Disinflationary pressure is even impacting on the UK

Today is one where consumer inflation is in the news and in particular weak or low consumer inflation. So the current disinflationary phase is persisting and let me illustrate this with some concrete details from this morning. First from Sweden.

The inflation rate was -0.4 percent in September, down from -0.2 percent in August.

Actually some of this is due to the fact that like the UK Retail Price Index interest-rates are used as a measure here and they have been cut. But even if we allow for this (called CPIF) the inflation rate only climbs to 0.3%

Now let us take a look at Spain.

In September, the annual rate of change of the HICP stood at -0.3%, two  tenths above the previous month.

Actually the monthly rate was 1% but as you can see the annual rate remained negative and if we look back we see a measure which has fallen from 2.9% in February 2013. Also apologies for the confusing nomenclature as HICP is the official name for the European consumer inflation standard which we call Consumer Price Inflation or CPI in the UK.

Let us now look at the situation in France.

The Harmonized Index of Consumer Prices (HICP) decreased by 0.4% in September and grew by 0.4% year-on-year, after +0.5% in August 2014.

So finally we get a positive reading but it is a weak one and this is reinforced by this below.

In September 2014, core inflation (ISJ) decreased by 0.3%. It reached zero year-on-year, the lowest level of this indicator (computed from 1990).

Also there is Italy which has declared this.

In September 2014, the Italian harmonized index of consumer prices at constant tax rates (HICP-CT) rose by 1.9% compared with August 2014 and declined by 0.5% with respect to September 2013.

I have used that measure for Italy so we can see the extent of the disinflationary pressure without the indirect tax rises that have taken place. One of those (the VAT rise from 21% to 22%) soon falls out of the annual numbers. The headline annual figure is -0.1%.

So having been used to situations where inflation has been following the song “the heat is on” we now find ourselves observing one much more like “ice,ice,baby”.

Why is a central banker talking of overshooting inflation targets?

In a world of disinflationary pressure right now there is a lot of food for thought in this from Charles Evan of the Chicago Fed.

In sum, we should be exceptionally patient in adjusting the stance of U.S. monetary policy — even to the point of allowing a modest overshooting of our inflation target to appropriately balance the risks to our policy objectives.

I know that the US inflation situation is different to that of Europe right now but I found it interesting that at a time when inflation is at most weak that he is worried about it overshooting. I would say that establishes a link between central bankers and reality! But I suspect Charles is signalling his intentions for the future. Anyway it is nice of him to confirm one of the earliest themes of this blog.

I feel that before the Fed raises rates, we should have a great deal of confidence that we won’t be forced to backtrack on our moves and face another painful period at the ZLB. (Zero Lower Bound).

Disinflationary pressure in the UK

We have been seeing signs of this in the producer price numbers in the UK but we are in the middle of a phase of it for our headline official consumer inflation number too now.

The Consumer Prices Index (CPI) grew by 1.2% in the year to September 2014, down from 1.5% in August.

If we allow for the fact that the UK retains a tendency to official or administered inflation there must be considerable downwards pressure elsewhere. Transport costs were a driver of this and those who recall that recreational drugs have been added to the national accounts may have a wry smile at this other component.

prices for a range of recreational goods

Actually if we look at the overall picture goods inflation seems to be fast disappearing in the UK.

The CPI all goods index annual rate is 0.2%, down from 0.6% last month

Increasingly the consumer inflation in the UK is services inflation and even this has fallen from an annual rate of 2.7% to 2.3%.

The outlook

I have been discussing the falls in the price of oil and other commodities for a while on here and the price of a barrel of Brent Crude Oil has fallen below US $88 today. More domestically we see this.

The output price index for goods produced by UK manufacturers (factory gate prices), fell 0.4% in the year to September, compared with a fall of 0.3% in the year to August.

The overall price of materials and fuels bought by UK manufacturers for processing (total input prices) fell 7.4% in the year to September, compared with a fall of 7.7% in the year to August,

So there is more downwards pressure in the system with the main contrary trend coming from the value of the UK Pound which has fallen below US $1.60 after today’s data was released.

What about the red pill from the Matrix?

Whilst there is plainly disinflationary pressure right now it is not correct to sing along with this from Blur.

