Today has brought some good news on the inflation front for the UK, so let us get straight to it.
The Consumer Prices Index (CPI) rose by 4.0% in the 12 months to January 2024, the same rate as in December 2023.
In itself a 4% inflation rate is nothing to shout about of course. But there was a reason to expect a rise this month and it comes from establishment incompetence. Regular readers will know that wholesale natural gas prices have been on the decline this winter but the UK system of a quarterly cap brought a 5% rise in domestic fuel prices in January. This means that there was a 0.2 bump in the CPI inflation measure due to this. So we have negotiated that with no effect on the annual rate and we know that in April there will be a 0.6 or so fall due to the expected change in domestic fuel prices then. So if we skip the establishment incompetence on energy prices the prospects for annual inflation to fall looks good.
In fact we had monthly disinflation as we look deeper into the figures.
On a monthly basis, CPI fell by 0.6% in January 2024, the same rate as in January 2023.
Or if you prefer.
The all items CPI is 131.5, down from 132.2 in December.
The Breakdown
It starts with the energy news and then moves to something rather welcome about food prices.
The largest upward contribution to the monthly change in both CPIH and CPI annual rates came from housing and household services (principally higher gas and electricity charges), while the largest downward contribution came from furniture and household goods, and food and non-alcoholic beverages.
We have been waiting for a monthly fall and finally it has arrived.
Monthly prices for food and non-alcoholic beverage fell by 0.4% between December 2023 and January 2024, compared with a rise of 0.6% a year ago. Monthly prices for food (excluding non-alcoholic beverages) also fell by 0.4%. This was the first fall in monthly prices since September 2021, and the largest fall since July 2021.
One might reasonably ask why it has taken so long? For example if we look at world wholesale food prices there are exceptions ( cocoa prices have been bad news for chocoholics) but the trend has been lower for around a year.
The FAO Food Price Index* (FFPI) stood at 118.0 points in January 2024, down 1.2 points (1.0 percent) from its revised December level, as decreases in the price indices for cereals and meat more than offset an increase in the sugar price index, while those for dairy and vegetable oils only registered slight adjustments. The index stood 13.7 points (10.4 percent) below its corresponding value one year ago.
One factor in play here has been loyalty cards as the prices there do not count for the inflation figures as the prices counted have to be available to everyone. So for example the loaf of Co-op farmhouse bread goes into the inflation numbers at the 85 pence I paid on Sunday as opposed to the 76 pence that members pay.
If you are wondering what particular items fell in price we do get some detail.
The easing in the annual rate for food and non-alcoholic beverages was driven by “bread and cereals”, where prices fell by 1.3% on the month, compared with a rise of 0.2% a year ago. The monthly fall was the largest since May 2021; some of the items providing larger negative contributions in this class were cream crackers, sponge cake, and chocolate biscuits.
Chocolate biscuits are an interesting one as I notice that the discount supermarkets have dropped their versions of dark chocolate ones.
Also I wonder how much of an influence the weaker retail sales numbers in December had on this?
The decrease in the annual rate was mainly the result of downward effects from furniture and furnishings, where prices fell by 5.2% on the month, the largest monthly fall since January 2020. Some of the items that contributed larger downward effects were kitchen base and wall units, leather settees, and dining tables and chairs.
Bank of England
Whilst this was welcome news a couple of policymakers at the Bank of England may well be hiding in its cellar today.
Two members (Jonathan Haskel and Catherine L Mann) preferred to increase Bank Rate by 0.25 percentage points, to 5.5%.
It has not been the best of days for this part of their worldview.
These members continued to judge that there was evidence of more persistent inflationary pressures than included within the forecast.
Although no doubt soon they will be back to argue that lower inflation does not matter on their er inflation views.
Although headline inflation had fallen by more than had been expected, this was not necessarily informative about inflation persistence
I can take that further for the Bank of England as a whole. Let me explain via the November Monetary Policy Report which confessed that inflation forecasts had been too high.
This was 0.3 percentage points below the August Report forecast.
Actually they were wrong again as we ended the year at 4%.
Inflation is expected to fall to 4.8% in October and remain around that level for the rest of the year.
