Inflation Report August 2013 Costs and prices

Chart 4.1 Contributions to CPI inflation (a) (a)Contributions to annual CPI inflation. Data are non seasonally adjusted. (b)Calculated as a residual. Includes a rounding residual.

Chart 4.2 Bank staff projection for near-term CPI inflation (a) (a)The blue diamonds show Bank staff’s central projection for CPI inflation for April, May and June at the time of the May Inflation Report. The red diamonds show the current staff projection for July, August and September. The bands on each side of the diamonds show the root mean squared error of projections for CPI inflation one, two and three months ahead made since 2004.

Chart 4.3 CPI services prices excluding VAT and CPI goods prices excluding energy and VAT (a) (a)Dashed lines are 1997–2007 averages. (b)Excludes staff estimates of the impact of VAT changes. (c)Excludes staff estimates of the impact of VAT changes and the contribution of domestic energy and fuel.

Chart 4.4 Consumer goods import prices and CPI goods prices excluding energy and VAT (a)Combined import price deflator for food, cars and other consumer goods. Data are available to May (b)Excludes staff estimates of the impact of VAT changes and domestic energy and fuel prices. Data are non seasonally adjusted.

Chart 4.5 UK import prices and foreign export prices excluding oil Sources: Bank of England, CEIC, Eurostat, ONS, Thomson Reuters Datastream and Bank calculations. (a)Domestic currency non-oil export prices of goods and services of 52 countries weighted according to their shares in UK imports, divided by the average sterling effective exchange rate index over the quarter. The sample does not include any major oil exporters. The observation for 2013 Q1 is an estimate, with export prices for Croatia, Pakistan, the Philippines and Turkey assumed to grow at the same rate as export prices in the rest of the world excluding the euro area and the United States. (b)Goods and services excluding fuels deflator, excluding the impact of MTIC fraud. (c)Domestic currency non-oil export prices of goods and services of 52 countries, as defined in footnote (a).

Chart 4.6 US dollar oil and commodity prices Sources: Bloomberg, S&P indices and Thomson Reuters Datastream. (a)US dollar Brent forward prices for delivery in 10–21 days’ time. (b)Calculated using S&P US dollar commodity price indices. (c)Total agriculture and livestock S&P commodity index.

Chart 4.7 Real product wages, labour market slack and productivity (a)This is a central staff estimate, around which there is considerable uncertainty. See Section 3 box on equilibrium unemployment and labour market slack on pages 28–29. (b)Private sector AWE total pay deflated by the market sector gross value added deflator. (c)Market sector output per worker.

Chart 4.8 Contributions to private sector unit labour costs (a) Sources: ONS and Bank calculations. (a)Contributions do not sum to total due to the method of calculation. (b)Calculated using private sector AWE data adjusted using the ratio of private sector employee compensation to wages and salaries. (c)Estimated labour costs per worker as defined in footnote (b) divided by market sector output per worker. (d)Quarterly growth in market sector output per worker, inverted.

Chart 4.9 Private sector corporate profit share Sources: ONS and Bank calculations. (a)A recession is defined as at least two consecutive quarters of falling output (at constant market prices) estimated using the latest data. The recession is assumed to end once output began to rise. (b)Private sector corporates’ gross trading profits (excluding the alignment adjustment), divided by nominal gross value added at basic prices, excluding general government gross operating surplus and central government and local authority compensation of employees. Central government and local authority compensation have been seasonally adjusted by Bank staff.

Chart 4.10 Agents’ survey: profit margins compared to normal (a) (a)The survey was conducted by the Bank’s Agents between 17 May and 19 June 2013, 406 firms with aggregate turnover of £61 billion took part. Respondents were asked, ‘How would you describe your current profit margin?’. (b)Weighted average of responses from companies reporting some export sales, weighted by company turnover and proportion of sales that are exported. (c)Weighted average of responses from all firms, weighted by company turnover and the proportion of sales that are domestic. (d)Percentages reporting above normal margins less percentages reporting below normal margins.

Chart 4.11 Companies’ expected changes in prices and private sector output deflator Sources: CBI and ONS. (a)Private sector output deflator is based on market sector gross value added. (b)Companies are asked: ‘What percentage change is expected to occur over the next twelve months in your own average output price for goods sold into UK markets?’. CBI data for the manufacturing, business/consumer services and distribution sectors, weighted together using nominal shares in value added. (c)Companies are asked: ‘What percentage change is expected to occur over the next twelve months in the general level of prices in the markets that you compete in?’. For details on the construction of the series shown, see footnote (b).

Tables

Table 4.A Private sector earnings (a) Sources: Bank of England, Incomes Data Services, the Labour Research Department, ONS and XpertHR. (a)Based on quarterly data unless otherwise stated. (b)Data in the two months to May. (c)Total pay excluding bonuses and arrears of pay. (d)Percentage points. (e)Average over the past twelve months, based on monthly data.

Table 4.B Indicators of inflation expectations (a) Sources: Bank of England, Barclays Capital, Bloomberg, CBI (all rights reserved), Citigroup, GfK NOP, ONS, YouGov and Bank calculations. Note: Due to an error, footnote (i) was incorrectly labelled as ‘Three-year forward RPI inflation implied by swaps’ in the printed version of the Report. (a)Data are non seasonally adjusted. (b)Dates in parentheses indicate start date of data series. (c)Financial markets data are the average from 1–31 July (d)The household surveys ask about expected changes in prices but do not reference a specific price index, and the measures are based on the median estimated price change. (e)CBI data for the manufacturing, business/consumer services and distribution sectors, weighted together using nominal shares in value added. Companies are asked about the expected percentage price change over the coming twelve months in the markets in which they compete. (f)Financial market measures are RPI inflation at various horizons implied from swaps. (g)Bank/NOP and Barclays Basix are two year ahead measures. The professional forecasters and financial market measures are three years ahead. (h)Bank’s survey of external forecasters. (i) RPI inflation over the next three years implied from swaps. (j)Bank/NOP and Barclays Basix are five year ahead measures. YouGov/Citigroup and financial market measures are five to ten years ahead. (k)Five year, five-year forward RPI inflation implied by swaps.

Monitoring medium-term inflation expectations

Chart A Estimated average changes in instantaneous forward inflation rates derived from swaps in response to CPI news (a) Sources: Bloomberg, ONS and Bank calculations. (a)The average changes are the estimated slope coefficients from regressions of the change in instantaneous forward inflation rates at each horizon on news in the CPI release, on the day on which CPI data were published. News is measured as the difference between the data outturn and the Bloomberg median forecast. (b)The bars cover two standard errors on either side of the estimated slope coefficients for September 2004-December 2007 (blue) and July 2012-June 2013 (pink). (c)Estimated slope coefficients for September 2004-December 2007.

Chart B Indicators of uncertainty about future inflation (a) Sources: Bloomberg, ONS and Bank calculations. (a)Standard deviation of the probability distribution of annual RPI outturns for five years and ten years ahead implied by options. It is not possible to construct a full set of probability distributions for some days due to technical reasons.