• CPI rose from 0.2% in August to 0.5% in September
• CPIH rose from 0.5% to 0.7%
• Inflationary pressure came from used cars and airfares
• The end of Eat out to Help also pushed inflation up between August and September
• Too many inflations?
Laith Khalaf, financial analyst at the investment platform AJ Bell comments on the latest ONS CPI data:
“Inflation ticked up in September as the Eat out to Help Out discount expired and used car prices rose, as commuters looked to avoid public transport ahead of a winter where it looks like coronavirus cases might well continue to rise.
“Domestic fuel prices have fallen back a touch which provides some measure of relief for consumers, but for those who have seen their income dry up as a result of the pandemic it will feel like a drop in the ocean.
“Low inflation lightens the load on consumer wallets and means the low yielding cash that savers hold in the bank isn’t falling too far behind prices. But it also tells us the economy is stalling and means the Bank of England is more likely to loosen monetary policy to get inflation back to its 2% target.
“The Bank expects inflation to remain below 1% until the end of the year as a result of lower oil prices and the temporary cut to VAT. Oil is currently trading at $42 a barrel, down from $60 a barrel this time last year, which is helping to keep inflation down. As we enter spring of next year, we can expect oil to push inflation up for a brief spell in March and April, when comparative prices from this year dipped below $30 a barrel.
“Today’s inflation figure also feeds into the state pension triple lock, which is the highest of earnings, CPI or 2.5%. CPI and earnings haven’t made the grade this year so the 2.5% minimum kicks in. This demonstrates the value of the triple lock and at a time when young people in particular have been hit hard by the pandemic, will inevitably lead to more questions about its fairness.”
Too many inflations?
“At a time when we don’t have to ask whether we have too much inflation, we might pose the question: do we have too many inflations? The ONS likes CPIH, the Bank of England targets CPI, and around £450 billion of government debt is tied to RPI. Indeed the government is currently mulling over a proposal to adjust the calculation of RPI, which would result in it being around 1% a year lower over the long term.
“While this may seem a fairly arcane academic discussion, it could have wide-ranging ramifications for investors and pensions savers. Some pension funds use RPI to determine what annual increases to give members and anyone who has bought an inflation-linked pension annuity also has their payments uprated each year in line with RPI and won’t be best pleased if they’re scaled back as a result of technical misgivings about RPI.
“On the other side of the coin, rail fares and the interest on student loans is calculated with reference to RPI, so commuters, students and graduates will celebrate anything which keeps RPI in check. The decision is due this autumn, so watch this space.”
