UK inflation dips in September but the irony is that it was due to falling utility prices. Ooops!

The path of UK inflation and the way that it has been higher than it should be if you allow for our economic circumstances has been one of the main themes of this blog over the nearly three years that I have been posting. As I look at the news in the media I see more and more consequences of this being reported. It is with a rather grim humour that I see reports of the consequences of higher inflation from organisations such as the BBC who told us that there would not be any.

An economic consequence: Real Wages have fallen

A direct impact of this inflationary episode has been the way that it has exceeded wage growth over this period. This means that UK consumption and domestic demand have been weakened as wage earners find themselves drip by drip becoming poorer in real terms. If we add this to the fact that consumers have a natural tendency to deleverage by such actions as repaying debts we get a strong reason for why our economic performance has been so disappointing over this period.

Food banks have become an increasing feature of UK life

One of the components of the rise in inflation has been a rise in food prices over this period. This has meant that more and more are finding it difficult to feed themselves and are increasingly having to turn to food banks to help.

Trussell Trust figures released this week show that food banks fed 128,697 people nationwide in the last financial year, compared to 61,468 in 2010-11: an increase of 109%. Many of those helped were families struggling as a result of rising food and fuel prices combined with static incomes, high unemployment and changes to benefits
In the six months of this year so far (April to September) the Trussell Trust has already helped 110,000 so we can see that it is likely that the numbers will surge again over the full year.  If we look at the trends for food prices worldwide we can see that the consequences of the drought in the United States and elsewhere means that any substantial  relief is not in sight and the pressure will continue. Whilst the price of corn has dipped back from the peaks I discussed back in the summer it is still at US $7.40 per bushel which is some 16% higher than this time last year. We are also seeing upward pressure on UK food prices due ironically to the anti-drought conditions we have and indeed still are suffering from which has led to lower crop yields for many staple items (for those who have not followed the UK weather situation after fears of a drought earlier in the year it has rained and rained ). This will be in addition to the existing rises where the UK food (and non- alcoholic beverages) section of UK official inflation has risen from 100 in 2005 to 138.5 in September.
So I am sorry to have to report that food price pressure will remain an influence on our poorest citizens and that food banks look likely to spread further.
The Bank of England continues to try to raise the inflation rate
It is somewhat extraordinary in the light of the above but the Bank of England is continuing with a policy to raise our inflation rate.
Without that extra spending in the economy, the MPC thought that inflation would
be more likely in the medium term to undershoot the target.
Today sees the latest instalment in that effort as it will undertake what I have christened heavy-duty QE (Quantitative Easing) as it plans to buy £1 billion of our longer-dated Gilts (government bonds) out to our longest conventional bond which matures in 2060.
The price of oil is not helping
Since late June the price of a barrel of Brent crude oil has been rising and this morning it has pushed towards US $116 per barrel. This contrasts markedly with the dip below US $90 per barrel we saw (briefly) then. It also means that the oil price is now just above what were supposed to be the inflated figures of this time last year.
Petrol and diesel prices
The consequence of a higher oil price and higher taxes can be seen below and remember a 3 pence increase in fuel duty was delayed to January.

On Monday15th October 2012, the price of ULSP (unleaded petrol) was 138.3p/litre, this is 0.1p higher than the previous week.  The price for ULSD (diesel) was 143.2p/litre, this is 0.2p higher than the previous week.

The price of ULSP is 3.9p higher, with the price of ULSD 3.5p higher than in the equivalent week in 2011

Utility Bills

Scottish Power announced plans to raise its prices by a claimed average of 7% only yesterday. This made it the fourth of the six main energy companies to raise their prices. So we can expect upwards pressure on inflation from this in the coming months. It is also interesting that the price rises come in front of the period of expected highest consumption as winter approaches. The weights in inflation indices are fixed for the year so they are unlikely to allow for this. Those who read their economics text books may be musing the consequences of allowing a market to be driven by oligopolies and mostly foreign-owned ones at that.

