Inflation

The minute Starmer gets in to power, prices go up. Just what you would expect. The Conservatives were getting inflation under control and it was coming down, but as soon as Labour gets in, it goes up again. And we have not seen the effects of the public pay rises yet. Did people realise what they were voting for? 

This is what I hear Conservative supporters saying. But is it really true that prices have risen since Labour was elected, and were going down until? 

On the face of it, yes. The monthly inflation figures published by the Office for National Statistics (ONS) show that inflation rose to 2.2% in July 2024, up from 2% the month before, and remained at 2.2% in August. That was much lower than a year earlier when it was 6.8%. 

I do not find the percentage rate all that meaningful on its own. If a bag of oranges went up to £2.10 from £2 the previous month, most of us would say they had gone up by 10p, not that they had gone up by 5%. If that continued with 10p increases each month for a year, so that oranges were then £3.20, few would say they had gone up 60%, or that the annual rate of increase had slowed from 5% per month to only 3.1%. We would say “Bloody hell! They’re expensive compared to what they used to be”, and think twice before buying than. 

We need to know about prices as well as inflation to properly understand what is happening. Prices are measured by the Consumer Prices Index (CPI). ONS calculates this each month by statistically combining the prices in a typical shopping basket. The percentage as usually reported is not the index. It is the change in the index over the previous year. The index itself is rarely reported. It is as if journalists think it would confuse us, or maybe they are confused about it themselves. 

The CPI was set at 100 in 2015. In August, 2024, it was 134.3. In August the previous year it was 131.3. The increase of 3.0 over the year is an increase of 2.2%, which is the inflation figure reported in the media. (Actually, it works out nearer 2.3 than 2.2, but let us not get paranoid). 

Finding the political point scoring irritating, I wanted to understand the figures better. This is my attempt to do so. 

I plotted prices against inflation over the past three years. What is most obvious is that they do not always move together. While prices over the last three years marched relentlessly upwards from 112.4 to 134.3, inflation increased and then decreased again, varying between 11.1% in October, 2022, and 2.0% in May and June, 2024. 

To see why, I imagined a scenario in which the price index remains unchanged at 100 for over a year, resulting in an inflation rate of 0%. The index then jumps suddenly to 130, causing an immediate rise in inflation to 30%. It then fluctuates between 100 and 130 in steps of 10 for the next 24 months. This is shown in the blue graph below. 

The red graph shows the effects upon annual inflation. 

As one might expect, for the 12 months after the first price rise, inflation and prices rise and fall together (A). This is because prices over the second 12 months are being compared with prices over the 12 months before, when they remained steady at 100. 

But the effects then become less intuitive. In week 25 (B), despite prices climbing back to their highest level, inflation falls to 0%. And in week 28 (C), as prices begin to go down again, inflation jumps back up. 

Another quirk is that inflation becomes negative in week 31 (D), and then falls further in week 34 (E), but this second fall is only marginal (from -8.3% to -9.1%) despite a fall of 10 in the index, and much less then the further fall in week 37 when the index is unchanged (F).

The scenario shows that prices can go up when inflation goes down, or down when inflation goes up, and when they do move in the same direction, one can change by a large amount while the other only changes a bit. Prices and inflation do not always change in the same direction, or to the same extent.

These effects occur because they compare current prices with those of 12 months earlier. There can be a time-lag between price changes and their effects. The percentage rate of inflation reflects what was happening a year ago as much as what is happening today. 

Are such month-by-month fluctuations found in the real ONS data? Indeed they are, but they are harder to see because the CPI goes up and down in small steps. You have to look more closely. This third pair of graphs shows the monthly changes in CPI and inflation in the ONS data. 

The largest CPI increase was in April, 2022, when it went up by 2.9. The smallest, actually a fall of 0.8, was in January, 2023. The large increase immediately showed in the inflation figure, which shot up by nearly 2%, but the fall had little impact. Most monthly changes are much smaller, but it is still fairly easy to find contrary movements, as in January and February, 2024, or movements of different sizes, as in October, 2023. 

Returning to the original questions, did inflation come down under the previous government, and will it go up under Labour? Yes and yes. But this begs the question as to whether this is caused by governments, or is it a simple statistical side-effects? 

Statistics plays its part. Inflation was bound to decrease as it fell from the previous highs, and if the CPI continues to increase at its current rate, inflation will climb to over 3% by the end of the year as the earlier falls drop out of the numbers. One reason for the July increase in inflation was that prices did not fall as much as they had twelve months earlier. 

Prices are also influenced by other events and phenomena beyond government control. The peak in inflation in October, 2022, was largely caused by international events. The new public sector pay awards will be inflationary, as would have been the costs to not awarding them. 

Political point scoring will no doubt continue on both sides, but it might be helpful to report monthly inflation changes as well as the annual retrospective. 

I think I understand it slightly better, now.