UK citizens do not believe the official inflation data

So far 2015 has been dominated by the way that many measures of consumer inflation around the world have recorded negative annual rates of inflation. Even the inflation nation that is the UK did so in the month of April.

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.

This had all sorts of effects on monetary policy as the Euro area,Sweden and especially Denmark and Switzerland have plunged into the world of negative interest-rates in response. It also affected economics as media hysteria ran riot about “deflation” and also saw the rise of what on the I labelled on May 19th as “deflation nutters” who to paraphrase told us this. From R.E.M.

It’s the end of the world as we know it
It’s the end of the world as we know it

There has been a smattering of such talk and “analysis” today as Taiwan has announced that the annual rate of consumer inflation was -0.73% in May. There are various problems with it however.Firstly is the issue of economic growth being expected to be 3% in 2015 so there is no sign of collapsing demand. Next is the fact that the underlying index is 103.14 where 2011 = 100 so prices have risen and then fallen back a bit. What is there to be afraid of in that? Next is the fact that the rate of disinflation is showing signs of slowing as it was -0.84%. It is the latter that is facing many countries as we move into the summer of 2015.

The Euro area

On Tuesday we saw a clear sign of the tide going out for the deflation nutters as Eurostat produced its latest consumer inflation report.

Euro area annual inflation is expected to be 0.3% in May 2015, up from 0.0% in April.

This means that in 2015 it has gone -0.6%,-0.3%,-0.1%,0% and now 0.3%. Anybody spot a trend there? If we look into the detail we find that the driver here has been the way that the stabilisation and rise of the oil price has impacted on the numbers. The annual rate of inflation in the energy sub-component has risen from -9.3% in January to -5% in May and will continue to do so if prices remain at current levels. All the other sub-components are showing a positive rate of inflation which should thoroughly embarrass the deflation nutters who predicted exactly the reverse. Also if we look at the services sector we see that inflation has been around 1% in 2015 and is now 1.3% so the vast majority of the economy never saw any price falls. It is often forgotten that the price falls have been for goods and it is odd that this time around it has been badged as bad as in the preceding decade price falls in goods from China were regarded as positive.

Meanwhile the average Euro area consumer and worker will be disappointed to see energy costs begin to rise again and also to see the end of falls in food prices. Rather than the end of the world as we know it they would have welcomed the time when prices dipped and fell.

Bond markets

It feels like only yesterday that we were discussing a ten-year bond yield in Germany as low as 0.07%. Well yesterday seems so far away in a week when it has nearly touched 1%! The market has seen price falls of 6 points in the futures contract this week alone as we await for reports of casualties. In an era of privatisation of profits and socialisation of losses we should fear the losses. The 100 year bond that was issued by Austria has fallen from around 220 to 160 just to give you an idea of scale. As I type this the ten-year German bund yield is 0.89% and relatively calm.

The Grand Old Duke of York must be having a wry smile at all of this but if we peer through the panic and hysteria we see a change in trend which indicates that  the bond markets have lost faith in the deflation saga too. Perhaps one or two thoughts of inflation have popped up which are hard to pay for with a 0.07% yield!

Inflationary expectations in the UK

This mornings release must have caused a few red faces at the Bank of England.

Median expectations of the rate of inflation over the coming year were 2.2%, compared with 1.9% in February.

Asked about expected inflation in the twelve months after that, respondents gave a median answer of 2.3%, compared with 2.1% in February.

So not only do they expect higher inflation but you may note that the numbers are above the inflation target. Oh dear and it gets worse as the Bank of England “experts” looked for confirmation of the official statistics.

Asked to give the current rate of inflation, respondents gave a median answer of 2.2%, unchanged since February.

So rather than the price falls we get inflation above target. As the Bank of England shuffles this to the back of its files in it slowest basement let me give you some thoughts as to why this might be.

1. The “not an official statistic” Retail Price Index has stayed positive and is 0.9% so may well be a better guide than CPI as I have argued all along.

