The rate of inflation in the UK has increased again this month. Rising energy bills and hikes in the cost of petrol continue to play a large part in driving up the overall rate, as does continued high demand for secondhand cars.
Inflation continues to rise in the UK. The latest data from the Office for National Statistics (ONS) reveal that the consumer price index (CPI) – a measure of changes in prices for goods and services – is 5.5% higher than a year ago. This is higher than the December 2021 figure (5.4%) and is the highest it has been since the ONS started recording this series in January 1997.
Covid-19 has had a lasting effect on inflation levels. Significant short-term changes in prices that occurred during the lockdown period (known as base effects) resonate in the data today, long after the strictest rules have been eased. The prices of goods and services that were cut sharply during lockdown are now getting back to ‘normal’, and this change is contributing to the high overall inflation rate.
Figure 1: Annual inflation rates (January 2012 to January 2022)
There are several ways of measuring how prices are evolving. But what do these different rates reveal?
According to the latest data, the consumer prices index including occupiers’ housing costs (CPIH) rose to 4.9% in the last 12 months to January. This is compared with 4.8% in the year to December 2021. Within this measure, rising housing and household services costs contributed most to the 12-month rate at 1.37 percentage points (see Figure 2, turquoise bars).
Figure 2: CPIH contributors (January 2020 to January 2022)
This was due, in part, to the revision of the cap on energy prices set by the Office of Gas and Electricity Markets (Ofgem) in October 2021. Ofgem has increased the price cap by 12% since the last revision in April 2021 because of a rise in energy costs of more than 50% over the last six months. This contributed to rising housing costs, as people’s bills increased sharply.
Prices from transport have shown the most variation since the start of the pandemic. The range of contribution to inflation has fluctuated from 0.2 percentage points at the start of the first lockdown to 1.34 percentage points in November 2021. Significant changes in petrol prices are partly responsible – these jumped to 145 pence per litre (ppl) in January 2022, from 117 ppl 12 months earlier. In November and December 2021 average petrol prices reached their highest recorded level, at 146 ppl.
Buoyant demand for secondhand cars has also driven prices up. In January 2020, at the start of the pandemic, secondhand cars were getting cheaper (a downward effect of 0.07 percentage points). This changed to an upward effect of 0.15 points in October of that year, perhaps due to people choosing not to use public transport because of fear of infection.
Semiconductor shortages also had an effect, limiting the supply of new vehicles, which include a lot of chips. This further increased demand for used cars. Together, these factors resulted in price increases for secondhand cars contributing 0.35 percentage points to the overall inflation rate (the largest recorded) in January 2022. This was up from only 0.1 percentage points in April 2021.
Figure 3: Contributions to change in the CPIH 12-month inflation rate (December 2021 to January 2022)
How has the breakdown of inflation changed since December? ‘Clothing and footwear’ stands out as an outlier (see Figure 3). The data show that the price of clothes and shoes has increased the rate by 0.14 percentage points between December 2021 and January 2022. Some of this may be due to shops putting up prices following sales. Other notable contributors to the overall change were housing and household services (0.06 percentage points) and furniture and household goods (0.04 percentage points).
The Bank of England has an inflation target of 1-3%. This is not being met at present, and it is natural to wonder what the central bank’s plan of action might be. There is pressure to raise interest rates to try to tackle inflation. In fact, earlier this month, the Bank of England adjusted the Bank Rate (the UK’s most important interest rate) from 0.25% to 0.5%, the second increase in under two months.
Continued inflation will have widespread effects across the economy, squeezing wages and pushing up costs. With many experts anticipating that inflation will reach over 7% in the spring, and nearly half of the members on the Monetary Policy Committee (MPC) opting for an increase to 0.75% in the last vote, further increases in interest rates are probable.
Where can I find out more?
- The latest ONS inflation data can be found here
- The Bank of England Monetary Policy summary (Feb 2022) can be found here
- What to expect from inflation throughout 2022 and beyond: NIESR blog by Huw Dixon
Who are experts on this question?
- Jagjit Chadha
- Richard Davies
- Huw Dixon