Has UK Inflation ever been so badly measured and reported?

Today sees the publication of the latest set of UK inflation figures which after the drop seen in December are likely to be the subject of much media attention and speculation. This was added to last week by Bank of England Governor Mark Carney at the Inflation Report.

Inflation is at its lowest level since the introduction of Inflation Targeting two decades ago. It will likely fall further, potentially turn negative in the spring, and be close to zero for the remainder of the year.

 

Mark Carney for the first time publicly added these measures to his toolkit.

expand the Asset Purchase Facility, or cut Bank Rate further towards zero.

 

A bit different to his past promises of Bank Rate rises which of course have not materialised is it not? Regular readers will be well aware that in the current environment (think what Sweden has just done) my view is that a Bank Rate cut is much more likely. Indeed in response to a question about deflation Mark Carney went even further.

but if we ever were in a situation where we needed to provide additional stimulus, we have many options – we have many options to provide that stimulus,

 

by which I mean we’re going to have a period where headline inflation is low – very low – for most of this year

 

This of course led to speculation in the media about deflation and its consequences. Also it did not fit well at all with another of the claims of Governor Carney on that day.

Helps support real incomes – we expect the strongest real income growth in over a decade actually.

 

What again? Was my first thought as we have been promised this sort of thing before as Mark Carney runs the risk of being like the boy who cried wolf. Actually later he said that he expected wage growth to be weak in the early part of 2015 but we have become used to such contradictions now. Indeed these days even the mainstream media seems to have cottoned onto the forecasting failures of the Bank of England.

One thing that recent history has told us is that the Bank’s
forecasts are unlikely to pan out exactly the way you expect them to.

 

If you consider that deflation is as much a product of the mind ( a bit like Monsters of the Id from the film The Forbidden Planet) then Mark Carney has just scored an own goal as he has just exacerbated the issue. As we go forwards this has implications for monetary policy as I do not believe the statement below.

Our inflation target is symmetric. We care as much about inflation below target as above.

 

I have written many times before about asymmetry of policy and I do not believe the above statement. Ironically the should the recent bounce back in oil prices continue (Brent Crude is at US $62 per barrel) then Mark Carney has raised fears about the future unnecessarily.

The Strong Pound £

This may surprise as a paragraph heading but the recent rally in the Pound against the US Dollar which has pushed it towards US $1.54 has reinforced the strength seen against the Euro which has seen it rise at times above 1.35. The effect on inflation is mostly through the US Dollar as most commodities are priced in it but there is the old Bank of England rule.

Bank of England Rule

This involved a rule of thumb between the effective exchange rate and the level of Bank Rate. Over the past year the rise in the exchange rate is equivalent to a 1% rise in the level of Bank Rate according to that rule.

Today’s Data

There is much to consider and the misinformation has begun at the UK Office for National Statistics which has confused the concepts of “grew” and “fall”.

0.3% fall in annual in January; lowest annual rate on record (@ONS )

 

The all items CPI annual rate is 0.3%, down from 0.5% in December.

 

It might be best if they get a job which does not involve taking care with numbers. Oh hang on! Also if we stick with number-crunching then this is being badly reported.

This is the lowest 12-month rate on record.

 

The headlines are screaming “record low” missing out the bit that such an index is fairly new in economic history terms and the back calculations of past numbers have been challenged at the Royal Statistical Society. Oh and that the headline Retail Price Index went negative as the credit crunch hit (falling to -1.6% in June 2009) and is currently running at an annual rate of 1.1%.

The main movers will be very welcome to shoppers and consumers.

The average petrol price fell by 8.5p per litre between December 2014 and January 2015 to 108.3p. The average diesel price fell by 7.3p over the same period to 115.6p. Petrol is now at its lowest price since November 2009 and diesel since February 2010.

 

Food & non-alcoholic beverages: prices, overall, fell by 0.7% between December 2014 and January 2015, compared with a rise of 0.2% between the same two months a year earlier.

 

The former should be no surprise at all. Also this is for the ordinary person and not the central bankers and their acolytes as of course movements in such prices are to be “looked through” as opposed to important prices such as those for I-Pads.

We had outright disinflation in January in terms of the underlying indices.

The all items CPI is 127.1, down from 128.2 in December…..The all items RPI is 255.4, down from 257.5 in December.

However do not get pulled in too much by the media hype as the UK’s propensity for institutionalised inflation is still ticking along.

