So is UK consumer inflation at an annual rate of 0.5% or 1.7%?

Today is a day that is unique in the current structure of UK inflation targeting. Whilst we have had more than a few incidents of inflation soaring to more than 1% above the target of a 2% annual rate of Consumer Price Inflation this is the first incident of it falling more than 1% below it. So Bank of England Governor Mark Carney will have to write an explanatory letter to the Chancellor of the Exchequer George Osborne. The details of this are shown below.

the Governor of the Bank must write an open letter to the Chancellor explaining the reasons why inflation has increased or fallen to such an extent and what the Bank proposes to do to ensure inflation comes back to the target.

The second section is of course not a little problematic right now as I shall come to in a moment. After all policy is extraordinary loose with an “emergency” Base Rate of 0.5% and a stock of £375 billion of Quantitative Easing or QE so putting a foot on the accelerator finds it already depressed. Also it poses an issue for the claimed Bank of England policy of Base Rate rises being on the horizon. Regular readers of this blog will be aware that since the Christmas before last I have been arguing that Base Rate cuts are as likely as rises.

A Change of Situation

It used to be the case that the letter would be published today but last year Chancellor Osborne changed the system.

I shall expect you to send an open letter to me, alongside the minutes of the Monetary Policy Committee meeting that followed the publication of the CPI data and referring as necessary to the Bank’s latest Inflation Report and forecasts, covering the same considerations set out above.

There was also an explanation as to why such a change was being made.

The reason for publishing this letter alongside the minutes is to allow the Committee time to form and communicate its strategy towards returning inflation to the target after consideration of the tradeoffs.

That is an odd reason to my mind as after all the MPC should be aware of what its policy and plans are at all times! It would do if I had the job. It gives the impression that a move away from the inflation target is a “surprise” when in fact it is a fact usually known some time ahead. the other alternative is that the Chancellor has little faith in the skills and abilities of the MPC.

The driving force of all this

If we look back the UK establishment made quite an effort to push UK inflation higher. To the usual pack of administered and institutional inflationary policies such as rail fares was added the Base Rate cuts,talking down of the value of the UK Pound and then other measures such as the QE discussed above by the Bank of England. However as time as passed we remain with a higher price level but lower annual inflation.

Then in the summer of 2014 there was something of a game changer as oil and commodity prices began to fall and in some cases plummet. This has continued this morning with the price of a barrel of Brent Crude Oil falling below US $46 for a 4% drop today so far and a 57% drop on a year ago. This has put considerable downwards pressure on many inflation measures around the world including in the UK. Whilst the weight of the price of oil is only around 4% of our consumer inflation measures directly it then feeds into many other prices starting with domestic fuels.

Boom!

The all items CPI annual rate is 0.5%, down from 1.0% in November.

The all items CPI is 128.2, unchanged from last month

In essence there were price rises last December but overall there were none in the UK this year so the annual rate of inflation dropped substantially. If you buy something tangible then there is further good news for you in the detail of the data.

The CPI all goods index annual rate is -1.0%, down from -0.2% last month.

The CPI all goods index is 121.0, down from 121.3 in November

If you are looking for examples of institutionalised inflation they seem to have tucked themselves away in the services sector.

The CPI all services index annual rate is 2.3%, down from 2.4% last month.

When Bank of England Governor Mark Carney received this news yesterday they must have put him off the Bank of England tea trolley. By contrast UK consumers and workers will welcome both lower annual inflation and in some places outright lower prices.

And the beat goes on

We can keep that track by the Whispers playing in the background as we look upstream in the UK inflation data.

The output price index for goods produced by UK manufacturers (factory gate prices) fell 0.8% in the year to December, compared with a fall of 0.6% last month.

Even further upstream we see this.

Total input prices fell 2.4% between November and December, compared with a fall of 0.7% between October and November.

The overall price of materials and fuels bought by UK manufacturers for processing (total input prices) fell 10.7% in the year to December, compared with a fall of 8.2% in the year to November.

With numbers like that perhaps we should switch to “The heat is on” by Glenn Frey. The major driver at the input level has been the fall in crude oil prices which has amounted to 35.9% over the year to December. However UK consumers will be pleased to note that the home food category has fallen by 12.3% as well.

