{"id":14031,"date":"2021-08-18T16:54:58","date_gmt":"2021-08-18T15:54:58","guid":{"rendered":"https:\/\/www.economicsobservatory.com\/?post_type=question&p=14031"},"modified":"2021-09-17T13:14:22","modified_gmt":"2021-09-17T12:14:22","slug":"inflation-do-the-latest-data-suggest-it-will-be-temporary","status":"publish","type":"question","link":"https:\/\/www.economicsobservatory.com\/test\/inflation-do-the-latest-data-suggest-it-will-be-temporary","title":{"rendered":"Inflation: do the latest data suggest it will be temporary?"},"content":{"rendered":"\n

The UK\u2019s headline measure of inflation, the Consumer Prices Index including homeowner costs (CPIH), increased by 2.1% in the 12 months to July 2021<\/a>. This was down from 2.4% in June and reversed a four-month upward trend in price pressure.<\/p>\n\n\n\n

Prices of women\u2019s clothing and computer games fell in summer sales, with three quarters of the sections\u00a0in the basket of goods and services measured falling overall. Clothing sales\u00a0in stores were wiped out by the pandemic last year, so a return to normal discounting this summer amplified their negative contribution to prices.<\/p>\n\n\n\n

Of the prices that rose, the key driver was transport, which saw its biggest upward contribution to inflation in a decade. In July, petrol prices reached their highest level since 2013, while\u00a0during the baseline period last year, prices were still recovering from reduced demand during the first wave of the pandemic. This so-called \u2018base effect\u2019 led to a high growth rate of fuel prices.<\/p>\n\n\n\n

Second-hand cars also drove transport prices up this month. Traditionally their prices fall during the summer, but a global semiconductor shortage has held back car production, pushing people who would have purchased a new vehicle into the second-hand market. Higher demand has been met with lower supply too. A fall in purchases of new cars last year means there are less one-year old cars available in 2021.<\/p>\n\n\n\n

Out of sync<\/h3>\n\n\n\n

Used car and petrol prices have risen even further in the US this year, which helps to explain the divergence between UK and US inflation (2.4% versus 6.4% in June, respectively). Figure 1 below shows second-hand car prices rose 41.7% in July in the US compared to only 14.3% in the UK. Common factors for these price rises include semiconductor scarcity for new cars, the reopening of dealerships and a reduced preference for public transport.<\/p>\n\n\n\n

Several specific factors are at play in the US. These include three rounds of Federal stimulus cheques, totalling $11,400 for a family of four, paid over the past 12 months to April this year; and rental car companies that sold off their fleet in 2020 (depressing prices) now buying back swiftly. Lower fuel duty in the US also means that while prices have gone up similarly in both countries, the proportional increase in pump prices (duty plus fuel price) has been much higher in the US.<\/p>\n\n\n\n

Figure 1: Second-hand cars 12-month percentage price growth in the UK and Unites States<\/h4>\n\n\n
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