UK Inflation Bulletin: Good news for the economy but price pressure remains on household basics

Simon-Kucher & Partners Inflation Bulletin

Increasing cost of household basics masked by overall CPI rate stabilising

The welcome stabilising and potentially peaking of inflation in the past couple of months is good news for the economy, CPIH in April 2018 was 2.2 down slightly from 2.3 in March. But those on lower incomes especially will continue to feel the pinch through strong price pressure on household basics for much of 2018 including:
 

1. Grocery prices up
For much of 2014 - 2016 the supermarket price war meant the cost of a typical household shop was often falling, rather than increasing. However the benefit of this has been lost through grocery prices shooting up since August 2016, wiping out these consumer benefits. We see grocery prices continue to outpace inflation, particularly non-alcoholic beverages which were impacted by the sugar tax introduced last month, notwithstanding the price war’s sudden return which is now a possibility if the Asda and Sainsbury’s merger is approved by authorities, although the impact on consumers wouldn’t be seen for some time.

2. Power prices on the up
British Gas announced a price increases of 5.5% for the average gas and electricity customer which will take effect from the end of May, alongside subsequent changes announced by Npower (5.3% from June), EDF (2.7% in June for Electricity) and Scottish Power (5.5% from June). These increases are not currently seen in the inflation figures but will start to take effect over the coming months. The impact will be less noticeable over the summer when people use less heating but they will really start to notice it from the autumn, although those paying on direct debits will notice their monthly instalments rising sooner. While it will only have a small impact on the overall CPI rate, it will have a much larger impact on people with lower incomes whose heating bills represent a higher proportion of their income (i.e. the elderly on state pensions).

3. Petrol prices up
Petrol Prices are at their highest level since Nov 2014. According to data from the RAC, the cost of filling up an average family-sized 55-litre car with petrol is now nearly £68, £4.50 more expensive than it was last July. For diesel drivers it’s even worse with a tank costing over £69, or £5.50 more. This hit those who drive to work, especially those in rural areas who have further to drive.

Rosalind Hunter commented:

While inflation stabilising is good news, the pain is not evenly distributed and overall inflation is falling more heavily on lower income households because there is upwards pressure on basics such as groceries, fuel and power.

 

Other noteworthy price impacts this month come from: Flights, newspapers, the sugar tax and staycations

4. Flight prices
Passenger travel by air and sea dipped lower in April than the same time last year.  This is mostly because Easter, when flight prices are typically expensive, was in March this year, while in 2017 it was in the middle of April.

5. Newspapers
Newspapers increased to 7.8 versus a relatively flat trend of 4.8 over the last year. As advertising revenues decline we expect more publishers to raise prices at both the newsstand and through subscription pricing to ensure the long term viability of the business model.

6. The sugar tax
This is the first month where inflation figures include the new Sugar Tax that came into effect in April. The category ‘Mineral waters, soft drinks and juices’ which is relatively stable in most months showed a larger increase to 6.2, a pattern we expect to continue over the next few months.  However the overall effect on inflation is still small as such drinks account for just 0.46% of the average household’s shopping (based on the representative shopping basket used by the ONS to measure inflation) so this doesn’t drive the headline rate.

7. UK staycations
A weak pound means that holidaying abroad continues to be more expensive than before, giving a comparative boost to the UK staycation market. Inflation rates for both UK hotels and restaurants are now trending downwards as previous cost increases have been present for over a year, while in contrast package holidays are trending upwards.

Rosalind Hunter commented:

Simon-Kucher’s latest research shows that due to Brexit 11% of the UK population are now planning to substitute some of their holidays abroad with some in the UK over the next year. An additional 7% are planning on taking fewer holidays overall due to an increase in cost pressures observed over the last year. As demand for UK destinations grow we may see an increase in local hotel prices in response.

Restaurants are now dealing with over a year of cost pressures as a result of the devalued pound, increases in the living wage and business rates. However many high street chains are struggling to pass these through to consumers due to a highly competitive and saturated market. We’ve seen big names close multiple locations over the past months and we expect this trend to continue throughout 2018. In the meantime consumers can expect chains to fight for their custom with generous promotional offers, especially during quieter periods.    

 


Want to know more? Read our previous Inflation Bulletins

January 2018

February 2018

March 2018

April 2018