High inflation matters a lot more than we think

First the good news – the UK’s inflation rate halved between March and April. The bad news is that it’s still running at 17 per cent. From that figure, we can instantly see we’re not talking about a headline inflation rate, such as that favoured by the Bank of England, the so-called CPIH (basically, consumer price index inflation with housing costs included). In April, that dipped for the second month running and is now 7.8 per cent.

Arguably, however, we are discussing a more important measure than CPIH, or than CPI, or RPI, or whatever alphabet soup of inflationary initials you care to choose. Specifically, the rate running at 17 per cent is Bearbull’s measure of core inflation, which quantifies the rising cost of goods and services that people simply cannot avoid and which, therefore, gobbles an especially big chunk of poor people’s spending.

We introduced this measure earlier this year as a contrast to the officially-favoured gauge of core inflation because that has absolutely nothing to do with spending consumers can’t avoid. Rather, it focuses on the bit of inflation that is “durable” while excluding that which is “fleeting”; adjectives supplied by the Office for National Statistics (ONS). Jolly convenient that the ONS selects as its favoured measure of ‘core’ inflation one that excludes items whose prices have been galloping lately yet which mostly consumers can’t exclude (specifically, food and energy).

The chart shows how real core inflation surged away from the others 20 months ago and is now fast retracing its steps. The table adds detail. In particular it shows the rates at which the two biggest components of core spending – food and domestic fuels – are moving; these two comprise almost 60 per cent of the weighting of the six items that comprise Bearbull’s core index. Between March and April, the inflation rate for fuels fell by three quarters as the previous April’s near-tripling of prices dropped out of the calculation. That trend may continue through the summer, although at a slower pace, and it remains guesswork what the winter brings. Meanwhile, the anticipated drop in food price inflation (currently at its highest in 35 years) will be more measured since it took 20 months, without a single annualised dip in the rate, to go from 0.4 per cent to its current 19 per cent.

Also noticeable in the data is that, over the long haul, there is little difference in average rates – and variation around their average – between CPIH and the favoured CPIH core version. Now that the CPIH core measure is rising – it went from 5.6 per cent in March to 6.3 per cent in April – while the CPIH rate is falling (it dropped by a percentage point to 7.8 per cent) one wonders how soon it will be axed in favour of a more compliant core measure; after all, the ONS has 13 such measures to choose from.

By contrast, over the 35 years that it can be measured, Bearbull’s core inflation rate has both run at a higher average rate and has had more volatile swings around its average than CPIH. True, this should be expected of an index that comprises just six components, even though their weights are close to those provided by the ONS.

Especially interesting is the way in which real core inflation accelerated away from CPIH soon after the financial crisis of 2008-09 and has not really stopped since. As such, it is tempting to think of underlying inflation as an explanation for the unhappiness of our times. After all, history tells us inflation pulls at the social fabric almost like nothing else. Sure, it might be a symptom as much as a cause. No matter, a nation where inflation is persistent is never a happy one. That’s why we’ll keep a watchful eye on core inflation. At the risk of sounding melodramatic, it’s not just about real investment returns; it’s more serious than that.