Low inflation is good for workers and consumers but not indebted governments

Today sees the latest inflation numbers for the UK and I would like to open by presenting something you rarely read these days which is to give an example of how low inflation is good for the majority of us. It can be found in the development of real wages in the UK which after a circa 10% drop finally nudged in positive territory in September compared to the official inflation measure. It was only a small gain as average earnings were rising at an annual rate of 1.4% compared to the CPI rising at 1.2% but after a long winter for UK real wages it was a hint of some upcoming spring sunshine. Whilst wage growth has nudged a little higher it has been the fall in the rate of consumer inflation that has been the major factor here. Accordingly both workers and consumers have been made better off which apparently if you read the mainstream media is bad for us and them!

Let me now contrast this with the state of play in Japan where the Japanese are being told by the Prime Minister Shinzo Abe and the Bank of Japan that higher inflation is good for them. The CPI rose by 3.2% in September so some 2 and two-thirds faster than the UK -how often has one been able to write that?- which meant that real wages fell by 3% which has been revised higher than the 2.9% as I discussed only yesterday. So the Japanese worker is definitely worse off and the stereotypical consumer Mrs Watanabe will be facing higher prices at the shops. Neither of them will welcome this however much official sources and their media lackeys tell them that higher inflation is good for them. Of course it is good for the state which has been facing a falling nominal GDP for some time making the public-sector debt burden a brick or two higher.

The same message is being repeated right now in Europe and will be repeated in the UK should our inflation rate dip further. However low inflation is something to be welcomed and does not have to turn into the disinflation and deflation which have affected Greece. For us in the UK there is much “excess” inflation to wash out of the system as we had a sustained period of above target inflation when the credit crunch bit pushing real wages lower. This is something that the mainstream media has failed to call the Bank of England to account for. There is a military dictum that the best place to hide something is in plain sight and that seems to have worked for the Bank of England.

UK Inflation numbers

There was a slight uptick in the official UK inflation rate this month.

The all items CPI annual rate is 1.3%, up from 1.2% in September.

So still well below target but a nudge higher. As I looked through the detail there were a couple of perhaps surprising influences. Those who have watched the price of Brent Crude Oil plummet may be confused to see fuel prices as a factor but the nuance is that they fell more slowly in October than they did in October 2013. Also the rise in tuition fees was back nudging inflation higher as whilst the actual increase was smaller the impact of the past increase means its weight in the numbers has risen.

What is in the pipeline?

The numbers for producer price inflation show that disinflation is in play here particularly at the input level.

The output price index for goods produced by UK manufacturers (factory gate prices) fell 0.5% in
the year to October, unchanged from last month.

Total input prices fell 1.5% between September and October, compared with a fall of 0.6% between August and September.

The overall price of materials and fuels bought by UK manufacturers for processing (total input prices) fell 8.4% in the year to October, compared with a fall of 7.4% in the year to September.

A little care is needed as the production sector of our economy is reducing in importance over time but it is clear that there is a strong disinflationary influence at play there.

If we look wider we see that downward pressure on many prices continues to be applied by a weak oil price and a barrel of Brent Crude Oil is around US $79 as I type this.

Inflationary pressure

Against this has been something which has mostly escaped mainstream attention which is the dip in the value of the UK Pound versus the US Dollar. This has fallen by 9% since the peak of US $1.717 on the second of July and is offsetting some of the oil and commodity price falls.

On such a road Mark Carney is silently morphing into Mervyn King who was never happier than when the value of the pound was falling. Also if we factor in the change in the UK trade or effective exchange rate UK monetary policy has been eased by the equivalent of nearly a 0.75% base rate cut since the peak of this summer. As a lot of our fall has been against the US Dollar my contention is that monetary policy has in fact weakened or been loosened by more than that.

Oh house prices!

These are not slowing according to the official data. In fact we are seeing the reverse according to the Office for National Statistics.

UK house prices increased by 12.1% in the year to September 2014, up from 11.7% in the year to August 2014.

Indeed many will be troubled by the fact that if we take out the London effect we get this.

Excluding London and the South East, UK house prices increased by 9.1% in the 12 months to September 2014.

Am I wrong to think that the house price boom is fading? Maybe not if we look deeper.

In September 2014, the UK mix-adjusted House Price Index reached 207.3 (Figure 2). This is 0.2% lower than August 2014, when the index reached a record level of 207.7

Of Rock Concerts and inflation

Back in June 1980 a young man/boy who  we shall call Shaun went to see Fleetwood Mac at Wembley Arena and paid some £8 for his ticket. This was back in the days of the Tusk tour and was a great show which I excuse me he thoroughly enjoyed! As they are touring again and the nearest like for like comparison is a ticket at the O2 I took a look at some prices at which the better seats were £138.50 and £89. Whereas if we use the retail price index to adjust the price it should be £30.60 and they tell us there is no money in being a rock star these days!

