UK consumer disinflation meets inflation in services (2.5%) ,rents and house prices

Today is inflation day in the UK and it is particularly significant because we are as Carole King put it “So Far Away” from the target of an annual inflation rate of 2% for the Consumer Price Index. Actually inflation on the CPI measure has been pretty much 0% all year and if we look at the news there are still disinflationary influences to be found. One of them is the ongoing slow down in China. From Bloomberg.

Imports plunged 17.7 percent in yuan terms in September from a year earlier, widening from a 14.3 percent decrease in August and an 11th straight decline.

This has an implication for demand for commodities and their price which is likely to have an impact however many copper mines Glencore tries to sell or close. By the way how does using debt to buy at the top and then selling at the bottom work as a business model?

Also we discovered this morning why the price of oil fell by around 4% yesterday with the price of a barrel of Brent Crude Oil falling back to the US $50 level. From the International Energy Agency.

Global demand growth is expected to slow from its five-year high of 1.8 mb/d in 2015 to 1.2 million barrels per day (mb/d) in 2016 – closer towards its long-term trend as previous price support is likely to wane,

Also Iraq is pumping more oil. You may note that this is yet another release where we have to suspect some form of “Early Wire” after yesterday’s oil price action.

UK Retail Prices

We already know that UK retail prices saw further downwards pressure in September as the British Retail Consortium (BRC) told us a week ago

Overall shop prices reported deflation of 1.9% in September from a 1.4% decline in August.

Food price fell again (0.5%) which most of us (farmers and central bankers excepted) will welcome.

Today’s numbers

Headline writers will be delighted with this bit as they rush to call it deflation in spite of the fact that the economy continues to grow with retail sales growth reported to be 2.6% in September overnight by the BRC.

The Consumer Prices Index (CPI) fell by 0.1% in the year to September 2015,

If we move to the underlying index we see that at 128.2 it is below the 128.4 of August and also September 2014. The factors which drove this were lower fuel prices and a slower rise in clothing prices than last year leading to this.

The CPI all goods index annual rate is -2.4%, down from -2.0% last month.

If you really want to have a disinflation festival there is this.

The annual rate for CPI excluding indirect taxes, CPIY, is -0.2%

Retail Price Inflation

Up until now the RPI has followed quite a different path to CPI as it has avoided the “deflation” hype by remaining at an annual rate of around 1%. However September was different.

The all items RPI annual rate is 0.8%, down from 1.1% last month.

It was particularly affected by the fall in motor fuels prices (-0.13% on its own) and I suspect this is due to the different timing of its measurements. If we move to the version which drops the Carli methodology we see an even sharper fall.

The all items RPIJ annual rate is 0.1%, down from 0.5% last month……..The all items RPIJ is 239.1, down from 239.4 in August.

So we see that RPIJ itself has dived closer to noflation and of course disinflation which is a clear change. This will give the Bank of England some food for thought and especially Mark Carney with his interest-rate rise promises.

What is coming next?

If we look to the producer price series for a hint of what is coming next we get a by now familiar message.

The overall price of materials and fuels bought by UK manufacturers for processing (total input prices) fell 13.3% in the year to September 2015……….Factory gate prices (output prices) for goods produced by UK manufacturers fell 1.8% in the year to September 2015.

For the vast majority of us this is good news as the driving forces of this are lower food and fuel prices.

Is the UK still an “inflation nation”?

Whilst the headlines may scream “deflation” or if better informed disinflation there are still pockets of what I have labelled in the past the “inflation nation” that is the UK.

The CPI all services index annual rate is 2.5%, up from 2.3% last month.

This has been a persistent feature of this phase where inflation in services fell but only to the inflation target and now may well be picking up again. Is it responding to the wage rises we have seen?

If you are looking for factors here well one is still the changes to the university tuition fees as inflation in education is running at an annual rate of 9.1% although the effect is fading in spite of the rise in its weighting.

House Prices and Rents

This is a consistent problem for those who argue that inflation is dead as both continue to rise. The CPI methodology neatly skips the problem by turning its telescope to its blind eye on this matter.

UK house prices increased by 5.2% in the year to August 2015, unchanged from 5.2% in the year to July 2015.

