13th February 2013 by The Harried House Hunter
UK consumer price inflation was stable at 2.7% in January but the forecast here remains for it to rise to more than 3.5% by mid-year and hold above 3% into 2014.
Sustained above-target inflation in recent years reflects a combination of a stubborn core trend and upward pressure on energy and food prices due mainly to rising emerging-world demand. Both should persist.
Core inflation can be measured by the annual change in the CPI excluding energy and unprocessed food adjusted for VAT changes and last year’s hike in undergraduate tuition fees. This was an estimated 2.3% in January and has been above 2% in 54 of the last 57 months – see first chart. Core inflation is expected to firm later in 2013 and in 2014 in lagged response to stronger money supply growth, based on the Friedmanite forecasting rule discussed in previous posts.
The near-term rise in inflation, however, will be driven by energy / food. Assuming no change to the current wholesale price, unleaded petrol should climb from 132 pence per litre in January to about 138 pence – second chart. Household energy bill inflation will increase further as tariff cuts in early 2012 drop from the annual comparison. Food price inflation may rise from 4.5% in January to 6-7% as higher input costs are passed on – third chart.
Energy and food are included in the CPI goods index, which should also capture most of the impact of recent exchange rate weakness. CPI goods inflation is forecast to rise from 1.9% in January to about 3.5% by mid-year, a scenario supported by CBI industrial firms’ price expectations – fourth chart. With goods accounting for 53% of the basket, this would be sufficient to lift the headline CPI rate to 3.5%, assuming stable services inflation.