Inflation – 2006 sector breakdown

Looking at the broad categories of the UK’s RPI numbers here’s a brief breakdown of where the inflationary – and indeed deflationary – pressures are occuring. The most recent inflation number we have is for November. The headline RPI was +3.9%, year on year.

 Components rising more quickly than average
- Fuel and Light: up 29.5% from a year earlier. Although crude oil prices were only up 11% over the same period we’ve experienced significant rises in utility bills.
- Housing: up 6.6%. Driven by higher house prices, higher council taxes, and higher mortgage interest payments. These are excluded from the narrower CPI measure, which in part explains why CPI is lower than RPI. See here for the Office of National Statistics explanation for the differences in the measures.
- Housing Services: up 5.3%. Probably related to the stronger housing market. New migrant workers from the new EU members might put downward pressure on this component as they join the UK labour force?
- Food: up 4.5%. A major component of food prices is the cost of energy. Transportation costs are a big input, and fertilizer is often petrochemical based. Difficult weather conditions have also caused food prices to rise. Seasonal food price rises were extremely strong (+10.7%).
- Tobacco: up 4.1%

Components rising slower than the average
- Leisure Services: up 3.1%
- Personal Goods & Services: up 2.9%
- Alcoholic Drink: up 2.8%
- Catering: up 2.7%
- Travel Costs: up 1.5%. May be upward pressure on this as the result of significant rail fare increases in January. However, demand for air travel may fall as a result of recent travel chaos (terror alerts, fog, baggage problems, potential strike action in Q1), which may lead to some bargain flight deals.
- Household Goods: up 1.4%. The China effect – although less pronounced than in 2005 where we had deflation here.

Components currently in deflation
- Clothing and Footwear: down 0.4%. Again the impact of cheap production in the far east is a major factor, but deflation in this sector is much lower than it used to be. In 2002 this sector saw year on year price falls of 6%. Some very mixed signs from UK retailers over the Xmas period means we need to pay close attention to discounting here.
- Motoring Expenses: down 0.9%
- Leisure Goods: down 1.6%

If you’re looking for future bargains, the biggest acceleration in deflationary pressures appear to be in TVs (falling at around 20% pa) and cameras (down around 5% pa).

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