Today’s numbers are an improvement

Let us start with the better news

The Consumer Prices Index (CPI) annual inflation stands at 2.2 per cent in September 2012, down from 2.5 per cent in August. This is the slowest rate of inflation since November 2009, when it was 1.9 per cent

The Retail Prices Index (RPI) annual inflation stands at 2.6 per cent in September 2012, down from 2.9 per cent in August

So an improvement in both measures but if we look at why we see something troubling if we consider the announced rises in many utility bills.

By far the largest downward pressure to the change in the RPI came as a result of September 2011’s utility bill rises falling out of the index calculation

It was also a strong influence in the fall of the CPI and was a downward influence of approximately 0.4%. You may note that this is twice the amount it fell by on a month on month basis compared to the same period in 2011.

They should have been better

If you were to go back to mainstream media output in the early part of the year you will see that they were promising inflation back to and below target right now. As our economy has underperformed then the let’s copy the Bank of England view line should have us well below target now. Why now? This was the period where inflation surged to an annual rate of 5.2% on the CPI measure. Instead we have found ourselves doing better but not a lot as you can see from the figures below.

The CPI rose by 0.4 per cent between August and September this year compared with a rise of 0.6 per cent a year ago.

October will be harder

If we look at the figures for last year we see that the “base effect” I have just discussed will fall away as the month on month increase was only 0.1% as opposed to the 0.6% for September. Added to this we know that there will be some upward pressure of which so far this month we have seen some evidence in the petrol and diesel prices I quoted above. Also there will be an impact from the rise in university tuition fees.

Comment

So we see from today’s numbers that whilst the UK’s inflation performance has improved it has done so by less than it should have done. Whilst the future is always uncertain the facts we do know such as planned price rises and “base effects” suggest that this is the low for the series for now. If we look at the UK’s poor economic performance in 2012 and late where the last three quarters for economic growth have gone -0.4%,-0.3% and then -0.4% this is a shocking effort which has driven the fall in real wages that has had effects which have echoed around our economy. One of these has been the rise in the use of food banks in the UK.

Next week I will be attending a seminar/conference on the planned changes to the RPI which I expect to involve it being somewhat neutered. If readers have any thoughts on this please let me know. Otherwise let me welcome you all to my new location.

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24 thoughts on “UK inflation dips in September but the irony is that it was due to falling utility prices. Ooops!

  1. It’s also well to remember that all the price increases over the past couple of years, while inflation was overshooting the BOE target, remain, and the erosion of real incomes that they caused remains a drag on consumption. Ironically, while interest rates have been at historic lows and shedloads of money thrown at the economy – in the form of QE – by letting inflation run too fast for too long and eroding real incomes, the real effect of BOE monetary policy may have been contractionary.

    • Hi Derrick

      I agree completely. This is also an example of another assymetry in what passes for our joint profession. When the US Federal Reserve was undershooting its target for core inflation in the US there was quite a bit of analysis concerning proposals for a catch-up to an annual 2% per year as in the creation of inflation. On the other side of the coin I note there is no mention of what the price level would have been if UK CPI had been 2% per annum or any effort to takes us back to where we should have been if it had been hit.

      Apparently undershoots should be caught up but overshoots should be ignored..

  2. Alex tests his ability to post comments…

    Has the planned changes to the way the CPI is calculated, been timed on the back of the USA Fed Reserve QE policy of $40 Billion per month to inifinity and beyond – from September 2012 ?

    If I recall from your previous posts the UK is interested in including House Prices in the new calculation method.

    Perhaps if they are to include House Prices in the new calc, their expectation is these prices will fall and thus offset the rise in the staples of living thereby acheiving the 2% nominal inflation target set.
    By hoping the consumer is glued to their tv to watch X Factor and other game / soap shows from the comfort of their living rooms while wearing their coats hats and gloves, the consumer won’t notice the real inflation rate.
    Besides a brisk walk to the food bank and return laden with bags of food will be good for their health, and as they walk they can think about selling their car they can no longer afford to use.

