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.
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.
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%).
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.