Interactive Investor

ii comments on the persistence in consumer price inflation

New methodology lays bare the extent of underlying inflation, which could reinforce the Bank of England’s approach to interest rates.

21st August 2023 11:11

by Myron Jobson from interactive investor

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The Office for National Statistics (ONS) has today published analysis on the persistent component of consumer price inflation for the first time.

Commenting, Myron Jobson, Senior Personal Finance Analyst, interactive investor, says: “The ONS’ newest take on inflation, which focuses on the persistent component of consumer price inflation, shows that more persistent factors, rather than temporary trends have kept prices elevated.

“Unlike core inflation, which excludes volatile food and energy prices, the methodology to identify the persistent component of consumer prices goes a step further and tries to filter out temporary shocks or price influences across the full spectrum of goods and services.

“The resulting model shows that underlying inflation has fallen at a slower rate than CPI including owner occupiers' housing costs over the 12 months to July 2023. The list of the top 10 most persistent components of the broader inflation metric is dominated by housing services and personal and recreational services. Price rises in restaurants and cafes have been a strong driver of persistent inflation - which have, in turn, been driven by the increase in labour, energy and food costs. Rising rent prices have also notably kept the broader inflation measure high. Renters across the UK have been squeezed by landlords passing on higher mortgage costs to their tenants.

“From a monetary policy perspective, the latest ONS inflation study would fuel the Bank of England’s concern that inflation is becoming entrenched, and, as such, the price growth we are seeing in the economy would persist for a long period. This could reinforce the UK central bank’s resolve to tame inflation staying the course rather than being more cautious about further rate increases.

“Higher rates could add even more pressure on household budgets already reeling from a double whammy of rising borrowing costs and rampant inflation. Those in the market for a mortgage would view the prospect of higher interest rates with trepidation, amid the extended period of uncertainty in the mortgage marketplace.”

Key points:

  • The persistent component of consumer price inflation is identified as that part of inflation which is common to all goods and services in the index; this can be considered as the general underlying trend or core inflation rate across the whole economy.
  • The persistent or common inflation component of the Consumer Price Index including owner occupiers' housing costs (CPIH) was 6.8% over the 12 months to July 2023; although the all-items CPIH inflation rate reached its peak in October last year and had fallen to 6.4% in July 2023, the persistent component of the inflation rate has been slower to reach a turning point and so the subsequent fall in the inflation rate has been smaller.
  • The inflation rate in the restaurants and cafes class is found to be a good measure of the underlying trend in consumer prices inflation in the UK economy.

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