Also to make the comparison I used the measure in play then which was the Retail Price Index. Is it rude to point out the gap between the version of it used for inflation targeting it and the more recent official inflation measure?

The annual rate for RPIX, the all items RPI excluding mortgage interest payments (MIPs) index, is 2.4%, up from 2.3% last month.


There are two main themes for today. The first is that the UK is seeing a battle between the worldwide disinflationary influences I have regularly discussed on here and its natural tendency to institutionalised inflation. In this instance the institutionalised inflation has been exhibited by the university tuition fee changes. The second is related as one of the forces pushing inflation higher in the UK has been Bank of England policy in the credit crunch era and with the recent falls in the value of the UK Pound £ it is back. This is equivalent to a 0.75% base rate cut and hopefully you will forgive me a wry smile at the thought that this is happening under the noses of those who are discussing and analysing a base rate rise in the UK. As Fleetwood Mac put it.

But don’t ask me what I think of you
I might not give the answer that you want me to

Oh well

Also as we move into the 6th year of this blog yesterday was the best day for views stand alone Notayesmanseconomics has had. So thank you to all of you who have supported it along the way.

Worrying news for chocoholics

The Washington Post seems to think we are in danger of running out of it. Eeek!



26 thoughts on “Low inflation is good for workers and consumers but not indebted governments

  1. That choccy story , haha just like the red wine shortage one run a while back …..

    hey listen guys , stock up on salt ! been a big issue and it gonna be on the shelves soon so hurry up !


    “sniggers” whilst eating pop corn ( salted of course )

  2. Shaun, as an ex forex man can you cast any light on why sterling has fallen so much recently? There was talk from Carney that rate rises may be delayed and that’s about it. Meanwhile in Euro land there has been unending bad news (except for today) and talk of QE etc etc and yet the Euro has risen. I can’t understand why traders have such faith in the Euro that they do not allow anything to dent their enthusiasm for it! Attempts by the ECB to talk it down don’t work either yet the slightest hint from the B of E and the pound sinks like a stone.

    • I would suggest the dollar has been massively undervalued if you look at it in trade terms. I ahve been saying this for most of this year at MM. I guess it was undervalued because good ol Benny and later our Janet kept printing so much of the stiff! CVontratry to popular opinion I believe the Fed stopped expanding it’s balance sheet this July/August despite the still existing tapering of QE as the Fed started increasing it’s reverse repo activities in July, effectively sterilising it’s QE from July on.

      Meanwhile, I suspect that traders just plain shorted the US$ possibly because they just looked at ongoing QE.

      So US balance sheet expansion stops in July and then traders unwind their positions and hey presto! You have a dollar tyrading in a band whre I believe it should always have been (circa $1.50 – $1.60 to the £).

      I think given the ERCB’s obsession with expanding it’s balance sheet back up to 3 trillion Euro, the only thing it’s left with buying (that there’s enough of) is European sovereign debt but the Germans stand in the way, but I suspect not for much longer and EZ money supply is already increasing nicely so may be traders see what I see, which is a filip to OVERALL EZ growth in the first half of next year, which will help the Euro.

  3. Your blog is well supported because it provides reasoned analysis of the economic situation, a product which is, in the well known phrase, “not available elsewhere”! And certainly not for free!

  4. In regards to live concert tickets – the music industry has been disrupted by the internet technological wave, I’d guess that modern music downloads are cheaper in real terms than records in 1980.

    • I understood the new dynamic for making money is in the merchantdise , play old records dont cut it anymore !


      Buy my Pop corn T-shirts today , along with mugs and pens 😉

      • oh, almost forgot ,, the Shaun Richards T-shirt collections and Video games ……

        Play BoE , a economics game with a twist! ( added reality !! – Better than ” Better Than Life ” ( Red dwarf ref.) )

        Forbin TM

    • Hi Robert and thanks

      I had read this and as a past options trader concepts such as standard deviations are still close to my heart. It reminded me that I feel that in terms of human behaviour the normal distribution and its derivatives simply do not apply as it understates issues such as Black Swan events. So the basis of the Bank of England’s analysis is wrong.

      The fundamental issue here though is the choice of labour market slack as a new proxy for the same old failed output gap theory. So in essence the statistics is built to justify what they already think…..

  5. Hi Shaun, as usual an excellent column and viewed with the perspective of the ordinary man.
    One point I would make, and it is this; when you write, “For us in the UK there is much “excess” inflation to wash out of the system as we had a sustained period of above target inflation…” are you forgetting that pollies, Carnage et al have been known to be less than honest about targets? (7% unemployment and interest rate rises)
    Now it seems to me that, if a BoE Governor was consistently failing, and by a large margin at times, to hit his one established target, then it would be unimagineable that no political action to remove and replace him would have taken place by now.

    It seems obvious to me that there was an announced policy and an unannounced one (effectively rendering the first a lie, [ again])

    It appears that the unannounced policy is 2% min inflation, and above that is naughty, naughty, wink, wink!

