Sunday, 9 October 2011

What is driving UK inflation upwards?

This was a tricky little number to put together. Interactive charts are complicated. At the same time, they are far more effective at illustrating key trends compared to static charts.

This chart, covering inflationary developments over the last decade, tells quite a story. It is a tale told in seven chapters.

First, the Bank of England has failed to meet its two percent inflation target since 2006. There have been the odd occasions when it went below, but in general, inflation has been well north of the target.

Second, before 2006 the BoE were lucky. Prices for goods, such as electronics, were actually falling. This is the "Asia" effect, as China and other emerging economies industrialised and flooded the UK and other western economies with cheap goods.

Third, prices for non-traded services have consistently exceeded the BoE's target. The UK was secretly inflating for a decade at around 4 percent a year.

Fourth, wage settlements broadly kept pace with services inflation before 2006.

Fifth, things started to go wrong in 2006. Cheap Chinese goods no longer kept the inflation rate down. The BoE were forced to raise interest rates, and popped the asset bubble that kept the UK economy growing at 3 percent a year. The financial crisis wasn't far behind. By the summer of 2007, UK banks started wobbling.

Sixth, once the financial crisis hit town in 2008, wage settlements declined sharply and fell below the headline inflation rate. Living standards began to fall.

Seventh, quantitative easing led to a devaluation of sterling, and the prices of those cheap Asian goods began to rise rather rapidly. Recently, the CPI inflation rate for goods is increasing at roughly the same pace as domestically produced services. Overall, inflation is now rising at around five percent a year.

Anyway, if you like the data application, please circulate it to friends and family. It was meant to be seen by as many people as possible.

When time permits, I will put together more......


Anonymous said...


Anonymous said...

Excellent chart. Any chance you can add in the cost of energy too? I imagine that in the decade or so since the uk went from net exporter to net importer of energy it must have had some impact on the inflation rate?

ED said...

It is kinda wierd that everything goes off-script in 2006. What happened then?

Electro-Kevin said...

So service (wage inflation) has gone down and been replaced by 'Asia effect' inflation going up (plus food and other resources)

Is what we've got in fact stagflation ?

I'm not bothered about about any of this. Things have been a lot worse.

What I am bothered about is the class which is hell bent on changing the very character of our nation.

GErL said...

Kevin - It is all connected. Inflation. The dissolution of Britain.

Joshua's Law said...

Good analysis information.