William John Market Report 16-09-21
Inflation data is released by the Bank of England and the Office for National Statistics - William John takes a look.
William John, Inflation, Macroeconomic Policy, Consumer Prices, UK Economy, Central Bank

William John Market Report 16-09-21

William John Market Report 16-09-21

Category: Reports

The UK Consumer Price Index (CPI) rose by 3.2% in the 12 months to August 2021, up from 2.0% in the 12 months to July. The 1.2% percentage point increase is, according to the Office for National Statistics, the largest incremental change in the inflation rate between two months since the CPI 12-month inflation rate series began in January 1997.

The largest contribution to the change in consumer price levels from August 2020 has been a “base effect”. A base effect refers to any impact on the inflation rate resulting from the initial price levels (in this case measured in August 2020) rather than the new price levels being measured today. As the UK proxy measure for the inflation rate is the Consumer Price Index, which measures the change in prices of a ‘basket’ of consumer goods and services, base consumer prices and services have had a large base effect.

One key contributor to this effect has been the introduction of the Chancellor of the Exchequer’s “Eat Out to Help Out” scheme which launched in August 2020 – offering consumers considerable discounts on food and drinks. This was reinforced by reductions in Value Added Tax (VAT) across the same sector. Such discounts on prices and taxes across the hospitality and consumer services sectors have exacerbated the size of price increases from August 2020 to August 2021 as many of these schemes and discounts have since expired, and hence the judgement from the Bank of England remains that such a dramatic increase in prices will only be temporary because of this base effect.

Additionally, the largest contribution to the overall consumer price levels in August 2021 came from transport costs (0.87%), restaurants and hotels (0.65%), housing and household services (0.65%) and recreation and culture (0.28) – the latter of which accounts for expenditure in theme parks, shows, nightclubs and cinemas etc.

Observing the Consumer Price Index since September 2019, broken down by its contributions:

Source: William John Analytics, Office for National Statistics

Although Bank of England forecasts already suggest that inflation will rise to 4.0% by the end of the year, the acceleration of consumer price increases will be unnerving. This follows UK labour market data released on 14/09 stating that the number of job vacancies in the UK rose above 1m for the first time on record in the three months to August. This, combined with the fact that the unemployment rate is falling, and payroll employment was up by 241,000 in August to match pre-pandemic levels alone, suggests the UK economy is running hotter than some may have anticipated.

Meanwhile, gas and electricity prices are set to increase over the autumn reflecting an increase in wholesale prices while food and clothing prices are also set to jump in the Autumn. Such a cocktail of hot labour market demand, accelerating inflation and a rising cost of living means that the Bank of England will be paying close attention to these macroeconomic indicators – as it has done all summer. On the news, market reaction was muted on 15/09, with the yield on the 10-year Gilt up 0.02 basis points and the Sterling up 0.2% against the dollar to $1.3832. This signals that the markets and the Central Bank believe it is business as usual until further changes arise.

Any opinions expressed in these documents are those of William John and are provided for information only. E&OE.