UK inflation slidepack February 2013

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An updated UK Consumer Price Inflation PowerPoint Slide Pack. Includes comparisons between UK, Eurozone and Republic of Ireland inflation trends. In addition, the latest trends in oil, petrol & diesel prices are included.

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UK inflation slidepack February 2013

  1. 1. UK Consumer Price Inflation  February 2013 Update Issued 14th February 2013 Richard Ramsey Chief Economist Northern Ireland richard.ramsey@ulsterbankcm.com
  2. 2. UK Inflation SummaryThe annual rate of UK consumer price inflation (CPI) remained unchanged in January 2013 at 2.7% for the 4thconsecutive month. UK CPI has now been above the 2% Bank of England target for 38 months in a row. Meanwhile the Retail Price Index (RPI) inflation measure saw its annual inflation rate accelerate to 3.3% in January 2013. UK CPI has exceeded the Bank of England’s Monetary Policy Committee (MPC) of 2% in 58 out of 65 months since the credit crunch began (August 2007). During this time, the Governor of the Bank of England (BoE) has written 13 ‘Dear Chancellor Letters’ (a 14th letter was written in April 2007 before the credit crunch), to 3 different Chancellors, explaining why CPI has deviated from the 2% target by more than one percentage point.Since August 2007, UK CPI has increased cumulatively by 18.8%. This compares with a rise in average earnings of just over 10%. 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 60% between August 2007 and January 2013. Over the same time period food has risen by 35% and Transport Fuels & Lubricants (i.e. petrol & diesel) have risen by 40%. 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 7.5 times greater than that of the RoI (+2.5%). The divergence is even starker when comparing some items of consumer spending.  For example, UK food prices have risen by 35% since August 2007, whereas RoI food prices in November 2012 (latest data available) were no higher than they were when the credit crunch began. The BoE’s latest Quarterly Inflation Report (Feb‐13) projected a peak in CPI of around 3.2% in mid‐2013.  This would require the existing Governor, or his successor Mark Carney, to pen another ‘Dear Chancellor Letter’. The BoE also expects UK CPI to remain above the 2% target until 2016. 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. 3. UK Consumer Prices: CPI Summary Table UK CPI Inflation by Sub‐Category January 2013     January 2013     % Change Since  CPI by main categories % Y/Y % M/M August 2007*     Food & non‐alcoholic beverages 4.2 0.1 34.4 Alcohol & Tobacco 8.5 4.3 37.5 Clothing & Footwear 0.2 ‐5.4 ‐13.7 Housing & household services          3.5 ‐0.1 30.2 (includes water & fuel) Furniture & Household Equipment 0.8 ‐2.3 16.8 Health 2.2 0.2 16.5 Transport 1.3 ‐0.6 23.4 Communication 3.5 1.0 12.9 Recreation & Culture 0.5 ‐0.1 3.6 Education 19.7 0.0 71.1 Restaurants & Hotels 3.2 0.0 18.7 Miscellaneous Goods & Services 1.4 ‐0.7 13.3 Overall CPI 2.7 ‐0.5 18.8 Source: ONS, * August 2007 marks the beginning of the credit crunch
  4. 4. UK CPI has exceeded the MPC’s 2% target in 58 out of 65months since the credit crunch began (August 2007) UK CPI vs RPIX 6 RPIX UK CPI 5 Old RPIX Target 4 3.3 3 2.7 2 1 New CPI Target 0 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11 Jan-13
  5. 5. RPI & RPIX both hit 3.3% y/y in January 2013. RPIhas averaged 3.1% over the last 4 years UK RPI vs RPIX 7 RPIX RPI 6 5 4 3 2 1 0 -1 Source: ONS, RPIX Excludes Mortgage Interest Payments -2 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11 Jan-13
