Stay informed with free updates
Simply sign up to the UK inflation myFT Digest — delivered directly to your inbox.
A spectre is haunting the City of London — the spectre of VED.
Two weeks ago, Britain’s latest inflation statistics landed with a nasty shock, although which part was shocking was a matter of perspective.
Headline consumer prices came in 3.5 per cent higher year-on-year, a leap from 2.6pc that set social media managers’ mouths frothing.
But for the sell- and buy-siders — who were braced for a major uptick — the real shock lurked in the subcomponents.
Everyone knows April is the cruellest month, and that’s especially true for UK economic analysts, who are forced to make sense of a tricky assortment of tax changes, prices hikes, and the effects of Easter.
This time around, lots of attention was focused on energy, sewerage, and Vehicle Excise Duty. Two weeks on from the print, the last of those is still causing consternation.
VED is a complicated tax placed on every vehicle that uses the UK’s public roads. Various change to levy came into effect place last month as part one of its occasional overhauls:
-
First-year VED rates were doubled for most vehicles, with the level of charge now closely-linked to emissions.
-
Electric vehicles lost their VED exemptions, although new ones now pay a marginal first-year rate of £10
-
VED rates on hybrids got hiked
Overall, these made it hard predict the VED shift. But people are paid a lot of money to do that kind of thing, so they did.
Expectations across the street were pretty wide going in, reflecting significant uncertainty about the impact of the change. Based on conversations and our own inbox, predictions ranged from the mid single figures to the mid-teens for the monthly VED per cent change.
The ONS, we’re told, weren’t a lot of help. “The uncertainty was not made any easier since the ONS was very unresponsive around questions to the methodology,” Lucas Krishan, an analyst at Taula Capital Management, told FTAV:
A bit more of a back and forth would have been very helpful, ex ante, in gaining some certainty around what was likely going to happen.
Morgan Stanley’s preview said “we see large two-sided risks”, which is sell-sidese for ¯\_(ツ)_/¯.
Still, there was significant bamboozlement when Office for National Statistics reported a 26 per cent month-on-month increase.
Goldman Sachs’ James Moberly — who had called for 13.7 per cent jump — told clients “the rise was much larger than we had anticipated”.
Robert Wood of Pantheon Macroeconomics, who had predicted 16 per cent — said the gap was worth nearly 10 basis points on headline inflation, which is a lot amount of inflation if you’re trading the print. He told FTAV:
It could be a storm in a teacup, but it is the sort of thing that can shift markets a lot, and there is potential for something odd having happened here.
MS’s Bruna Skarica, who said “forecasting how the ONS would capture the VED reform was near-impossible”, wrote in a note (our emphasis):
It is not an exaggeration to say that the April inflation print is one of the most important data releases of the year in the UK. For three years now, it has surprised consensus meaningfully to the upside, although the drivers of the beat did vary. [This year] we think that consensus was caught out primarily by the strength in the ONS’ measure of the VED tax hike (our sense was that most analysts worked with an assumption of ~6-15%, where the actual figure came in at 26%), package holidays and air fares.
So how much of the April strength is likely to reverse in May, and what is the implication of the strong VED number? On this latter point, on our estimates, the VED hike added ~40bp to the uptick in headline services inflation today (~20-30bp more than we think consensus anticipated, and that we think seems plausible based on historical weights of vehicles on which inflation calculations are based). VED is car tax, with rates adjusted just once a year. Only in April 2026 will this boost to headline services inflation peter out from the numbers.
Krishan added:
So far, everyone I have talked to — that does not have an easily disprovable framework — also can’t make sense of the ONS’s VED number. I originally thought that either I would find the error I made or that I would find someone that managed to make sense of this, but we’re all confused about this still.
Now, clearly there’s a possibility that much of the City was just caught slipping this time around — although we see the argument that the ONS should be giving a clear steer on its methodologies and sources in advance.
But if the figure is wrong — which seems at least plausible — then it’s going to result in misleadingly-elevated services inflation for the next year, which isn’t much help for anyone setting interest rates, or force the ONS to issue a correction.
Asked about the VED number, a spokesperson for the ONS said it never speculates on the potential for revisions or corrections in any of the office’s statistics. The ONS only revises CPI and RPI numbers in exceptional circumstances, they added.
Further reading:
— The ONS vs the Xbox
— It’s possible that Pink broke UK hotel inflation. Has the ONS fixed it?