    Full circle, back to notayesmanseconomic land 🙂

    happy days

    Alex

    • Hi Alex

      Welcome or perhaps more accurately welcome again 🙂

      As to your question it was decided that “rental equivalence” would be used rather than house prices (via net acquisitions) as part of what will be called CPI-H. So in fact they have not taken that opportunity although on the other side rents would on the basis of the evidence have made little difference to the CPI in the last decade. So rather than a cynical plan it was a waste of time! Unless they do not want to have a way of measuring the next house price boom with our inflation target either….

  3. Hi Shaun, Welcome back.

    “One of the components of the rise in inflation has been a rise in food prices over this period. This has meant that more and more are finding it difficult to feed themselves and are increasingly having to turn to food banks to help.” A direct result from the deliberate and continuous manipulation of government published statistics and ongoing debasement! There is no hope of it getting any better, with all the cost pressures in the pipeline. This UK government is deluding itself just like the last. The problem they now have is that although QE debasement and the manipulation of official inflation data gets them out of the hole which all politicians have dug themselves into over many years of foolishness, and thus gives a quick fix, real inflation subsequently also hits the government’s own costs! They thus end up hoisted by their own petard, and the effect of the inflation which they have presided over comes back to hit them like a poison-tongued serpent in higher costs and lower tax revenue. They are then forced into even more QE debasement just to stand still. Eventually there will fiscal runaway! That is the problem with Zimbabwe economics. It always has a dire outcome.

  4. Ah , the old home ground , hope the job prospects go well , Shaun,

    Well here’s a rum do , as others have commented. But still MiniTrue thinks “this is a good thing ” that the Mervin has got close to the 2% figure !! its still above fer’ gods sake !!

    and the drop in wages and the cumalative erosion of old inflation on peoples income is not mentioned at all

    So whats next

    1, NO economice recovery – I dont rate 0.1/2% as recovery – thats a marging for error – by recovery I mean growth

    2, increasing prices again – those gas prices – conveinent yes? I suspect more Gerry Mandering….

    3, Why is oil still so expensive ? ah theres the clue…… and oil and all other fossile fuels power our and the world economy

    watch out for more inflation

    Forbin

    Popcorn in hand watching the show go on…….

    • Hi Forbin and thank you

      Quite a few places reported a falling cost of living for the UK in September which ignores the following.

      The underlying index for Consumer Price Inflation rose from 123.1 in August to 123.5 in September which is of course a rise.

      The underlying index for Retail Price Inflation rose from 243 in August to 244.2 in September which is also a rise.

  5. I’m not an economist (my comments are probably going to demonstrate this!!)……

    With the price of oil/energy remaining high or rising further, and the “western lifestyle” based pretty solidly on the consumption of oil-based products – is there anything that the BoE/FED can realistically do to curb inflation?

    OK so QE/devaluation won’t help as this raises the price in “local currency” (I think I’m right on that?!). That apart, it’s serious question.

    • Hi Mark and welcome to my part of the blogosphere

      That is a very valid question and one which is the subject of debate as there are many different paths that could happen. As we stand it looks as though the oil price would be under upwards pressure, but what we do not know is the impact of fracking or shale gas on supplies and hence prices. Perhaps there will also been a breakthrough in nuclear technology such as thorium or fusion power.

      However in the main it is the central banks job to deal with the consequences or second-order effects of these which is to stop inflation spiralling away in response to fuel price rises. So wage/price spirals are their remit rather than the oil price rise which is usually nothing to do with them. Although with the emergence of such much monetary activism such as QE I have written before that central banks have probably contributed to the rising oil price.

      • Thorium fission reactors require a small amount of implementation engineering, controlled fusion for power generation still requires a major scientific breakthrough.

        Oil price is subject to supply & demand. Hence we should expect restrained supply & high prices to trigger progress in energy efficiency technology.

  6. “real inflation subsequently also hits the government’s own costs! They thus end up hoisted by their own petard, and the effect of the inflation which they have presided over comes back to hit them like a poison-tongued serpent in higher costs and lower tax revenue”.

    Thanks drrdf (I think) I hadn’t thought about the fact any Government still can’t escape the true inflation number no matter how much meddling they do with the measurement method.

