Figures released by the ONS last week indicate that Consumer Price Inflation has reduced to 4.6%. Alice Pugh discusses what has caused inflation to fall and what it means for consumers.
It has been a year since the consumer price inflation (CPI) index reached its highest rate in over 40 years, at 11.1% in October 2022. At the start of this year, the government stated it would halve inflation from 10.7% at the start of the year, as one of its ‘big’ five pledges.
The Office for Budget Responsibility (OBR) forecasted that if there were no more shocks in the economy this year, then by the end of Q3 2023 (December 2023) inflation would hit 5.3%.
Whilst inflation has indeed fallen below the expected rate for this month, it is largely as a result of changes in demand and supply, not as a result of the introduction of government policy. The two reasons for the fall are largely due to:
Demand changes
- Interest Rates: The Bank of England (BoE) has repeatedly raised interest rates which has led to reductions in spending. As interest rates rise, it becomes more expensive to borrow capital, costing many people and businesses out from being able to afford to borrow capital. The income generated by savings also rises when interest rates increase therefore, it becomes more attractive to save and less attractive to invest and spend.
Supply Changes
- Lower Energy Prices: Energy prices have vastly reduced compared to last year. Gas prices are down 31% from 12 months ago and electricity prices are down 15.6%. The main impact of this is reductions in energy input costs for businesses, reducing their overall costs and allowing them to reduce the price of their product or increase it but at a slower pace than in previous months.
Prices are not falling, they are going up slower
However, to be very clear whilst the CPI inflation rate has fallen this does not mean that prices are falling. A fall in the inflation rate means prices are still rising but at a slower rate. Thus, if inflation for October 2023 is 4.6%, it means that prices are 4.6% higher than they were last year.
To demonstrate this the table below shows the prices of different food goods for October of each year between 2019 and 2023. As can be seen in the table, whilst the headline figure for inflation has decreased, this still means that the price of food between this year and last has increased. Only 3 goods have seen decreases in the actual price between this year and last, Margarine (-1.8%), Instant Coffee (-2.36%) and Apples (-1.36%). These products have experienced deflation, which means the price in October 2023 is lower than the price in October 2022.
The majority of products, however, have all increased compared to October 2022. Whilst the increase in price may be lower between October 2022 and October 2023, than the increase between October 2021 and October 2022, it is still an increase.
For example, between October 2021 and October 2022, the total price of the list of goods increased 17.1% from £49.58 to £58.04. By October 2023, the total price of the list of goods was £63.53, an increase of 9.5% from October 2022. Therefore, whilst it is positive that the inflation rate is decreasing, it does not mean prices are going down, just the rate at which they are going up has slowed.
| Shopping Items | Oct-19 | Oct-20 | Oct-21 | Oct-22 | Oct-23 | Y on Y % change | % change between August 2019 & August 2023 |
| White loaf, 800g | £1.02 | £1.06 | £1.06 | £1.30 | £1.37 | 5.38% | 34.31% |
| Margarine, per 500g | £1.43 | £1.27 | £1.52 | £2.22 | £2.18 | -1.80% | 52.45% |
| Large Eggs, per dozen | £2.25 | £2.26 | £2.15 | £2.92 | £3.30 | 13.01% | 46.67% |
| Cheese, per kg | £7.03 | £6.69 | £6.22 | £7.91 | £8.87 | 12.14% | 26.17% |
| Milk, per pint | £0.44 | £0.43 | £0.43 | £0.65 | £0.65 | 0.00% | 47.73% |
| Tea bags, per 250g | £2.11 | £2.00 | £2.03 | £2.20 | £2.42 | 10.00% | 14.69% |
| Instant Coffee, per 100g | £3.05 | £2.78 | £3.02 | £3.39 | £3.31 | -2.36% | 8.52% |
| Sugar, per kg | £0.75 | £0.72 | £0.72 | £0.84 | £1.15 | 36.90% | 53.33% |
| Apples, per kg | £1.86 | £1.91 | £2.37 | £2.20 | £2.17 | -1.36% | 16.67% |
| Bananas, per kg | £0.98 | £0.84 | £0.81 | £0.91 | £1.13 | 24.18% | 15.31% |
| Grapes, per kg | £3.85 | £3.66 | £3.74 | £3.94 | £4.19 | 6.35% | 8.83% |
| Potatoes, per kg | £1.31 | £1.32 | £1.34 | £1.33 | £1.43 | 7.52% | 9.16% |
| Tomatoes, per kg | £2.05 | £2.18 | £2.36 | £2.85 | £3.09 | 8.42% | 50.73% |
| Broccoli, per kg | £1.86 | £1.73 | £1.68 | £1.99 | £2.32 | 16.58% | 24.73% |
| Onions, per kg | £0.79 | £0.84 | £0.86 | £0.84 | £1.07 | 27.38% | 35.44% |
| Mushrooms, per kg | £2.94 | £2.98 | £3.20 | £3.36 | £3.48 | 3.57% | 18.37% |
| Chicken, per kg | £2.73 | £2.54 | £2.76 | £3.43 | £3.86 | 12.54% | 41.39% |
| Sausages, per kg | £5.01 | £4.94 | £5.21 | £5.93 | £6.75 | 13.83% | 34.73% |
| Ham 100 – 125g | £1.90 | £2.02 | £1.94 | £2.47 | £2.49 | 0.81% | 31.05% |
| Best beef mince, per kg | £6.55 | £6.34 | £6.16 | £7.36 | £8.30 | 12.77% | 26.72% |
| Total | £49.91 | £48.51 | £49.58 | £58.04 | £63.53 | ||
| Year on Year % change | -2.8% | 2.2% | 17.1% | 9.5% | |||
| % change between August 2019 and August 2023 | 27.3% | ||||||
This blog was written by Alice Pugh, Policy and Data Analyst, City-REDI / WMREDI, University of Birmingham.
Disclaimer:
The views expressed in this analysis post are those of the authors and not necessarily those of City-REDI, WMREDI or the University of Birmingham.