A must read new study from the New Economics Foundation looks at the headline negative inflation figures now circulating:
“Latest UK inflation figures have been greeted with an extraordinary amount of fuss. A 0.1% decline in the rate at which prices are increasing is not, by itself, especially newsworthy. But of course the symbolism of hitting a 2% rate matters. It means the Bank of England’s inflation target has, for the first time since late 2009, been achieved.
“Leaving aside the politics around this arbitrary target, there are three things to note here. First, the cost of living crisis is not over. Prices are still rising much faster than wages and salaries. Inflation is 2%. Average earnings, however, have risen less than 1%. In other words, the real value of people’s wages and salaries is still falling. Most people are still becoming steadily worse off, as they have been for the last five years. The figures for December also miss out the sharp rises in household energy bills, which will feed into next month’s numbers.
“Second, the fall in inflation has little to do directly with the government’s actions. The biggest reason for the decline in the overall rate of inflation was a fall in the rate of price increases for food and drink, down from 2.8% to 1.9% over the year. But Britain is a huge importer of food, buying some £20bn more from abroad than it sells to the rest of the world. The prices we see in the shops are to a large extent determined by what is happening internationally. And with the pound rising in value over the last few months, the price of importing food has declined. Alongside that, after years of sharp increases, the prices of basic food commodities like wheat and sugar have fallen globally over the last year.
“Third, there’s an unusual danger lurking underneath this. Strip out food, drink, and energy prices from the headline inflation and you get a measure of what is often called “core” inflation. This excludes those items that are most affected by pretty contingent, day-to-day factors to try and get a sense of where the underlying economy is heading. Core inflation, currently, is 1.7%, having fallen from 1.9%.”
Read the full report on the NEF website: