When we consider UK inflation the headline rate suggests little inflationary pressure in the economy relative to history. But inflation is the average rate of change of a basket of goods, and when we dig deeper the picture becomes far more complex. Clothing prices fell sharply between 1999 and 2009, widely believed to be a statistical error which led to the under recording of prices, and have flat lined thereafter. But the cost of education has soared, with university tuition fees and private education costs rising.
The prices of alcohol, tobacco, restaurants and hotels have also risen by more than the average – no wonder Generation Z are choosing to stay at home and abandoning nights out. Fortunately household equipment prices for goods such as televisions have barely budged.
The real takeaway from all of this is how important government policy has been on UK inflation data over the last twenty years. It is government policy that caused education costs to spike in 2012 as the maximum universities could charge was raised from £6,000 per annum to £9,000 per annum. The introduction of minimum alcohol prices and rising duties on alcohol and cigarettes has played a role in their spiralling costs. When we look forward, carefully monitoring the role of government policy will be key to our inflation outlook, especially with the rise of populism around the world which introduces the potential for even larger government interference in prices.
David Hooker, inflation-linked corporate bond fund manager, Insight Investment.