UK Consumer Price Inflation
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Slide pack by Richard Ramsey, chief economist, Northern Ireland, Ulster Bank, on UK Consumer Price Inflation

Slide pack by Richard Ramsey, chief economist, Northern Ireland, Ulster Bank, on UK Consumer Price Inflation

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  • 1. UK Consumer Price Inflation  November 2013 Update Issued 20th November 2013 Richard Ramsey Chief Economist Northern Ireland richard.ramsey@ulsterbankcm.com Twitter @UB_Economics
  • 2. UK Inflation Summary The annual rate of UK consumer price inflation (CPI) fell by 0.5 percentage points to 2.2% in October 2013. UK CPI  has now been above the 2% Bank of England target in 67 of the 74 months since the credit crunch began (Aug‐2007).  Meanwhile the Retail Price Index (RPI) inflation measure saw its annual inflation rate decelerate to 2.6% in Oct‐13.  The UK’s annual rate of CPI inflation (2.2%) compares with 1.0% for the United States, 0.7% for the Eurozone and ‐ 0.1% for the Republic of Ireland.  Since August 2007, UK CPI has increased cumulatively by 21.2%. This compares with a rise in average earnings of  11%. Meanwhile, the inflation rates of other categories of consumer spending have increased at a much faster rate.  Utility bills (electricity, gas & other fuels) increased by 61% between August 2007 and October 2013. Over the same  time period food has risen by 37% and Transport Fuels & Lubricants (i.e. petrol & diesel) have risen by 39%.  Inflation has been more pronounced in the UK than in the Eurozone. Indeed, since the credit crunch began, the UK  has experienced the largest increases in consumer prices within the EU‐27, outside of Eastern Europe. Conversely, the  Republic of Ireland (RoI) has become the poster child of low inflation within Europe and is the only EU‐27 economy  not to experience a double‐digit rise in consumer prices since August 2007.   Since the credit crunch began (August 2007), the UK has experienced a cumulative rise in consumer prices 7 times  greater than that of the RoI (+2.9%). The divergence is even starker when comparing some items of consumer  spending.  For example, UK food prices have risen by 37% since August 2007, whereas RoI food prices in October 2013  were no higher than they were when the credit crunch began.  The BoE’s latest Quarterly Inflation Report (Nov‐13) projects the annual rate of CPI to be 2.2% at the 2‐year target  horizon assuming monetary policy settings remain constant. The BoE also expects UK CPI to remain above the 2%  target until 2016 (assuming no change in policy). If this comes to pass, this would represent 10 consecutive years of a  CPI (annual average) overshoot. 2005 was the last year that CPI averaged at or below the 2% target.
  • 3. UK Consumer Prices: CPI Summary Table UK CPI Inflation by Sub‐Category CPI by main categories October 2013     % Y/Y October 2013     % Change Since  % M/M August 2007*     Food & non‐alcoholic beverages 3.9 0.1 36.3 Alcohol & Tobacco 5.4 0.3 41.2 Clothing & Footwear 1.0 1.0 ‐7.1 4.1 0.0 32.1 Furniture & Household Equipment 1.0 ‐0.4 19.3 Health 2.6 ‐0.2 19.1 Transport ‐0.3 ‐1.5 24.2 Communication 2.7 0.3 15.2 Recreation & Culture 0.7 0.2 4.5 Education 10.3 8.2 88.6 Restaurants & Hotels 2.8 0.2 21.3 Miscellaneous Goods & Services 0.7 ‐0.2 14.3 Overall CPI 2.2 0.1 21.2 Housing & household services          (includes water & fuel) Source: ONS, * August 2007 marks the beginning of the credit crunch
