With house prices rising at an annual rate of 8.4% how can UK inflation be 0%?!

The UK is facing right now what is an unusual situation in its inflation targeting history. Up until now all problematic episodes have been of inflationary pressure which are not a surprise in a nation prone to administered and institutional inflation. Whereas right now the fall in the oil price which is some 48% lower than a year ago and other commodity prices has given the UK economy a strong disinflationary push. The strength of the UK Pound £ has also added to this as whilst it has been pushed into reverse by a strong US Dollar otherwise it has been firm. Accordingly on the 12 th of February Bank of England Governor Mark Carney had to make history and write a letter to the Chancellor George Osborne explaining why the official inflation measure CPI was so far below target.

The most important single reason for below – target inflation over the past year is the unexpected recent sharp drop in energy prices. Between the middle of 2014 and the time at which the December CPI collection was made, the sterling price of crude oil fell by 40%. The price of a litre of unleaded petrol fell by 10% in the year to December, from £1.30 to £1.17. And in contrast to the previous December, when they rose by over 6% on the month, retail gas and electricity prices were unchanged in December 2014.

You may note that the official view always finds falls in prices to be “unexpected” which is revealing in itself! But also I note that even after such a sharp fall in energy costs domestic fuel costs were unchanged. However even so UK workers and consumers have for once had some good news and this has been added to by another basic commodity.

Food prices, which rose by 1.9% a year during the 1997 -07 decade, fell by 1.7% in the year to last December. That reflects a combination of factors, including bumper harvests in 2014, which reduced UK farm prices by 11%, falls in global agricultural prices and more intense competition among retailers.

And The Beat Goes On

All shoppers will be pleased to know that the British Retail Consortium feels that shop prices continue to be on a downwards path.

Overall shop prices reported deflation for the 22nd consecutive month, accelerating to 1.7% in February, after reporting deflation of 1.3% in January.

Today’s Data

After such a build-up you may not be surprised that something I tweeted before the figures were released has happened this morning.

The Consumer Prices Index (CPI) was unchanged in the year to February 2015, that is, a 12-month rate of 0.0%, down from 0.3% in January.

So it is now inflation rather than economic growth which is flatlining in the UK! You may not guess it from the media scare stories but this is a vastly preferable development. The particular drivers were as follows.

The main contributions to the slowdown in the rate came from price movements for a range of recreational goods (particularly data processing equipment, books and games, toys; hobbies),food and furniture ; furnishings.

What is coming next?

It looks as though there is still considerable downwards pressure on prices to come.

The output price index for goods produced by UK manufacturers (factory gate prices) fell 1.8% in the year to February 2015, compared with a fall of 1.9% last month.

Even further down the chain it is a case of ice,ice baby.

The overall price of materials and fuels bought by UK manufacturers for processing (total input prices) fell 13.5% in the year to February 2015, compared with a fall of 14.1% in the year to January 2015.

Of course the recent uptick in the oil price could end this period but for now we remain under pressure the other way.

Accordingly the situation starts to look very optimistic in terms of the official data. Even the UK’s troubled wages series should be able to beat 0% growth and so we can expect an improvement in the real wages series. Indeed with the recent economic growth performance of the UK there was a long time that this would be considered to be an economic nirvana although apparently Robert Peston missed that out.

So deflation just a sneeze away, with zero inflation rate for Feb – below expectations.

If you are a retailer perhaps you might like to raise prices just for him to make him happy!

What about house prices?

The economic nirvana does not come under pressure from lower prices as alleged by Robert Peston as he ignores much higher asset prices. Odd because according to his logic they appear to be welcome to him. The issue here is that higher asset prices are being ignored by the UK consumer inflation system. The obvious issue is over UK house prices as shown below.

UK house prices increased by 8.4% in the year to January 2015……..In January 2015, prices paid by first-time buyers were 9.7% higher on average than in January 2014.

As you can see there is considerable inflation to be found here. Also we apparently help first time buyers to experience an even higher rate of house price inflation than everyone else. They must feel that they are living a real life version of Alice In Wonderland!

