Economics: UK inflation remains low, for now

Date : 25 March 2021

Data for February 2021 shows that inflation remains muted at +0.7% year-on-year for all items (measured via the CPIH method, which includes owner-occupier housing costs).

So far, there is little sign of the strengthening inflation predicted by the Bank of England and the Office for Budget Responsibility for 2021.

Prices for certain items remain strongly negative, especially clothing and footwear. This benefit – for shoppers - is being offset by modest price increases in other areas, especially housing costs and motor fuel.

Rising prices for motor fuel are especially important, since lower fuel prices have helped to support the spending power of some hard-pressed households over the last year.

Petrol prices are now higher than they have been since the beginning of the Coronavirus emergency and this will affect more people as the government “roadmap” is implemented and “normal” conditions return.

Food and drink costs fell by 0.6% year-on-year, in spite of continuing good volume demand growth. Competition between retailers evidently remains extremely strong.

Average weekly pay data from ONS suggests that pay is up by about 4% year-on-year, which indicates that workers are significantly getting better-off, in “real terms”.

However, data on pay should be used with caution – it is affected by “compositional effects” within the sample population.

It is likely that job losses and furlough amongst lower-paid workers are distorting outcomes and showing an artificially high figure for pay change.

A more accurate gauge of the financial position of households may be consumer confidence. Measures such as the GfK index and IGD’s own Shopper Confidence Index suggest that shoppers remain cautious, although confidence has risen noticeably since the Autumn.

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