  • 4. UK CPI has exceeded the MPC’s 2% target in 67 out of 74 months since the credit crunch began (August 2007) UK CPI vs RPIX 6 RPIX UK CPI 5 4 Old RPIX Target 3 2.7 2.2 2 1 New CPI Target 0 Oct-01 Oct-03 Oct-05 Oct-07 Oct-09 Oct-11 Oct-13
  • 5. The annual rate of RPI & RPIX inflation in October 2013 fell to its lowest rate in 13 months UK RPI vs RPIX 7 RPIX RPI 6 5 4 3 2 1 0 -1 -2 Source: ONS, RPIX Excludes Mortgage Interest Payments -3 Oct-01 Oct-03 Oct-05 Oct-07 Oct-09 Oct-11 Oct-13
  • 6. All measures of inflation ease significantly in October with Core CPI dipping below 2% for the first time since Nov-09 % Y/Y 7 UK Inflation - CPI, Core CPI, CPIY and RPI CPI CPIY MPC Target RPI Core CPI 6 5 4 3 2.6 2.3 2.2 2 1.7 1 0 -1 -2 Source: ONS; CPIY excludes indirect taxation e.g. VAT; Core CPI excludes Energy, Food, Alcohol & Tobacco -3 Oct-08 Oct-09 Oct-10 Oct-11 Oct-12 Oct-13
  • 7. UK inflation still rising at a much faster rate than earnings and therefore prolonging the income squeeze UK Average Weekly Earnings & CPI Inflation % 6 Ave Weekly Earnings 3m Y/Y % (Excl. Bonuses) CPI Y/Y 5 4 3 Income squeeze NICE Decade 2 2.2% 1 Does not include taxes or changes to benefits Source: ONS 0.8% 0 Oct-01 Oct-03 Oct-05 Oct-07 Oct-09 Oct-11 Oct-13
  • 8. Energy & food inflation has eased markedly since 2008 & 2009 but it’s the cumulative impact that is doing the damage… UK CPI Inflation Year-on-Year 50% Food & Non-Alcoholic Beverages Electricity Gas & Other Fuels Transport Fuels & Lubricants 40% 30% 20% 10% 7.7% 4.0% 0% -4.2% -10% -20% Source: ONS Oct-05 Oct-06 Oct-07 Oct-08 Oct-09 Oct-10 Oct-11 Oct-12 Oct-13
  • 9. Since Aug-07 CPI has risen by 21% which compares with a rise in average earnings of just 11% Cumulative % Change in UK Consumer Prices since 'Credit Crunch' began (Aug 07 to Oct 13) 70% 60% 50% 40% 30% 21.2% 20% 10% 0% Food & NonAlcoholic Beverages Food Electricity Transport Transport Hotels & Total CPI Average Gas & Other Fuels & Services Restaurants Earnings* Fuels Lubricants
  • 10. International Consumer Price Inflation Comparisons
  • 11. Inflation has been more pronounced in the UK than in the Eurozone… UK CPI vs Eurozone HICP Y/Y % 6 UK CPI EZ HICP 5 4 3 2.2 2 1 0.7 0 -1 Oct-01 Oct-03 Oct-05 Oct-07 Oct-09 Oct-11 Oct-13
  • 12. …and even more pronounced relative to the Republic of Ireland UK CPI vs RoI HICP % Y/Y 7 UK CPI ROI HICP 6 5 4 3 2.2 2 1 -1 -0.1 -2 -3 -4 Oct-01 Oct-03 Oct-05 Oct-07 Oct-09 Oct-11 Oct-13
  • 13. The RoI has gone from having the highest annual rates of inflation to the lowest Consumer Price Inflation (HICP) % year-on-year 6 EZ UK RoI 5 4 3 2 2.2 1 0.7 0 -0.1 -1 -2 -3 -4 Oct-01 Oct-03 Oct-05 Oct-07 Oct-09 Oct-11 Oct-13
  • 14. Ireland has become the poster child of low inflation with the UK experiencing the highest rises outside of Eastern Europe EU-28 Cumulative % Rise in Consumer Prices (HICP) August 2007 to October 2013 Ireland Germany Portugal France Sweden EU 28 EZ Netherlands Denmark Spain Belgium Austria Malta Czech Republic Cyprus Italy Slovakia Luxembourg Greece Slovenia Finland Croatia Poland UK Bulgaria Latvia Lithuania Estonia Hungary Romania 0% 2.9% Source: ONS & Eurostat € 12.7% 12.7% 21.2% 5% 10% 15% 20% 25% 30% 35% 40%
