The UK finds itself at peak deflation mania as house prices rise by 9.6%!

As 2014 moved into 2015 we saw one of the manias of our times develop and by this I mean the way that economists and the mainstream media started to scream and shout “deflation”. This was presented as one of the economic evils of our time in spite of the fact that below target inflation would of course be welcomed by consumers and workers and that an economic boost would be provided by a better trend for real wage growth. Indeed they seemed to have an outbreak of amnesia about the fact that the UK had just gone through a period of above target inflation. Odd that because there is plenty of economic literature arguing that inflation “shortfalls” should be made up which means that for symmetry surely so should overruns. The “deflation nutters” also ignored the fact that the UK economy was growing solidly and that if we looked at sectors of the UK economy unaffected by the oil price fall inflation seemed to be pretty much as before.

What has changed?

The “deflation nutters” have seen their economic bogeyman fade somewhat as 2015 has progressed. The price of a barrel of crude oil has risen by 14% in 2015 if we use the Brent Crude benchmark and it is up around US $20 since it hit its low of US $45 in Mid-January. So whilst in annual terms it still has an effect on inflation numbers due to the large previous fall in month on month terms we are now seeing rises. This is why the UK inflation bulletin has told us this.

motor fuels: prices, overall, rose by 1.6% between March and April 2015 compared with a fall of 0.1% between the same 2 months a year ago.

This poses an immediate problem for the “deflation nutter” theory where falling prices escalate and then we see falling wages and falling economic output in a downwards spiral. It is also a bit awkward that wages seemed to have picked up a little according to the latest data and of course other commodity prices such as Iron Ore have stabilised and rallied a little.

Also the UK has been experiencing this all along from the sector which remember is around 4/5 ths of our economy.

The CPI all services index annual rate is 2.0%, down from 2.4% last month.

Falling yes but as you can see it is on target and chugging along (not very) nicely.

The ordinary citizen will of course have struggled with the concept that buying cheaper fuel and energy was bad for them.

Today’s data

The deflation mania has gathered in force in the media after today’s data release.

The Consumer Prices Index (CPI) fell by 0.1% in the year to April 2015 compared to no change (0.0%) in the year to March 2015.

The UK Office for National Statistics has chosen to ramp up the shock effect of this.

This is the first time the CPI has fallen over the year since official records began in 1996 and the first time since 1960 based on comparable historic estimates….. Based on comparable historic estimates, the last time the UK saw consumer price deflation was in the year to March 1960, when prices fell by an estimated 0.6%.

The media has lapped this up ignoring the “comparable historic estimates” part. Presumably they are unaware of the fact that some of the required data was not collected as back then we used the Retail Price Index such that if it was an airplane it would have no tail fins. What could go wrong?

Oh and the Retail Price Index (RPI) went negative in 2009 for a few months which you might think merits a mention. Actually this was a really big deal as it is my view that the Bank of England panicked over this development as it slashed interest-rates and commenced QE (Quantitative Easing) in response. Back then the Bank of England was a “deflation nutter” which of course turned out to be an inflationary episode. How quickly we forget!

Problems with the deflation mania

Our old inflation measure called RPI gives a completely different answer.

The all items RPI annual rate is 0.9%, unchanged from last month.

So the UK establishment has achieved a success by getting the media to accept an inflation measure that is consistently lower and the scale of the “success” has increased as the gap is currently 1% per annum.

Also there is the issue of UK house prices which do not fit at all well with any deflation theme.

UK house prices increased by 9.6% in the year to March 2015, up from 7.4% in the year to February 2015.

No longer is this just a London driven development.

Excluding London and the South East, UK house prices increased by 8.1% in the 12 months to March 2015.

As you can see there is raging inflation in the UK housing market which is the largest purchase that home owners are ever likely to make. How does that go with inflation which is officially negative? It does not as they exclude house prices from the numbers and have gone to a great deal of effort to do so as we were supposed to be aligning with Europe but are ignoring Eurostat’s advice that the housing version of CPI should include house prices. Presumably on the grounds that it gives too big a number.

Actually inflation is on the rise again

If we look at the numbers we do see signs of a turn higher in the UK inflation rate as shown below.