2. House prices are officially increasing at an annual rate of 9.6% which the official numbers completely ignore. This is because you ignore the rise being inflationary you can claim it is a wealth increase and then tell everyone they are better off.

3. Services are around 4/5 ths of the UK economy and rising and even under the measure used by the CPI they are increasing at an annual rate of 2%.

The UK establishment reverts to type

Even the UK establishment realised that its inflation infrastructure had lost credibility and in fact had become a bad joke. So changes were proposed and they looked hopeful as I attended the meetings about them at the Royal Statistical Society. However sadly a latter day Sir Humphrey Appleby has intervened along the lines of this below.

You never interefere with a member of her majesty’s judiciary

Hacker: What do you do then?

You appoint someone who does not need interfering with!

From the RSS Statsusernet as to the respective committee chairs.

Dame Kate Barker – Stakeholder Panel
Nick Vaughan – Technical Panel

So Kate Barker who sat supinely on the Monetary Policy Committee as RPI was replaced by CPI and house prices were removed from our consumer inflation measure. Of course she was still on the MPC when the economy collapsed partly due to a house price boom on her watch. Mr. Vaughan comes straight from the UK Treasury and perhaps more importantly was on the complete failure that was the Consumer Prices Advisory Committee. Rewards for failure? Or more cynically was it considered a success?

Just for clarity it is a role I would have been happy to undertake as I have plenty of ideas, which of course probably excluded me! Also thank you to Andrew Baldwin for his kind words about me in his reply to this neutering of a good idea.


There are plenty of hazards facing the world economy in the years ahead. But for now we have seen the current deflation scare start to fade away. Much of it was self-inflicted in the way that official institutions have changed and manipulated consumer inflation indices in particular by either never including house prices or dropping them out like in the UK. But there were also clear disinflationary trends from oil and commodity prices.

As inflation returns to the system then let us consider the impact on real wages. It was the surge in late 2011 which pushed real wages lower in the UK which gets conveniently ignored. Also it is the poorest who gets the most affected by inflation and of course it is those who will have most benefited from the recent energy price falls. But it has been a while since even those in better circumstances had seen gains if this from the Wall Street Journal is any guide.

Median household income, adjusted for inflation, was $51,939 in 2013, only slightly higher than it was in 1988, when it was $51,514. Slow wage growth is part of the problem; adjusted for inflation, blue-collar pay has increased just 0.3% a year over the past quarter-century.

Something to think about as we peruse the monthly US labour market data.


20 thoughts on “UK citizens do not believe the official inflation data

  1. “Slow wage growth is part of the problem; adjusted for inflation, blue-collar pay has increased just 0.3% a year over the past quarter-century.”
    Firstly, I think that this shows, as I have oft repeated, that the wage growth problem for ordinary people is one which far precedes the credit crunch.
    Secondly, the mitigation for the nauseating excesses produced by neo-liberalisim is based on a false tenet, namely that, “The Poor benefit from the greed of the Rich.”
    The problem with this is that the Rich’s greed is not limited to the wealth it can use, has bought all political power, and can and does appropriate all wealth, whether it can use it or not.
    Such is the nature of greed, and this is also the explanation for lack of demand.

    Before anyone points to the fact that 0.3% IS an increase, I’d remind you that there are quite a number of strata within the term, “Blue collar”.

    • Hi therrawbuzzin,
      If it’s a problem now just wait until we are having to compete with robots for our jobs as well as low-wage economies. These things never happen as quickly as predicted but it’s only a matter of time before driverless vehicles are widespread for example. I am also constantly annoyed that at my local DIY store they often only have self-service check-outs available. Given the choice I would happily pay a few pence more on my shopping if it kept someone in work at a check-out. Of course my simplistic view is probably naive as I dare say the cost savings don’t find their way back to the customer in the form of cheaper goods anyway!

    • I see the UK’s problem differently. UK wages are high compared internationally. The problem is that UK housing costs are excessive, which causes UK purchasing power parity to record low living standards by international comparison.