There’s No Other Way

If we swallow the red pill then our previous inflation target will move into our range of vision.

The annual rate for RPIX, the all items RPI excluding mortgage interest payments (MIPs) index, is 2.3%, down from 2.5% last month.

As you can see on this measure we have seen disinflationary pressure as it has fallen but we are now only just below target. The simple answer to the question were we misled when the inflation target was changed in 2002/03? Is yes.

What about house price inflation?

Well according to the official numbers this is still motoring even if we exclude London.

UK house prices increased by 11.7% in the year to August 2014, unchanged from the year to July 2014.

Excluding London and the South East, UK house prices increased by 7.8% in the 12 months to August 2014.

So we see that asset price inflation continues to let rip. Many of you will be thinking that there was a plan to exclude house prices from even the housing consumer inflation measure so that policy could push them higher. Whether you believe in that as a Sir Humphrey style conspiracy theory or not that is the way that it turned out.

It is possible to do a few calculations and put them where I feel they should rightfully be. If we do that then we would have a measure of CPI (Housing) running at approximately 2.8%. It would be flashing a warning which is exactly its role in life.

Meanwhile our official measure tells us this.

CPIH (not a National Statistic) grew by 1.2% in the year to September 2014, down from 1.5% in August.

And no that is not a misprint it is in fact a national disgrace. You may note that it has been so embarrassing it lost its status as a national statistic. My issue would be how it ever got it  in the first place. Stealers Wheel got it right I think about those responsible for this.

Clowns to the left of me,jokers to the right

Has anybody apologised for this utter failure?


The ordinary worker or consumer will welcome a lower level of consumer inflation especially in these times of weak wage growth. However governments do not because inflation tends to help them and of course this is a time they need help with the debt burdens they have built up. Accordingly they have with the aid of much of the media built up a fear of it associating disinflation with deflation. Odd that in the other direction they call hyper-inflationists “nutters”! Not much symmetry there.

As we stand there is clear disinflationary pressure around the world and if I was to pick one signal it is a new price high and yield (0.856%) low for ten-year German Bunds. Turning Japanese? Well they still have 0.356% to go. However projecting trends forever plainly has its dangers and there are other roads forwards.

As ever there is much to consider and I shall leave you today with a tweet from M&G’s Bond Vigilantes.

The rally in UK index linked gilts is HUGE. Capital return of the longest linker is +22% since July!

From today’s morning meeting: “Long linker yields are so low that we’ve had to recalibrate all our charts”. Linker 68s now yield -0.44%.

Just to be clear it is bonds linked to (higher) inflation which are rising in an environment which is disinflationary.


12 thoughts on “Disinflationary pressure is even impacting on the UK

  1. Nice post..
    Always wonder why my rent increases do not contribute much to RPI/CPI.. Just learned about CPI(H). How do you calculate it differently so that you get CPI(Housing)=2.8% when official CPI(H) is 1.2%?

    Also, does CPI(H) influence the MPC rate votes? I am really diappointed with the rate my savings are earning while the house I wanted to buy last year has gone up by 50-100k this year (at least 15-20 % higher – desirable areas don’t obey the law of the averages)

    • Hi Binoy Joseph and welcome to my part of the blogosphere.

      The difference between my calculation and the official one for CPIH is that I use house prices (up 11.7%) whereas they chose to use rents (up 1%) instead. I argued against it at the time (my blogs on the subject are on online on Mindful Money and on here) and this shambles was predictable but those in power chose to press ahead anyway.

      The MPC looks at a range of factors and as of the last count is following some 18 of them! But in my opinion the main factor right now is wage growth on which the latest official data is released tomorrow morning.

      • To add in another factor.
        I have a long term BTL (from before BTL!), which does have a mortgage on it.
        When the BoE reduced rates to the emergency 0.5% my costs went down – the same week I reduced the rental on my property.on its existing contract. How to surprise a tenant.
        The point is, the rental went down but a year later the capital cost of the property had boomed. Seems logical to relate rent to cost via rates to me, so CPIH can only reflect reality when rates are set to reality.