  6. 6. Annual rate of RPI inflation accelerates in January. CPI &CPIY remain unchanged while core CPI inflation rate eases UK Inflation - CPI, Core CPI, CPIY and RPI % Y/Y 7 CPI CPIY MPC Target RPI Core CPI 6 5 4 3.3 3 2.7 2.3 2 1 0 -1 -2 Source: ONS; CPIY excludes indirect taxation e.g. VAT; Core CPI excludes Energy, Food, Alcohol & Tobacco -3 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13
  7. 7. UK inflation still rising at a faster rate than earnings andprolonging the income squeeze % UK Average Weekly Earnings & CPI Inflation 6 Ave Weekly Earnings 3m Y/Y % (Excl. Bonuses) CPI Y/Y 5 4 Income 3 squeeze 2.7% 2 1.4% 1 Does not include taxes Source: ONS or changes to benefits 0 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13
  8. 8. The annual rate of energy & food inflation has eased markedlysince peaks in 2008 & 2009 but it’s the cumulative impact… UK CPI Inflation Year-on-Year 50% Food & Non-Alcoholic Beverages Electricity Gas & Other Fuels Transport Fuels & Lubricants 40% 30% 20% 10% 4.5% 4.2% 0% -0.7% -10% Source: ONS -20% Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13
  9. 9. Since Aug-07 CPI has risen by almost 19% which compareswith a rise in average earnings of just over 10% Cumulative % Change in UK Consumer Prices since Credit Crunch began (Aug 07 to Jan 13) 70% Source: ONS, *Average Earnings as of November 2012 60% 50% 40% 30% 18.8% 20% 10% 0% Food & Food Electricity Transport Transport Total CPI Average Non- Gas & Fuels & Services Earnings* Alcoholic Other Lubricants Beverages Fuels
  10. 10. InternationalConsumer Price Inflation Comparisons
  11. 11. Inflation has been more pronounced in the UK than inthe Eurozone… Y/Y % UK CPI vs Eurozone HICP 6 UK CPI EZ 17 HICP 5 4 3 2 1 0 -1 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11 Jan-13
  12. 12. …and even more pronounced relative to theRepublic of Ireland % Y/Y UK CPI vs ROI HICP 7 UK CPI ROI HICP 6 5 4 3 2 1 -1 -2 -3 -4 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11 Jan-13
  13. 13. The RoI has gone from having the highest annual ratesof inflation to the lowest % Consumer Price Inflation (HICP) year-on-year 6 EZ UK RoI 5 4 3 2 1 0 -1 -2 -3 -4 Jan-01 Jan-03 Jan-05 Jan-07 Jan-09 Jan-11 Jan-13
  14. 14. Ireland has become the poster child of low inflation with theUK experiencing the highest rises outside of Eastern Europe EU-27 Cumulative % Rise in Consumer Prices (HICP) since August 2007 to December 2012 / January 2013* Ireland Germany Source: ONS, CSO, *January 2013 only for EZ & UK, all others December France Portugal EZ Sweden Netherlands Malta Denmark Austria Czech Republic Belgium Spain EU 27 Luxembourg Cyprus Slovenia Italy Slovakia Finland Greece UK Poland Bulgaria Latvia Estonia Lithuania Hungary Romania 0% 5% 10% 15% 20% 25% 30% 35% 40%
  15. 15. The UK has experienced a cumulative rise in consumerprices 7.5 times greater than the RoI since August 2007 UK & RoI CPI Inflation by Sub‐Category UK % Change  RoI* % Change  UK January 2013  RoI December  CPI by main categories Since August  Since August  % Y/Y 2012 % Y/Y 2007             2007             Food & non‐alcoholic beverages 4.2 1.6 34.4 1.1 Alcohol & Tobacco 8.5 2.8 37.5 11.6 Clothing & Footwear 0.2 ‐0.8 ‐13.7 ‐22.2 Housing & household services          3.5 4.3 30.2 5.9 (includes water & fuel) Furniture & Household Equipment 0.8 ‐2.8 16.8 ‐13.1 Health 2.2 0.2 16.5 13.6 Transport 1.3 3.6 23.4 6.7 Communication 3.5 ‐5.4 12.9 ‐1.1 Recreation & Culture 0.5 ‐0.7 3.6 ‐2.7 Education 19.7 4.8 71.1 37.1 Restaurants & Hotels 3.2 1.6 18.7 ‐1.2 Miscellaneous Goods & Services 1.4 3.3 13.3 15.8 Overall CPI 2.7 1.7 18.8 2.5 Source: ONS & CSO using HICP measure, *RoI is up to Dec‐12 not Jan‐13 as with the UK