Here is a deeper perspective for you on the situation.

In August 2015, the UK mix-adjusted house price index increased by 0.7% from the record level witnessed in July 2015 to reach 218.5 . The UK index is 17.8% higher than the preeconomic downturn peak of 185.5 in January 2008.

If only wages had done anything like that. In terms of house prices real wages have seen heavy falls in the credit crunch era which is a clear fail when we consider that such a development was one of the reasons we are in the mess that we are in.

As to rents Countrywide tells us this according to Property Wire.

The average rent of a newly let home in the UK has increased by 3.6% year on year to £941 per month, according to the latest rental market index.

We see a range of numbers for rental inflation of which this is one of the lowest.

The national embarassment which is CPIH

We do have a measure which is supposed to incorporate owner-occupied housing costs in consumer inflation. In spite of warnings from me that it would fail the UK establishment pressed ahead and then it failed.

CPIH is currently undergoing re-assessment to evaluate the extent to which it meets the professional standards set out in the Code of Practice for Official Statistics.  In August 2015 its National Statistics status was removed

Actually the situation is summed up by the fact it was August 2014.

How is CPIH 2.0 going?

The all items CPIH annual rate is 0.2%, down from 0.3% in August……The OOH component annual rate is 1.8%, unchanged from last month.

So not so well really……

Believe it or believe it not Paul Johnson of the Institute of Fiscal Studies has recommended that it be our main inflation measure. So he should be banished to the corner of the room wearing a hat with a D on it. That was Madness,

You’re an embarrassment…


Rather intriguingly Twitter posted an excellent response to these numbers. First we had the Chancellor George Osborne who had 24 hours to think this up.

Inflation at -0.1% while wages rising at fastest rate in over a decade is a real boost for budgets of working families

Then the reply from LandlordXX

so, George, if deflation is good, why is trying to create inflation?

I will leave that to the Chancellor who is trying to have his cake (pasty?) and also to eat it.

Also this is the month that UK benefits annual increases are set so let me calm some worries but pointing out that they will not fall. Although some may not be calm when they see the cost of the indexation switch from RPI to CPI. From Dharshini David of Sky News.

decision to link pensions etc to CPI not RPI since 2011 cost recipients about 0.7% per year – but saved c. £6bn so far.

Odd how what we pay still depends on the higher RPI isn’t it? Oh and there is also this which at -0.1% CPI inflation sticks out like a sore thumb especially post a General Election.

uprating the basic State Pension by at least 2.5% each year of this Parliament.

The Government Actuary published the cost and then changed it mind and withdrew it whereas @pensionschamp estimates it at £1.8 billion per annum. So as Taylor Swift put it the public finances are.

Now I’m lying on the cold hard ground
Oh, oh, trouble, trouble, trouble
Oh, oh, trouble, trouble, trouble

10 thoughts on “UK consumer disinflation meets inflation in services (2.5%) ,rents and house prices

  1. A masterful column, Shaun. It certainly is an arresting mental image that you evoke: Paul Johnson, Director of the Institute of Fiscal Studies, sitting or standing in the corner of the room wearing a dunce cap. Perhaps you could photoshop it.
    Do you plan to reply to John Astin’s inquiry of members of the RPI CPI User Group on Brexit and the fate of owner-occupied housing (OOH) in the UK consumer price indices. I am sure John, the other members of the Group and the readers of your blog would all be interested in your views. Eurostat has hinted that it might calculate Household Expenditure Price Indices (HEPIs), distinct from the HICPs, which would be essentially the HICPs including OOH series. John obviously doesn’t think much of this idea, with good reason. We seem to be seeing too great a proliferation of different series and different acronyms. HEPI is particularly infelicitous as it has already been used for a long time in North America to designate Higher Education Price Indices.

    • Hi Andrew and thank you

      Paul Johnson did not cover himself in glory. Even worse in the meeting to discuss his findings he dragged the Institute for Fiscal Studies into it “We at the IFS consider different inflation measures frequently” so they suffered from some guilt by association. That is the same meeting he left early at 4;30 in frankly bizarre fashion. Over here the IFS is treated as the bible for fiscal numbers which is far from always true and its leader showed feet of clay with his recommendation.

