It takes quite a determined Cassandra to see the rise in Consumer Prices Index (CPI) from 0.6 per cent in August to one per cent in September as some kind of crisis, not that that will stop the holdouts of the Remain campaign from trying to do so. When CPI fell below one per cent at the end of 2014, you might remember, there were dark warnings about the threat of deflation – with the horrors that would imply for borrowers, who would see the real value of their debts increase. Now, some are trying to present a rise to one per cent as bad news, with former Monetary Policy Committee member Andrew Sentance, for example, calling it the ‘tip of an inflationary iceberg’.
Steady on. Sure, inflation is likely to increase over the next few months. It may even double – in which case it would hit the Bank of England’s target. In any other context, the weight of opinion would surely be that that was a good thing. But these of course are not normal times. Remain holdouts will use anything to try to claim that the country is in economic crisis. Here, for example, was Polly Toynbee in the Guardian on last week’s brief Marmite crisis:
'Unilever says all its prices must rise by 10 per cent – which is still less than the 15 per cent fall in the pound, so expect worse to come.'
Er, not quite, Polly. A 15 per cent fall in the pound does not translate to a 15 per cent rise in prices for several reasons. The fall in the pound only affects imported goods, and even then the effects doesn’t fully feed through to prices in the shops because a sizeable part of the final price of, say, your US-produced popcorn, is accounted for in storage, transport and other costs within the UK. A hefty chuck of what you pay for the popcorn will go to the retailer itself. A sinking pound does not make it a lot more expensive to run a branch of Sainsbury’s in Balham.
Moreover, the rising price of imported food will not feed through fully to British grocery bills because it will lead to consumers switching to British-produced goods instead. If French beef is £10 per lb and English beef £11 per lb, you might choose the French beef. But if the French beef then rises to £12 per lb and the English beef stays at £11 per lb you are likely to switch to the English beef. The price you pay has not risen by 20 per cent but by 10 per cent (it has also helped the British beef industry and the economy in general).
Interestingly, the tendency of consumers to switch to cheaper alternatives when prices rise is one of the big differences between CPI and the older Retail Prices Index (RPI), now dropped as the Government’s preferred measure of inflation. CPI takes this into account whereas RPI does not – one of the reasons RPI tends to run ahead of CPI. Over the next few months we might see a widening of the gap between CPI and RPI – good news for people with pensions linked to RPI but who are prepared to adjust their shopping habits.