  • 15. The UK has experienced a cumulative rise in consumer prices 7 times greater than the RoI since August 2007 UK & RoI CPI Inflation by Sub‐Category UK % Change  Since August  2007*            RoI % Change  Since August  2007*            CPI by main categories UK October  2013  % Y/Y RoI October  2013 % Y/Y Food & non‐alcoholic beverages 3.9 0.1 36.3 0.5 Alcohol & Tobacco 5.4 5.3 41.2 18.4 Clothing & Footwear 1.0 ‐4.1 ‐7.1 ‐24.3 4.1 3.0 32.1 9.0 Furniture & Household Equipment 1.0 ‐4.0 19.3 ‐16.6 Health 2.6 0.6 19.1 14.3 Transport ‐0.3 ‐3.5 24.2 5.3 Communication 2.7 ‐3.8 15.2 ‐2.9 Recreation & Culture 0.7 0.0 4.5 ‐2.8 Education 10.3 4.7 88.6 43.2 Restaurants & Hotels 2.8 1.7 21.3 0.5 Miscellaneous Goods & Services 0.7 ‐1.5 14.3 13.4 Overall CPI 2.2 ‐0.1 21.2 2.9 Housing & household services          (includes water & fuel) Source: ONS & CSO using HICP measure, * denotes when credit crunch officially began
  • 16. UK Food & Drink prices have risen by 36% since the credit crunch started whereas in RoI they are almost unchanged UK (NI) & RoI Consumer Price Inflation Levels (August 2007 = 100) 140 UK Food & Drink UK All Items CPI +36.3% RoI Food & Drink RoI All Items CPI 130 +21.2% 120 110 +2.9% 100 +0.5% Source: ONS, Eurostat HICP inflation & UB Calculations 90 Oct-07 Oct-08 Oct-09 Oct-10 Oct-11 Oct-12 Oct-13
  • 17. After Hungary, the UK has posted the largest rise in food & drink prices (& the RoI the least) within the EU-28 since Aug-07 EU-28 Cumulative % Rise in Food & Drink Prices August 2007 to October 2013 (HICP) Ireland Portugal Spain France Greece Netherlands EU 28 EZ Italy Germany Sweden Luxembourg Denmark Belgium Austria Cyprus Slovakia Croatia Bulgaria Czech Republic Slovenia Finland Romania Poland Latvia Lithuania Estonia Malta UK Hungary 0% 0.5% Source: ONS & Eurostat € 14.2% 14.3% 36% 5% 10% 15% 20% 25% 30% 35% 40%
  • 18. Food prices in the RoI were no higher in October 2013 than they were when the credit crunch began! UK v RoI Cumulative % Change in Consumer Prices since 'Credit Crunch' began (Aug 2007 to Oct 2013) 70% UK RoI 60% 50% 40% 30% 21.2% 20% 10% 2.9% 0% Food & NonAlcoholic Beverages Food Electricity Transport Transport Hotels & Gas & Other Fuels & Services Restaurants Fuels Lubricants All CPI
  • 19. Consumers in the RoI have benefited from almost no Hotel & Restaurant inflation over the last 6 years too EU-28 Cumulative % Rise in Hotel & Restaurant Prices August 2007 to October 2013 (HICP) Ireland Spain France Greece Croatia Italy Latvia EZ Portugal Belgium Malta Germany Cyprus EU 28 Czech Sweden Netherla Austria Slovenia Denmark Luxembo UK Slovakia Finland Poland Lithuania Hungary Estonia Romania Bulgaria 0% 0.5% Source: ONS & Eurostat 12% € 14.5% 21% 5% 10% 15% 20% 25% 30% 35%
  • 20. Northern Ireland’s tourist industry has experienced fierce price competition from its nearest competitor UK (NI) & RoI Hotel & Restaurant CPI Levels (August 2007 = 100) 130 UK RoI No Change +21.1% 120 110 +0.5% 100 Source: ONS, Eurostat HICP inflation & UB Calculations 90 Jul-07 Oct-08 Jan-10 Apr-11 Jul-12 Oct-13
