheet and charting a path towards sustainable public finances.”
IFS Green Budget 2021: key points
Citi says the global economy is recovering:
Pandemic is not over, but economies are resilient and rebound can become a recovery
Supply constraints will restrict growth and higher inflation is likely for some time
Risk of fiscal tightening is low and central banks likely to be cautious in exiting monetary support
Citi expects UK economy to be 2.5% smaller in 2024-25 than pre-pandemic forecasts:
UK in an imbalanced recovery with fading growth in the winter
Profound economic adjustment looms (e.g. less hospitality, more transport and storage).
Brexit leading to supply disruptions and a drop in exports
Labour market in process of adjustment, but despite shortage sectors, real-terms pay settlements overall remain broadly in line with pre-pandemic range
Inflation increasing sharply – should be temporary, but there is risk of a wage price spiral
Monetary policy constrained, so fiscal capacity needed to stabilise the economy.
IFS says economic and fiscal outlook is better than predicted in March, but still much worse than pre-pandemic forecasts:
Deficit in 2021-22 to be £180bn, over £50bn below OBR Spring Budget forecast
At 7.7% of GDP deficit remains extraordinarily high – the third highest deficit since WWII
Recovery should see current budget be in surplus by 2023-24
Upside scenario would see overall deficit eliminated
But further lockdowns could see borrowing more than double pre-pandemic forecasts in 2024-25
Central scenario would see public debt start to fall, but only gradually
Higher interest rates and inflation have increased debt interest costs to around £15bn a year more than expected in March
Health and social care levy will need to increase from 1.25% to 3.15% by end of the decade to meet expected health and social care pressures
Fiscal rules are needed, but:
Well-designed fiscal rules can help make it harder to borrow for ‘bad reasons’
UK has had poorly designed fiscal targets, with 11 new rules in the last seven years – most of which have been missed before being dropped
Both Conservatives and Labour appear to favour a current budget fiscal rule
Strong case for gilt-issuance to be tilted towards more long-dated index-linked gilts to lock in the current low real cost of more debt
Reducing debt should be a long-term target to create more fiscal space for potential future adverse shocks
Health, social care and state pensions likely to add 6.1% of national income to costs by 2050
Net zero costs likely to peak in 2026-27 at 2.2% of national income
IMF says UK has lowest general government net worth of 24 advanced economies
A broader focus on wider public balance sheet by government and opposition is welcome
Fiscal rules should be seen as rules of thumb and no fiscal target is sacrosanct
Spending Review 2021:
Chancellor faces unpalatable set of spending choices, despite manifesto-breaking tax rise
Spending envelope is £3bn a year smaller than pre-pandemic plans, which is a problem when 64% of departmental spending is already protected or otherwise committed
Potential cuts in unprotected budgets such as local government, prisons, further education and courts of £2bn in 2022-23
More spending room in 2024-25, so potential for Chancellor to re-profile spend to avoid cuts next year with spending more overall
NHS and other demands likely to eat into amounts available for unprotected budgets.
COVID-19 reserve needed to cover non-NHS virus-related spending
Now is time to return to certainty of multi-year budgeting
Extending public sector pay freeze risks damaging recruitment, retention and motivation
Pressures on the NHS:
NHS already showing signs of strain before pandemic began, with last decade seeing lowest level of spending growth in NHS history
NHS entered pandemic with 39,000 nursing vacancies and many fewer doctors, hospital beds and CT scanners per person than in many similar countries
NHS funding plans blown out of water by pandemic, with extra £63bn spent in 2020-21 and £34bn in 2021-22
Extra funding needed in the next three years of £9bn, £6bn and £5bn – substantial, but manageable, sums. Covered by new health and social levy initial for first two years
New funding unlikely to be sufficient in the medium term, with extra money needed from 2024-25 onwards
Missed treatments, bringing down waiting lists, demand for mental health services and higher pay all likely to add to spending pressures
Some savings from moving to remote outpatient appointments and potential for more from other innovations in the pandemic
Local government funding in England:
English councils’ non-education spending almost a quarter lower than 2009-10.
This contrasts with Welsh councils, where spending has fallen by only a tenth
£10.4bn in additional funding in 2020-21 covered most in-year COVID-19 pressures
But mismatches mean some councils are ‘over-compensated’ while district councils are ‘under-compensated’
COVID-19 funding in 2021-22 of £3.8bn expected to be £0.7bn short of what is needed
Central government funding currently implies council tax rises of 3.6% a year assuming no further impact on budgets from COVID beyond next April
Uncertainties mean that setting firm plans for council funding for the next three years is an impossible task without guarantees from central government
Social care funding still allocated based on local populations in 2013 and the delayed ‘Fair Funding Review’ needs to be completed
For example, Tower Hamlets’ population is up 21%, Blackpool’s is down 2%.
Transition to new system of funding may need extra money to avoid potentially large cuts in some areas
Council tax needs reform!
More devolution on the agenda – government should develop ‘devolution packages’ rather than have bespoke arrangements for each area
Additional £5bn of health and social care levy funding for adult social care is unlikely to be sufficient – an extra £5bn a year could be needed by the second half of the 2020s
Tax policies to achieve net zero:
Greenhouse gas emissions fell 38% between 1990 and 2018, the fastest in the G7
Emission reductions will have to accelerate from 1.4% a year to 3.1% a year to meet net zero in 2050
Many low-cost opportunities to reduce emissions already done, so further reductions will be more difficult
Tax rates on emissions vary wildly, so incentives to reduce emissions are highly uneven
Renewables attract subsidies paid for by higher electricity prices – may pay-off in long-term but there are risks
Carbon footprint higher for higher-income households, but costs take up a bigger share of poorer household budgets
Weak incentives to improve energy efficiency
International collaboration needed, eg on taxing international aviation
Employment and the end of the furlough scheme:
Furlough scheme ended in September at gross cost of £70bn
Huge success, but significant challenges remain in the labour market
Significant concerns about the employment prospects for the 1.6m on furlough in July
Vacancies exceed 1.0m, but mismatch between regions and industries
London appears hard-hit on multiple fronts
Young people leaving full-time education last year were less likely to get jobs, but employment rates have since fallen back into line with pre-pandemic cohorts
Our chart illustrates how banknotes in circulation have grown during lockdown despite a decline in cash usage. Will the new £50 note launched on Wednesday cause a further rise?