Fuel Prices

Whilst there is a shortage of activity from UK domestic fuel suppliers there has been quite a lot of activity in petrol and diesel prices at the pump.  UK petrol prices have fallen 16.5% over the past year to the current 108.9 pence and diesel prices have fallen 16% to the current 130.36 pence. As a fair bit of this has happened recently then there is more downwards pressure on the way for the headline inflation measures of the UK.

There is another way

Today would look very different under the old system.

The annual rate for RPIX, the all items RPI excluding mortgage interest payments (MIPs) index, is 1.7%, down from 2.0% last month.

No open remit letter from Mark Carney would be required and the headlines would not be screaming deflation. Indeed the gap at 1.2% between the old and the new measures is now so wide that supporters of the old system have a case for wheeling out the word debasement. As we are reminded on the London Tube system “Mind the Gap”. I have argued before that gaps of this size between the old and the new system with of course the new system always giving a lower number do pose questions for the credibility of the system.

What about Paul Johnson and his report?

It was nice to see my argument against this embarrassment reach the broadsheets. Today we are told this.

The all items CPIH annual rate is 0.6%

So for once it is above the headline CPI albeit marginally. A driver is this.

The OOH component annual rate is 1.1%, up from 1.0% last month

But this is yet another odd result from this measure as you can see below.

UK house prices increased by 10.0% in the year to November 2014, down from 10.4% in the
year to October 2014.

The UK housing market was slowing in November and other numbers make us think it slowed again in December. But finally our guide is picking a faint hint!

When Paul Johnson is ennobled can he be the Lord of Circuses and Clowns?

Comment

Already there is an extraordinary amount of both misinformation and disinformation being produced by the media about these numbers. I have challenged the BBC several times today about them quoting CPI numbers from days before it actually existed. These are official simulations which have been challenged at meetings I have attended at the Royal Statistical Society. So far the worst effort is show below.

UK Inflation falls to lowest since records began

Really?

The deflation drumbeat is picking up although you may note that overall prices are unchanged rather than falling, so far anyway. Going forwards there will be further pressure but January last year saw falls too so the picture is complex in the short-term. However if we look for some perspective I note that under our old system inflation (RPIX) would be 1.7% and we would be welcoming it. Have we been mislead and cheated and has there been a Sir Humphrey Appleby style plan all along? If so those who concocted the plan have got it all wrong as it backfires on them. Still as ever it could not possibly be the fault of anybody in authority……..

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16 thoughts on “So is UK consumer inflation at an annual rate of 0.5% or 1.7%?

  1. I look forward to seeing both the committee minutes and the letter… On how they are going to simultaneously raise interest rates in the Summer AND solve the disinflation conundrum. Should be entertaining.

    Got any spare popcorn Forbin?

    • Hi Tim

      According to the BBC Mark Carney thinks this.

      “He wanted to stress that the Bank still expected to “normalise” interest rates, or raise them gently, within the foreseeable future.”

      I wonder how long he thinks the foreseeable future is? After all it did not turn out well in the case of Forward Guidance.

  2. From Robert Peston on the BBC…
    “I have just interviewed the governor of the Bank of England.

    Mr Carney says he expects inflation to fall further, as petrol prices are reduced to catch up with the tumbling oil price.

    But his current assessment is that the reduced food and energy prices are an economic stimulus – because, as I mentioned earlier, they boost our spending power.

    He said that conditions in the eurozone were more deflationary than here, citing its much higher unemployment rate and stagnant wages.

    That said Mr Carney said it was not impossible that the falls in energy and food prices could infect other sectors – such that growth-killing deflation could become a more clear and present danger.

    The Bank had the tools to deal with that risk, he said, to nudge inflation back towards the 2% target.

    Evasive action, if needed, would be by keeping interest rates at these record low levels for a bit longer, he said, rather than engaging in more money creation through quantitative easing.

    He wanted to stress that the Bank still expected to “normalise” interest rates, or raise them gently, within the foreseeable future”

    So his plan to raise inflation is to do nothing 😳 Leave interest rates where they are, not print any more notes and to promise higher interest rates at some point in the future.

    And we pay this man for what, exactly?

