Connected Research

Union policy research in the 21st century

Posts Tagged ‘RPI

Rise in inflation and other economy stuff

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The Office for National Statistics has this morning published the inflation figures for October, which show that inflation is rising – on all measures.

The Retail Price Index rose from -1.4% in September to -0.8%, the highest month-on-month increase since 1990: although we should bear in mind that, on this measure, prices are still lower than they were one year ago. Over the previous three months, RPI had been static at -1.3% to -1.4%. The volume of the September-October increase is accounted for by rises in prices in motoring, houses, food and fares and other travel over the month; the lower general prices than one year ago is accounted for largely by drops in housing and fuel costs.

Meanwhile, the Consumer Price Index rose by 1.5%.

The rise in inflation was expected and is expected to be volatile over the next couple of months, not least as VAT rises again in January after last year’s temporary cut, and as the Bank of England’s November report had recently explained. Rising inflation will provide an important backdrop to whether the Bank will need to put more money into the economy via its quantitative easing programme, currently standing at £200bn, with rising inflation making this less likely.

Meanwhile, a speech last night by Andrew Sentance, a external member of the Bank’s Monetary Policy Committee, highlighted the uncertainty with which the Bank views the economy: a combination of four factors (signs of growth across the global economy, including with major trading partners; positive news from a range of business surveys; improvements in consumer spending and confidence; and an apparent levelling-off of unemployment) indicates that the recession may be ending but, at the same time, recovery is likely to be fragile, since a synchronised recovery is likely to lead to upwards pressure on world energy and commodity prices, and and the need for ‘domestic rebalancing’.

These are controversial views – especially the latter, since Sentance here is referring to a rebalancing between public and private sectors aimed at a reduction of the UK public sector deficit. As the TUC has continually warned, as recently as yesterday at its ‘Beyond Crisis’ conference in the speech of Brendan Barber, General Secretary:

Public spending is the only motor of growth currently available to us. Swingeing cuts would increase the risk of Britain suffering a Japanese-style lost decade, would mean the unwelcome prospect of a jobless recovery, and would lead to the emergence of a so-called Zombie economy,

setting the country back for years, if not for years. A far better re-balancing of an economy that has become over-dependent on financial services and London and the south-east would aim towards a revitalisation of manufacturing, regeneration of the regions and a renewal of infrastructure towards a greener, fairer and more equal society. This remains the correct path to an economic renewal which doesn’t repeat the money-go-round, cash machine policy mistakes of yesterday but which creates the essential pre-conditions for sustainable growth.


Written by Calvin

17/11/2009 at 1:38 pm

Posted in Economic trends

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Further fall in UK inflation

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National Statistics published new figures for inflation today – and they show similar trends to previous months: the annual rate of change in the Retail Price Index fell further, to -1.6% where it really is in uncharted territory, at least in post-war times.

There were also declines in the Consumer Price Index – the government’s preferred measure of the level of prices and the one forming the basis of the Bank of England’s monetary policy – and in RPI-X. Over the last two years, the following chart compares the three measures on the basis of the monthly figures:


All the measures are based on the same price collection date, but CPI (and RPI-X) exclude, among others, a series of data relating to housing costs particularly in the owner-occupier sector (i.e. mortgage interest payments, house depreciation and buildings insurance). RPI is also based on an arithmetical mean of the individual price rises, whereas CPI is based on the geometric mean – a measure apparently more appropriate to annual growths in figures over time.

Focusing on RPI, the largest downwards contribution came from housing, where prices fell by 11.6% on the year stemming from mortgage interest payments and house price depreciation. Motoring also saw lower prices, with a drop of 4.6% over the year principally due to a fall in the price of petrol and oil.

The group of items making the largest upwards contribution on the overall figure was food, where prices overall rose by 5.3%, with higher price rises recorded against processed fish, sugar, lamb, pork, coffee and processed fruit. Nevertheless, the fuel and light group saw prices rise overall by 9.6% over the year, with gas prices rising by 24% and electricity prices by 6.8%. This group saw the largest increase in prices of the fourteen that make up the RPI (but it has an overall lower weight in the overall index than food).

Meanwhile, the Bank of England is convinced that its £125bn quantitative easing programme, which the Monetary Policy Committee at its monthly meeting last week chose not to increase, is ‘heading in the right direction’ according to its Deputy Governor, Charlie Bean, whose remit covers monetary policy. The Bank continues to believe that it is still far too early to evaluate the effects of the programme, which could take nine months fully to work through the system, but is, however, concerned (based on the Japanese example) not to withdraw the programme too early, thereby nipping recovery in the bud, while not doing so too slowly and ‘letting the inflationary cat out of the bag’. The Bank has spent £112bn so far and expects to complete the programme to the limits of its existing political authority next month.

