From the TUC

Zero inflation and still reducing core inflation. To repeat: deflationary pressures are not just about fuel

14 Apr 2015, by in Economics

For once CPI inflation was in line with market expectations, remaining at zero per cent for the second month in a row. 

But this unchanged reading simply followed because fuel prices were not as low in March as they were in February, falling by -13.7 per cent on the year rather than -16.6 per cent. The balance of pressures outside of fuel were clearly to the downside.

To capture this kind of effect statisticians derive so-called core inflation figures, or strictly ‘all items CPI excluding energy, fuel, food and alcoholic beverages’. In  March core inflation fell to 1 per cent from 1.2 per cent in February. A year ago core inflation was 1.7  per cent, and the trend is clearly steadily downwards. Looking at a longer run of figures on the chart, core inflation was last lower in 2006 (and only just, at 0.9 per cent for one month only).

Consumer price inflation, per cent

ppi_cpi_mar15

Moreover core inflation now (unlike in 2006) still includes the working through of the large increase in student fees (as discussed last month). This accounts for 0.2 percentage points of headline CPI inflation (and a little more of core inflation, given education is a bigger share of a smaller basket). Without education core inflation would be around 0.8 per cent, below the ‘open letter’ threshold and only just above the euro area core rate of 0.6 per cent. Even those who are sanguine about UK deflationary pressures are worried about the position in the euro area, when really there is very little difference (though plainly the conditions for some countries within the euro area are more extreme).

Confirming these underlying disinflationary trends are producer price figures, also released today.  Producer prices are measured from the output perspective (what factories sell for) and input perspective (what they pay for materials). From both perspectives, on a headline basis, prices are falling, though as with the CPI less so in March. But again on an underlying ‘core’ basis the figures show increasing disinflationary (in the case of output prices) or deflationary pressures (input).

Producer price inflation, per cent

ppi_ma515

The reality is deflationary pressures are intensifying. It is complacent to ignore this fact and to see only good news in the figures.