Economics

Study Notes

UK Inflation - Building Questions Around the Data

Level:
AS, A Level, IB
Board:
AQA, Edexcel, OCR, IB, Eduqas, WJEC

The annual rate of CPI inflation for the UK economy was 3.0% in the twelve months to December 2017. The number itself makes the headlines but what other questions could we build around it to broaden the discussion and improve evaluation?

UK CPI inflation

Digging beneath the published number

  1. Is the published CPI measure accurate? What are the pitfalls in the current calculation of the consumer price index?
  2. Is the recent rise in CPI inflation a temporary movement - for example accentuated by the lagged effects of the recent depreciation of sterling (which makes imports more expensive priced in £s) - or are we about to have a period of average target inflation that the Bank of England may want to address through changes in interest rates?
  3. How high in UK inflation relative to that of our trading partners?
  4. Does a pick-up in the annual rate of inflation from 2% to 3% affect in any significant way the decisions that businesses take about planned investment and employment?
  5. Have wages kept pace with rising prices? What is happening to real wages in the UK labour market?
  6. Are the main causes of the increase in inflation domestic in origin? Or are they mainly the result of external factors such as world energy / food prices over which the Bank of England has little or no control?
  7. To what extent is the 3.0% inflation rate one that is experienced by different groups of households in the UK? What is the inflation rate for a pensioner couple, or single parent family?
  8. Are there significant regional variations in the changing cost of living not picked up by a national figure?
  9. Is there a gap between the published (actual) rate of inflation and inflation expectations among the general public?
  10. How much further can the UK unemployment rate fall before the labour market starts to generate cost-push inflationary pressures through a pick-up in wages and unit labour costs?

The latest inflation projections from the Bank of England suggest that CPI inflation will fall back below 3% in the coming months. The Bank of England decided recently to nudge the base rate of interest up to 0.5% from 0.25% but they appear to be relatively confident that current monetary conditions will be sufficient for inflationary pressures to be kept under control.

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