The UK economy continues to benefit from goods disinflation but be hurt by house prices

Today is inflation day in the UK or if we look at the official consumer inflation numbers may be disinflation day as we face the prospect of another negative inflation reading albeit one of only -0.1%. This means that the spell of low and at times negative headline inflation is persisting for longer than we would have expected from a one-off disinflationary burst. A major factor in this as I discussed only last Thursday is the reality that commodity prices have not only remained weak but have been falling again. As I shall discuss below we are continuing to see multi-year lows for a list of major commodities in what looks like a second disinflationary burst.

Dr Copper

The product which was long considered as a diagnosis provided for the world economy is seeing its price drop into the doldrums again.

Copper plunged to the lowest intraday price since May 2009………The metal used in power cables and wiring lost as much as 2.1 percent to $4,590 a metric ton on the London Metal Exchange before trading at $4,654 by 4:51 p.m. in Singapore, while futures slumped as much as 4.3% in Shanghai.

If we move to the way that the copper price is reported in the Financial Times then on Thursday I pointed out it had fallen into the US $2.21s and now it is in the US $2.12s. It is now some 30% lower than at this time last year. Also it was far from feeling lonely in its decline.

Zinc fell as much as 2 percent, while lead dropped as much as 1.5 percent and nickel lost 1.7 percent.

They seem to have missed out tin so let me add that to the list for them.


We see a by now familiar beat being hammered out here too.

The front-month contract for U.S. hot-rolled coil steel futures traded on the New York Mercantile Exchange is down nearly 40 percent year-over-year:

We are seeing the consequence here of production rising but facing demand which stalled and in 2015 so far has actually fallen. This of course is related to the slow down seen in China and is one of the biggest signals of it. In the UK we have faced the grim reality of steel operations closing and jobs being lost as we find that we are simply unable to compete at such prices.

All of these price falls are likely to have been compounded by the way that basic metals were collateralised and financialised in the Chinese boom. We must be seeing more than a few margin calls contributing to the decline but we cannot say exactly how many.


Even through a period where you might expect a rise in prices due to the terrorist outrage in Paris we see the price of a barrel of Brent Crude remaining below US $45. Thus it is 43% lower than a year ago and contributing to a lack of inflationary pressure.

Today’s consumer inflation numbers

The headline will no doubt be presented by places such as the Financial Times as deflation although of course it is disinflation.

The Consumer Prices Index (CPI) fell by 0.1% in the year to October 2015, the same fall as in the year to September 2015.

We have had two months in a row of outright disinflation here which the Financial Times is reporting as not happening for 50 years. Perhaps they have redacted 2009 from their memories as the Retail Price Index went negative for eight months in a row back then. Also the CPI only began in 1997 and there are genuine issues with backcasting it decades before it ever started. But if you want some real perspective there is this from Ed Conway which raises a wry smile.

Between 1660 and 1914, when the gold standard was in place, annual UK inflation averaged zero per cent.

The world ended right? There was no advancement surely?

What drove today’s numbers?

Pleasingly for those of us who eat there was some good news.

Food and non-alcoholic beverages, where prices, overall, fell by 0.4% between September and October this year compared with a rise of 0.1% between the same 2 months a year ago.

Sadly the news for chocoholics was not so good as has been highlighted on here. Also there was something which was a result of a past move. Yes, university tuition fees rise from the past but this time to lower inflation.

Education, where prices, overall, rose by 3.6% between September and October this year compared with a larger rise of 7.9% between the same 2 months a year ago. The downward contribution came principally from UK and EU student tuition fees,

Not so good if you wanted to buy some clothing or footwear I am afraid although the statisticians in a refreshing burst of honesty say the pattern has changed there and we may be misreading it.

The gap with the Retail Price Index

The headline gap narrowed slightly but is still very wide if we consider that we used to be told (2010) that the “formula effect” was only 0.1%.

The RPI 12-month rate for October 2015 stood at 0.7%,

However the new version or RPIJ has noticeably narrowed the gap between itself and the headline CPI over the past few months.

In October 2015, the 12-month rate for RPIJ stood at 0.0%, down from 0.1% in the year to September 2015.

The other side of the inflationary coin

Whilst there are downwards forces on inflation it is not correct to say that they are all-encompassing. I am not a fan of switching to core inflation measures ( core CPI is 1.1%) as central bankers love to as that ignores the fact that food and energy are vital and hence core for anybody who eats and wants to keep warm in winter. However we get a hint that the UK remains an inflation nation from the numbers below.

The CPI all services index annual rate is 2.2%,

After when the weightings are next updated the service sector will nudge nearer to and may even reach four fifths of our economy.

House Prices

The UK establishment went to a lot of effort to keep house prices out of the UK consumer inflation measures. Today we got another reminder of why.

UK house prices increased by 6.1% in the year to September 2015, up from 5.5% in the year to August 2015…..On a seasonally adjusted basis, average house prices increased by 0.8% between August and September 2015.

These days the rises are broader based across the country than they once were and if you think of the fact that real wages have fallen by between 5% and 6% depending on the measure you use then these numbers are chilling.

In September 2015, the UK mix-adjusted house price index increased 0.3% from the previous record level witnessed in August 2015 to reach a new record of 219.8 . The UK index is 18.5% higher than the pre-economic downturn peak of 185.5 in January 2008.