  16. 16. UK Food & Drink prices have risen by over 1/3rd sincethe credit crunch whereas in RoI the figure is just 1% UK (NI) & RoI CPI Inflation Levels (HICP) (August 2007 = 100) 140 UK Food & Drink RoI Food & Drink +34.4% UK All Items CPI RoI All Items CPI No Change in Prices 130 +18.8% 120 110 +2.5% 100 +1.1% Source: ONS, CSO Ireland & UB Calculations, RoI figures up to Dec-12 90 Aug-07 Sep-08 Oct-09 Nov-10 Dec-11 Jan-13
  17. 17. After Hungary, the UK has posted the largest rise in food &drink prices (& the RoI the least) within the EU-27 since Aug-07 EU 27 Cumulative % Rise in Food & Drink Prices August 2007 to December 2012 (HICP) Ireland Portugal Source: ONS, CSO & Eurostat Spain France Greece EZ € Italy Netherlands Germany Sweden Luxembourg EU 27 Belgium Austria Slovakia Cyprus Denmark Slovenia Czech Republic Finland Bulgaria Poland Romania Estonia Lithuania Latvia Malta UK Hungary 0% 5% 10% 15% 20% 25% 30% 35% 40%
  18. 18. Food prices in the Republic of Ireland were no higher inNov 2012 than they were when the credit crunch began UK v RoI Cumulative % Change in Consumer Prices since Credit Crunch began (Aug 2007 to Nov 2012) 60% Source: ONS & Eurostat UK RoI 50% 40% 30% 18.8% 20% 10% 0% -10% Food & Non- Food Electricity Transport Transport All CPI Alcoholic Gas & Other Fuels & Services Beverages Fuels Lubricants
  19. 19. UK Oil, Petrol& Diesel Prices
  20. 20. The rise in petrol prices is squeezing disposable incomes UK Fuel Prices - Pence per litre (Weekly) 160 Source: ONS Petrol Diesel 148.0p 150 143.0p 140 135.6p 130 120 110 59% rise 100 90 85.4p 80 70 **Note Northern Ireland Prices are traditionally the highest of all UK regions** 60 Feb-04 Aug-05 Feb-07 Aug-08 Feb-10 Aug-11 Feb-13
  21. 21. Filling up an average family car with diesel now costsover £85. One of the side-effects of a weak currency £ UK Fuel Prices - Tank* of Petrol / Diesel (*60 Litres) 100 **Note Northern Ireland Prices are traditionally the highest of all UK regions** £88.8 90 £85.8 £81.3 80 70 59% 60 rise 50 £51.3 40 Source: ONS Petrol Tank Diesel Tank 30 Feb-05 Feb-06 Feb-07 Feb-08 Feb-09 Feb-10 Feb-11 Feb-12 Feb-13
  22. 22. It cost just £28 for a tank of fuel 20 years ago £ UK Fuel Prices - Tank* of Petrol / Diesel (*based on 60 Litres, monthly prices) 100 **Note Northern Ireland Prices are traditionally the highest of all UK regions** 90 80 70 60 50 40 30 Petrol Diesel Source: DECC 20 Jan-91 Sep-94 May-98 Jan-02 Sep-05 May-09 Jan-13
  23. 23. Remember it is the price of oil in sterling that matters £/$ pb Price of Brent Crude Oil in Dollars & Sterling Weekly 160 £pb $pb 140 120 100 80 60 40 20 Source: Bloomberg 0 Feb-06 Feb-07 Feb-08 Feb-09 Feb-10 Feb-11 Feb-12 Feb-13
  24. 24. It was £12.50 for a barrel of Brent crude 20 years ago.Now it is £75pb £/$ pb Price of Brent Crude Oil in Dollars & Sterling Weekly 160 £pb $pb 140 $118.9 120 100 £75.2 80 60 40 20 Source: Bloomberg 0 Feb-91 Oct-94 Jun-98 Feb-02 Oct-05 Jun-09 Feb-13
  25. 25. Forecourt petrol prices will broadly follow oil price (in £) Brent Crude Oil (in £) versus UK Petrol Prices Brent Crude £pb Pence per Litre 90 160 Brent Crude £pb (LHS) Petrol Prices Pence Per Litre (RHS) 80 140 70 60 120 50 100 40 30 80 20 60 10 Source: Bloomberg & DECC 0 40 Oct-03 Jul-05 May-07 Mar-09 Jan-11 Nov-12
  26. 26. UK Inflation Forecasts
