Economics

The state of play

Volatility has returned to stock markets. Should investors be worried, and what does it signal for the longer term? David Thornton investigates.

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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?

Oil price in US$

Oil in US$ had risen sharply since 2009. Then last year, the oil price fell. The price of oil did rise again since then, but the cost of US crude is now £62/barrel, about 5% higher than at the start of 2011.

March UK CPI was up 1.6% year-on-year; down from 1.7% the previous month. Meanwhile, RPI was up 2.5% on a year ago, compared to 2.7% in February.

Oil prices lead year-on-year percent changes in our cost of living by around three months. A rising oil price may see inflation rise further.

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 of now, the index is in fact about 1% down year-on-year.

That could indicate that Britain's inflationary pressures are easing 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 2.4% 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 March, this sub-index stood at 12, ie, 12% more survey respondents expected their selling prices in three months' time to be higher rather than lower.

The index leads UK inflation by some two months. The latest downtick suggests some inflationary pressure is easing 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 0.5% higher year-on-year. The downtick in PPI suggests some 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 AWE index shows total UK wages climbing 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 March, the BRC Neilsen Shop Price index was down 1.7% year-on-year. It tends to be 1-2% below UK CPI.

The downwards trend in the SPI suggests inflationary pressure in Britain is easing for the moment.


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