For the first time since they started recording the CPI measure of inflation, the rate of price growth has fallen to 0% (for February). We’ve compared that to our simple “essentials index”, which measures the price inflation of the basics; this measure has been experiencing deflation for almost a year now.
What does the chart show?
The solid red line is the CPI measure of inflation, as a monthly percentage change compared to the same month in the previous year, measured against the left hand axis. The solid blue line is our own “essentials price index”, measured on the same basis as the CPI. The dotted lines represent the overall index growth for each respective measure over the period, with January 2005 equal to 100, measured against the right hand axis.
Why is the chart interesting?
The big economic news in the UK this week has been the announcement that the CPI growth rate fell to 0% in February. This was slightly lower than expected, but not by much. Inflation has been dragged down by falling oil and food prices, with “core” inflation slightly higher. We’ve updated our “Cost of Essentials” index from last year, to see how it compares to the headline CPI. This is a measure that attempts to isolate what we consider the bare minimum cost of living: food, clothing, rent and utility bills, petrol, and public transport.
As you can see from the chart, from 2005 to 2010 the cost of the essentials grew faster than the headline rate of inflation (and peaked at almost 11% in September 2008). However, since 2013 price growth in these essentials has been much slower than average, first falling into deflation in March 2014 and hitting a low of -2.8% in December. This isn’t particularly surprising, as the main factors influencing the fall in headline CPI (oil and food) both feature prominently in the basic cost of living.
However, this recent deflation hasn’t been enough to make up for the much higher inflation in the first half of the decade. Since 2005, while general price levels have increased by 30%, the cost of the basics has risen by just under 40%. This has been one of the factors contributing to a rise in inequality, as lower income households spend a higher proportion of their income on the basics.