The situation as to how to deal with this has been a conceptual and organisational shambles in the UK which brings discredit to our establishment. An example of this is shown below.

following improvements made to the OOH index, the annual average growth rate of OOH (for the period from 2005 to 2014) has been revised upwards by 0.6 percentage points to 1.5 per cent,

Yes the measure only recently recommended by Paul Johnson of the Institute of Fiscal Studies could not have a worse track record!

If we use the new numbers developed we see that a consumer inflation measure for housing would have it with an 18% weight. So putting the house price numbers in from above would mean CPIH would be running at 1.5%. Now for various reasons that is an overstatement but it would end the deflation mania would it not? Unless of course we only want to count the prices which are either flat or falling….


Whilst we are gaining in many areas that does not mean that the UK tendency to institutionalised inflation has gone away. Some companies are raising prices by reducing product size and hoping that we do not spot it. Which magazine put it thus last week.

In our latest investigation, we uncovered 13 products that have lost 50g here or a few centimetres there, which all adds up to a more expensive shop.

For example a tub of Philadelphia cheese spread lost 10%, Birds Eye mixed vegetables lost 6% and those baking a Hovis Best of Both loaf produced one of 750 grams rather than 800! Tetley Blend of Both Tea Bags were the worst as the loss of 5 tea bags to 75 saw the price rise 20 pence as well.


There is much to welcome in the current UK economic situation as we find that economic growth is strong and at least according to official data inflation has disappeared bringing in a period known already as no-flation. Soon we are likely to see outright falls in prices or negative inflation which will be good for consumers and indeed as real wages rise also good for workers. I hope that the media reflects this rather than spinning some deflation mania.

The rub as Shakespeare would put it comes in as we consider how we measure inflation. As I have pointed out above a large amount of expenditure goes on housing which is excluded from the official series for no better apparent reason than it tends to go up! Although it has its weaknesses our old inflation measure the Retail Price Index covers the situation much more adequately in my view.

The all items RPI annual rate is 1.0%, down from 1.1% last month.

Yes inflation has fallen but we still have some especially in our housing market. Of course when surveyed by the Bank of England we tell it that something which it then chooses to conveniently ignore.

Question 1: Asked to give the current rate of inflation, respondents gave a median answer of 2.2%, compared with 2.8% in November.


17 thoughts on “With house prices rising at an annual rate of 8.4% how can UK inflation be 0%?!

  1. So let me try and understand this, the levers that central banks choose to pull (QE/Interest rate) largely effect asset prices yet the target they are hoping to effect doesn’t include those prices..

    • Hi Dave and welcome to my corner of the blogosphere

      Yes that is pretty much it. Of course it allows them to claim that the increase in both house and indeed equity prices is all growth as opposed to a combination of growth and inflation. Of course wealth rises too especially for those at the top of the tree with no allowance for the inflation caused.

    • Hi therrawbuzzin

      Back in the early part of the last decade we had a move to CPI that today lowered the official measure of inflation by 1% as it is zero and RPIX is 1%. So if they pull a similar stunt this decade then today’s circumstances will have annual consumer inflation reported at -1% in the 2020s..

  2. Hello Shaun,

    Perhaps we should be asking what the BoE and HMG are doing about so called “non core” inflation ?

    like food , fuel and housing ?

    Its a shame MSM cant seem to get a grip on this !

    Dave does have a point , one who going to raise that question ?

    Buzzin got it also right – Oaf-icail statistics ! only an oaf would believe them/make them

    So with “core” inflation we can have MIF ( minus inflation rate ) but unable to afford food, fuel and somewhere to live – well I guess the people will be “MIF’ed ” off !!


  3. I think you hit the nail on the head with shrinkflation. The Wagon Wheel biscuit is a well known example of this! Statistics have been manipulated by governments for years which I imagine led to the phase “there are lies, damn lies and statistics”.

    • Hi Bez and welcome to my part of the blogosphere.

      Wasn’t that Mark Twain? Although we have learned that many of these quotes were not as believed to be so.

