By Jonathan Everett, Head of Policy
At the start of the year, the prime minister set out his five key priorities for 2023, the first of which was halving inflation. So far this year, inflation has remained high – but can it still halve from here? And what would it mean for it to halve?
Prices data suggests that if inflation is to halve this year, prices are going to have to start behaving very differently soon.
At the start of the year, the headline rate of inflation was 10.1%. The headline measure of inflation is based on the Consumer Price Index (CPI) – this is a measure to indicate how the price of a set range of goods is changing across the UK (for more detail on inflation and CPI, see our blog Inflation: A statistic hiding in plain sight). In January 2023, this price index was 10.1% higher than it was 12 months ago, in January 2022.
If headline inflation is to halve in 2023, this means that it will drop to 5.1%* by December 2023 – meaning that by December 2023 the prices will be 5.1% more than they were in December 2022. Prices will still be higher than in December 2022 but by around 5% instead of by around 10%. So, strictly, the headline figure of inflation could stay at the level it is now (8.7%) or increase further in the year and, as long as by December it drops back to being just 5% more than it was the year before the government would have been successful in halving inflation.
That is not a likely way for prices to behave – we have charted a more plausible way for CPI to halve, where for each month from May 2023 the 12-month rate of inflation drops by steady increments until it reaches 5.1%. The chart uses ONS data up to May 2023 – the figures for the rest of the year are based on a simple calculation to give an example of how prices might move from June onwards in a way that would meet the target. It is not a forecast or a prediction.
This shows a few noteworthy things.
First, the CPI index values (the yellow bars) continue to increase until October 2023 – even while the 12-month rate is dropping. This is because the 12-month rate (the blue line) is based on a comparison of the same month each year – so that can be trending downwards even while CPI continues to increase when compared month-to-month.
Second, for the halving to occur in this way, prices overall have to start increasing at a much slower rate – and start decreasing (slightly) at the end of the year. By the end of the year, CPI index values should have increased by 2.3 (from 131.3 to 133.6) – for comparison, between March 2023 and May 2023, it increased by 2.4 (from 128.9 to 131.3). So, it needs prices to grow by less over the rest of the year than they have in the last two months for which we have data.
What this shows is that there is a path for the government to meet its target – but it requires prices to start behaving very differently to how they have been so far this year.
* Half is 10.1% is 5.05%, but as inflation is usually given to one decimal place, we refer to 5.1% throughout.