August 17, 2023 - 10:00am

Is Britain now an inflation nation? The ONS released the consumer price data for July this week and the papers are playing up the news, claiming, with a contented sigh, that we are “through the worst of it”. Yet, as has become typical with British economic data over the past few years, this is a simplistic reading.

The good news is that inflation has continued to come down, falling from an annualised rate of 7.3% in June to 6.4% in July. The bad news is that this was mostly driven by falling energy costs and core inflation, while attempts to measure price growth with the cyclical components removed (energy, food, alcohol) remained the same this month as last at an annualised rate of 6.4%.

This means that more interest rate hikes are not off the table. The Bank of England will have predicted falling energy costs, but the real number it will be looking at when setting policy is core inflation. This is because, while interest rates do not have any immediate impact on the price of energy, they can induce a fall in demand for the types of services that make up the core inflation basket.

Perhaps it is worth stepping back here and looking at what inflation has meant for households in concrete terms. This will help us understand what core inflation is and what is driving it, but it will also give us a sense of how the inflation has affected people over time.

The first datapoint we should look at in this regard is the “households” component of CPI. This is the component of CPI that impacts consumers through the costs associated with maintaining a household. The headline numbers tell us that the cost increases associated with running a household have fallen, but when we drill down a different picture emerges.

The only reason that the cost of running a household has eased is because energy inflation has slowed down. The energy price shock that we felt in our bills last year is now petering out (though costs do remain very high). But the cost of basically everything else associated with running a household is rising at a faster and a faster rate with every passing month. There is a steady march upwards in the cost of water, sewage, council tax, rent, and the other general costs of owning a home.

What the data is telling us is that in April of 2022 households saw a very sharp rise in their energy bills. Then, in the second phase of the inflation, we saw a gradual squeezing on everyday spending as bills mounted for basically everything associated with running a household. This cost pressure is still growing, and the Bank of England is no doubt watching it closely.

But these are not the only pressures on households. To get a sense of the other cost pressures we should look at the components of CPI as a whole. When we do this, we see that the costs of food, alcohol, clothing, furniture, and transport are easing. These costs jumped together with the energy shock, as the energy costs for firms and producers were passed through to consumers. Yet all is not well among the more service-based components. Recreational activities, restaurants, pubs, hotels, and similar services are all seeing a continued — and accelerating — rise in prices.

This gives us some sense as to why the cost-of-living crisis continues to worsen even as the inflation numbers ease. While we may have acclimatised ourselves to the high energy and food prices, there is still a relentless push on costs in the form of higher bills and higher prices when we try to have a meal out or a drink. Unless something changes, we will have to live with this as if it were a permanent loss of living standards in Britain.

Philip Pilkington is a macroeconomist and investment professional, and the author of The Reformation in Economics