CPI, RPI & Inflation – Current State of the Economy in the Western World? 2022 Q1
Inflation, CPI, RPI, Energy prices, Interest rates, Property Markets, Financial Sector, etc.
What does this all mean in the first quarter of 2022?
The rate of inflation is the change in price for goods and services over time. Measures of inflation and prices include consumer price inflation, retail price inflation, producer price inflation, and the house price index.
The consumer price index (CPI) measure of inflation surged to 5.4% in the last year to December, its highest level in almost 30 years (1992 CPI – 7.1%).
The increase from 5.1% last November (2021) is mainly due to higher gas and electricity bills, and rising food and fuel costs.
The Bank of England (BOE) sets a consumer price target of 2% in order to keep inflation low and stable. The BOE can curb inflation by raising interest rates, but to make matters confusing, the UK uses several ways to measure inflation, including:
· CPI (consumer prices index)
· CPIH (consumer price index plus owner-occupiers’ housing costs)
· RPI (retail prices index)
For October 2021
· CPI – 7.5%
· CPIH – 5.4%
· RPI – 4.8%
RPI includes mortgage interest payments – this means it is ‘heavily influenced’ by house prices and interest rates.
CPI takes no account of housing costs but factors in all the other goods and services.
CPIH includes housing costs but uses an approach called ‘rental equivalence’ – this is not the mortgage payments but how much rent the householder would pay for an equivalent property.
Here is a list of items that are linked to RPI:
· Final salary pension payments
· Income from index-linked annuities
· Income from some index-linked bonds
· Train tickets
· Mobile phone tariffs
· Air passenger duty
· Car tax
· Tobacco duty
· Alcohol duty
· Interest on student loans
Here is a list of items that are linked to CPI:
· State pension
· Public sector pensions
· Lifetime allowance for pensions
· Personal independence payments (PIP)
· Attendance allowance
· Jobseeker’s allowance
· Universal Credit
· Housing Benefit
· Income Support
· Statutory maternity and paternity pay
· Statutory sick pay
The government tends to link its own spending, such as benefits and the state pension to the lower CPI figure.
Critics call this convenient ‘inflation shopping’, where the government links expenses to the lower CPI, and to income generators (e.g., car tax) to the higher RPI.
There are demands for the system to be changed!
High Inflation – means that you can’t buy as much with the money that you have. If wages don’t rise in line with inflation, then living standards fall.
Low Inflation – This is where prices are rising slowly. This tends to be good for consumers because prices are not rising faster than wages. However, if inflation is too low people might be put off spending (as they believe ‘things’ will get cheaper). A slowdown in spending means companies are selling fewer products/services which can affect wages and cause people to lose their jobs.
CPI tripled between March and May 2021.
Rising Oil and Energy Prices
British Petroleum (BP) profits for 2021 reached an eight-year high of $12.8 billion (£9.45 billion) compared to the $5.7 billion (£4.2 billion) LOSS in 2020 when the Covid-19 pandemic reduced demand for energy.
BP’s rival company Shell reported a quadrupling in profits to $19.3 billion (£14.25 billion), which benefitted from the energy crisis, which has prompted calls for a windfall tax on fossil fuel companies to relieve the financial pressure on households facing a sharp rise in bills.
Natural gas and electricity prices have soared since last summer (2021) because of tight gas supplies and rising demand as economies bounced back from the pandemic, and the standoff between Russia and Ukraine pushed energy prices even higher.
Rachel Reeves, the shadow chancellor tweeted: “the chancellor’s energy plans last week left families more worried than ever. It’s time for Labour’s plan for a one-off windfall tax on oil and gas producers to cut bills.”
These huge profits have come as UK households face a record energy bill increase of 54% from April 2021 with the average annual bill rising by more than £700 to £1971 which is pushing more families into fuel poverty and forcing them to choose between heating and eating!
In the United States, oil giants ExxonMobil and Chevron have reported net profits of $23 billion (£16.98 billion) and $15.6 billion (£11.52 billion) respectively for 2021 – the highest since 2014 when crude oil last traded above $100 p/barrel.
Borrowing Money and Interest Rates in 2022
Millions of homeowners face paying hundreds more towards their mortgages after the Bank of England upped interest rates.
On Thursday 3rd February 2022 the Bank of England upped interest rates to 0.50% from 0.25% in the face of spiralling inflation which hit 5.4% in December – the highest in 30 years. It is the second time rates have gone up in less than two months and the first back-to-back increase since before the financial crisis in 2004.
It will hit borrowers on variable rate mortgages most, just as families are contending with higher National Insurance from April, as well as soaring energy bills.
It comes on the same day the energy regulator Ofgem announced a 54% rise in the energy price cap affecting more than 22 million households. This will add £693 a year in energy bills to the average household, making the annual bill £1,971 a year.
Homeowners with £250,000 left on their mortgage paying today’s average variable rate of 3.31% will now see their annual mortgage costs increase by more than £600 per year, assuming banks pass on the 0.25 percentage point rise in full.
Economists have warned rates will rise further. Capital Economics predicted the Bank of England Monetary Policy Committee will up rates four times this year
(0.25% increase each time) to 1.25% by the end of 2022. Source-capitaleconomics.com. This would mean someone with £250,000 left on their variable mortgage-paying £208 a month more by the end of the year – an extra £2,500 annually.
In December 2021 the Bank of England raised the Bank rate from its record low of 0.1% (due to COVID-19 on the 19th of March 2020) to 0.25%. High street banks and lenders typically pass any increases on to customers by raising interest rates on credit cards, loans, and mortgages.
Why would the Bank of England raise interest rates?
Interest rates set the price for borrowing money and determine what banks pay you to save money with them. Central banks tend to increase rates when inflation rises above a target. The Bank of England’s target is 2% but inflation hit 5.4% in December.
This is because higher interest rates drive up the cost of borrowing and reduce households’ disposable income. This is one of the main tools the Bank uses to moderate economic growth because it limits consumer spending.
So, rising interest rates, very high inflation, supply shortages, soaring energy costs, and a slowdown in the economy indicate a global property downturn and possible market crash.
Escalating repossessions (the banks yet again adding property and land assets to their already burgeoning portfolios!), unaffordable mortgages, declining wealth, and buying power for the working and middle classes is the reality we are facing in the Western, Developed World during 2022 and beyond. The rental market will become the growth sector within the property markets whilst banks and financial institutions become our landlords.
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