  2. what dis-inflation ?

    my food index is still 36%higher that 2009 and my gas the leccy are still 33% higher

    as for housing …. there is no way I can afford my house

    good job none of these are “core” , hah hah

    Frankly I couldn’t care less if the Ipads and iphones drop to zero price – you cant live in one or eat one , although you might be able to burn them the fumes would be toxic

    It is the disconnect between official figures and reality thats the problem here and until the fantasy world is rejected then the two will continue to diverge with the current crop of economists scratching their heads ….

    in every other scientific field such divergance would mean new laws to explain them , not the scientists complaining that reality is at fault ……


    • Hi forbin,

      Probably best not to mention the divergence between what we may loosely describe as Keynesians on the one hand and (insert your term of choice here, let’s say Austrians for now) on the other. This divergence seems to me to have more to do with ideology than anything to do with science.

      The yawning gap at the heart of the Economics (in)discipline.

    • Hi Forbin

      Just to add that the oil price drop has turned into something of a rout today as it has fallen 4% in Brent Crude terms to US $85.24. Maybe this is the reverse of a blow-off top but it now down 25% on a year ago.

  3. Hi Shaun,

    It strikes this weary old cynic that if one makes the figures loose enough and massages them thoroughly then like economic play-doh you can reshape the economy to fit any ideology you wish.

    My own little anecdote about unreliable figures:

    In Morrisons today a 1 litre bottle of barley water costs £1.79, or 2 for £2.50. Yesterday the same bottle (same size, same product, same packaging) cost £1.

    So which price do we use to calculate??

    • Hi Jim M

      Thank you for the Morrison numbers which are rather revealing of why people have fallen out of love with our supermarkets aren’t they?! To answer your question it depends on which day the survey is taken and yes I would imagine that the supermarkets are more sophisticated at that than the Office for National Statistics.

      This was my earliest theme if I recall correctly so here we are again…

  4. Great column, Shaun. However, I don’t believe that the Swedish economy is truly deflating, It is just that using the dysfunctional Swedish CPI as its target inflation indicator as the Riksbank does, it would appear to be deflating. As you say, the CPIF measure shows the inflation rate at 0.3%. But all the CPIF is take the Swedish CPI’s dysfunctional measure of owner-occupied housing (OOH) and impose a constant interest rate. While the UK RPI and the Swedish CPI both include interest rates in their OOH component, the Swedish CPI, for OOH other than condominium apartments, uses an opportunity cost approach, so the interest rate effects go beyond mortgage interest cost changes, which are, after all, a paid cost, and impact the CPI through the opportunity cost of owner’s equity, which isn’t a paid cost.The Swedish HICP showed 0.0% inflation, while the Swedish real estate price index showed a four-quarter rate of change in 2014Q3 of 7.0%, so an HICP with an OOH based on the net acquisitions approach would almost certainly show feeble growth.
    One thing to remember about the Swedish CPI is it is the only official CPI measure that is chain linked annually using a formula that passes the time reversal test. For the Swedish CPI it is the Walsh formula. So the upward substitution bias in the CPIF is virtually zero, whereas it may be 0.1 percentage points or more in the RPI, and is even higher in the US CPI or the Canadian CPI. So it is not legitimate to infer that if the measured inflation rate is 0.3%, the actual inflation rate is actually negative. That may be the case, but it’s unlikely.

    • Hi Andrew

      Thanks for your detail on the Swedish system of inflation measurement. I should have remembered the house price issue as a while back a Swedish journalist contacted me about house price booms and we got to discussing it.

      One thing that these inflation numbers did do is put a scare in the Swedish system as they were lower than expected. Actually that is a modern theme as inflation used to be more accurately forecast unless my memory has gone all rose-tinted on me.

  5. Hi Shaun,
    Your blog is hitting the nail on the head, Newsnight, dear Evan had 3 economists discussing “secular stagnation”, whatever that is? Perhaps you can explain better than them? Anyway there was much hand-wringing about disinflationary spirals across Europe. At least there was open acknowledgement and discussion that Central Banking accommodation has pushed up asset prices whilst doing virtually nothing for the really economy. George Magunsson related his deepest concern that sterling could tank as the government resorted to printing money to directly fund spending creating “bad” inflation. I guess that is what we’ll be getting then?

    Paul C.

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