      British tradition, AKA the land owning gentry are all about living the high life off a rent seeking model. Planning restrictions that prevent enough housing being built are about enforcing feudal financial domination over the population.

      Internationally, there is an obvious solution – as practised by Germany, which uses a strong tenants association with the legal power to control rents at reasonable level, enforce basic adequacy of building standards and tackle abusive landlords. It’s not perfect, and some slumlords do exist in places like Berlin in immigrant communities. This system encourages the rich to invest in productive businesses – increasing employment.

      Ergo I’d suggest that German style capitalism is working better than the American or British model.

      • “I see the UK’s problem differently. UK wages are high compared internationally. ”
        Not by per capita GDP, they are not, which reinforces my point.
        Capitalism died in 2008.
        We now have electoral facism.

        • UK democracy is in rude health – whether or not you like the outcome, the UK had a real referendum. Get a reality check – less than 10% of nations worldwide offer these. It could use improvement, both the Tories and the SNP are heavily over represented by the FPTP system, and the SNP have no business voting on English issues as per the West Lothian question.

          Using various estimates from , the UK is rich with over $40,000 per capita. The world median is between $5,000 and $6,000

        • Are you having a laugh or raving nuts ? UK democracy is healthy. No opposition leaders get assassinated, unlike Russia. Vote buying is not condoned. Vote Rigging & ballot stuffing is not condoned.

          The voters get what they vote for – you’re entitled to free speech without fear of assassination (unlike various other criminal regimes internationally I might add) But most of the UK accepts the voters verdict, whether or not they agree with the resultant political outcome.

      • I like the German model, however, many people dismiss it as “Socialist”. I call it “heavily regulated capitalism” and don’t care if the economic distribution system is capitalist, socialist or communist as long asit ensures that maximum utility is delivered to the maximum amout of people in the country.

        I don’t understand your argument re English wages are too high – justlook at Germany’s and their economy continues steaming ahead mainly due imo to decades of investment in human and physical productive capital which England doesn’t believe in. Hence Germany is where it is and England is where it is.

        • UK democracy is in rude health – whether or not you like the outcome, the UK had a real referendum. Get a reality check – less than 10% of nations worldwide offer these
          The policies of the three neo-liberal parties which could form a UK govt. are almost identical, so there was effectively only a choice of by whom those policies are delivered.
          That is not real democracy, and the only reason ANYONE could support it, is precisely because the DO support these policies.
          It could use improvement, both the Tories and the SNP are heavily over represented by the FPTP system, and the SNP have no business voting on English issues as per the West Lothian question.
          The “West Lothian Question” is just as much a red herring as the “Laffer Curve”.
          It is used by those opposed to decentralisation, just as the “Laffer Curve” is trotted out incessantly by those opposed to progressive taxation of the wealthy, and both are a nonsense.
          The point about devolution is that NO Westminster MPs have power over devolved issues, even those elected to serve West Lothian constituencies.
          If you wish to devolve similar powers to an English parliament, I’d be the first to support your right to do so.

          Westminster SNP members have always ABSTAINED on matters they see as having no effect on Scotland.

    • Hi Alan and welcome to the corner of the web.

      I agree that the recent spurt of low and negative inflation has been good for the UK. For a start it has created the first situation for a while where real wages have risen.

  2. I have to admit why should I belive the figures

    come on , imputed sex trade and drugs !

    then the lack of housing inflation as you rightly point out , Shaun

    but I have had 5 years or more food and fuel inflation yet alone bus and rail fares

    just this year we get no inflation ? so WHAT!

    I’m a third worse off in food an fuel , the people know it underneath the headlines and because they aint that clever, average IQ 100 remember , the poor souls try an figure whats going on as they pop off to the footy match and pay HOW MUCH!

    Still if you’re in the top slice things aint so bad , the proles always moan ……


    • Hi Forbin

      I agree completely that the deflation mania takes no account of the fact that the UK has just had a burst of inflation. I made the point in the post with reference to Taiwan where the underlying index shows that prices are up on 2011 but the UK is much worse. If we look back to say 2008 as the start of the credit crunch the CPI averaged 108.5. In April it fell back from the 128.1 of April 2014 to 128.

