UK “noflation” hides service sector inflation and rises in rents and house prices

Today sees the publication of the latest UK inflation numbers and there will have been downwards pressure on them from the fall in petrol and particularly diesel prices at the pump. For readers abroad the UK had encouraged drivers over the past decade or so to drive diesels and had then promptly made it more expensive than petrol,sometimes quite a bit more expensive! Of course there have also been issues over the pollution (particulates and nitrogen dioxide) especially for city dwellers pumped out by what we were told ( I have one) were modern regulated engines . It is not only in the finance sphere where regulation and official advice were failures.

However returning to a pure inflation theme not only did prices at the pump fall in August but diesel prices fell by more and went below that of petrol. According to the weekly official figures petrol prices at the pump fell by 5 pence per litre and diesel by 6 pence per litre during the month. This affects the inflation measures differently as CPI can measured through the month but RPI is measured between a day and a week.

UK “Noflation”

The headline was what was once regarded as something of a nirvana.

The all items CPI annual rate is 0.0%, down from 0.1% in July.

We really wanted zero inflation until we got it! Oh well! As Fleetwood Mac put it. Indeed we have been in this particular boat for a while.

Annual inflation (the overall rate at which prices have increased over the last year) has been at or around 0% since February this year.

Also it has been driven by what are two of life’s essentials.

Falls in food and motor fuel prices are two of the main reasons for this. In the year to August, food prices fell by 2.8% while prices of petrol and diesel were down by over 15 pence a litre and over 21 pence a litre respectively. In total, falls in food and motor fuel prices reduced the CPI 12-month rate by approximately 0.7 percentage points in the year to August

I rather like the idea of food and fuel price inflation being -0.7% don’t you? Well apart from any central bankers and their acolytes reading this. Imagine the deflation headlines if this was general! Whereas of course there is disinflation and some deflation in the oil and farming sectors (milk especially) but the rest of us benefit.

Oh and we only avoiding a general deflation scare due to a rise in indirect taxes that I have to confess I am trying to recall.

The annual rate for CPI excluding indirect taxes, CPIY, is -0.1%, down from 0.1% last month.

Services Inflation

This is missed by many but it chugging along on its own not very merry way as shown below.

The CPI all services index annual rate is 2.3%, down from 2.4% last month…..The CPI all services index is 140.5, up from 140.0 in July.

So we have disinflation in goods prices driven by oil and commodity price falls but the impact on what is 79% of our economy has not even brought inflation in that sector back to target. This was my response to this question by Robert Peston of the BBC.

Since February, inflation has been 0%, 0, -0.1, 0.1, 0, 0.1,0. When is it reasonable to worry that deflation is a genuine threat?

I hope he reflects on that and learns something. An example is this from The Times.

It is the second time this year that TalkTalk has pushed up its prices, with a standard “simply broadband” package rising from £3.50 a month to £5 on June 1 and now to £7.50 from October 1.

Domestic Energy Prices

With the price of oil so cheap you might think that the outlook is bright here for energy consumers. The catch is that the UK supply situation for electricity has become very tight compared to  the past and the dangers of demand exceeding supply have risen. For example a cold day with no wind would do the job and would see not only power cuts for industry but prices soaring in the short-term which could easily have knock-on effects. We could be lucky or unlucky this winter.

What about housing inflation?

This is a continual problem and issue for inflation in the UK it comes in several forms. The simplest is that our headline measure CPI completely ignores owner occupied housing costs. This means that the biggest item of expenditure someone is likely to make in their life is ignored. Secondly UK rents are an extremely lagging indicator of housing market  conditions and these days are taking around 3 years to respond to movements.With interest-rate changes by the Bank of England needing 18/24 months to have a full impact you are pretty much guaranteeing that policy set on private-sector rents will be inappropriate when it applies. Even worse our measurement of rents as I have discussed many times on here has been at best a shambles and at worst a national embarrassment.

Let me take you through the numbers to illustrate. From HomeLet yesterday.

on an annual basis, rent prices remain significantly higher than a year ago, with the average UK rent 10.5% higher than in the three months to August 2014……Overall, the average UK rent on new tenancies has increased 1.6% in the three months to August 2015, compared to an increase of 2.2% for the three months to July and June 2015.

