Eyewatering Inflation RPI Hits 11.7% pa and CPI 9.1% pa

The Office for National Statistics (ONS) has today published yet more 40-year record inflation figures for May 2022 in the UK.  This followed another 40-year record but unexpected inflation rate increase in the USA from 8.2% pa in April to 8.6% pa in May.  Last month, USA inflation had actually fallen to 8.2% pa from 8.5% pa in March.

UK Consumer Prices Index (CPI) increased only moderately by just 0.1% to 9.1% pa in May 2022 (9.0% in April, 7.0% in March, 6.2%pa in February, 5.5%pa in January, 5.4%pa in December, 5.1%pa in November and 4.2%pa in October). 

The ONS put the inflationary increases price increases down to the same as last month, see below with transport and housing accounting for half of the total inflationary increase:

• Transport and energy, as Ukraine and Russian energy restrictions continue
• Housing and household services (not included in CPI but included in the Consumer Prices Index plus Housing)
• Restaurants and hotels
• Recreation and culture
• Communications
• Food and non-alcoholic beverages

What about the old inflation measure of the Retail Prices Index (RPI)?

The old measure of inflation RPI, an arithmetical mean of the average prices of a basket of household spending, went double digit again, as predicted, to an unbelievable 40 year high of 11.7% pa (up from 11.10% pa in April, March 9.0% pa, 8.2% pa in February, 7.8% pa in January, 7.5% pa in December, 7.1% pa in November and 6.0% pa in October).  That’s means RPI inflation i.e., real spending costs (not weighted costs) have nearly doubled in 7 months.

We repeat our message on inflation in that we still believe that RPI is a more accurate measure as it is the costs of a standard amount of a set of goods and services divided by the number of goods and services called an arithmetical mean whereas the newer measure of inflation, CPI is a geometrical mean i.e., prices multiplied together and then the nth root of the same number of goods and services.

Bold Interest Rate Action Not Delivered

The Bank of England increased interest rates by just 0.25% in June to 1.25% pa to try and curb inflation but balance this with not putting the economy into recession.  We suggested in our news story earlier this week that they had ‘bottled’ it, whereas the Federal Reserve acted more strongly with a 0.75% increase.

We Repeat:  ‘Smoke and Mirrors’? Governments Needs Inflation

Governments around the world need inflation to devalue public sector debt.  Just the UK government alone borrowed £500 billion to pay for covid-19.   Most of this debt borrowing was via fixed rate gilts (government bonds).  Think of them like an interest only fixed rate mortgage.  You pay interest every month or year and then at the end of the term, you pay the debt back in full.  £500 billion of debt on an interest only fixed rate means that if we had inflation at just 5%pa over a 10-year period, that £500 billion debt would be reduced in real terms value by 63% i.e., in today’s ‘real terms value’, debt to be repaid in 10 years would be the equivalent today of £185bn.