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 athttps://fullfact.org/factcheck/economy/deflation_Britain_first_time_1960-45187
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.
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.
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.
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.