The Office for National Statistics (ONS) has released its latest report on the persistence of consumer prices inflation in the UK economy. This report analyzes the underlying trend rate of inflation and explores how certain factors contribute to the consistency of inflation rates.
Main Points
The persistent component of consumer prices inflation refers to the part of inflation that is common to all goods and services in the Consumer Prices Index including owner occupiers’ housing costs (CPIH). This can be considered as the general underlying trend or core inflation rate across the entire economy.
As of the 12 months leading to July 2023, the persistent or common inflation component of CPIH was 6.8%. While the overall CPIH inflation rate reached its peak in October of the previous year and had declined to 6.4% by July 2023, the persistent component of inflation has taken longer to follow suit, resulting in a smaller decrease in the overall inflation rate.
The inflation rate within the “restaurants and cafes” category has been identified as a reliable measure of the underlying trend in consumer prices inflation in the UK economy.
Among the 87 classes of goods and services that constitute CPIH, there is an evident inverse relationship between items that display relative inflation persistence and those that display relative inflation volatility.
Estimation of Persistent Inflation Component
The ONS employs a unique approach to measuring inflation persistence, closely related to the concept of core inflation. Unlike excluding volatile components like food and energy, the ONS identifies inflation persistence as the underlying trend inflation rate across all goods and services in the CPIH.
The report outlines the methodology used to estimate the common component and individual component of inflation for each good or service, based on the observed and common trend inflation rates.
Results
The estimate of the common component of inflation in the CPIH index shows a steep rise, peaking at 7.3% in May 2023 before falling to 6.8% in July 2023. On the other hand, the all-items rate reached its peak at 9.6% in October 2022 and had fallen to 6.4% in July 2023. The report notes that the underlying inflation rate in the UK economy, as represented by the common component, has been slower to decline compared to the headline all-items inflation rate.
Additionally, the report lists the items with the highest and lowest signal-to-noise ratios, indicating their association with the common underlying trend rate of inflation. Items like restaurants and cafes, housing services, and personal and recreational services show a strong correlation with the common component, while energy-related items and data processing products exhibit low signal-to-noise ratios.
Conclusion
The ONS’s exploration of inflation persistence offers insights into the factors driving inflation trends in the UK economy. By identifying the common component of inflation and examining its relationship with various goods and services, the report provides a deeper understanding of the underlying inflationary pressures.