At 28 February 2021, there were 357m paper £50 notes worth £18bn, 2,237m polymer and paper £20 notes worth £45bn, 1,540m polymer £10 notes worth £15bn and 407m polymer £5 notes worth £2bn – a total of £80bn in circulation. This excludes around £8bn in Scottish and Northern Irish banknotes and in the order of £5bn in coins.
With around 60m people in England and Wales (as Scotland and Northern Ireland have their own banknotes), this is equivalent to approximately six £50 notes, 37 £20 notes, 26 £10 notes and seven £5 notes per person. Of course, not all of these are in purses, wallets or stuck down the back of sofas – many live in cash drawers and safes at high street banks, retailers and other businesses, as well as a certain proportion that have migrated around the world.
There has been some speculation about the reasons for the jump in cash holdings during the pandemic, which appears counterintuitive given the significant decline in cash usage as contactless and online payments have become more popular. Part of this may be hoarding in the context of a national emergency, while others have speculated that criminal enterprises have struggled to launder cash at a time when many retail businesses have been closed. Another potential driver is the crossover between the old and new £20 notes, with the polymer £20 launched in February 2020 while the paper note it replaced is still in circulation. With the announcement that both £20 and £50 paper notes will be withdrawn in September 2022, there is likely to be a flood of cash coming back to the Bank of England next year.
The new Turing £50 note completes the changeover from paper to polymer, joining the Churchill £5, the Austen £10 and the Turner £20 polymer notes. The Adam Smith £20 note and the Boulton-Watt £50 note are the last paper notes still in circulation.
Speaking at Bletchley Park, where Turing carried out his famous codebreaking work, Bank of England Governor Andrew Bailey said: “Our banknotes celebrate some of our country’s most important historical figures. That’s why I am delighted that Alan Turing features on the new polymer £50 note. Having undertaken remarkable codebreaking work here at Bletchley Park during the Second World War, he went on to pioneer work on early computers, as well as making some ground-breaking discoveries in the field of developmental biology. He was also gay and was treated appallingly as a result. Placing him on this new banknote is a recognition of his contributions to our society, and a celebration of his remarkable life.”
More information on banknotes is available from the Bank of England.
This week’s chart takes a look at UK inflation following news that the annual rate of inflation more than doubled in April to 1.5%, more than twice the 0.7% reported for the previous month.
The headline rate of inflation doubled this week from 0.7% to 1.5%, giving rise to concerns about the economic recovery. Economists aren’t getting worried just yet, but are they right to be so sanguine?
This scale of this jump partly reflects the timing of the first and current lockdowns, as inflation is typically measured by comparing prices with the same month a year previously, with significant changes both this year as the UK started to emerge from its third lockdown and a year ago as it was entering its first. Some commentators have pointed out that the temporary cut in VAT on restaurant food and leisure activities help prevent the jump from being even higher.
Our chart compares the annual rate of Consumer Price Index (CPI) inflation with a more stable measure, which is the annualised rate of CPI inflation over a five-year period. This is less susceptible to short-term swings in the economy, but as the chart shows, medium-term inflation has been gradually rising over the past five years even as headline rates on an annual basis fell over the last four years before the pandemic.
This perhaps explains some of the relaxed responses from economists about the sudden burst in inflation in the last month, given the annual rate of increase still remains below the medium-term trend, despite the current extraordinary economic circumstances.
Of course, that is not to say that inflation might not become a problem as the UK emerges further from lockdown. Many businesses have closed over the last year, particularly in the retail sector, while those that have survived will be looking to repair their balance sheets – a recipe for higher prices as constrained supply meets higher post-lockdown demand from consumers. Only time will tell whether this will feed into sustained higher levels of inflation or will jump be a temporary adjustment that falls out of the headline rate again in a year or so’s time.
This week’s chart takes a look at the rebound in UK gross domestic product in March 2021, despite the country remaining in lockdown.
UK GDP jumped 2.1% in March 2021 according to the Office for National Statistics. A positive sign but, as our chart of the week illustrates, there is still a long way to go to get back to pre-pandemic levels of economic activity.
The #icaewchartoftheweek is on the economy this week, taking a look at how the latest economic statistics from the Office for National Statistics indicate a rebound in GDP in March 2021 even as the country remained in lockdown. This is a positive sign as the UK starts to emerge from the pandemic and people start to return to ‘normality’, albeit a new normal that is likely to be different to what came before.
However, the chart also makes clear how far the UK still has to go to return to pre-pandemic levels of economic activity, with the anticipated square-root shaped recovery stopped in its tracks in the last quarter of 2020 as COVID-19 resurged and restrictions on daily life were reimposed. The 2.1% real-terms growth in GDP in March follows a pattern of ups and downs in recent months with a fall of 2.2% in November, an increase of 1.0% in December, a fall of 2.5% in January, and an increase of 0.7% in February.
With the progress made in combating the virus over the last few months enabling lockdown restrictions to be progressively lifted across the UK, the hope is that March will be the second month on a more sustainable upward curve.
