The UK “Deflation” experience did not amount to much did it?

Last month saw the event that had been waited for by what I christened the “deflation nutters” . Yes the UK official measure of inflation dipped by as small an amount as it could (-0.1%) into negative territory in annual terms. Rather disappointingly the UK Office for National Statistics revved up the atmosphere too by producing this.

Prices faced by households have fallen by 0.1% over the last year. An annual fall in prices is often referred to as “negative inflation” or “deflation”. 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%.

Actually “negative inflation” is not the same as “deflation” as I keep telling them but as you can see the mistake keeps appearing. In case you are wondering about the difference the UK was not in deflation because the economy (strictly speaking aggregate demand) is growing. So my subject of yesterday Greece has been in deflation for a while for example.

Royal Statistical Society

I took the issue to the RSS on two main grounds.

One clear issue is that whilst RPI is now “not a national statistic” it was back in 2009 when it went negative. It went as low as an annual rate of -1.6% and averaged -0.5% for the year. You might have thought that this would merit a mention!

There is also the issue of house prices rising at an annual rate of 9.6% (March) as we claim consumer prices are falling…

There is also the issue of producing estimates for an index (CPI) which did not exist for more than 30 years.

You will be pleased to read that the RSS agreed with me.


You made a very good point. Some of us thought it merited an article by Full Fact. FF agreed and the resulting article has just been published at


So the battle for accurate reporting does sometimes make progress although on a personal level it was a little disappointing to see the article name check someone else.

The UK leaves deflation

The scare campaign run by the media and some economists always had a problem. This was that in May 2014 prices in the UK fell by 0.2% so unless prices fell even faster this May we were always likely to exit the situation. The oil price did drift a little lower in May but petrol and diesel prices at the pump rose by around 2 pence per litre each so there was a little bit of upwards pressure. Just for perspective petrol prices have risen by around 10 pence per litre since the lows earlier this year and diesel by 8 pence. Of course that poses its own problem for deflation scaremongering.

Today’s data

Thus as forecast on here we left negative inflation in May.

The Consumer Prices Index (CPI) rose by 0.1% in the year to May 2015, compared with a 0.1% fall in the year to April 2015.

Indeed the ordinary worker and consumer will wonder about all the deflation mania as they note that the prices of essential goods are rising again.

There were also significant upward pushes from motor fuels, with average petrol prices rising by 2.5 pence per litre between April and May this year, and from a variety of food products, where overall prices rose slightly this year

Care is need here because of course central bankers and experts ignore such prices because you see they are not core items. Just for clarity their definition of core excludes what the ordinary person considers essential. You may think that I have left out water but sadly they seem to have plans for that too.

Launch of IMF Study on Managing Water Challenges and Policy Instruments
Data reveal that those countries that price water more cheaply can also be the ones that consume it more freely and often less sustainably.

It is rather chilling to read the IMF calling for increases in the price of water. Does consuming water “more freely” and “less sustainably” include drinking it?

The largest part of our economy

We are regularly informed that the services sector of the UK economy is the most dynamic part. Of course in the modern era it is also by far the largest part as it heads inexorably towards being some 4/5 ths of it. But the “deflation nutters” have quite a problem here.

The CPI all services index annual rate is 2.3%, up from 2.0% last month.

For newer readers the price falls were in  the price of goods as shown below.

The CPI all goods index annual rate is -1.8%, up from -2.0% last month.

So what we actually have is something of a bipolar situation where falling oil and commodity prices have pushed good prices lower but significantly for any ongoing deflation fears have failed to have much of an impact on services prices.

What are the trends?

There are still disinflationary pressures impacting on the UK economy as shown below.

The output price index for goods produced by UK manufacturers (factory gate prices) fell 1.6% in the year to May 2015, compared with a fall of 1.7% in the year to April 2015.

The overall price of materials and fuels bought by UK manufacturers for processing (total input prices) fell 12.0% in the year to May 2015, down from a fall of 11.0% in the year to April 2015.

As you can see there is still disinflationary pressure in the system. However if we note that the fall in the price of oil represents a 1.23% drop in the output index and a 8.6% fall in the input index over the past year we get some context. As to the acceleration in input price disinflation well the ordinary worker and consumer will welcome it.

This fall was driven by a decrease in the price of home-produced food, which fell by 6.9% between April and May 2015.

House Prices

These continue to rise at well above the inflation rate although it looks as though there was quite a pre-election scare.

UK house prices increased by 5.5% in the year to April 2015, down from 9.6% in the year to March 2015.

In April 2015, the UK mix-adjusted house price index fell 0.6% from the record level witnessed in March 2015 to reach 208.4

London prices increased by 4.3% over the year to April 2015 (down from 11.2% in the year to March 2015).

Monthly deflation in UK and especially London house prices? Sorry I could not resist that.The reality is that we have seen sustained house price inflation over the past couple of years leading to the situation shown below.

The UK index is 12.3% higher than the pre-economic downturn peak of 185.5 in January 2008.