    It’s hardly sophisticated, and it’s hardly a surprise.
    It’s not really about govt. indebtedness either.
    That’s a red herring.

    It’s another attack on the living standards of ordinary people, just as “austerity” is.

    • Hi therrawbuzzin

      Over the period of this blog there has bit a fair bit of debate over what the Bank of England was actually targeting. One suggestion was that it was CPI inflation of 3-4%. The other was nominal GDP targeting where it was supposed to rise by 5% per year, so should we flat-line in growth terms inflation would be ~5%. The latter was true for a bit.

      At no point has there been any real case for them aiming at 2% per annum for CPI. The current dip below it is a function of the past strong UK Pound phase and the drop in oil and commodity prices.

      I agree that the ordinary person does not appear in such analysis.

  6. Congratulations on your hitting a new high for hits on your blog, Shaun. I am sure your readership will continue to expand. I doubt that you have anything like the readership of Terry Corcoran, the editor of the Financial Post, and some of the other incompetent hacks who dominate the Canadian business press. It is a pity that you don’t.

    Earlier this year I put a document in the RPI CPI User Group library on the July 2014 update and the package holidays index:


    One can see the same problem I analyzed in today’s CPI update. The 0.1 percentage points increase in CPI inflation occurred in spite of its package holiday component, which had an annual increase of 0.9% in October, down from 1.2% in September. ONS provides its usual analysis of the contributors to the change in the inflation rate from 1.2% in September to 1.3% in October based on their October 2013 and October 2014 monthly changes. While formally sound, in the case of package holidays, the analysis is misleading and in a sense meaningless, since the October monthly change does not represent a change from September holiday prices to October holiday prices or anything like it. The same problem exists for horse race admissions. The ONS uses a seasonal weighting approach to measure package holiday trips, which is all to the good. However, the approach that they use is sui generis, and will always remain so. The Irish CSO moved to a seasonal weighting approach for package holiday trips in their own CPI, but didn’t follow the ONS approach. I guarantee you that no other national statistical institute ever will.
    The paper just released by Mark Courtney, formerly of the Treasury Department, on the RPI simply ignores the problem. He starts by making a list of the important changes in the RPI over its history, gives factually incorrect information about the seasonal weighting approach used for seasonal food groups in the RPI and its demise in 2008, then mentions the addition of holidays in 1993 and 1994 to the RPI as if this all had nothing to do with the seasonal weighting previously described. What is this but playing the ostrich?
    Seasonal weighting inevitably complicates analysis of changes in the inflation rate, but most seasonally-weighted price indices, like the kind I would recommend, would not distort October monthly price changes by bringing in prices from months other than September and October. THE CURRENT TREATMENT OF HOLIDAYS AND HORSE RACING ADMISSIONS IN THE RPI AND THE CPI HAS GOT TO GO. IT SHOULD BE REVISED OUT OF EXISTENCE AS SOON AS POSSIBLE.

    • Hi Andrew and thank you

      I have met Mark Courtney at some of the RSS meetings so it is disappointing to read that he has written a report with such issues. As to the impact of correctly allowing for seasonal price changes what do you think that the impact would be on the published inflation rate?

      I am intrigued in a way that horse race admissions are in the index I will have to investigate,

      • Shaun: It is hard to say as we have only the existing indices for holidays and horse race admissions. As far as I know the ONS has never calculated and published alternative indices based on more suitable methodologies. For 2014 the total weight for holidays in the RPI was 44 per thousand, and the total weight for package holidays in the CPI was 32 per thousand. The weight for horse track admissions is not separately identified in the reference tables but would be substantially smaller.

        Of course, the impact of a change in methodology would be much greater if there were a change for other seasonal items, like seasonal clothing.

  7. When done on reaching your sixth year. You blog has been of much use to me in much improving my knowledge of economics and I much thank you for that and very much look forward to the next six years.

    On a more general note, where I’m a Kremlin watcher and I also keep a close eye on what is happening in Ukraine, and geopolitics in general, is the amount of quality blogs and information that is available by very knowledgeable people (many are acknowledged experts in their fields), which like your blog is succinct, accurate information, with sensible, knowledgeable interpretation and comment. It is also normally available much quicker that the sensational rubbish written by a journalist with a media studies degree that eventually appears in the MSM.

    Twitter, I find invaluable in following these many sources where you can browse through very quickly and follow when I want further information on the many relevant links to the full article and then comment as appropriate.

    If like me you have had enough of the MSM for anything other than sport, then there are many good sources of information on many subjects out there, you just need to use Google to dig a little, along with Twitter recommends.

  8. Hi Shaun.

    Thank you for illuminating us for the last 6 years. I am very glad your audience is expanding, because your posts are essential reading for anyone with an interest in economic issues and I am also regularly impressed with the quality of some of your readers’ comments too.

    There’s only one problem – I don’t think your readers will ever allow you retire though!

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