They were wrong about January too although the error was smaller. My point here is not any individual error as no-one is always exactly correct but rather that they have been consistently too high suggesting yet another forecasting failure. That of course begs the question of what has happened to the forecasting review that is being led by Ben Bernanke.
From the point of view of interest-rates was the last rise to 5.25% necessary if they had more accurate forecasts? This is even worse news for those who voted for a rise to 5.5%.
Retail Prices Index
There was some especially good news here as the headline number fell.
The all items RPI annual rate is 4.9%, down from 5.2% last month.
As you might expect from that we saw quite considerable monthly disinflation.
The all items RPI is 378.0, down from 379.0 in December.
That is welcome on two main fronts and the first is that via its measurement of housing inflation it remains our best guide to the cost of living. Secondly on the tactical it has a higher weight for domestic energy ( roughly double CPI) and thus had more upwards pressure from the January increase.
Comment
If we now switch to looking ahead then the situation looks set for further falls in inflation. I have already mentioned the impact of the likely lower domestic fuel prices in the April release. Now we can add to that the hints of the future path from the producer price numbers.
On a monthly basis, producer input prices fell by 0.8% and output prices fell by 0.2% in January 2024…….
In fact that series has disinflationary pressure pretty much everywhere you look.
Producer input prices fell by 3.3% in the year to January 2024, down from a revised fall of 2.1% in the year to December 2023.
Producer output (factory gate) prices fell by 0.6% in the year to January 2024, down from a rise of 0.1% in the year to December 2023.
I have seen some mentions of motor insurance costs and their influence on inflation so let me do a quick explainer.
UK CPI has net premiums
UK RPI has gross premiums ( what you actually pay)
Thus inflation has been higher via the RPI as it reflects reality in my view. If you pay your premium it is no use to you that someone in the next street gets a payout and that is subtracted from the numbers.
Notayesmanseconomics's Blog 
Hi Shaun
Great article as always.
Is it me or has the narrative been carefully managed. During the last month the narrative was that inflation would be down and interest rates would be cut to save the housing market.
And yet at the weekend the narrative changed. It was inflation up and GDP is in a recession. And now miraculously inflation is steady. Hurrah 8% annual food inflation is great.
Are we yet to see a recession being avoided on thursday with a 0.000001% increase in GDP? Deficit spending of 124bn to achieve a flat line economy is now considered a win. Sad times.
Hi Anteos and thank you
There are lots of questions about fiscal policy. In the Covid times we spent a fortune to save the economy and since then we have only grown by a little bit. So what exactly did we save? Oh and we pumped up inflation as well.
A lot of the issue is Forbin’s point about energy where we have crippled our economies with energy policies that make us uncompetitive
Crackers.
Indeed.
I told you all on here how they were going to play this, say inflation has come down to 2% as the cover for cutting rates, I was wrong!
They are going to cut rates IN ANTICIPATION of inflation going to 2%!!! when it is even by their fiddled fantasy world figures precisely DOUBLE THAT!!!!
I don’t care what the official lies come out with as the current rate, all I know is that I see ZERO evidence of prices slowing their increase in my world, myself and many others on here have shown examples of massive increases still occurring, and I believe there are still huge price pressures still in the system that haven’t come through yet.
And yet we STILL have the highest inflation of the G7 countries(as a consequence of doing the most money printing) and now we have to reflate the housing market to try and prevent the tories from being wiped out at the next general election, so much for independence of the Bank of England.
BOE indicates BOE not ready to reduce rates yet..
https://www.bbc.co.uk/news/business-68285819
Yes, a similar line in The Guardian
“. The governor said the Bank’s monetary policy committee – the nine-member body that sets interest rates – wanted to see more evidence of a cooling in wage rises before acting. It was likely pay bargainers would ask for smaller increases as inflation came down,…”
With the emphasis on targeting wage growth.
Oops , forgot the link
https://www.theguardian.com/business/2024/feb/14/uk-inflation-cost-of-living-crisis
The fact that furniture is now negative is a warning that discretionary sending is being squeezed as more people come off fixed rates. As you say BoE too rear view looking but this is potentially a precursor to wider drop in activity. What forward indicators to BoE look at to avoid being caught behind the curve on the way down
THe Halifax house price index.