    For me, the bigger problem is that as they get further from the true inflation number as a result of their messing with the way it’s measured, how can they possibly come up with realistic policies to tackle it? Given that they have less and less idea of what the inflation number is?

    If they continue to ignore my idea of the real “core inflation” number (i.e. food, shelter and fuel) they may find themselves being bitten by mass riots and ultimate overthrow. A long way away at this juncture I think, but in the words of Joy Division’s “Candidate” “it’s creeping up slowly, that last fatal hour”.

  7. Nice to be back!

    Further to Alex’s thoughts as well as a brisk walk to the food bank, how about a spot of digging in the garden and getting the veggie plot going? As well as keeping us warm we can get some nice healthy, cheap food.

    Seriously I can see a return to the land happening especially in parts of Europe where older family members may well still live in the country whilst the youngsters went to the cities to make their fortunes. This is definitely the case in countries like China and India where it wouldn’t take much to reverse the flow back from the cities.

    As for me I shall have to practice as my gardening skills are rudimentary at best and I can see starvation on the horizon unless they improve fast.

    It will certainly be beneficial to the inflation indeces if house prices fall as Alex says so they can conveniently offset all the other rises.

    • Hi Jan

      Yes in many ways it is although the muscial theme might be Return to Sender by Elvis Presley! Unfortunately my share of the garden and my window boxes would not amount to much but I guess they are there if we go back to a Wartime Farm type situation.

      Actually the changes to the inflation indices seem to be heading towards not recognising the next boom in house prices rather than capturing falls. Perhaps we are getting a hint that they will try not to allow house price falls of any substantial nature.

  8. ah back to the country – growing our own food – I hope not !

    we couldn’t feed 40million in WWII yet alone 62 Million in 2013/14

    and in 2015 the lights start going out because either we cant afford the gas or its not available to buy

    ah , interesting times indeed!!

    I expect a National Effort to get Xfactor to the people when the telly doens’t work !

    Forbin

  9. Back to where i first encountered your wonderful blog which i look forward to reading daily – not even a newspaper columnist has kept me that engaged

  10. OH, well… Back here again! Now I have to reorganise my icons again. Good luck Shaun, I hope you remain as successful at analysis and comment in this location.

    As for food banks, out there in the real world, there is a benefits system that is costing the country a fortune. I have very detailed knowledge of this system as a long time adviser. You will not starve on the UK benefits, especially if you have any disability when amounts can easily double. But both the DWP and the recipients are capable of introducing significant delays in payment. Of course minor delays are backdated so there is compensation, eventually. But for people with no savings (a vast proportion), the only solutions are a crisis loan (taken later from your paid benefits), help from your family and/or the food banks. I hope those who get benefits backdated are using some of that to return some food to the banks! No, seriously, of course they won’t.

    The government has made the benefits system enormously complex, mostly aiming for fairness but also to cut fraud. Unfortunately the users and DWP staff find it very demanding to operate. I hope the government has budgeted for a big chunk of extra crisis loans when the Universal Credit starts in about a year. There will be a lot of problems then. It relies on a new IT system!

  11. Hi Shaun,

    For your conference, I think the UK needs a “money spent” inflation index to record hard numbers. Money spent uses hard numbers, not a manipulable “price basket” of occasionally purchased items. We could record house transactions and record average prices per area. (This simple measure allows accurate inflation numbers regardless of housing transaction volume) I suspect the cost of housing per square meter would have shown an alarming increase from about 1998.

    A money spent index could also track both public and private borrowing. Borrowing numbers transparency would embarrass many politicians and possibly the OBR.

    Why fumble in the dark with “rental equivalence” when we could have the transparency of a “money spent” index using proven data ?

    PS. We could try to model rental income per square meter, it should be reasonably accurate – even if it’s under declared.

  12. And how is the average saver meant to protect against inflation if they only revise the index calculation method downwards? Those NS&I products won’t be so attractive when the reported inflation is so different to what the money can actually be used to buy.

    We need a new party!

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