    • sorry forgot to add – raising interest rates feed through as a rise inflation

      with the added “benefit” of reducing the amount of money in circulation thus dampening the rise in wages we’ve all had…….

      erm,……

      forbin

  3. hello Shaun

    Have we been mislead and cheated and has there been a Sir Humphrey Appleby style plan all along?

    Well yes I think so , with the added benefit that we now have fairy dust GDP figures and unicorn CPI inflation figures. and in computing terms – garbage in = garbage out !

    Oh and when can we vote for Carnival Carney ? A man with such God like powers should be elected or is he really just a puppet of HMG all along ?

    Also as 30% increase in Gas and food is not offset by 30% drop in petrol prices , and the other baked in increases? You know , train fairs , water rates ?

    oh well I guess they’re not counted in the CPI

    Hmmm, so with nice low inflation we’ll get zero increase in outgoing benefits and as tax is RPI more tax taken in ? surely that must be good ?

    You gotta laff , haven’t you ?

    Fobin

    PS : with the current formula of CPI plus 10% housing inflation , gives us -0.2% CHIP ??

    Whoaa! dis-inflation or deflation ?

    • Hi Forbin

      In the future prices which rise will be excluded from inflation indices and only those which stay the same or fall will be counted! Thus we will have disinflation forever at least according to the official measures.

  4. ‘Already there is an extraordinary amount of both misinformation and disinformation being produced by the media about these numbers.’

    So,the govt produce misleading data about the cost of living and then,for good measure,the media distorts it some more.

    As for the BBC ,they’re bought and paid for by the political class.

    • Hi Dutch

      I spent a fair bit of time today challenging many of the mistakes in the media about inflation. One of the BBC News broadcasts talked of a “record low” for inflation as if it was the lowest ever. There were plenty of other examples.

      Anybody can make a mistake, but many of these turn out to be systematic…

  5. Great analysis, Shaun, of this epochal day in the history of British monetary policy. I wasn’t aware that this will be the very first time a Governor of the Bank of England must write a letter to the Chancellor of the Exchequer explaining why the inflation rate fell below the lower bound. However Governor King would have had to write four such letters in 2009 if the target inflation indicator had not been changed by Gordon Brown, as the RPIX inflation rate between June 2009 and September 2009 varied between 1.0% and 1.9%.

    • Hi Andrew and hi Shaun,

      The devil really is in the detail isn’t it?

      Listening in on the conversations between you two restores my faith in Statisticians (not to be confused with Economists!) and I thank you both.

      I

      • Thank you so much, Jim M. That really pumps me up, being put in the same class with Shaun. I wish it were so. I apologize for the typo in my comment. It should end “as the RPIX inflation rate between June 2009 and September 2009 varied between 1.0% and 1.4%”. The lower bound prior to December 2003 was 1.5%. Happy Old New Year! (January 14 is New Year’s Day by the Julian calendar.)

  6. Shaun, I really laughed at your proposal that Paul Johnson be made the Lord of Circuses and Clowns. A number of the statements he makes in his review are distinctly clownish, as for example: “[CPIH] is a pure price index based on best international practice”. Never mind that it is questionable if CPIH can be considered a pure price index, just what does the reference to international practice mean? There are a lot of countries that calculate HICPs, including the United States and Japan. There are also a lot of countries that calculate consumer price series with owner-occupied housing components based on imputed rents, although Mr. Johnson is engaged in boosterism when he suggests this is the most common international practice. Exclusion of OOH is more common, in terms of the number of countries, their populations or their GDPs. However, I don’t think there is a single national statistical institute anywhere in the world that publishes an index like the UK CPIH. There’s no reason an NSI would want to combine such incompatible components except for very specialist kinds of analysis. The closest would probably be Statistics South African CPI. Since 1998 it measures OOH using imputed rents in the South African CPI. Since 2013, it has gone from a national concept to a domestic concept, much like an HICP, and it seems that for a long time it has adopted a net premiums approach to measuring insurance, so in some respects its CPI resembles an HICP. Unfortunately, a proposal by David Fenwick to get the South African CPI to move to a net acquisitions approach to measuring OOH, never seems to have been implemented, at least not yet. Still, it is a bit of a stretch to say that the South African CPI is like the ONS CPIH series, and defines international best practice. For example, the South African CPI has its basket updated every five years, which is clearly out of line with the regular annual basket updates of the CPIH.
    .

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