Data released by the Office for National Statistics over the past few days has shown that consumers in the UK are in a tricky position. Yesterday saw the publication of the latest Consumer Price Inflation figures, which revealed that inflation continued to rise in May, albeit at a reduced pace. With the release of the latest Labour Market Statistics today showing that total earnings fell in the three months to April, the net result is a lighter wallet for the British shopper.
Consumer Price Inflation, including housing costs, grew by 2.7 per cent in May on the same month in the previous year, a further step up on the ladder from the 2.6 per cent growth in April. This is the rate of inflation since April 2012. Excluding housing costs, CPI inflation grew by 2.9 per cent on the previous year.
This increase in is ahead of most expectations. In May, the Bank of England predicted CPI inflation would rise by 2.7 per cent over the second quarter of 2017. Given that the rate has accelerated to 2.9 per cent in May from 2.7 per cent in April, this forecast is under threat: inflation is unlikely to fall significantly, or at all, next month.
When viewed alongside the Labour Market Statistics, this increase in inflation forms a worrying picture. The average weekly regular wage, which excludes bonus payments, grew by 2.1 per cent in the three months to April, a deceleration on the previous three months, when wages grew 2.3 per cent. Regular pay is now growing at a far slower rate than prices are, which can only mean difficult times ahead for retailers.
Average weekly earnings growth vs. consumer price inflation
Source: The Office for National Statistics
A closer look at which products and services are driving inflation gives a better idea of where consumers are being squeezed. The main contributors to the increase in inflation in May were Recreation and Culture, contributing 0.28 percentage points to the headline CPI rate, up from 0.13 in April, and Food, with a 0.22 contribution, up from 0.16 in April. A closer look at these categories shows that a surge in the cost of Oils and Fats is driving food inflation, while within Recreation and Culture price deflation slowed significantly, driving the category into inflation.
Inflation continues to follow the upward path we’ve seen since the end of last year. The story remains much the same – food has become more expensive and continues to do so, inflation accelerating to a growth rate of 2.1 per cent on May 2016, while costs increases for other items are beginning to creep through. Clothing and Footwear prices grew at a rate of 3.1 per cent in May on the previous year, a clear acceleration on April’s rate of 2.4 per cent.
The sharp deterioration in the value of sterling in after the 23rd June last year remains the culprit behind some of these price increases. Ever more hedging contracts made before the devaluation are running to their ends as the year grows older, while stock bought by retailers needs to be renewed, at new inflated prices. Food retailers, who import goods on a much shorter timeline, have increased prices first, since they are the first to see an increase in their own costs.
Value of sterling vs. Consumer Price Inflation, 2016-17
Source: Bank of England, Office for National Statistics
Not all of the food price increases of the recent months are due to the fall in the value of sterling. Looking at producer prices, the amount which retailers are having to pay for food, and particularly dairy, has been on the increase before the impact of the sterling devaluation really began to be felt. From October onward factory gate prices for food, i.e. the prices paid by retailers for food products have been on the rise, and primarily because of an upturn in the costs of dairy.
Factory gate prices for food rose by 5.6 per cent year-on-year in May, 1.5 percentage points faster than in April. Within this, dairy products rose 18.7 per cent on May 2016. While input costs have risen, the upward pressure in dairy costs is coming from shortages in supply, UK milk production falling 3.2 per cent year-on-year in May. Poor weather hasn’t helped grazing, and has had an impact on production.
Annual rate of factory gate inflation for food producers and contributions to the rate, May 2015 to May 2017
Source: Office for National Statistics
The BRC-Nielsen Shop Price Index has recorded rising food prices for four consecutive months, with May seeing food prices rise at their fastest rate since January 2014. With shoppers forced to spend more on their food and drink, the amount they have left to spend on discretionary items is being sapped. This helps explain the slowdown in retail sales, and in household consumption growth, which fuelled UK growth as a whole in the second half of 2016. With such conditions likely to continue, retailers are in for a tricky few months.