For believers in the Net Zero conspiracy, climate hoax, and wind power con, this is catnip:
https://www.zerohedge.com/political/britains-net-zero-disaster-wind-power-scam
Hi Kevin and thank you for the link.
Great blog as usual, Shaun.
As you say, the RPI is the best monthly guide to cost-of-living increases in the UK, largely because of its treatment of owner-occupied housing. If one makes a 0.6 percentage point correction for the formula effect, it shows a fall in the annual inflation rate from 4.9% in December to 4.5% in January. Unfortunately, the HCI no longer seems to be a suitable replacement for it, now that it seems the ONS management no longer seems to show any interest in including equity payments on owner-occupied housing in the HCI.
This month the annual CPI inflation rate for package holidays was 11.5% in January 2024, up from 10.8% in January 2023. This does not mean what one would think it means. The 12-month inflation rate for January 2024 actually measures the inflation rate for fiscal year 2023 as compared to fiscal year 2022, with the fiscal year running from February to January. So the annual inflation rate for fiscal year 2023 picked up from the annual inflation rate for 2022. Except for the January annual inflation rates, which are obviously badly out of place in the CPI, and mean that changes in holiday price inflation are only incorporated with a lag in the index. The other annual rates really don’t mean much. They are basically just accounting entries on the way to calculating the January inflation rates.
This really should be the last year that this dysfunctional approach to calculating holiday inflation is used. Paul Johnson wrote it should be a priority for reform many years ago in his CPI manual. I think the ONS is discouraged from acting due to the very real difficulties in going to an ideal seasonally weighted index from what they already have. The main problem would be the incorporation of a seasonally weighted index in a CPI that has no other seasonally weighted components. In the long run the whole CPI could be calculated as a seasonally-weighted index, with additional seasonal components for food, clothing, etc. and with the same monthly weights for non-seasonal components. In the short run, the answer may be to do something like what the Irish Central Statistical Office does for holiday trips, where it is the ONLY seasonal component. It is hardly ideal, but it is a seasonally weighted index without the unacceptable lag to be found in the current British series. It would get the ball rolling, and it would be better than what is there now. When it is done everyone could crack open a Guinness or a Smithwick’s to celebrate.
Hi Andrew and thank you.
I can say that I will do my best to keep the housing equity component in the HCIs and believe that Jill Leyland and John Astin are onboard with that. As to the ONS an effort to stop this is as predictable as their efforts/excuses to avoid producing monthly numbers.
Why do you think that they do that with package holiday inflation? Also what purpose do the numbers produced in the other 11 months serve?
Thank you very much for your reply, Shaun. I really appreciate that you are still working to put equity payments into the HCI series.
For the holidays index, the way it works is that each month from February 2023 to December 2023 is an intermediate step in calculating the final calculation of the annual inflation rate for fiscal year 2023. In February they would calculate the 12-month change for February 2023, while the 12-month changes for the other months would be assumed to be nil. For March 2023, the 12-month inflation rate for that month would replace the nil change assumption used in the February calculation, and so forth. Finally, in January 2024, the 12-month inflation rate for January 2024 would click in place, and the calculation would be complete. However, since each month is weighted differently you can say something about the sign of the 12-month change, but not its magnitude. So it would be correct to say that the 12-month inflation rate for February 2023 was positive since there is a monthly change of 0.7% in the CPI for holidays, but it would generally be incorrect to say that this indicated a 12-month rate of change of around 8½%, since this would assume the January weight was around one twelfth, consistent with equal weighting, which isn’t necessarily true. I wrote a paper on the subject in August 2014 called “Time to Start Calculating the Holidays RPI as Originally Planned.” I would still stand by virtually everything in that paper except I think I oversold the existing seasonal-weighting approach used for fresh fruit and vegetables in the RPI, which was not ideal, although it was better than what got implemented for holiday trips.
I am a little puzzled nothing has been done on this already. One of the great experts on seasonal weighting in the world, the Dutch economist Bert Balk, was on one of the advisory committees. Why didn’t the ONS take advantage of his expertise?