      As to the Royal Statistical Society thank you for the heads-up. I have been meaning to update everyone on my thoughts on the meeting for the Charlie Bean review so I have some ground to catch up. But should Brexit occur then we would no longer need CPI and could switch to something better.

  2. Given all price indices actively exclude the purchase price of a house and prefer instead some measure of either rental value or the costs of occupation,how can anyone take these seriously?

    I understand some of the allusions to the Carli formula and jevons I think,(Arithmetic vs geometric-or am I wrong here?) but aren’t we in danger of directing eyes away from the elephant in the room when we have these discussions? Wouldn’t it be appropriate to restate that which appears to be blindingly obvious for occasional readers as this will be one of the few places they read it?

    I can affirm the rental market is rising at the moment.As it represents the nearest thing to the cash market in houses I’d be interested to know how they calculate this aspect of the series.From memory I remember you saying sometime ago that the rental numbers they use for the inflation data are different to the rental numbers they use for GDP……can you or Andrew confirm this?

    Also do you know which wage data the Chancellor is quoting?Is this a mean average of everyone’s or the median average of full time workers?

    Thanks in advance if you can help.

    • Hi Dutch

      Using rents as a proxy for owner occupied costs can work reasonably well. Whilst there are disputes over how well it works in the United States it certainly works much better than here. When it was discussed at the RSS Martin Weale of the Bank of England was present when i explained that they would be useless here but he either ignored it or did not pass it on. Actually he grinned rather oddly almost like in a Hammer House of Horror film and i never did quite figure out what he was thinking.

      As to your questions you can kind of get a handle on at least part of the current debate by comparing RPI (0.8%) with RPIJ (0.1%). I am pleased to tell you that the rental numbers for inflation and GDP are now aligned and if you really want your head to swim you could look up how it was done with large revisions which seem to worry only me! I do not especially recommend that as the data is not so easy to track down.–housing-costs-and-private-housing-rental-prices/index.html

      As to the wages numbers can you give an example please?

      • “when i explained that they would be useless here but he either ignored it or did not pass it on. Actually he grinned rather oddly almost like in a Hammer House of Horror film and i never did quite figure out what he was thinking.”

        He was probably thinking “EXACTLY!” and was throwing his head back laughing – “Raaahahahahaha” imagining himself in a black wing collared cloak with red lining as his dastardly “Masterplan” (and only he knows what that is) came a little closer to fruition.

  3. Also Shaun,a quick thank you for introducing me to some of the anomalies in the Trade data.I only managed to read the column late last night.

    I had no idea imputed rents were included as logically,I just couldn’t think of a reason they would be.You know what Squaddies say about ‘assumption’……..

    ‘I will keep this simple. In spite of the implied claims based on 300 years of data collection there are serious problems with the trade and current account numbers. These feed into the already flawed GDP numbers such that those who argue for fine tuning policies have the issue that they may and in fact are probably likely to be responding to the wrong numbers.’

    Not half.

    Simply stunning.Keep up the good work.

    • Hi Dutch

      My pleasure and the corporate Imputed Rent numbers are a new innovation and I await details on more. They are a consequence of the housing boom especially in London and this time around subtract from GDP so sooner or later official attention will be on them.

  4. Hi Shaun – “In terms of house prices real wages have seen heavy falls in the credit crunch era which is a clear fail when we consider that such a development was one of the reasons we are in the mess that we are in.” I think the salient point there is that whilst the average mortgage rate in 2008 was approximately 6.75% it is now approximately 2.5% (, so, although house prices have increased 17.8% in the last 7 years the monthly repayment has reduced about 62% which roughly approximates to a 50- 55% fall on monthly payments. Whilst I agree real wages have fallen and are a problem, I don’t believe they have fallen by that percentile, therefore the housing affordability issue is nowhere hear as great now as it was in 2008.

    The real problem is how do you increase rates without bankrupting those mortgagees who decided to grge themselves on cheap money over the last 7 years.

    • Hi Noo2

      I completely agree in terms of current affordability. However mortgages are for long-terms and in many cases longer and longer terms and as you point out there are plenty of issues with future affordability. Unless of course we combine ever higher house prices with ever lower interest-rates.

      Putting it another way this could be the road to negative interest-rates.

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