Economics Essay Example: Using UK CPI Data to Understand and Model Inflation

Ideally, consumer price inflation embodies the extent to which the costs of products and services purchased by households increase or decrease. Price indices are instrumental in estimating such alterations. Moreover, the best analogy to illustrate the concept of consumer price inflation entails analyzing the changes in prices of goods and services contained in a shopping basket. In the United Kingdom (UK), the determination of Consumer Price Index (CPI) is the best measure to analyze the variation in prices of goods and services contained in the basket. Particularly, examining UK's CPI data between August and September 2016 provide insight into the essential products and services that had a significant impact on the inflationary trends in the UK.

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UK CPI Data

Between September 2015 and September 2016, the CPI 12-month rate in the UK was approximately 1% ("Office for National," n.d.). This figure measured the price changes recorded in a year. In theory, this shift implies that a basket containing goods and services valued at 100 pounds in 2015 would translate to 101 pounds in 2016. According to the reports by the Office for National Statistics (ONS), the 12-month rate CPI recorded was at its peak since November 2014. During this year, the rate started decreasing till 2015, when it gradually began to ascend (B. Clausen & J. Clausen, 2010). The highest downward pull on inflation recorded in September 2016 originates from the cost of foodstuffs and non-alcoholic drinks. Contrarily, goods and services from a broad category such as restaurant and hotel bills contribute to the upward pressure. Although transport prices resulted in a downward pressure between 2015 and early 2016, their effect has changed translating into an upward effect (Kara & Nelson, 2003).

Figure 1: Contributors of UKs 12-month rate CPI between 2015 and 2016 retrieved from https://www.ons.gov.uk/economy/inflationandpriceindices/bulletins/consumerpriceinflation/sept2016

Comparing the 12-month CPI rates of two consecutive months is the best technique of determining consumer price inflation over a year. As well, this method ascertains the long-term inflationary tendencies for products and services. In the UK, the CPI witnessed a 0.2% increase between August and September 2016 (Thomas, Hills, & Dimsdale, 2010). In contrast, the year 2015 recorded a 0.15 decrease within the same period. Notably, the changes observed this year were high compared to the figures in the previous year, which culminated into an increase in the CPI 12-month rate.

Upward Contributors of UKs CPI in September 2016

Examples of the variety of products and services that orchestrated the upward movement in UKs CPI over a year are clothing, restaurants, water, electricity, and transport.

Clothing and Footwear. Garments, primarily women's outerwear, were the core cause for the upward effect due to their 6% increase between the two months ("Office for National," n.d.). Compared to the prices recorded in the previous year, the rise in 2016 was almost double, which explains the steep increase in the rates of CPI. According to economic reports by ONS, the depreciation of the sterling caused by the European Unions referendum result is not responsible for this increase. Instead, clothing prices have a predetermined trend. For instance, March to July realizes a heavy fall in prices while in August, the prices start to increase. Secondly, despite the effect of currency depreciation on imports and outsourcing, most businesses in the UK have appropriate measures to curb against the adverse implications of the variations in the exchange rate (Kapetanios, 2004).

Restaurant and Hotels. Compared to the 0.2% increase a year ago, the overall prices of restaurant and hotel services experienced a 0.7% rise between August and September 2016 (Thomas et al., 2010). The primary contributors to this change include the enhanced prices of an overnight stay in hotels. Primarily, this increase occurred after a massive fall recorded in August 2016.

Miscellaneous Products and Services. Between August and September 2016, the prices of miscellaneous products and services increased by 0.5% (B. Clausen & J. Clausen, 2010). According to the economic reports advanced by ONS, this rate remained constant from a year ago. Moreover, the overall upward trend recorded for this category included a collective increase of exclusive range of items such as electronic appliances and personal care products.

Housing and Energy Resources. The prices for this type of items recorded a 0.1% increase between the two months in the latest reports regarding UK's CPI trend. This value was high compared to the previous year where the cost of housing and energy resources such as electricity, water, gas, and oil had declined by approximately 0.2% (Kara & Nelson, 2003). However, the main contributor to the increased CPI in this category included the cost of gas, which in most parts of the preceding year, remained unchanged. In contrast, the fluctuating prices of oil and electricity threatened the upward pressure in UKs CPI.

Transport

Despite transport making an insignificant contribution to the changes in the 12-month rate CPI, it had significant implications compared to other items within this group (Thomas et al., 2010). Primarily, the increased costs of motor fuels triggered by the escalating costs of petrol were the primary causes of the upward pressure. Between the two months, petrol experienced a 1.2 pence increase ("Office for National," n.d.). However, the situation was worse in 2015 due to the steep decline in prices across the second half of the year. A reduction in the air fares counteracted this upward effect.

Downward Contributors of UKs CPI in September 2016

Food and Non-Alcoholic Beverages. Essentially, the downward contributions of these items were minimal. Adverse effects concerning food prices were evident when the costs declined by 0.3% between August and September 2016 compared to a 0.1% increase recorded in the previous year (Kapetanios, 2004). Ideally, the cumulative effect originated from a collection of small downward effects caused by a range of food items. The rising price of non-alcoholic drink counteracted the downward trend by food items.

Figure 2: Contributions to Changes in UKs CPI in September 2016 retrieved from https://www.ons.gov.uk/economy/inflationandpriceindices/bulletins/consumerpriceinflation/sept2016

Inflation in the UK from CPI data

Based on the prevailing consumer price index recorded in July, the inflation rate in the UK has remained unchanged. The Office for National Statistics reiterates that increasing food prices and air were offset by the reduced prices for restaurant and hotel services ("Office for National," n.d.). Economic reports in this region indicate that the effect of importation is minimal. Despite the harsh implications of foreign exchange rates, most commercial firms have established strategies to tackle this menace. As a result, UK has managed to curb the ill-effects of imported inflation (Kapetanios, 2004). Although the British Chambers of Commerce suggests that inflation is likely to increase within the coming months, the unmoved inflation figures indicate a low risk.

To conclude, a variety of products and services contributed to the changes in UKs CPI not only between August and September but also over the year. For instance, restaurant, hotels, garments, energy resources, and housing cost made an upward contribution to UKs CPI rate. On the contrary, food and non-alcoholic beverages were the essential constructs of the downward pressure. Comparing these figures with the values recorded last year portrays a slight alteration in the rates of change. Hence, it is evident that the UK has little inflationary tendencies. The region needs to reevaluate its economic and political policies to minimize the occurrence of uncontrollable inflation in future.

References

Clausen, B., & Clausen, J. R. 2010. Simulating inflation forecasting in real-time: how useful is a simple Phillips curve in Germany, UK. and the US? Washington, D.C, IMF.

Kapetanios, G., 2004. A note on modeling core inflation for the UK using a new dynamic factor estimation method and a large disaggregated price index dataset. Economics Letters, 85(1), pp.63-69.

Kara, A., & Nelson, E. 2003. The exchange rate and inflation in the UK. London, Centre for Economic Policy Research.

Office for National Statistics (n.d.). Statistical bulletin: UK consumer price inflation: Sept 2016. Retrieved from http://www.ons.gov.uk/economy/inflationandpriceindices/bulletins/consumerpriceinflation/sept2016

Thomas, R., Hills, S. and Dimsdale, N., 2010. The UK recession in contextwhat do three centuries of data tell us? Bank of England Quarterly Bulletin, p.Q4.