The decision last week not to increase the programme led to short-term sharp rises in long-term gilt yields – key to the valuation of pension scheme liabilities – although these have now fallen back on the grounds that the Bank may not, after all, have yet finished with the quantitative easing programme. Nevertheless, according to the Pension Protection Fund’s July update of its PPF7800 Index, assessing the overall health of UK pension schemes, 10-year gilt yields are on a rising trend albeit well off their June 2007 peak.

Written by Calvin

14/07/2009 at 2:31 pm

UK economy deflates further

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This morning’s official inflation figures see the UK economy slipping further into deflation – a period in which prices are ‘growing negatively’ (falling) rather than rising.

The annual Retail Price Index – RPI, the traditional measure of inflation used by negotiators – fell by 1.2% in April. This represents the largest recorded decline in prices since records began in 1948. In March, when the year-on-year decline was -0.4%, this was the first time the economy had officially recorded prices falling since 1960.

Of course, whether prices are really falling is a matter of… well, statistics, as Benjamin Disraeli (or Mark Twain) might  have said. The Consumer Price Index – called for international comparative purposes the Harmonised Index of Consumer Prices – rose by 2.3% on the figure for April 2008, while the RPI-X measure rose by 1.7% on the figure one year ago.

Both the latter measures take a different perspective on inflation: CPI excludes many items of housing costs (including council tax, mortgage interest payments, house depreciation and buildings insurance), and also trade union subscriptions, strangely enough; whereas RPI-X excludes mortgage interest – a measure originally developed by the Tories when they were in power on the grounds that when your only measure to keep a dampener on inflation is interest rates, it doesn’t make much sense to build what you are doing with that policy tool into how you measure the dimensions of the problem you are trying to tackle with it.

Contributors to the fall in RPI in April include – somewhat evidently – lower mortgage interest payments, which were some 47% lower than in April 2008, as well as home insurance and – on issues which concern all measures of inflation, lower utility (chiefly, electricity) and food bills. Mortgage interest payments make up 4.1% of the RPI basket while housing costs in general (down 12.1% on April 2008) make up 23.6%.

Most people’s experience of whether the prices that they are paying are rising or falling is probably the former rather than the latter. This makes this a particularly interesting time for negotiators since, on their preferred measure – the one that guides their pay settlements – it is the latter. This can only mean greater pain for ordinary workers since if indeed the reality is of rising, rather than falling, prices, then wages are being stretched further by the lack of pay rises stemming from collective bargaining being associated with the RPI measure.

But, RPI tends – usually – to be higher (as the BBC’s chart neatly illustrates) than either CPI or (inevitably) CPI-X. And, what goes around comes around.

As for the economy as a whole, a period of deflation in which prices fall is, strategically speaking, not generally as good news as it might initially appear to be for consumers’ pockets: a market economy loses the signal of rising prices while investment is likely to be reduced, or directed elsewhere where returns are more certain.

Written by Calvin

19/05/2009 at 1:09 pm

Posted in Economic trends

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Treasury economic data

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The Treasury has just published its most recent economic forecasts from a series of City and non-City forecasters, containing 24 updated forecasts.

Newly updated forecasts now show forecasters’ views that the economy will shrink during 2009 by, at the median level, -3.7% within a range of -1.3% to -4.5%; for calendar year 2010, the median forecast is for slight growth of 0.3% within a range of -1.2% to 2.5%.

Turning to inflation, new forecasts show RPI in formal deflation for 2009 – a ‘growth’ in prices of -1.6% within a range of -3.3% to 1.0%; for 2010, forecasters believe inflation will return to the economy but at the moderate level of 2.4% within a range of 0.2% to 5.4%.

In his Budget speech, Chancellor Alistair Darling referred to a contraction in 2009 of 3.5%, with growth in 2010 of 1.25% (and 3.5% from 2011 onwards) so it would seem that he is in line with recent forecasts for 2009 but quite signficantly more optimistic about the speed of the recovery: essentially, he looks to be a ‘V’ man rather than an ‘L’, ‘U’ or ‘W’ one, or even a ‘square root’ or ‘hook’ man. Confused? Perhaps a little less so if you check out Deborah Hyde‘s guide to the alphabet spaghetti of economic forecasting.

Written by Calvin

15/05/2009 at 11:56 am