The all items CPI is 128.0, up from 127.6 in March

The underlying index has in fact been rising since January when it fell to 127.1 and since then it has risen by 0.3 in February,0.2 in March and now 0.2 in April. So if that were to continue it would not be too long before we found ourselves facing inflation back at its target level in yet another “surprise”.

A technical issue called Easter

A downwards push was provided by the timing of Easter this year and the impact it has on airfares.

transport services: prices, overall, rose by 2.4% between March and April 2015, compared with a larger rise of 7.9% a year earlier. The majority of the downward contribution came from air and sea fares. Price changes for these fares between March and April vary notably year on year, with the timing of Easter a likely factor.


So we arrive at what I consider to be peak deflation mania for the UK. If we review the situation strategically we see that the oil and commodity price falls have stopped for now and the UK Pound £ seems unlikely to keep rising at the rate it has been. The currency issue is complex because of the impact of the strength of the US Dollar but the UK Pound £ has been very strong against other currencies. Tactically I note that last May prices fell by 0.1% on the month before so we arrive at a period where the annual rate of inflation will get an upwards nudge unless anybody has spotted price falls this month.

One slightly odd result of the various machinations is that Euro area inflation at 0% is for once higher than that of the UK. So should it be the Bank of England with negative interest-rates and QE? Actually I think that this is a result of the UK Pound £’s strength but of course the Bank of England may not and could spring a Riksbank style surprise.

Meanwhile those who are buying a house or facing the inflation in the services sector will be singing along with the Who.

I said I can’t explain, yeah
You drive me out of my mind
Yeah, I’m the worrying kind, babe
I said I can’t explain

Which will morph into the perfect song for inflation statistics.

Then I’ll get on my knees and pray
We don’t get fooled again
Don’t get fooled again
No, no!

Apologies for the early version of this which got published by mistake.


17 thoughts on “The UK finds itself at peak deflation mania as house prices rise by 9.6%!

  1. Hi Shaun

    This “deflationary” episode will most likely disappear when the oil price effects of earlier in the year fall out of the index and the recent rises (if maintained) are included and we will be back to business as usual aka inflation, with possibly sharp increases. Will the BOE “look through” this if it happens and goes above 2%; I rather think yes it will because we could well be in a slowdown, or worse, by then. As one of your compatriots, Stephen King, of HSBC said last week words to the effect that a recession may be around the corner and we’re on the Titanic without lifeboats.

    Of course the panic by the MSM is understandable; inflation erodes debt and deflation (which of course this isn’t) can be the “booger man” to call for more stimulus. Both of these are dear to the hearts of the MSM.

    I have to say that one of the reasons I read blogs like this is that the MSM has deserted truth almost completely over the last few years and, by and large, isn’t worth bothering with and this even applies to organs like the BBC. They are increasingly simply confidence tricksters rather than seeking a balanced and informative view.

    • Hi Bob J

      It took quite a lot of factors to push the official UK inflation measure into negative territory albeit by only 0.1% on a year ago. Some have faded and others have reversed and as you say underlying inflation goes on.

      As to the BBC I did my bit pointing out to the Personal Finance Reporter Brian Milligan the error of claiming this was the lowest inflation since 1960 and that RPI was negative in 2009. He says that he changed the article but I am not sure it is much better myself.

      “In March 1960 Eisenhower was in the White House, Macmillan was in Downing Street, and Cliff Richard and Perry Como were in the Top 10 of the pop charts.
      It was also the last time that the UK had negative inflation, according to the Consumer Prices Index (CPI).
      In fact back then inflation had been negative for three months running, and in March 1960 reached its biggest fall, at – 0.6%.”

      If only other things could be in operation 30 years before they started!

  2. Hi Shaun.
    Is there good reason to be a “deflation nutter?”
    As discussed on here many times, we believe that the GDP figures are, shall we say, “Polished?”
    Now if there is more “polish” than we actually know about, let’s say far more, could it be the case that real GDP is far worse than we are led to believe?
    Will tax receipts tank further and is the Govt. absolutely reliant on inflation above the “target” rate to save its bacon?

