The Lockdown Weighted Inflation (CPILW) For April 2021

Summary

CPILW rose significantly to 1.5% in April from 0.8% in March. The official CPIH measure of inflation also rose significantly to 1.6%  from 1.0% the previous month.  The gap between the official measure and the measure using lockdown weights has remained small but positive.  This contrasts with the months prior to December 2020, when CPIH was less than CPILW, indicating that the official measure tended to understate inflation in that period. Since December 2020 the two measures have moved closely together indicating that the official measure CPIH is robust to any expenditure shifts resulting from the Pandemic.

Main Text

CPILW rose significantly to 1.5% in April from 0.8% in March. The official CPIH measure of inflation also rose significantly to 1.6%  from 1.0% the previous month.  The increase in inflation rates in both measures was 0.7pp (they appear to be less due to rounding).

The gap between CPIH and CPILW remains small: 0.17pp in April and 0.15pp in March. The closeness of the values despite the different expenditure weightings indicates that the official CPIH measure is robust against the effects of the pandemic on expenditure patterns.

An increase of 0.7pp in CPIH in one month is a big change. The last time we saw such a large change in one month was when CPIH fell from 1.5% to 0.9%, a drop of 0.6%. between March and April 2020 when the Pandemic first impacted inflation statistics.

It is tempting to think that we are seeing a reversal of this fall at the start of the Pandemic.  However, this is not the case. The big drop in inflation back in April 2020 was driven almost entirely by the dropping out of the big month on month (mom) increase of 0.6pp in April 2019: the mom decline from March to April 2020 was in contrast less than 0.01pp. Thus, the increase in inflation in April 2021 is almost entirely driven by the current mom inflation of 0.7pp and has nothing to do with the “dropping out” of the April 2020 mom inflation.  This can be seen clearly from the price-level graph below, which shows the price levels measured by CPIH and CPILW both going higher than ever before.

So, what has driven the big increase in mom CPIH this month? Housing Water Electricity and Gas (COICOP 04) has registered a very high mom increase of 2.4% and has a high expenditure weight. There have been huge increases in electricity and gas prices (over 9% mom) and Council tax (over 4% mom).  Since the expenditure weight of this expenditure category is one third, this would have caused o its own an increase of 0.8pp in CPIH. There are other sectors which have shown large mom increases: Clothing and Footwear (2.4%), Communications (1.8%), Transport (1.1%) and Health (1.2%).  The inflationary pressures have been partly counteracted by fall in Recreation and Culture (-1.1%) and miscellaneous goods and services (-0.4%).  Recreation and culture has fallen largely because of toys, games and hobbies, along with items to do with gardening, flowers and pets. The story for CPILW is much the same, although the weights differ the overall effects add up to the almost the same.

Overall, we can say that the increase in headline inflation in April 2021 is mainly driven by inflationary pressures felt in the month since March, not a reversal caused by the “dropping out” of April the previous year.

What was driving the big increase in energy prices? There was a significant increase in the price-cap set by Ofgem, driven by increases in wholesale energy prices over the last year. This is altered twice per year and so domestic electricity and gas prices should remain flat for the coming months.

As we move forwards, there are some large mom inflation figures which will drop out: notably July (0.38%), August (-0.32%) and September (0.35%).  The August and September figures reflect the Eat out to Help Out initiative and its reversal. The Inflation figures for July to September 2021 should be particularly variable due to this historic echo effect in the headline inflation figures. The other big mom figure in 2020 was December (at 0.24%).  However, since the “normal” mom rate corresponding to annual inflation around the long-run average of 2% is 0.17%, we can expect CPIH to rise in 2021 as in most of the months during the pandemic mom was significantly less than this (and even negative in some months). However, for inflation to rise above 2% we would need a succession of mom figures above 0.17% in 2021. The April 2021 figure is “three months target inflation in one” and indicates that we can expect inflation to rise to above 2% later in 2021.

If we look at the overall price-level as measured by the two measures CPIH and CPILW, we can see that the two are quite close this month. Their paths have diverged with CPILW above CPIH levels April to June 2020, and below for September to December, being close in the other months and have now converged.

Further Reading:

ONS Corona Virus and the effect on UK Prices. May 5th 2020. https://www.ons.gov.uk/economy/inflationandpriceindices/articles/coronavirusandtheeffectsonukprices/2020-05-06)

Huw Dixon, How can we measure consumer price inflation in a lockdown? Economics Observatory (May 25th 2020).

https://www.coronavirusandtheeconomy.com/question/how-can-we-measure-consumer-price-inflation-lockdown

ONS. Re-weighted consumer prices basket – adjusting for consumption changes during lockdown: July 2020. (August 19th 2020)

https://www.ons.gov.uk/economy/inflationandpriceindices/articles/priceseconomicanalysisquarterly/july2020

ONS. Coronavirus (COVID-19) and Consumer Price Inflation weights and prices: 2021 (11 February 2021).

https://www.ons.gov.uk/economy/inflationandpriceindices/articles/coronaviruscovid19andconsumerpriceinflationweightsandprices/2021

Energy price cap to increase in April but consumers should switch to save money | Ofgem, 5th February 2021.

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