In case you were wondering why the official CPI measure of consumer inflation has not picked this up it is because the UK establishment has put a lot of time and effort into excluding them from it. The Retail Price Index does have a housing component which is  a major factor in why they have put so much effort into labelling it as “not a national statistic”.

Also each month I note that “help” for first time buyers seems to involve them suffering from a higher rate of house price inflation than everyone else.

In April 2015, prices paid by first-time buyers were 5.8% higher on average than in April 2014. For owner-occupiers (existing owners), prices increased by 5.4% for the same period.

Web scraping

I am pleased to report that UK inflation measurement is entering the technological era.

Today ONS published trial inflation indices using web scraped data. Web scraping is the process of using automated tools to collect prices from retailers’ websites. Since April 2014 the ONS big data team has scraped daily prices from three large supermarkets collecting over 1.5 million price quotes for 35 grocery products in 11 months, providing a wide breadth of accessible price information.

The problem is what you do with it. Let me explain one issue. Being a keen runner I buy running shoes regularly where I note that as click bait companies offer very cheap prices for shoe but these turn out to be for sizes 3 and 14 but not the size 9 I and many others want! Putting those prices in without an appropriate very small weighting would be misleading.


For all the column inches devoted to it the UK deflation experience was not much was it? Due to the pattern last year there are possibilities for the June and perhaps August numbers of another flicker but the downwards spiral promised by some seems to have been a chimera. In many ways it was simply a relative price fall driven by a cheaper oil price. There has been something of an asymmetry between the treatment of a 0.1% fall and the push above 5% we saw back in late 2011.

Meanwhile services inflation in the UK has continued on its own not very merry way and in spite of the pre-election dip so have house prices. Accordingly it was the decision to change the measure of UK inflation back in 2002 which has caused the scaremongering as the previously targeted measure has simply seen a slowing of inflation.

The annual rate for RPIX, the all items RPI excluding mortgage interest payments (MIPs) index, is 1.1%, up from 0.9% last month.

But that is not the only consequence of the change as you see CPI was put in the Gross Domestic Product numbers a few years ago. If RPI was still there then our rate of GDP growth would be around 0.5% lower.


16 thoughts on “The UK “Deflation” experience did not amount to much did it?

  1. Hi Shaun

    You continue to highlight the perils of a simple reading of economic statistics, and rightly so.

    I think you are right about some underlying disinflationary forces. What QE and ZIRP have done is to keep alive the zombie firms which augment capacity and thereby downward price pressure. Of course what will happen if we have a bust and IRs are tightened is anybody’s guess; theory say those firms would finally go out of business and the excess capacity is eliminated after which we may get even more rapid inflation. The excess capacity in such places as China is likely to be considerable and this is bound to impact on goods inflation, unless of course the Chinese allow an appreciation of the yuan, which is most unlikely.

    As to services it seems to me that the UK economy epitomises the “rent extraction” model whereby activity is geared towards rent extraction rather than providing goods and services.

    I find the point about the GDP deflator interesting because, as you say, if a more realistic figure was chosen then we are probably in recession, a situation that I think is mirrored in the US. This view is backed up to some extent by lacklustre results for companies and in business surveys, which seem to me to be, at best, very mixed

    I really do wonder how long it will be before this whole thing falls apart.

    • I think its better to gauge the economy in these Gerry Mander’ed days by the size of the tax take

      excluded one off rate increases , if the economy is motoring there should be a corresponding increase in VAT take and income tax . Company tax is fraught as so many offshore profits one way or another .


  2. 0.2% is tiny, probably within error ranges, yet so important.
    It may seem counter-intuitive, but 0.1% inflation is better for ordinary people than 0.1% disinflation.
    Why? Because TPTB (who are at economic war with the rest of us) have no justification for taking (more) extraordinary action.

    • really scarey Buzzin

      I mean to our TPTB really believe these figures or do they have another set of books they keep ?


  3. Hi Shaun
    From personal experience it seems that if you
    exclude first time buyers from the equation then ACHIEVED
    house prices are falling.
    If any of the g8 countries raise their IR’s then that
    would be an acceptance of reality therefore it’s very
    unlikely to happen any time soon.

    “If a horse is standing and you hold the reigns,you can guide
    it wherever you want”


    • hi JRH ,

      I prefer the saying

      “you can lead a horse to water – then watch it p1$$ in it ! ”

      Which seems to sum up most politicians
      ( or the British public if you like 😉 )


  4. Hi Shaun,

    Another excellent article.

    The screen scraping one is interesting as it won’t take long for the supermarkets to workout which products are being targeted from ip addresses (I presume ip spoofing would be unethical for ordinary Government departments) and then use this to gerrymander the results, I’m sure there is a considerable pool of unemployed talent in the City that could help with this, now the banks no longer gerrymander Libor etc! My first thought is they could make inflation look lower, then thought about the benefits and realise they would make it look, bigger, much bigger as all supermarket prices could then go up inline with ‘inflation’ boosting profits, but even better, benefits and pensions would also go up more, so increasing disposable income available to spend with retailers.