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

 

What happens next?

If we look up the inflation chain we see evidence of further disinflationary pressure on the way.

The output price index for goods produced by UK manufacturers (factory gate prices) fell 1.8% in the year to January 2015. This is a record fall for the index (data begins 1997) and is down from a fall of 1.1% last month.

 

The overall price of materials and fuels bought by UK manufacturers for processing (total input prices) fell 14.2% in the year to January 2015, compared with a fall of 11.6% in the year to December 2014.

 

Accordingly the musical theme is much more “Ice Ice Baby” than “The Heat Is On”.

What about house prices?

The UK establishment has gone to great effort to keep these out of the inflation numbers. This includes abandoning its past objective of aligning ourselves with Europe as we are now ignoring its procedures.

UK house prices increased by 9.8% in the year to December 2014, down from 9.9% in the year to November 2014.

 

Indeed as the London boom/bubble fades the rest of the UK seems to be in hot pursuit of its rises.

Excluding London and the South East, UK house prices increased by 7.4% in the 12 months to December 2014.

 

These numbers are behind the times as we wonder what the impact will be of the mortgage rates falls which have generated what appear to be genuine record low mentions will be.

Perhaps also they want to keep this sort of thing under wraps. From the Council of Mortgage Lenders and the emphasis is mine.

Buy-to-let loans totalled 17,300 in December, unchanged from November but up 18% compared to December 2013. The total value of these loans (£2.5bn) was up 4% month-on-month and up 32% compared to December 2013.

 

Perhaps the rumours that the new supposedly business based version of the Bank of England Funding for Lending Scheme was funding a more corporate buy-to-let are true.

Comment

I have covered a lot of ground today so let me say that I am someone who welcomes the fall in inflation. I covered the theoretical issues in the post below which is edging is way around as I note that Edward Hugh has linked to it from A FistFul of Euros today.

https://notayesmanseconomics.wordpress.com/2015/01/29/falling-prices-are-providing-an-economic-boost-for-the-ukspain-and-ireland/

However whilst the falls in food and fuel are extremely welcome for the ordinary person I counsel caution in the way that “record lows” are being bandied about as they are not far off being of the record low since yesterday variety.

Meanwhile the UK establishment via the (arise Sir) Paul Johnson report suggests that we use CPIH (where H=Housing) as our inflation measure. So as house prices surge it will no doubt be signalling that? Er no.

The all items CPIH annual rate is 0.4%, down from 0.6% in December.

 

Actually that is perhaps its best ever effort as it moves from complete disaster to disaster. Whilst there are points of debate spiritually I agree with the letter written to the National Statistician by the President Royal Statistical Society about this.

we feel the recommendations fall short in a number of areas and some are simply wrong.

 

 

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13 thoughts on “Has UK Inflation ever been so badly measured and reported?

  1. Hello Shaun,

    good to see we have ” due diligence” and ” best in class” in Gerry Mandering the figures

    As most is made up of unicorn droppings and fairy dust can we say “garbage in = garbage out” ?

    I guess taxes based on RPI will not be rising much …. oh wait a mo……

    Forbin

    • Hi Forbin

      I think that Paul Johnson will find it hard to emerge with any credibility after the critique from the RSS. But I guess that he will get his reward in one of the honours lists.

      When it comes to taxation suddenly the RPI comes back into favour. I wonder why.

  2. Hi Shaun

    I agree re the next move in IRs; I also think it’s just as likely to be down than up.

    This recovery, such that it is, seems to me to be getting long in the tooth and we must be getting on towards the next recession and I can’t see IRs going up before that arrives (the spin will continue), at which time of course they will embark on more QE. This is notwithstanding that the current falls will drop out of the index in a year and the structural tendency for inflation will reassert itself unless, very unlikely, the falls continue. They will “look through” the elevated numbers as they did four years ago as an excuse not to act.

    This (the possibility of recession) is not the view of the OBR which sees merely a diminution of growth rates up to (I think) 2020 rather than an outright recession; recessions don’t seem to exist in their lexicon.

    What intrigues me is how long will it be before people realise that the CBs have no real idea what they are doing and are conducting a giant con game in increasingly desperate attempts to keep the plates spinning ?

    • Office of Baffled Research ?

