UK inflation rises are not a “surprise” they are now a regular feature as are falling real wages

Sometimes events move with their own motion and of their own course flow into each other. For example yesterday I was discussing a future boost to the UK money supply via the fact that changes to the Bank of England’s Quantitative Easing programme will mean that the UK will be issuing fewer Gilts (government bonds) than otherwise and thus sucking up less cash to buy them. I also discussed that QE was now looking ever more permanent which for those who feel that the stock of QE matters will also provide a boost. Now with a timing that will have the American economist Milton Friedman smiling from his grave we move today to the UK inflation figures.

Where do we stand?

There are two main components to this. Firstly we need to examine our inflation performance in recent times. If we do so we see that it has been above the 2% target for the Consumer Price Index since December 2009 and during that period it was  over 3% -when the Governor of the Bank of England has to write an explanatory letter to the Chancellor- for twenty-eight months in a row. This was not such a surprise when you consider that the Bank of England was employing a policy designed to increase inflation called QE. You do not need to take my word for it take theirs.

Without that extra spending in the economy, the MPC thought that inflation would be more likely in the medium term to undershoot the target.

Actually it used to say explicitly that QE was to boost inflation but I guess someone figured that it was embarrassing and changed it! If you cannot change reality then try to change perception and all that.

Where this inflationary episode with the Consumer Price Index peaking at an annual rate of 5.2% last autumn really gets significance is if one compares it to the performance of the UK economy. If we look over the same time period we see that in the last quarter of 2009 our economic output (GDP at market prices) was 100.5 and as of the third quarter of this year the same measure was 103.  If economic growth of just under 2.5% in just under 3 years is inflationary then we are, to use a technical term, in a right mess! But in fact of course we have a central bank which has pursued the wrong policy as QE has generated inflation (as it was designed too) but not generated much economic growth.

Real wages have fallen

This to my mind has been a main driver of why the policy has failed. The additional inflation has led to this from the Office for National Statistics.

Since the economic downturn in 2008 wages have not kept up with price rises

In many ways it is quite simple. Higher inflation has exceeded wage growth and led to a fall in real wages. Workers are accordingly poorer and have therefore spent less than otherwise. So our economy has had a downwards influence from something which was supposed to provide a boost. In twitter terms you might call that #policyfailure.

What are today’s numbers?

From the Office for National Statistics.

The Consumer Prices Index (CPI) annual inflation stands at 2.7 per cent in October 2012, up from 2.2 per cent in September.

Okay so we continue to have a problem what were the causes this month?

The main upward pressure came from the education sector (university tuition fees) with smaller upward contributions from food & non-alcoholic beverages and transport

What about our old measure?

The Retail Prices Index (RPI) annual inflation stands at 3.2 per cent in October 2012, up from 2.6 per cent in September. The largest upward pressure came from university tuition fees, followed by food and housing.

So we see that it rose at a faster rate widening the gap between it and CPI. Those who remember my discussion from the 29th of October  about proposed “improvements” to the RPI will probably be having a wry smile at this point. The old target of RPI rose to 3.1%.

The underlying index for the CPI rose from 123.5 to 124.2 and if we look at the last three monthly rises of 0.5%,0.4% and now 0.5% we can see that these would have it even further above the 2% annual target if repeated.

This brings me to a fundamental difference between me and some economists. David (Danny) Blanchflower was in such a rush to say the below he forgot that it was his view too!

oops coalition argument that inflation falling just got booted into touch

He went on to say that he had always meant the forecast horizon when I asked but we engaged again. From Mr.Blanchflower.

Just to be clear that 0.32% of the 0.5% rise in the CPI caused by one-off rise in tuition fees has no effect on inflation in LR as drops out

If we ignore for the moment that he has just swept aside a price rise which some people will have to pay (although not him as he resides in the US) I responded with this.

How many more times will “one-off” be used. Isnt its frequent use a contradiction in terms? Ditto for temporary

To which he replied.

inflation is only 2.7% & economy is flatlining we are in a mess due to disastrous macro policy QE is economy’s lifeblood

I did not think that was actually a reply to my question but if we stick with it we see several things. Firstly the fact that inflation is 3.2% under the RPI measure seems to have been ignored. Secondly I would like to return to real wages. You see the latest data was this, from the ONS

Between June to August 2011 and June to August 2012, total pay for employees in Great Britain rose by 1.7 per cent.

Now if your pay rise was 1.7% would you think that “inflation is only 2.7%”? You are facing a fall of 1% per annum in your real wages if you use CPI or 1.5% if you use RPI. An odd description of your “lifeblood” don’t you think? Draining away perhaps.

Actually I believe that the position is worse than the averages tell us. We know that sadly our society has become very unbalanced between the “haves” and “have-nots” and this makes me suspect that many have had a lower wage rise or maybe none at all. Accordingly the downwards economic impact is likely to be magnified.

