What’s happening with inflation?

Inflation stabilising

According to the ONS, “all items” inflation has risen marginally, up from 2.0% year-on-year in June to 2.2% in July, when measured by the CPI method (the method used when setting government inflation targets).

This supports IGD’s view that inflation is now stabilising after a long period of decline. A major reason is that deep cuts in the cost of fuel and household utilities are now exiting annual comparisons.

The bulk of remaining inflation pressure – about 80% - is being exerted by services. The cost of services rose by 5.2% in July (versus 5.7% in June). This category includes eating out, travel and communications.

Labour is a key cost in providing services and, in many instances, it is hard to achieve scale efficiency or increase productivity, so delivering more services requires more labour input.

Wages in the services sector are currently rising by about 4.3% year-on-year. Ongoing high wage growth in services is a key force driving inflation across the economy and, therefore, delaying interest rate reductions.

In contrast, goods inflation was slightly negative in July, down 0.6%. This category includes food and drink, clothing, household goods and other tangible items.

Retail food and drink inflation has declined from 19.1% in April 2023 to 1.5% in July 2024. Eating out inflation is more persistent, standing at 5.1%.

How inflation is measured

The ONS offers several measures for consumer inflation, but they are calculated in a similar way. Raw data comes from a national sampling effort, collecting prices every month, in the field and online.

Sampling is controlled via a system of fixed baskets meant to reflect typical household expenditure. Each item has a weighting (points out of 1,000), showing its relative importance.

Price change for each sample item is used to calculate inflation month-on-month and year-on-year. Items with higher weights have more influence when inflation is calculated.

Sample baskets are revised annually, with items added or removed and weightings are also revised annually. The sample is therefore consistent month-to-month, but not necessarily year-to-year.

(Note that at present, prices for food and drink are gathered via sampling but, from 2025, the ONS plans to switch to retailer scanning data. At time of writing, detail is still to be confirmed).

The table below shows the sample items used in the inflation basket for catering services in 2024 – each one will have tight specifications, to ensure that data remains consistent month-to-month.

Inflation: influence of the food system

In the ONS 2024 CPI methodology, food and drink bought at retail is allocated 113 points out of 1,000, with alcohol and tobacco adding a further 39. Catering services are worth 114.

As stated, in July, inflation for food and drink bought at retail was 1.5% year-on-year. This means that price change in this market is contributing less than one-tenth of all items inflation.

Inflation for alcohol and tobacco was 7.3%, contributing around one-tenth.

However, catering services (i.e. eating out) saw inflation of 5.1%, with inflation here being more persistent. Price change in this market contributed about a quarter to all items inflation.

Consumers may be able to avoid the impact of this by moving out of the market, at least to some degree – and IGD’s ShopperVista data shows that at least some are choosing to do this.

IGD opinion

Both businesses and households would benefit from lower interest rates, which would reduce debt repayments and allow for higher spending and investment.

However, interest rates will not be cut until the inflation pressure coming from services is under firm control.

Given the influence of the eating out market in driving overall inflation, the Bank of England may be expected to watch price change in the eating out market closely when making its decisions.