UK Inflation: A Methodology Makeover Masks Persistent Pressures

The Office for National Statistics (ONS) recently revealed that a new methodology, set to take effect in 2026, would have reduced UK inflation figures by an average of 0.28 percentage points per month for the year ending June 2024. While this adjustment highlights evolving data precision, it also obscures a deeper truth: underlying inflationary pressures remain stubbornly embedded in key sectors. Investors must look beyond the headline numbers to uncover opportunities—and risks—in this evolving landscape.

The Methodology Shift: What Changed?

The ONS’s reforms focus on enhanced outlier detection and scanner data integration. For instance, “price relative fences” now exclude extreme fluctuations in categories like second-hand cars, while upcoming grocery scanner data (to be fully implemented by 2026) aims to capture real-time pricing. Crucially, these changes are prospective only—historical data from 2024 will not be revised. This means the 2.8% CPIH and 2.0% CPI rates reported for June 2024 remain valid, but they understate the true inflationary forces at play under the new framework.

The Data Behind the Decline: Where the Pressure Lingers

While headline inflation has cooled dramatically from peaks in 2022, sectoral splits reveal divergent trends:

1. Housing Costs: The Elephant in the Room
   Owner-occupiers’ housing costs (OOH) rose 6.8% annually in June 2024—the highest since 1992. This component alone contributed 1.09 percentage points to CPIH, a record high. With rental markets and mortgage rates still elevated, this sector remains a key driver of persistent inflation.

2. Goods Deflation vs. Services Inflation

3. Goods prices (CPI) fell 1.4% annually, the lowest since 2016, driven by plunging second-hand car prices (-9.8% year-on-year).

4. Services inflation, however, held steady at 5.7% annually, with sectors like hotels (+8.8% monthly) and rail fares adding upward pressure.

5. Food Prices: A Fragile Calm
   Food inflation dropped to 1.5-1.7%, but this masks volatility. Categories like sponge cake and tinned tuna saw price spikes, while meat and bread prices stabilized. Supply chain resilience remains uncertain.

International Context: UK Lagging in Inflation Relief

The UK’s 2.0% CPI trails peers like Germany (2.5%) and France (2.5%), but mirrors the Eurozone’s 1.9%. The U.S. HICP at 3.3% underscores differing methodologies—U.S. inflation metrics still grapple with higher core services costs. For investors, this suggests the UK’s “lower for longer” inflation environment may favor sectors like utilities or real estate, where pricing power is tied to OOH costs.

Investment Implications: Where to Look (and Avoid)

1. Winners: Real Estate & Services
2. Real estate stocks: Companies like British Land (BLND.L) or Land Securities (LAND.L) could benefit from sticky OOH inflation, which supports rental growth.

3. Travel & hospitality: The 6.3% annual rise in hotel prices hints at demand resilience, favoring firms like Whitbread (WTB.L).

4. Losers: Auto & Consumer Goods

5. Second-hand car retailers: Declining prices (-9.8% annually) and the ONS’s outlier filters suggest continued pressure on businesses like Inchcape (INCH.L).

6. Textiles & apparel: Clothing prices fell 1.2% monthly in June, squeezing margins for retailers like Next (NXT.L).

7. The Undecided: Energy & Utilities

8. Petrol prices rose 2.6% annually, but this pales compared to 2022’s spikes. Utilities may see moderate growth if OOH inflation fuels demand for energy-efficient home upgrades.

Conclusion: Inflation’s New Normal—Caution Required

The ONS’s methodology tweak underscores that inflation metrics are not static. While the new approach may reduce reported rates in the future, the data through June 2024 paints a clear picture: services and housing costs are the new inflation battlegrounds. With core CPIH at 4.2% and services inflation near 6%, the Bank of England’s wait-and-see stance may persist, but investors should prepare for sector-specific volatility.

The key takeaway? Ignore the headline figures. Instead, focus on sectors insulated from OOH-driven costs or positioned to capitalize on services demand. As the ONS’s own data shows, the UK’s inflation story is less about cooling prices and more about shifting sands—where the real risks and rewards lie.

Data Sources: ONS Consumer Price Inflation Reports (June 2024), ONS Methodology Updates (2023-2025).