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Key trends: inflation

Inflation affects us all, one way or another. It lowers the value of money, and it's key to the cost of cash – otherwise known as the level of interest rates. Find out what each indicator suggests for UK inflation using the tabs below.

The UK bank rate

If the UK's bank rate (what we all used to call 'base' rate) rises, mortgage rates won't be far behind. That could mean higher mortgage payments for millions.

This chart will give you an idea of just how low the UK bank rate currently is. It shows the bank rate in red, and RPI minus the bank rate in blue going back to 1948.

In other words, RPI is about as high as it's been compared with the Bank's core interest rate since 1980. For how long can this continue?

CRB/Reuters food index

With around 11% of the UK CPI consisting of foodstuffs, this index is a useful indicator of future cost of living rises. Food prices are more volatile than changes in the overall cost of living.

The index rose by more than 10% over the last decade, but as of now, the index is about 11% lower year-on-year.

That could indicate that Britain's inflationary pressures are decreasing for the moment.

Chinese inflation

Many of the goods we buy in our shops are made in China. So China's inflation rate is now a major determinant of the UK's cost of living.

For years, we've been used to paying lower prices on our Chinese imports. But soaring wages and pricier food drove up CPI in China, and that meant higher costs for British consumers.

Chinese inflation has slipped since 2011. March's Chinese CPI was up by 1.4% year-on-year.

The CBI MTE survey

This survey gives the latest snapshot of UK manufacturing trends. It's a handy guide to price pressures at the factory gate – and to CPI inflation.

For January, this sub-index stood at -3, ie, 3% more survey respondents expected their selling prices in three months' time to be lower rather than higher.

The index leads UK inflation by some two months. The broad downtrend suggests inflationary pressure is rising for the moment.

The producer price index (PPI)

The 'output' PPI - often called the 'factory gate' price – measures what the UK's manufacturers charge their retail customers, who in turn sell on to us.

PPI output prices tend to be more volatile than consumer prices, but the overall trend is similar and they are a handy warning indicator.

March's output PPI was 1.7% lower year-on-year. The downtick in PPI suggests inflationary pressure is easing for the moment.

UK average weekly earnings (AWE) index

If wages rise, employers try to pass these costs onto customers by raising prices, thus pushing up inflation. UK labour costs are rising.

February's AWE index shows total UK wages rising an annualised 1.7%.

A sudden jump in pay packets would add to inflationary pressures and could force a rate hike sooner than expected.

The BRC Nielsen shop price index

This is a key indicator of what's happening to prices in Britain's shops. So it's a very handy guide as to what to expect from UK CPI inflation.

In May, the BRC Neilsen Shop Price index was down 1.9% year-on-year. It tends to be 1-2% below UK CPI.

The overall downtrend in the SPI suggests inflationary pressure is easing in Britain for the moment.


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