A cold February, it turns out, is not just miserable. It is also, in a roundabout way, the thing that decides whether your mortgage gets cheaper next year.
That sounds like a stretch. It isn't.
The Basket That Runs the Country
The Bank of England sets interest rates largely in response to inflation. And the number they watch most closely – the Consumer Prices Index, or CPI – is calculated by tracking the cost of a notional "basket" of goods that a typical British household buys: food, fuel, clothing, energy bills, and a few hundred other things.
The detail nobody mentions when journalists talk about "the inflation figure" is that this basket is full of things whose prices move with the weather. Literally with the weather. Gas and electricity costs spike in a cold January. A wet spring hammers soft-fruit harvests and the price of your strawberries goes with it. A hot dry summer pushes up the cost of animal feed, which feeds through into meat prices months later. The basket does not know about macroeconomics. It just knows it's cold.
From the Field to the Decision Room
So picture the chain. A cold snap hits in February, households crank their heating up, gas demand rises faster than suppliers expected, and energy bills jump. That jump gets captured in the next CPI reading. The reading comes in higher than forecast. The Bank of England's Monetary Policy Committee sits down in Threadneedle Street and looks at a number that says prices are rising. They raise rates, or hold them higher for longer. Your mortgage renewal lands six weeks later and the rate is half a point higher than you'd hoped.
None of the people in that chain did anything wrong. The MPC is not being careless; the statisticians are not cooking the books. But the governing number that determines what millions of people pay to borrow money was, at its origin, partly a weather report.
There is actually a long tradition of finance and weather being tangled together like this. They called it prudence. We now call it quantitative modelling and it costs considerably more.
What is core inflation and why is it watched?
This is exactly why economists also publish something called "core inflation", which strips out energy and food prices on the grounds that they're too volatile, too weather-dependent, to give a clean read on underlying price pressures. Core inflation is the Bank trying to hear what the economy is doing without all the meteorological noise.
Whether they succeed is a different argument. But the fact that they need a separate figure at all tells you something: the headline number everyone quotes on the news is, openly and by design, partly seasonal. Partly agricultural. Partly a function of where the jet stream decided to sit in November.
Your mortgage rate has a lot of parents. The weather is one of them, and it never gets mentioned in the Budget.
Questions this raises
- How much of the CPI basket moves with the weather?
- Does the Bank of England ignore food price spikes?
- Why do rate decisions lag the inflation figure?
