WIREDGOV

According to ONS figures released this morning, consumer price index inflation rose by 0.1 percentage points to 2.5 per cent in the year to July 2018. Our new analysis of the prices of the 135,779 goods and services included in the consumer price index this month suggests that this increase was driven by idiosyncratic factors as the underlying rate of inflation has fallen.

Main points

• Underlying inflation fell by 0.2 percentage points to 1.0 per cent in the year to July 2018, as measured by the trimmed mean, which excludes 5 per cent of the highest and lowest price changes (figure 1).
• At the regional level, underlying inflation was highest in the South West at 1.4 per cent in the year to July 2018 and lowest in Yorkshire and the Humber at 0.6 per cent (figure 2).
• 19.1 per cent of goods and services prices changed in July, implying an average duration of prices of 5.2 months (figure 3). Of the prices that did change, 6.2 per cent were decreases due to sales, which is the lowest for the month of July since 2012; 4.2 per cent were decreases due to other reasons, which is an increase on the previous month this year and the same month last year; and 8.7 per cent were increases, which is the lowest for the month of July since 2015.
• The relationship between current trimmed mean inflation and future CPI inflation implies CPI inflation of 2.1 per cent in the year to July 2019.

Dr Jason Lennard, Senior Economist, said: “CPI inflation rose slightly in the year to July 2018. However, our analysis of the prices of the 135,000 goods and services included in the CPI basket suggests that this increase was driven by idiosyncratic factors. Trimmed mean inflation, which is a measure of core inflation that excludes a fraction of the most extreme price changes, fell by 0.2 percentage points to 1 per cent. This measure of core inflation fell in 10 of the 12 regions of the United Kingdom. The fall cannot be explained by the summer sales, as the fraction of goods and services at sales prices was the lowest since 2012. The fall is instead explained by more non-sale price decreases and less price increases. Based on this analysis, CPI inflation is set to return to the 2 per cent target over the year ahead.”

This analysis builds on the work presented in the latest NIESR Review , which constructs a measure of trimmed mean inflation based on the full basket of goods and services prices that underlie the consumer price index.

Our next analysis of consumer prices will be published on 19 September.

Figure 1- CPI and trimmed mean inflation

Note: Our measure of trimmed mean inflation excludes 5 per cent of the highest and lowest price changes. The level of trimmed mean inflation is typically lower than CPI inflation due to differences in how the largest price changes are treated and to how the prices are weighted.

Figure 2 - Regional trimmed mean inflation

Note: Our measure of trimmed mean inflation excludes 5 per cent of the highest and lowest price changes.

Figure 3 - Decomposing price changes: Decreases due to sales, decreases due to other reasons and increases

Notes for editors:

For further information and to arrange interviews, please contact the NIESR Press Office:
Paola Buonadonna on 020 7654 1923 / p.buonadonna@niesr.ac.uk

NIESR aims to promote, through quantitative and qualitative research, a deeper understanding of the interaction of economic and social forces that affect people's lives, and the ways in which policies can improve them.

Further details of NIESR’s activities can be seen on http://www.niesr.ac.uk or by contacting enquiries@niesr.ac.uk . Switchboard Telephone Number: +44 (0) 207 222 7665