In addition we have those who are savers who see low interest rates on their savings which due to the Bank of England’s Funding for Lending Scheme is in fact getting lower but they are having to face persistent inflation. I doubt whether it feels like “only 2.7%” to them. Let us also remember that we will also have people on fixed incomes such as annuities and pensions and even some in this category (income drawdown) who have in fact seen reductions.

Borrowers seem to be losing too

From the ONS.

Mortgage interest payments: which increased the RPI 12-month rate in October by 0.1 percentage points but is excluded from the CPI.

Ahem isn’t Funding for Lending supposed to be reducing these? So savers get lower rates and borrowers get higher ones? I note also that according to Moneyfacts average credit card rates have risen to 19.1% per annum.


Over the nearly three years that I have been writing this blog my earliest and most constant theme has been that UK inflation has been too high. I opened with the correct view that we were in danger of such an inflationary episode and that it would have consequences which we would regret. Now three years later we are pretty much in the same place but sadly many seem to have learnt nothing. Those who told me this would not happen have twisted the numbers with words and phrases such as “one-off” “temporary” and “surprise” and they have dashed for other measures such as “core inflation” “CPIY” and “CPI-CT” and then usually abandoned them just as fast as they disappointed them too.

This has weakened the UK economy for as I have described above the latest figures tell us that current policy is hurting workers,savers and mortgage borrowers! That does not leave many does it? Well it does leave the banking sector benefitting and that policy is proving to be a bigger and bigger failure. In fact the UK banking sector is probably a fan of the group Hot Chocolate and this is my suggestion for them to sing at any karaoke evenings when they are with members of the UK’s political class.

Baby, it’s amazing just how wonderful it is
That the things we like to do are just the same.

Everyone’s a winner, baby, that’s the truth (yes, the truth)


16 thoughts on “UK inflation rises are not a “surprise” they are now a regular feature as are falling real wages

  1. hello shaun,

    sort of a ground hog day – and oue elected politico’s are wanting to change the measuring stick as well

    well why not , beats actually having to do something , doesn’t it ?

    a theme of mine is/was – its the banks, stupid.!

    governance of the people by the banks , for the banks….

    The poor old top 5% are doing ok – I’m alright jack is the motto of the day you know!

    What to do ? well I don;’t think I’m allowed to do anything so I’ll sit here with my popcorn – hopeing I can still afford it next year !


  2. Shaun

    I don’t agree with QE but as I have said before what is the alternative ?

    If we don’t want real austerity (not George’s mocksterity) then the the government will have to run a big deficit and that must be financed. Without QE monetisation, this would be have to be financed in the market at much higher yields. We can debate what those yield might be, but they will be a lot higher. With inflation, 1 trillion+ debt pile, 120bn+ deficit and flat GDP the market, particularly foreign investors, would want unaffordable yields. There would be a rush to the long Gilt exit.

    So if they stop QE now, the result would likely be rapidly rising GIlt yields, much higher mortgage rates, crashing house prices, falling GDP – higher deficits, downgrades etc, etc. A death spiral towards hard default.

    Isn’t it just a choice between soft default via inflation or hard default ?

    I would vote for latter but I don’t think its realistic to expect any politician to choose hard default given that QE is now considered a normal monetary tool. And yes, the bankers and the asset rich wealthy benefit whilst real incomes suffer – just as they have for the last 30 years. Lets not forget in hard default, the biggest holders of Gilts are UK citizens themselves.

    I know I am repeating myself but I am genuinely interested to know what the alternatives are.

    • DaveS
      Let the banks go bust, sharp shock and re-set. Problem is the 0.1% lose proportionally the most under that scenario, so aint going to happen, so its back to milking the 99% using inflation to lower living standards in our zombified ‘alice through the looking glass’ world.

      • Thanks JW – I agree, should have happened in 2008 but it didn’t – so I have to say, if they do it now…… then what……….

        Government debt jumps as all bailouts become on balance sheet – in theory rising to 150% GDP ? Will certainly take losses on its bail-outs anyway,. Would still be running 120bn+ deficit – without QE. Where would Gilt yields be ? Would we be downgraded etc etc.

        What happens to housing market – should nationalised banks subsidise mortgage rates i.e. make losses ? Be better to have house price crash but then that could tip us over into depression……… and risk of hard default.

        Would nationalised banks increase lending to business? I read yesterday in Telgraph that SME’s are sitting on 120bn cash pile but won’t spend it due to fears for economy – don’t think house price crash will encourage them. Even if lack of bank lending really was the problem it would take years/decades to rebalance economy (I doubt it would anyway) – we would face default long before we got there.

        The bankers would certainly suffer but so would City – what would UK look like without the City ?

    • Hi DaveS

      I can see others have replied but let me throw something extra into the debate. I ahev observed before that it is the countries that do not have QE are the ones which have negative bond yields i.e the highest bond prices.

      James mackintosh of the FT had clearly been thinking about such issues and here is our twitter exchange from earlier.