  • 21. Consumers in the RoI have seen energy inflation below that in the EZ & half of that in the UK Cumulative % Rise in Electricity, Gas & Other Fuels Prices August 2007 to October 2013 (HICP) Source: ONS & Eurostat Netherlands Sweden Slovakia Austria Bulgaria Luxembourg Denmark Italy Ireland Germany Hungary EU 28 EZ France Czech Republic Belgium Portugal Poland Romania Slovenia Croatia Cyprus Spain Finland UK Estonia Lithuania Malta Latvia Greece 0% 29% 35% 35% € Greece has seen prices more than double as hiking electricity bills was a measure to raise household taxation revenue 61% 20% 40% 60% 80% 100% 120%
  • 22. UK Oil, Petrol & Diesel Prices
  • 23. Petrol & diesel prices have fallen from their recent highs UK Fuel Prices - Pence per litre (Weekly) Pence 160 Source: ONS Petrol Diesel 150 148.0p 140 137.5p 130 129.9p 120 110 100 90 85.4p 80 70 60 Nov-04 **Note Northern Ireland Prices are traditionally the highest of all UK regions** May-06 Nov-07 May-09 Nov-10 May-12 Nov-13
  • 24. Filling up an average family car with petrol or diesel has fallen by 7-8% relative to last April’s peak UK Fuel Prices - Tank* of Petrol / Diesel £ 100 (*60 Litres) **Note Northern Ireland Prices are traditionally the highest of all UK regions** £88.8 90 June Budget 2010 80 £82.5 £77.9 70 60 50 £51.3 'Credit Crunch' begins 40 30 Source: ONS Petrol Diesel Nov-05 Nov-06 Nov-07 Nov-08 Nov-09 Nov-10 Nov-11 Nov-12 Nov-13
  • 25. Filling up some vehicles still costs well over £100 UK Tank of Diesel Prices £ 160 Diesel Toyota Hilux / Nissan Navarra 80L Toyota Land Cruiser 93L £138 140 £118 120 £127.8 £110 100 £88.8 £91.4 80 £82.5 £78.7 60 40 £58.5 Source: DECC & UB Calculations Nov-05 Nov-06 Nov-07 Nov-08 Nov-09 Nov-10 Nov-11 Nov-12 Nov-13
  • 26. It cost < £30 for a tank of fuel 20 years ago UK Fuel Prices - Tank* of Petrol / Diesel £ 100 (*based on 60 Litres, monthly prices) **Note Northern Ireland Prices are traditionally the highest of all UK regions** 90 80 70 60 50 40 30 Petrol Diesel 20 Nov-91 Jul-95 Mar-99 Nov-02 Jul-06 Source: DECC Mar-10 Nov-13
  • 27. Remember it is the price of oil in sterling that matters £/$ pb Price of Brent Crude Oil in Dollars & Sterling Weekly 160 £pb $pb 140 120 $108.5 100 80 £67.3 60 40 20 Source: Bloomberg 0 Nov-06 Jan-08 Mar-09 May-10 Jul-11 Sep-12 Nov-13
  • 28. It was £12.50 for a barrel of Brent crude just over 20 years ago. Now it is £67pb having hit £80pb last year £/$ pb Price of Brent Crude Oil in Dollars & Sterling Weekly 160 £pb $pb 140 120 $108.5 100 80 £67.3 60 40 20 Source: Bloomberg 0 Nov-91 Jul-95 Mar-99 Nov-02 Jul-06 Mar-10 Nov-13
  • 29. Forecourt petrol prices will broadly follow oil price (in £) Brent Crude Oil (in £pb) versus UK Petrol Prices Pence per Litre Brent Crude £pb 90 Brent Crude £pb (LHS) Petrol Prices Pence Per Litre (RHS) 160 80 140 70 120 60 50 100 40 30 80 20 60 10 Source: Bloomberg & DECC 0 Oct-05 40 Dec-06 Feb-08 Apr-09 May-10 Jul-11 Sep-12 Nov-13
  • 30. Domestic heating oil has fallen by 9% since Feb-13 peak but prices still up 84% in 6 years UK Price of Domestic Heating Oil per 1,000 Litres £ 700 £688 £630 600 500 400 300 £342 Source: ONS 200 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 Sep-12 Sep-13
  • 31. Electricity and gas prices have also posted significant rises since the credit crunch began (Aug-2007) UK Electricity, Gas & Other Fuels CPI Levels Index Index August 2007 = 100 220 Gas Electricity Liquid Fuels No Change 200 +84% 180 160 +76% 140 +46% 120 100 Source: ONS CPI & UB Calculations 80 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 Sep-12 Sep-13
  • 32. UK Inflation Forecasts