      As we have been in a recessionary phase it is the 108.5 to 128 or so that is the problem for workers and consumers as real wages fell. Yet the panic is over a so far -0.1%!

  3. Great column, Shaun, and thank you for noticing my entry in the RPI CPI User Group website. The experimental quarterly owner-occupied housing estimates based on the net acquisitions approach were published by the ONS on Wednesday. The ONS itself mentions that there are problems with this series, especially in its renovations component, and it should probably be showing more inflation than it does. Just the same, even as it is, it gives a quite different take on inflation from the CPI or the CPIH. Its annual inflation rate is 2.3% for 2015Q1, down from 3.5% in 2014Q4. By contrast, the OOH series for the CPIH shows 1.9% for 2015Q1, up from 1.6% in 2014Q4. Excluding OOH altogether implicitly assumes that OOH costs show the same inflation as the overall CPI, i.e. an increase of 0.2% in 2015Q1, down from 0.9% in 2015Q4.

    • Hi Andrew

      Thank you for the reminder about the Eurostat Owner Occupied Housing (OOH) inflation numbers. At least it is not just me who follows them!

      On a more serious note I find the “Acquisitions of dwellings” costs numbers to be odd (as in low) too. I recall the analysis as to why it would be lower than recorded house price inflation but did not expect it at 2.92% for Q1 of 2015 to be that much lower.

      • Very good point, Shaun. Doesn’t the UK HPI show an 8.5% annual increase for 2015Q1, with new dwellings showing an even higher increase. It is hard to understand why the dwelling acquisition component is so low.

  4. Hi Shaun

    Your last paragraph shows a significant truth: that living standards for many (in the UK as well as the US) have probably been stagnant for a long time.

    Elizabeth Warren did a lecture some years ago about the decline in the US middle class and said that the only reasons the show was still on the roads as far as living standards are concerned were: more debt as a substitute for income; more women going out to work and more support via social security. All these have masked a declining situation and, as mentioned above, with the burgeoning of robotics and the continuance of globalisation this will only get worse.

    Also you didn’t mention those wonderful hedonic adjustments to the inflation figures which so mislead us. In the US they also have substitution adjustments (if steak becomes expensive they substitute ground beef) but I’m not sure about the UK. I have no idea what the “true” rate of inflation is but, as you say, it’s probably higher than the statistics say

    • Hi BobJ

      I wanted to reply about the hedonics issue but it is hard to reply to without writing another post! The UK ONS uses in more areas than other statistical bodies but the impact is small and in some ways oddly declining

      “In 2013 the combined weight of all hedonic items in the CPI was 0.73 per cent (or 7.30 parts per 1000), which has fallen from a high of almost 1 per cent in 2007, despite the subsequent introduction of smartphones and tablet PCs”

      However other quality measures and the substitution effects you mention are big issues in my opinion and are BIG if I may put it like that. For example the quote below makes me think of “can” and “worms”

      “the standard quality adjustment technique of imputation used elsewhere in consumer price inflation statistics.”

      Please do not misunderstand me the statisticians are probably doing their best but there are loads of pitfalls.

      As to substitution I remember at one of the Royal Statistical Society public meetings someone standing out a pointing out that his grandmother liked a specific apple type. As he explained that she wanted Coxs Pippin only those supporting substitution had an obvious problem which is that somewhere between sometimes and often there is a quality loss from substitution. So if we upwards adjust for quality we should also downwards adjust.

  5. Hi Shaun a late post I know and don’t expect an answer but wanted to record that I lost all faith in all official statistics last year with teh introduction of double counting of R & D and guessing at the “contribution” that coke and hookers made.

    I do chortle to myself every time I see people saying we can’t trust Far East official numbers as they just lie!! What? and the West doesn’t ???!!!.

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