Economists said after the referendum on Brexit that a temporary spike in the inflation rate could be expected due notably to the British currency depreciation.
That’s what has happened with a peak in November 2017 at 3.1%. After this date, the inflation rate is receding at less than 2.5% in March 2018. The core inflation rate has followed the same profile with a current rate at less than 2.3%.
The current acceleration of the inflation rate creates a complex situation in the United Kingdom as it weighs on households’ purchasing power.
In April the inflation rate was at 2.7% and the core inflation rate was at 2.5%. The inflation rate has not been so high since the fall of 2013 and november 2012 for the core rate. This is mainly the impact of the depreciation of the currency after last june referendum on Brexit.
A year ago the inflation rate was at 0.3% and the core inflation rate was at 1.2%. This latter magnitude is worrisome as the economy is not growing more rapidly.
The main issue is that wages momentum will not follow the inflation profile. Continue reading
The inflation rate was at 2% in February after 1.8% in January. It’s the highest record since January 2013. The core inflation is stable at 0.9%. It means that energy is the main driver for the higher inflation rate.
The first graph shows that the core inflation rate is stable since 2014 and the volatility of the inflation rate is associated with the oil price yearly change.
The oil price effect has started to diminish. The second graph shows the consistency between the yearly change in oil price (blue) and the energy contribution to the inflation rate (purple). We see that the oil price change has peaked in January and will follow the red line which shows the oil price yearly change when the oil price is at 55USD and the exchange rate at 1.06.(the last point is June 2017)
The oil price impact will be transitory and the energy contribution will start decreasing in April probably as there is persistence and delay between the oil price and contribution.
In other words, after the current peak, the inflation rate will converge to the core inflation rate (circa 1%).
This temporary effect of oil price on inflation is a strong incentive for the ECB to keep its monetary policy stance unchanged.
The Euro Area inflation rate jumped at 1.8% in January after 1.1% in December 2016.
The graph below shows the cumulated contributions to the inflation rate. It can be read in the following manner: the red line is the goods price contribution to the inflation rate; the blue line is the sum of the red line plus the services price contribution to the inflation rate; the green line is the sum of the blue line and of the food price contribution to the inflation rate. Alle these prices represent more than 90% of the Consumer Price Index. The green line is almost stable; its range is 0.6% – 0.85% since mid-2014. There is no surge in inflation through all these prices.
The last line, the purple one, is the sum of the green line and of the energy price contribution to the inflation rate. Continue reading
The stabilization of the oil price around USD 50 implies that the contribution of the energy sector to the inflation rate converges currently to 0.
In October for the Euro Area, this contribution was only -0.09%, its highest number since June 2014. The profile is the same in the US.
The point is simple. The current oil price is comparable to the price seen one year ago. This wasn’t the case since mid-2014. Therefore the energy contribution to the inflation rate was systematically negative as the oil price was lower than a year before. As prices are currently comparable the contribution converges to 0 Continue reading