So we start with the view that there is considerable inflation in rents in the UK at a similar level to that in Ireland that I discussed in my replies to comments on Friday’s article.

How is that officially recorded?

The OOH component annual rate is 1.8%, unchanged from last month.

As the group Pilot put it back in the 1970s.

Ho, ho, ho
It’s magic, you know
Never believe it’s not so
It’s magic, you know
Never believe, it’s not so

Back on the 4th of this month I raised the statistical and theoretical issues here where there are clear problems. Yes new rents need to be adjusted to some extent as others do not change but that much? I do not think so.

Meanwhile in the what could go wrong section? The Johnson Report.

The Office for National Statistics (ONS) should move towards making the Consumer Prices Index including owner occupiers’ housing costs (CPIH) its main measure of inflation;

Yes it is the same CPIH as this one.

The National Statistics status of CPIH and its derivative indices has been discontinued.

Arise Sir Paul!

What about house prices?

A much more timely guide to asset price inflation in the UK in particular is given by house prices. Todays numbers tell us this.

UK house prices increased by 5.2% in the year to July 2015, down from 5.7% in the year to June 2015.

This is well above the inflation target and in the UK house prices are a much more timely guide to what is happening than rents. If we put them in the CPI then we would have an inflation reading of 0.9% which gives a completely different context to our economic situation.

There is a Eurostat effort to improve things called OOH (NA) which uses house prices. I welcome this although sadly it has also got itself into a theoretical mess in my opinion.

As to house price increases it is no longer London leading the way.

Annual house price increases in England were driven by an annual increase in the East (8.3%) and the South East (6.7%).

Comment

The UK consumer inflation measurement landscape and infrastructure is in quite a mess. We are in “noflation” according to our headline measure and could easily have slipped into what the media would rush to call “deflation” this month. However our services sector is seeing inflation at 2.3% and the housing sector is seeing substantial rises in house prices and now even private-sector measures of rents. This is why when even the Bank of England surveys the matter it gets told this.

Asked to give the current rate of inflation, respondents gave a median answer of 2.1%, compared to 2.2% in May.

Thus we see a couple of things firstly the good sector is experiencing disinflation driven by oil and commodity prices and this looks set to stay over the rest of this year.

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

Factory gate prices (output prices) for goods produced by UK manufacturers fell 1.8% in the year to August 2015, compared with a fall of 1.6% in the year to July 2015.

So as the Champions League starts up in earnest tonight we can see that the cliche of it being a story of two halves is in fact also true of the UK inflation situation.

Other measures of inflation are available

The all items RPI annual rate is 1.1%, up from 1.0% last month…..The all items RPIJ annual rate is 0.5%, up from 0.4% last month.

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15 thoughts on “UK “noflation” hides service sector inflation and rises in rents and house prices

  1. Hi Shaun

    You’ve shown how the inflation index needs to be analysed in order to get a rounded view of inflation and also why it is woefully inadequate. One cannot escape the feeling that these indices are “rigged” in some subtle way so that issues are downplayed.

    I do wonder what would happen if CPI suddenly started going up sharply; would we get calls for a new index saying that CPI was no longer “suitable”? Was this one of the tacit reasons why RPI was dumped, that is because it’s too high and was of course reflected in the escalation of benefits and pensions?

    Of course if inflation is in fact so much higher than stated on a more “reasonable” basis then this would put a lot more pressure on the BOE to hike interest rates and you can only “look through” the figures so much before people smell a rat. They got away with it in 2011 but, under new arrangements, they might have a permanent place at the window and this would be rather uncomfortable as the excuses would become evermore egregious.

    • your answer is that you are correct

      HMG cheats the public because when it comes to tax rises apparently RPI is all good !

      see CPI used for spending

      see RPI used for tax collection

      Why doesn’t MSM take any notice , well they’re part of the Rat Pack , don’t yer know?

      Forbin

    • ‘Was this one of the tacit reasons why RPI was dumped, that is because it’s too high and was of course reflected in the escalation of benefits and pensions?’

      Seemed that way to me at the time.RPI was consistently higher than CPI and Brown changed the BoE target,which sort of nullified the point of making them independent in the first place.

      But he was on a mission to save the world.So that was ok then?