      James Mackintosh‏@jmackin2

      For those moaning about low interest rates: if there had been no QE, bond yields would (probably) be even lower, due to risk aversion

      Shaun Richards‏@notayesmansecon

      @jmackin2 A point I have made before is that it is non-QE countries who have negative bond yields… Curious in some ways but true

      James Mackintosh‏@jmackin2

      @notayesmansecon Except Switzerland: not QE exactly but biggest/fastest central bank balance sheet expansion since Zimbabwe, still -ve yield

      Shaun Richards‏@notayesmansecon

      @jmackin2 Agreed Qeasy but not strictly QE…

      Actually I am coming to the view that QE may reduce bond yields at first but it then wears off. I will wrote more on this once I have coalesced my thoughts more.

    • @Dave S
      “I don’t agree with QE but as I have said before what is the alternative ?”

      Sorry Dave I dont have any alternatives.
      I would answer that perhaps any alternative would be unlikely to change the course of future events at this stage. QE, it could be argued will make the end result somewhat worse at the final reckoning but do what you will… we are all going to see it come tumbling down upon us at some point.

      The numbers are all just TOO BIG and QE only makes the numbers bigger!

      I’m with Forbin and his popcorn (if he can spare any?)

  3. Dave S
    As I’ve said on another thread, there really isn’t an answer is there? We made the wrong choices in 2008 and now the problem is just compounded. I expect (at some unknown time in the future) that we will be forced into drastic spending cuts and tax rises, thereby lowering the general standard of living by quite a bit. Asset prices such as houses and stocks will probably have to revert to levels at which they can be sustained, as indeed will all selling prices which largely depend on sources of credit. It’s not a happy scene to contemplate. My only consolation would be to see people like Blanchflower permanently removed from influence as he and his ilk have helped to speed up our financial destruction. QE really is a disgraceful policy as it’s simply a hidden tax on the people.

    • Forced into Greek style austerity then…………..

      Don’t think democratic leaders will choose this – Greece, Spain etc have to because they don’t elect Merkel (not suggesting dictatorship here – yikes). Can’t see it ever happening in UK now central bankers have new “weapon” of QE. I expect debt forgiveness (cancelled Gilts) – followed by more QE – followed by debt cancellation – with inflation rising until as Bernanke puts it – “it works”.

      I feel the debts of the West are simply too large for any conventional default mechanisms. The risks are too great. The IMF would be overwhelmed. They have let it get too big.

      I can’t see an answer but open to ideas – I am still looking.

      • “Can’t see it ever happening in UK now central bankers have new “weapon” of QE.”

        We are still in danger of a credit downgrade from at least two agencies as I recall. Clearly not everyone believes that the BoE can do QEinfinity without consequences.

        “Forced into Greek style austerity then… Don’t think democratic leaders will choose this – Greece, Spain etc have to…”

        They dont “have to”! Thats just the pro-euro brigades patter!! The people of those countries just have to choose the correct leaders. One day when things get just bad enough they will do just that. Then the can will finally reach the end of the road and no amount of QE will make any difference to the final outcome.

    • while we will never recover the money Brown threw into failed banks, we could stop adding to their funds and let them fail the next time they ask for another bailout. We could also launch legal action against those responsible.

      But we do not need to keep following the path of rewarding failure.

  4. As said so many times, all we are doing is picking the winners and losers and QE simply spreads the pain and lengthens the time to recovery. Maybe those who espouse such a view explain how printing money creates wealth since the problem isnt one of liquidity but of solvency.

    • Hi Ian

      I completely agree and have argued for a long time that the cross-currents created by QE will offset much of the gains. Now I fear that it may have made things worse particularly via the effect on real wages it has had and is still having. If we had not done it and restructured our banking system we would have had a hard time and begun to recover as opposed to recovery being just around the corner year after year after year…..

  5. Yes, the banksters continue to benefit, year after year. Political funding has been THE issue all the way through IMO. He who pays the piper (politicians) calls the tune (policy). We simply must get publicly funded politics in The West, and ban corporate / union political funding. Until then, the whole kaboodle will continue to be profoundly depressing.

  6. I think it needs to be bourne in mind that whilst the inflation rate has been above target most of the time, it is indeed nigh impossible to meet exactly 2%, hence the tolerance of 1% extra.

    As long as CPI doesn’t go above 3% then we should be tolerant (given that RPI has erroneously been dumped and replaced by CPI as the official target). Remember, the BOE must work on the inflation measure it is told to regardless of the personal feelings of individuals within the BOE as to the sensibility of such a measure.

  7. “If we had not done it and restructured our banking system we would have had a hard time and begun to recover as opposed to recovery being just around the corner year after year after year….. ”
    Which would assume that those utilising QE had any interest in “saving” the general economy.
    Of course, if you take the view that the use of QE was to save a certain percentage of the economy it makes more sense, and yet more sense if you take the view that it saved and enhanced a select portion of the personal economies..
    But I may be paranoid ?

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