    • Hi therrawbuzzin

      In essence any downgrading of the inflation numbers or GDP deflators specifically inflates Real GDP and leads to a false reading. I went to a talk at the Royal Statistical Society before Xmas where Dr. Mark Courtney argued that switching from RPI to CPI in the GDP deflator raised real GDP by 0,5% per annum on average.

      Many economists want higher inflation too as it bails out their numbers, but of course the individual worker or consumer is invariably worse off.

  3. Hi Shaun
    As someone who spends far more time than is healthy hanging around airports, my anecdotal info about airfares is that they have not declined in the slightest.
    The UK continues to be in an exponential inflationary trend, how can it possibly be otherwise with debt-based fiat currency?
    Stats as useful (less) as pre-election polls.

    • There’s no suggestion (either in the blog or from ONS) that they have declined – as the quote said, they have been measured to have increased by 2.4%, compared to 7.9% a year earlier, and thus the effect airfares have on the overall CPI figure is to cause the CPI figure to be lower than it would be had airfares risen by 7.9% again.

      • Transport costs ( as measured, apparently) exhibited the %age changes you quote, however the implication is that air and sea fares provided the greatest negative impact. My comments related to air fares. I do not personally see that in practice.
        Besides your confusion between ‘acceleration’ and ‘velocity’ ,ie zero increase yoy does not give rise to negative inflation on any measure, I really do not understand the logic or motivation behind your comment.

      • Hi Shaun
        I experience a continuing moderate increase in fares.
        Decline in ‘oil prices’ ( Brent) has not resulted in a reduction, in my view. However this is not surprising as airlines hedge their fuel costs at least 12 months out. Quoted ‘oil prices’ are short-term traded financial numbers, the actual price paid for real deliveries I would conjecture has moved far less in practice.

  4. There are certin problems with the deflation mania which you identify. However I assume aggregate inflation levels to be somewhat lower than those that the money printers would have expected.
    Oil prices are a major component in this. There were, I believe, sound reasons as to why oil prices fell. The recent recovery in oil prices appear to be based on sentiment as the fundamental problem of excess supply provided by high cost production remains. In the near term oil prices could fall precipitiously. Should this happen then there will likely be further negative CPI prints, which will further complicate the preferred solution of inflating the debt away

  5. Deflation my @rse!
    I bought a Snickers chocolate bar the other day and was shocked at how small it was when I opened the wrapper. On checking the weight I was amazed to find that it was just 48g! It was quite literally gone in a couple of bites, yet it still cost me 69p
    Just one example of how everything in my life just keeps going down in size or quality or up in price.

    • Yes I often wonder if the ONS calculates on a price/gm basis or on the pack price; in these days of shrinking Mars bars these could have an impact on the inflation rate.

    • Hi Tim

      Here is how it is officially measured according to the ONS Technical Manual.

      “5.3.5 Obtaining a Price per Unit
      Some food items, such as cheese, are sold in packs of variable weight, so it may not be possible to find the identical weight each time. In this case, a price per unit weight is collected. If it is not marked, it is found from the displayed price and weight. Each month, a pack of roughly the same weight is used, as a lower price per unit weight may be charged for larger packs.

      If a single good such as one bar of chocolate is specified, and it is only available as a multi-pack in January, the price of one bar is computed from that of the multi-pack. The same multi-pack is used in subsequent months. If price collectors are forced to calculate a single good price from a multi-pack price, they are instructed to use the smallest multi-pack (e.g. using a 2-pack rather than a 3-pack).”

      I do hope that they keep a careful record of the sizes and weights.

  6. So unable to make a sound economic reason for deflation lower productivity worldwide so call those that are nutters,the trouble with flat earth economic believers is they never understand the gravity of their head in the sand actions

    • Hi the ghost and welcome to my corner of the web

      There are certainly plenty of economic issues ahead and deflation may turn out to be one of them but so might above-target inflation as these days we can see maybe 6/9 montsh down the road maximum.

      • Thank you
        since jan12 prices have been falling , looking at the graph it is just now that it passes the base line & into negative territory, So it is a trend not a one off & i see nothing that threatens or justifies price increases without damaging the economy even more ,although tax rises are now more likely to pay for increased debt,but if targeted wrong it will also damage the economy,interest rate rises will destroy the economy because it exasperates over valuation not rebalances it

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