      Office of Bull$h!t and Rubbish?

      diminished growth rates – if we had a shadow stats would we have found out there was no recovery at all and we’re really in depression 1930’s MkII ?

      regardless of fantasy GDP ( they admit to making the figures up ) tax income has fallen .

      Who do I believe when MSM are just a bunch of copy and paste artists with scribble ( in crayon ) in between?

      Well I come here for one thing 😉

      Thanks Shaun , please keep up the good work !

      Forbin

    • Bob J,
      I quite agree, Carney has mentioned his endless options to deal with deflation, I am sure the Govt is grimacing at food and fuel price falls but having to grin and pretend it is nice for their electorate. Yes you called it, when deflation takes grip -1%, we obviously need more QE….!

  3. Hi Shaun,

    Right on cue the BBC News at One announces that inflation today has hit an historic low.

    Yup … it’s the lowest inflation ever! (And that really is a direct quote!)

    Strangely enough they seem very sure about it … no doubts at all. They never mentioned all that fiddly CPI / CPIH / RPI stuff tho, which probably goes some way to explaining their certainty.

    Forbin’s “Garbage in – Garbage out” description has a long history. Way back in 1980 a friend at college told me of the BIMBO acronym, in which Garbage is replaced by Bullshit.

    Bullshit In Means Bullshit Out.

    Let’s have it engraved above the entrance to the OBR as a little reminder, eh?

  4. Shaun, don’t you think you are a little harsh on the ONS with the title of your blog today?
    You observe that “the headline Retail Price Index went negative as the credit crunch hit and is currently running at an annual rate of 1.1%.” True, but the RPI is no longer recognized as an official statistic, and was never used as the inflation measure of the Bank of England at any time since it became an inflation-targeting central bank. I would think the best monthly measure of inflation produced by the ONS now would be the RPIJ series for all items excluding mortgage interest and council tax. Unfortunately, this series is not published by the ONS. However, its RPI counterpart dropped from an annual inflation rate of 1.6% in December to 1.1% in January (i.e. the same as the RPI). This is not the lowest inflation rate on record (i.e. from February 1998 forward), since the June 2009 inflation rate is 1.0%. However, if one adjusts for the formula effect using the differences between the RPI and RPIJ inflation rates, the inflation rates for June 2009, December 2014 and January 2015 drop to 0.6%, 1.1% and 0.5% respectively. I’m not sure a national statistical institute should be trumpeting a record-low inflation rate when it is not very different from one posted less than six years ago, but it doesn’t seem to me that the statement is contradicted by the data, if you accept them as they are.
    The Johnson report noted without a lot of interest that “stamp duty is also arguably a transaction cost, although it is excluded from the RPI”. Except for the man in the Monte Python sketch who believed that contradicting every statement his interlocutor made constituted a debate, I don’t know who would argue that stamp duty is not a transaction cost, so it really should be part of the RPI and the RPIJ. Now that the ONS has a quarterly data series for it, which is a component of its quarterly owner-occupied housing series based on the net acquisitions approach, it really should be added to the RPI. Hopefully, this will happen with next month’s February update.

    A crude calculation suggests that simply adding stamp duty might suffice to raise the assumed inflation rate for RPIJ All-items ex mortgage interest ex council tax from 0.5% to 0.6%.

    • Hi Andrew
      I take your point about the UK ONS who are what is described in war as the poor bloody infantry . My critique is much more aimed at the puppet masters who leave them defending the indefensible. Many are just trying to earn a living.

      As to the RPI it is the one with a track record so it has a value for comparison with the past which others do not have and is the proper metric for long term comparisons. The RSS has challenged the way that CPI was projected back in time which the media has ignored.

      • HI Shaun,
        I think the MSM, especially the BBC, cause confusion ( and upset Pete Comley ) with the well-used phrases like “since records began” or “historical low”. It would be more accurate to say “since records were invented”.

        CPI was first published in January 1996 when it was known at the Harmonised Index of Consumer Prices (Pronounced “hiccup”, perhaps !); but why estimate historical numbers back to 1988? Just for comparison with other indices to show how different they are? Like this from Wikipedia – http://en.wikipedia.org/wiki/Consumer_Price_Index_(United_Kingdom)#mediaviewer/File:UKinflation.png

        It makes no sense no compare different indices- all that does is tell you they’re different. As you say, what matters are historical comparisons using the same index, and not comparisons with someone’s estimate of the past.

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