  27. 27. Probability of an inflation overshoot has risen significantlysince the last Quarterly Inflation Report (Nov 2012) Probability of an inflation overshoot based on market interest rate expectations has risen throughout the forecast period Probability of CPI rising above 2% has risen significantly relative to November forecast throughout the forecast period Source: BoE QIR February 2013 Chart 5.5
  28. 28. The Bank of England expects UK inflation to remainabove its 2% target throughout the forecast period CPI inflation projection based on constant nominal interest rates at 0.5% and £375 billion asset purchases Overshoot of 2% target in 2 years time with a peak of @3.2% in mid-2013 Marginal CPI undershoot of 2% target in 2 yrs time 1.9% Source: BoE QIR February 2013 (November 2012) (February 2013)
  29. 29. BoE expects UK inflation to remain above its 2% target until2016 (i.e. 10 years of an annual average CPI overshoot) CPI inflation projection based on market interest rate expectations & £375 billion asset purchases 3 years of an overshoot Source: BoE QIR February 2013
  30. 30. CPI inflation set to average 2.7% in 2013 & 2.1% nextyear. RPI even higher at 3.4% in 2013 & 2.9% in 2014 UK Consumer Price Inflation Y/Y % Core CPI excludes Energy, Food Alcohol & Tobacco 8 Annual Growth Source: ONS & RBS Forecasts 7 CPI Core CPI RPI 2011 4.5% 3.2% 5.2% 6 2012 2.8% 2.3% 3.2% 5 2013 2.7% 1.8% 3.4% 2014 2.1% 1.4% 2.9% 4 3 2 1 0 Forecasts -1 -2 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 CPI RPI MPC Target Core
  31. 31. …with FBTE inflation averaging over 5% in 2013 &4% in 2014 UK Consumer Price InflationY/Y % *FBTE includes Food, Beverages, Tobacco & Energy18 Source: ONS & RBS Annual Growth CPI FBTE RPI15 2011 4.5% 8.4% 5.2% 2012 2.8% 4.3% 3.2%12 2013 2.7% 5.1% 3.4% 2014 2.1% 4.2% 2.9% 9 6 3 0 Forecasts-3 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 CPI RPI FBTE (CPI)
  32. 32. DisclaimerThis document is issued for information purposes only for clients of Ulster Bank Group who are eligible counterparties or professionalcustomers, and does not constitute an offer or invitation to purchase or sell any instrument or to provide any service in any jurisdictionwhere the required authorisation is not held. Ulster Bank and/or its associates and/or its employees may have a position or engage intransactions 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 publicationand are subject to change without notice. The information contained herein should not be construed as advice, and is not intended to beconstrued as such. This publication provides only a brief review of the complex issues discussed and readers should not rely on informationcontained here without seeking specific advice on matters that concern them. Ulster Bank make no representations or warranties withrespect 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 yourcircumstances. In the event the market has moved against the transaction you have undertaken, you may incur substantial costs if you wishto close out your position.Ulster Bank Limited Registered Number R733 Northern Ireland. Registered Office 11-16 Donegal Square East, Belfast, BT1 5UB. Authorisedand regulated by the Financial Services Authority. Member of The Royal Bank of Scotland Group.Ulster Bank Ireland Limited, a private company limited by shares, trading as Ulster Bank, Ulster Bank Group and Bank Uladh. Registered No.25766. Registered Office Ulster Bank Group Centre, George’s Quay, Dublin 2. Ulster Bank Ireland Limited is regulated by the Central Bank ofIreland. Member of The Royal Bank of Scotland Group.Calls may be recorded. Slide 32

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