  • 33. Probability of an inflation overshoot has fallen significantly since the last Quarterly Inflation Report (Aug 2013) Probability of an inflation overshoot based on market interest rate expectations has fallen throughout the forecast period Probability of CPI rising above 2% has fallen significantly relative to August forecast throughout the forecast period Source: BoE QIR November 2013 Chart 5.4
  • 34. BoE expects CPI to remain above its 2% target until 2016 (i.e. 10 years of an annual average CPI overshoot) CPI inflation projection based on constant nominal interest rates at 0.5% and £375 billion asset purchases 2.2% in 2 years time & 2.1% in 3 years time Overshoot at 2-yr horizon Source: BoE QIR November 2013 (August 2013) (November 2013)
  • 35. CPI inflation set to average 2.4% in 2014 & 2.2% in 2015. RPI even higher at 2.8% in 2014 & 2.6% in 2015 UK Consumer Price Inflation Y/Y % 8 7 6 5 4 3 2 1 0 -1 -2 Core CPI excludes Energy, Food Alcohol & Tobacco Annual Growth Source: ONS & RBS Forecasts Dec-09 2011 2012 2013 2014 2015 CPI Core CPI 4.5% 3.2% 2.8% 2.3% 2.6% 2.1% 2.4% 1.6% 2.2% 1.8% RPI 5.2% 3.2% 3.1% 2.8% 2.6% Forecasts Dec-10 Dec-11 CPI Dec-12 RPI Dec-13 MPC Target Dec-14 Core Dec-15
  • 36. FBTE inflation to average 4.8% in 2014 & 3.3% in 2015 at a time when some welfare benefits capped at 1% p.a UK Consumer Price Inflation Y/Y % *FBTE includes Food, Beverages, Tobacco & Energy 18 Annual Growth Source: ONS & RBS 15 CPI 4.5% 2.8% 2.6% 2.4% 2.2% 2011 2012 2013 2014 2015 12 9 FBTE 8.4% 4.3% 4.2% 4.8% 3.3% RPI 5.2% 3.2% 3.1% 2.8% 2.6% 6 3 0 Forecasts -3 Dec-09 Dec-10 Dec-11 CPI Dec-12 RPI Dec-13 Dec-14 FBTE (CPI) Dec-15
  • 37. Disclaimer This document is issued for information purposes only for clients of Ulster Bank Group who are eligible counterparties or professional customers, and does not constitute an offer or invitation to purchase or sell any instrument or to provide any service in any jurisdiction where the required authorisation is not held. Ulster Bank and/or its associates and/or its employees may have a position or engage in transactions in any of the instruments mentioned. The information including any opinions expressed and the pricing given, is indicative, and constitute our judgement at time of publication and are subject to change without notice. The information contained herein should not be construed as advice, and is not intended to be construed as such. This publication provides only a brief review of the complex issues discussed and readers should not rely on information contained here without seeking specific advice on matters that concern them. Ulster Bank make no representations or warranties with respect to the information and disclaim all liability for use the recipient or their advisors make of the information. Over-the-counter (OTC) derivates can involve a number of significant and complex risks which are dependent on the terms of the particular transaction and your circumstances. In the event the market has moved against the transaction you have undertaken, you may incur substantial costs if you wish to close out your position. Ulster Bank Limited Registered Number: R733 Northern Ireland. Registered Office: 11-16 Donegall Square East, Belfast BT1 5UB.Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Member of The Royal Bank of Scotland Group. Calls may be recorded. Slide 37