      One thing we can be sure of is that Shrinkflation is in full force. From the Guardian on the 16th of March.

      “Over the weekend the news broke that the nation’s favourite brand of tea, PG Tips, has quietly reduced the weight in its much vaunted pyramid-shaped bags by 0.2g, while keeping the price exactly the same. Parent company Unilever justified the change with talk of a new blend, which, it claims, means that the brewing time, and the results are unaffected.”

      About 6% I think.

    • Yes, I remember those Wagon Wheels when I was a kid. I used to try to force the whole wheel into my mouth in one go but couldn’t get anywhere near. Nowadays I can do it with ease – is that cecause their smaller (they do seem smaller) or because I’m bigger now or because I’ve got a big mouth, hmmmm….

  4. I found UK supermarket prices refreshing cheap and the selection of my favorite items great on a recent work trip to Britain. Here Lidl offers a limited subset of it’s UK produce and prices are 20% higher due to our govt charging VAT on basic foodstuffs.

      • Lidl is quick to update it’s prices on exchange rate. from what I’ve seen UK prices = German prices & BG is 20% more. Ergo UK supermarket food is cheaper that BG. Somehow the BG restaurants serve really cheap food & drinks – a pub pint is about 1 quid !

  5. Sorry, Shaun, I’m not sure I understand your point about the CPIH. The February 2015 update released today revises the previous estimates back to 2005, does it not? However, it only shows an annual inflation rate of 0.3% for February 2015, up from 0.5% in the previous month. Unfortunately, although it produces a quarterly owner-occupied housing series based on the net acquisitions approach, the ONS still doesn’t publish a monthly counterpart to the CPIH series with an OOH component based on net acquisitions rather than imputed rents.
    The closest thing to it is probably the RPIXX series, i.e. RPI excluding mortgage interest and council tax. It shows a 1.0% increase in February 2015, down from 1.1% in January. Even after a downward adjustment of 0.6 percentage points to account for the formula effect, the RPIXX series still shows a 0.4% annual inflation rate for February 2015, slightly higher than the CPIH. Also, the RPI still excludes stamp duty, whose inclusion would undoubtedly have raised the annual RPIXX inflation rates for 2015.
    Hopefully, next March, when the RPI series are updated to a new basket, stamp duty will be added to the RPI. Since the ONS is already calculating a quarterly price series for stamp duty for use in the OOH series based on net acquisitions, there seems to be no good reason why it should not be part of the RPI.

    • Hi Andrew

      Yes the “old” CPIH which we were assured was reliable by the UK establishment turned into a disaster and has been replaced by what is in essence the series used by the Wriglesworth agency. Even so using a rental series as a proxy for house prices has two major problems in the UK. The first is that UK rents respond much more slowly than house prices (up to 3 years) and the second is that they tend to move by less.

      You are right about Stamp Duty which plainly should be in any proper measure of inflation.

      If we move to the national accounts I am presuming that the new higher numbers for the weights of rental income in housing will impact on them too via imputed rents?

      • ‘The first is that UK rents respond much more slowly than house prices (up to 3 years) and the second is that they tend to move by less.’

        Let me emphasise your point. Personally I have ‘frozen’ the rental on my property for the last 5 years (bought before the term BTL was even coined, so don’t throw bricks!) regardless of the bubble capital increases. My costs have only been increased by government mandated policies over that time, so my lucky tenant has had a rent freeze. Not to say that inflation has been so tame in other areas, so it makes a mockery of ‘statistics’.

        Anyone want to figure what happens in this case in the event of interest rates (costs) increasing by 1% on rents and capital?

  6. Yes Shaun, You are right to highlight massive house price inflation, but don’t worry we can print money and hand it to first time buyers who will pass it to the grwat banker gods and this will greasethe wheels of GDP and also to improve productivity


    • Hi Paul C

      Yes asset price inflation equals economic growth apparently in the official ledgers! Also so does consumer inflation up to 2% as it “greases the wheels” as you point out according to Mark Carney.

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