      RPI only measures the costs of some aspects of ownership as opposed to the actual cost of buying a house.

  2. Interesting given reported views of the Shadow Cabinet how much coverage and analysis the effectiveness of our independent central bank will get over coming months.
    We have them missing their inflation target consistently, but partly only because they’ve excluded the big costs – does that make them more or less effective – I don’t know.
    As Bob says above, the pressure should be there to hike rates now, but then many would say that the inflation in housing is a consequence of QE v1 (also including the highs of the stock exchange).
    Big decision now is whether to deflate the bubbles and imperil the real economy, or just bumble along until there’s a Labour govt to blame.
    (I’m not saying the BoE think like that, but Mr Osborne probably does).

    • Hi Oblomovlll and welcome to my corner of the web.

      The big miss in infllation targeting came in 2011 when both CPI and RPI were allowed to exceed 5% per annum in the autumn. This collapsed real wages and turned an expansionary policy into a contractionary one. I feel rather alone shall we say in pointing that out (I did so at the time)….

      As to the house price inflation that was driven by the Funding for Lending Scheme which started in July 2012 and turned house prices around quickly. So would the Bank of England raise Bank Rate to deal with a boom it created ?!

      Oh and leaving bubbles alone can create their own problems as we discovered when the credit crunch hit us.

  3. Hi Shaun, your blogs and commentators continue to shine light in the darkness, maybe Corbyn, McDonnell will take time to read them

    Re diesel, I was driving through RoI during the summer and diesel was 10 cents cheaper than unleaded which was generally circa €1.40 pl anyway. Rip off Britain once again..,

    • Hi Seasiders and thank you

      As to diesel prices we were told this by the UK Petroleum Industry Association in March.

      “In common with other EU countries, diesel supply
      in the UK has become tighter in recent years. This
      has been reflected in wholesale prices and pump
      prices that are often higher than petrol prices. ”

      Apart from the fact that it is contradicted by your experience in Ireland which I am sure plenty of others can add to in Europe it seemed to change rather fast didn’t it?

  4. ‘This is a continual problem and issue for inflation in the UK it comes in several forms. The simplest is that our headline measure CPI completely ignores owner occupied housing costs. This means that the biggest item of expenditure someone is likely to make in their life is ignored. ‘

    It’s not hard is it.

    Sadly,you won’t get onto the Board of the BoE with an opinion like that.

    • Hi Dutch

      Those on the Monetary Policy Committee have been much too supine about changes to the inflation infrastructure in the UK. The change to CPI in 2002/2 was botched and was always supposed to later include a measure for owner occupied housing costs which 12/13 years later seems not to have arrived! Forgetful aren’t they?

      • Why is that everybody seems to know even housing inflation needs to be in control as it is a necessity as food and water. But then why is it not being included as part of CPI. I did ask my local MP but nothing seems to come out of it. This is shocking as we seem to exist only for banks and politicians to enjoy the material benefits of the world.

        • Hi Kavitha and welcome to my website

          The problem is that the establishment want to claim housing inflation as economic growth. It has become their go to policy option then they tell everyone they are better off. Some of course are but many are left out as they face higher house prices but have wages which have risen much more slowly.

          Did you MP reply?

  5. One final rant.

    I read this great article once about how they came up with the 2% inflation target.

    Simply stunning and goes to prove the point that incredibly bright people are capable of doing some incredibly dumb things

    http://www.nytimes.com/2014/12/21/upshot/of-kiwis-and-currencies-how-a-2-inflation-target-became-global-economic-gospel.html?_r=0
    ‘Roger Douglas, Mr. Caygill’s predecessor as finance minister, had been seeking to dissuade New Zealanders from thinking that the central bank would be content with high inflation, and so he said in an interview that he was aiming for inflation of around zero to 1 percent.

    “It was almost a chance remark,” Mr. Brash said in a recent interview. “The figure was plucked out of the air to influence the public’s expectations.”
    One view was that zero inflation should be the goal — that a dollar today should have the same buying power as a dollar in a decade, or two or three. That was the view embraced by, among others, Paul A. Volcker,
    But there was an alternate view — that keeping inflation that low might be dangerous. And the person mounting that argument most forcefully within the Federal Reserve in the 1990s was a Fed governor named Janet L. Yellen.’

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