Consumer & Producer Prices (Aug.) - Capital Economics
UK Economics

Consumer & Producer Prices (Aug.)

UK Data Response
Written by Andrew Wishart

It is possible to put a lot of the fall in inflation in August down to clothing and computer game prices, which are volatile. But there’s no denying that overall inflation is strikingly weak given high wage growth.

Inflation defies rising pay

  • It is possible to put a lot of the fall in inflation in August down to clothing and computer game prices, which are volatile. But there’s no denying that overall inflation is strikingly weak given high wage growth.
  • The fall in CPI inflation from 2.1% in July to 1.7% in August (consensus 1.9%) took inflation to its lowest level since December 2016. Half of the the 0.4ppt fall was due to lower inflation in the recreation category, driven by a fall in computer game prices (which are affected by bestseller charts and can be volatile) and “cultural services”, such as online media subscriptions and theatre tickets. A further 0.1ppts was due to lower clothing inflation, perhaps due to unusually wet weather keeping shoppers away from the high street.
  • While you can pick out these more volatile components as the cause of the fall in inflation, the big picture is that there is little underlying inflationary pressure at the moment. Core inflation fell from 1.9% to 1.5%, its lowest in almost three years. (See Table 1.) And our measure of core services inflation fell from 2.9% to 2.4%, its lowest since March 2017.
  • The fall in services inflation is remarkable given pay is rising at its fastest rate since 2008. Indeed, the past relationship suggests core services inflation should be above 3%. (See Chart 1.) But it does mean real pay is rising at over 2%, its highest since June 2016. Core goods inflation also dipped, but that looks unlikely to be sustained given ongoing moderate import price inflation.
  • But the risk to our forecast is that inflation is doesn’t rise much. Having hit $71 per barrel oil prices appear to be on their way back down. The fall in producer price inflation from +0.9% in July to -0.8% in August suggests if anything price pressures further up the production line are easing. And utility prices will knock 0.3ppts off inflation in October when Ofgem reduces its utility bill cap.
  • Our forecast is for overall inflation to rise back to 2% by the end of this year and then creep a bit higher. But the risk to our view, which was borne out in today’s release, is that core services inflation fails to pick up pace as strong wage growth suggests it should. At the margin, this might allow the MPC to strike a more dovish tone at its meeting tomorrow.

Chart 1: Average Earnings & Core Services Inflation

Sources: Refinitiv, Capital Economics

Table 1: Consumer Prices

 

CPI

RPI

CPIH

 

Index

% m/m

% y/y

Core % y/y

Fuel % y/y

Food % y/y

Index

% m/m

% y/y

(% y/y)

May

107.9

0.3

2.0

1.7

3.4

1.0

289.2

0.3

3.0

1.9

Jun.

107.9

0.0

2.0

1.8

0.7

1.7

289.6

0.1

2.9

1.9

Jul.

107.9

0.0

2.1

1.9

0.2

1.4

289.5

0.0

2.8

2.0

Aug.

108.4

0.5

1.7

1.5

-0.2

1.8

291.7

0.8

2.6

1.7

Source: Refinitiv


Andrew Wishart, UK Economist, +44 20 7808 4062, andrew.wishart@capitaleconomics.com