Inflation: at a turning point?
Inflation: at a turning point?
The pandemic has posed problems for the Office for National Statistics (ONS) when it comes to calculating the rate of inflation. For example:
- How do you measure the price of an item or service when a lockdown means it is not for sale? Two good examples are the ‘Restaurants and hotels’ category, which in 2020 took up almost 12% of the Consumer Prices Index (CPI) and the ‘Package holidays’ subgroup of the ‘Recreation and culture’ category which had a 4.2% weighting in the Index. In February 2021, the ONS said that in the previous month it had managed to collect only 88% of the prices it had collected before the first lockdown.
- Are the right items and services being measured? All inflation indices measure the prices of a ‘basket’ of goods and services. The ONS reviews and amends that basket each year to reflect changing spending patterns. This is often a source of humorous headlines, such as the replacement of crumpets by individual fruit pies last year.
- The new ‘basket’ for 2021 would normally have been based on expenditure in 2019. However, that was in the pre-pandemic era and spending patterns changed in 2020, as we all know. The ONS has therefore created a special 2021 ‘basket’ that uses data from both 2019 and, where there have been significant changes, 2020. As a result, the weighting for ‘Restaurants and hotels’ and ‘Recreation and culture’ have both fallen while those for ‘Food and non-alcoholic beverages’ and ‘Alcoholic beverages and tobacco’ have risen. Eating and drinking in is the new dining out…
Annual inflation over the last ten years to January 2021 has averaged 1.8%, as measured by the CPI, which means overall prices have increased by almost a fifth since 2011 – bad news for anyone with a fixed income.
Although 2021 started with annual inflation of 0.7%, by May the figure is likely to be nearer to 2% as a result of price rises already built in. These include the 9.2% rise in capped gas and electricity bills and council tax increases of up to 5%.
For all the problems of pandemic measurement, inflation is still out there and needs to be built into your financial plans.
This document is marketing material. This document is provided by the author and may not necessarily represent views expressed in other Aspect8 communications, strategies or funds. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested. Exchange rate changes may cause the value of any overseas investments to rise or fall. The sectors, securities, regions and countries shown above are for illustrative purposes only and are not to be considered a recommendation to buy or sell. All investments involve risks including the risk of possible loss of principal. Information herein is believed to be reliable but Aspect8 does not warrant its completeness or accuracy. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Some information quoted was obtained from external sources we consider to be reliable. No responsibility can be accepted for errors of fact obtained from third parties, and this data may change with market conditions. This does not exclude any duty or liability that Aspect8 has to its customers under any regulatory system. Regions/sectors shown for illustrative purposes only and should not be viewed as a recommendation to buy/sell. This content is issued by Aspect8 Limited, Holmwood House, Broadlands Business Campus, Langhurstwood Road, Horsham, West Sussex, RH12 4QP. Registered No. 07572431. Authorised and regulated by the Financial Conduct Authority, FCA no. 227247.