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Saturday, 18 March 2017

INFLATION TO HIT 4.1% BY CHRISTMAS

The Chancellor expects to deliver an unwelcome Christmas present to us all. Inflation will hit 4.1% in the last three months of the year, the latest forecasts say.

I know Philip Hammond’s last Budget was a U-turn ago (and perhaps it's not called his last Budget for nothing! Boom, boom). But after the announcement a week after his Big Day that he would scrap plans to bring in £2bn over four years from raising National Insurance for self-employed people my wide eyes lighted on some small print I had missed.

Inflation. We’ll get the actual numbers for February on Tuesday 21st March. But when the Chancellor announced in his Budget on 8th March that he would “make no changes to previously planned upratings of duties on alcohol and tobacco” the plans he referred will raise the duty on alcohol by inflation and on tobacco by 2% above inflation.

So far so sneaky. But when I checked the actual alcohol duties they were rising by 3.9%. Duty on the alcohol in spirits and wine rose on 13 March by £27.66 per litre to £28.74. When he made that statement the latest CPI inflation was less than half that at 1.8%. Time to call the Treasury who, after a bit of toing and froing, explained. The inflation rate used for duties is not the CPI but the RPI. Hmmm. Four years ago the Office for National Statistics decided the RPI was such a poor measure of inflation they demoted its status and it is no longer a national statistic, though it is still published. The good thing for the Chancellor about the RPI is that the maths used to work it out makes it higher than CPI under almost all circumstances. So it's ideal for raising taxes.

Back to the figures. The January inflation figures - the ones the Chancellor had access to on Budget Day - show RPI at 2.6% not 3.9%. So back to the Treasury. More toing and froing. Aha. I'm told that the Chancellor doesn’t use past figures for raising duties he uses a forecast figure for RPI. The one he uses is the forecast for the third quarter (Q3) ie the months July to September 2017. And the forecast for RPI inflation for Q3 2017 is 3.9%. What! 3.9% inflation by the late summer?! Sure enough a bit more burrowing found the forecast tables from the Office for Budget Responsibility showing the Q3 forecast for RPI inflation is indeed 3.9%. Hence the hefty rise in your beer, wine, and spirits bill. And hence the 5.9% rise in tobacco duty, underpinned by a minimum pack price of £7.35 to put a lower limit on cheap brands.

Just to confuse things the actual January RPI figure is used for other things like Air Passenger Duty which will rise from 1 April for journeys over 2000 miles by £2 to £75 per flight or by £4 to £150 if you want to feel special by flying in anything other than economy. The cost of owning a car will also rise from April as Vehicle Excise Duty rises by £5 for anything but the least polluting vehicles and by £10 and £20 for the more and most polluting. At least petrol duty is frozen – as it has been for seven years the Treasury was keen to tell me. Without adding that the Chancellor has a bit of a windfall anyway from the rising price of petrol and diesel which has put up the VAT take by around 20% as the pump price rises from £1 to £1.20.

But back to inflation. By Christmas the OBR forecasts RPI inflation will be 4.1% before it starts falling. And the official measure of inflation, the CPI, will be 2.7% by Christmas. After that of course it is on a downward path to the 2% target which the Bank of England must – but almost never does – meet. Even the independent OBR never forecasts that the Bank will miss its target two years hence.

The February figures, published two weeks after the Budget, show inflation is indeed rising. CPI was up 0.5 to 2.3%. That is rather ahead of the 1.9% forecast by the OBR and close to the 2.4% it predicts for Q2 (April to June). RPI was up 0.6 to 3.2%, also slightly above the 3.0% predicted for Q1. So the latest figures do nothing to ease fears about inflation being back.

So the key takeaway from these figures is that Christmas 2017 is going to be much more expensive than last year.

Updated from my Money Box newsletter 17 March 2017. Sign up and get it every week with a full agenda for Saturday's programme. 

Vs. 1,10
22 March 2017