William John Market Report 30-11-21
William John analyses UK inflation through the month of October
WilliamJohn, Inflation, CentralBank, InterestRates, Markets, Macroeconomics
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William John Market Report 30-11-21

William John Market Report 30-11-21

Category: Reports

In October, inflation reached its highest level in a decade. The Consumer Price Index, which tracks the prices of a ‘basket’ of consumer related goods on a year-to-date basis, rose by 4.2% in the 12 months to October 2021, up from 3.1% in September. 

The current rate of inflation exceeds the Bank of England’s annual target by 2.2% (or over double the targeted inflation rate). Looking at CPI 12-month inflation rates for the last 10 years from October 2011 to October 2021:

Source: William John Analytics, Office for National Statistics

The rate of inflation at 4.2% was the highest level recorded since November 2011, when the CPI annual inflation rate was 4.8%. The largest contributors were price rises in education, transport, clothing and footwear, housing and household services and restaurants and hotels. 

Analysing the top three contributors, housing and household services was the largest with an additional 0.54 percentage points (54 basis points) to the rise in consumer price levels. This was attributed to rising prices of gas, electricity, and other fuels, following Ofgem’s (Office for Gas and Electricity Markets) decision to raise the price cap on the back of gas prices hitting record highs and a 50% rise in energy costs over the last 6 months. 

Transport was second and has shown the most variation out of all the different groups of consumer prices over the past two years. It has ranged from a downward contribution of 0.2 percentage points in March 2020 with the inception of the first “National Lockdown” to an upward contribution last month of 1.08 total percentage points. This contribution was influenced primarily by the change in prices of fuel, which had the highest price recorded since September 2012 at an average of 138.6 pence per litre, as well as the rise in prices for second hand cars. Rising second hand car prices has been observed as a reflection of people demanding alternatives to the use of public transport. 

Finally, restaurants and hotels were the third largest contributor to the increased rate of inflation. The contribution rose to 0.43 percentage points (43 basis points), which reflected widespread discounting from the government’s “Eat Out to Help Out” scheme in the previous year. This has been marked as a reflection of the rise in catering costs, as catering was largely unavailable throughout the majority of last year given movement restrictions and lockdowns. Furthermore, the rate of Value Added Tax (VAT) increased to 12.5% from 5% as of 01/10/21. If outlets choose to pass VAT to their customers, then this could also reflect some of the price rises across restaurants and hotels. 

Given the current inflationary environment, this all but assures markets of an interest rate rise by the Bank of England at the Monetary Policy Committee’s next convening in December. Rises in the price level and specifically consumer price levels erode the real purchasing power of household income, that is, each pound purchases less goods and services. As it continues to rise without monetary resistance, there is no doubt that those in low household income groups will be hit hard in the lead up to Christmas – the busiest shopping season of the year. 

Given this circumstance, and that a general rise in the cost of living will affect the speed of the UK’s economic recovery from the COVID-19 era, there is no question that the Bank of England must act to temper an already inflationary environment in the months ahead. 

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