    The only possible fly in the ointment is that the budget supermarkets may not play ball where their offering is based on price rather than the big incumbents which based on locality and always telling us how ‘cheap’ and ‘low’ their expensive prices are. In my area the incumbent’s prices are typically 50 to 100% higher on fresh produce!

    The other danger is that some retailers have much cheaper online prices, compared to their stores, as the the direct ordering cost of sale is much lower and they want to capture a slice of the online market. This also applies to supermarket outlets where pricing levels also vary considerable from store to store, type of store and higher priced filling stations.

    Only having very small or large sizes for special offers is a common problem in retail sales promotions as they can always claim that the sizes people actually wear were so popular they have already sold out. It has got you in the store, so there is a chance you will buy something! Look on the bright side when it comes to size 9 running shoes, if this was the USSR, you would probably have to put up with using 2 left ones!

    • ” being targeted from ip addresses (I presume ip spoofing would be unethical for ordinary Government departments) and then use this to gerrymander the results, ”

      I think the super markets already know and do that , ask yourself why certain promotions are running at the times they do , normally just before the HMG needs a drop in inflation

      but its in support of HMG , not against it ….


    • oh I forgot to add I already know from personel expirence that the local store managers are allowed to offer prices that they think their local customers can take

      to wit one big brand offers me prices online that are higher ( I kid you not ) and other “offers ” that if I went to the local branch I can get better !

      but I have to buy from the bigger branch online if I want the said goods delivered to me ? Because I ‘m between the two it seems the larger branch is in a more richer area than the slightly closer smaller branch!!


      PS: dont get me started on

      1, manager “special ” – it’s new size is pound for pound higher than the regular item. ( and stuck on the end isle which the local consumer expect the “bargains” to be !! – Sainsbury I’m looking at you!! )

      2, 500g rice box sold at the “new lower,cheaper” price of 2.20 instead of 2,50 ( the 1Kg box is 3.99 ……… )

      3, Still 1 pound sized packets / bottles – they have the regular size that is cheaper per pound/pint /liter/ gram ( Sainsbury again ) around the corner !

      4, if you can afford steak do you know which is the better cut , sirlion , rump or fillet? I have seen many in the local stores unable to tell ( yeah gods man these people have SMART phones – frigging google it ! – SMART phones for dumb people !! ) *

      * if you answered “porterhouse” you’re showing your age

    • Hi Rods

      Or one extra large shoe for everyone along the lines of the giant nail supposedly produced in Stalin’s time! As to the web scraping I hope that the project continues whilst realising that there is a lot of methodological work to do. My reason? I agree with you about the Supermarkets gaming prices for inflation measures ( I am sure the numbers we have now reflect that reality) so the more prices we record the harder it is for them. Along the lines of the MIT billion price project…

  5. Since the ONS doesn’t publish a monthly CPI series with a net acquisitions approach to owner-occupied housing (OOH) yet, probably the closest they come is their RPIXC series, the RPI excluding mortgage interest payments and council tax. Usually it matches the RPIX series you referred to, as it does in April and May, going from a 0.9% to a 1.1% annual inflation rate. With an adjustment for the formula effect (why is there no counterpart to the RPIX and RPIXC series published for the RPIJ?) this would imply inflation going from 0.3% in April to 0.6% in May.
    I blogged here before assuming that if stamp duty were included in this series it would boost the RPIXC annual inflation rate higher, but actually for January to May 2015 it would push it down slightly. Nicola (Nicky) Pearce has taken over the experimental quarterly OOH series based on the net acquisitions approach. She pointed out to me that the stamp duty portion of the acquisitions of dwellings component of the index (it has a 5.76% basket share in the acquisitions of dwellings index) actually had a negative annual inflation rate for 2015Q1, in spite of the big increase in housing prices. This was because of the December 3 changes in the way stamp duty is charged, which would reduce it on purchases of all but the most expensive homes. The impact of the change in legislated tax rates will likely continue to outweigh the impact of any increase in house prices until December 2015, when it will fall out of the annual inflation rate.

    • Hi Andrew

      Thank you for the Stamp Duty data which explains some of what I consider to be underperformance of the acquisitions of dwellings element of OOH. It made me wonder about the tax revenue implications of this. The amount for the latest fiscal year is shown below.

      “stamp duties (on shares, land and property) increased by £1.3 billion, or 10.3%, to £13.8 billion”

      So far in 2015 (calendar year) they are down by 7% so it is something to watch in the public finances as revenues appear to be fading.

  6. Hi Shaun.

    I see that the RSS has given the credit for your observation to Robert Peston, a man whose name is only one R short of being an anagram of SPOT BENT ERROR and a man who singularly failed to spot any errors anywhere at all in the financial sector as he cosied up to it..

    • Hi Jim M

      I would not be human if I did not confess to a bit of disappointment when I read that. Partly personal but also the fact that someone who knows little or nothing about it is presented as an expert. But on the other side of the coin I was pleased to see the RSS taking action in such a manner as it is in my opinion exactly the sort of thing they should be doing. It is nice to see that a body formed in 1834 is as relevant as ever and is doing good (extra “o” relative to Goldman Sachs) work still.

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