Regionally the leaders are shown below.

The largest annual increase was in the East at 8.4% (down from 8.8% in the year to August 2015) followed by the South East (7.4% increase in the year to September 2015, unchanged from August).

London is sending out a multitude of signals right now but on this measure annual price growth rose from 5.4% to 7.2%.


If we look at UK wage growth and compare it to inflation we see that this disinflationary phase has provided a boost to real wages and hence to the economy via consumption. I first pointed out this theme back on January 29th and a direct link to it is below.

Of course some individual sectors such as oil and gas and latterly steel have caught the chill winds of this move and been affected adversely but overall we have gained. Indeed those who I described as “deflation nutters” have had a bad 2015 as wage growth has risen and inflation in the service-sector has remained above target. Indeed they have had to completely ignore the housing market where prices and rents continue to rise.




14 thoughts on “The UK economy continues to benefit from goods disinflation but be hurt by house prices

  1. Hi Shaun,

    Is there any evidence to show that increased rates of recycling are keeping down the price of metals? I would have thought we already have enough metal in the UK right now to keep us going if we just keep re-using it. Since we can no longer make/extract Aluminium as the Anglesey plant relied on a Nuclear Power station next to it which is being decommissioned, it’s really important that we don’t throw these resources away.

      • Hi Forbin,

        I am aware of those two factors, in fact I have pointed the Banks move from commodities out before on this blog but it strikes me that if we really are re-using more ( I have no idea if we are but then councils are reporting higher recycling rates ) then we ought to be importing less raw materials as a result of this.

        • hi bootsy

          I havent looked too far yet but in line with recycling there was a BBC program / article that posit that aluminium was or could soon get to the point we’d not need to mine much more as its recycle rate approached nearly 100%

          so your point is valid

          Other metals I have no information but phosphates remain a thorn as we dont do much in recovery of that vital element


        • Bootsy the key driver here is China and the financial sector.
          Paul Hodges has been bang on in my opinion when he talks about how commodity prices were driven higher by QE and Chinese debt growth.

          ‘The problem is that the vast expansions of recent years have been based on two false assumptions. The first was that up to 3bn people were about to become middle class by western standards. The second was that this would drive a ‘super-cycle’ of new demand.
          The wishful thinking was compounded by the stimulus policies adopted by central banks from 2004, first through the subprime bubble and then through quantitative easing. By keeping interest rates very low and then printing trillions of dollars, they created massive bubbles in financial and property markets. ‘

          ‘Global debt has risen by $57tn since 2007 to $199tn,….
          In turn, of course, this means that most people under the age of 40 have never known a world where markets fulfilled their fundamental role of balancing supply and demand.
          I therefore doubt that it will be too long before Brent prices hit my forecast level of $30/bbl. And they will quite possibly go much lower, due to the long-term surpluses that have now developed in all major energy sources – coal, gas and oil. This will create great opportunities for those who are light on their feet. But it will also create major challenges for those who cling to the idea that policymakers and the consensus know best.’

    • Hi Bootsy

      It is a great idea and I hope that it is true! As for some data there is this from but I do not know how accurate it is.

      “The aluminium drinks can is the worlds most recycled packaging. In the UK alone 60% of current drinks cans have previously been recycled.”

      Alupro has some more up to date numbers

      “Packaging waste recovery data for the third quarter of 2015 shows that reported aluminium packaging recycling has recorded its highest ever quarterly performance at 23,330 tonnes*.”

      Let us hope we continue to do better.

      • I’ve often thought that it would be more economical to “mine” old rubbish tips/landfill sites rather than conventional mines for discarded metals which we used to throw away before recyling took place. There must be plenty of glass and plastics as well.

  2. Hello Shaun

    Although welcome , wage growth has a lot to make up for in food and fuels , yet alone housing

    after about 5 years at this rate we;ll be halfway there 🙂

    In the mean time 2016 is going to be a bumpy ride


    • Hi Forbin

      Even at the current express rate ( for these times) levels of real wage growth in the UK it will take us a couple of years to get back to the previous peak. If we see some slowing then it could push into 2018 and then we would be facing a “lost decade” in this particular area.

      The price of oil is struggling again with a barrel of Brent Crude below US $44 tonight. Dr Copper has fallen to US $2.10 as the commodity price drums continue to beat retreat.

  3. Super analysis Shaun.

    The exclusion of house prices from inflation figures are just utterly laughable.There’s much to comment on.

    Firstly,and to me most importantly,you-and Ed Conway- raise the issue of the inflation target..
    ‘Between 1660 and 1914, when the gold standard was in place, annual UK inflation averaged zero per cent.’Hello…… there’s a figure that makes a lot of sense as an inflation target.I’m still stunned that someone somewhere thought 2% represented stability-as opposed to 5% or 42%-the reality is that that figure was plucked out of the air by some central bankers who wanted to go home for Christmas.There’s no scientific or mathematical reason for it to exist.0% must be the only logical inflation target if stability is your end game.

    Anyone who thinks what we’re experiencing is stability is probably better off moving into buy to let for a 4% gross yield and preparing for a hosing.

    Secondly,in this inflation=growth=inflation obsessive CB world,I’m really beginning to doubt that we can ever find a true reflection of the cost of living.I have spent too much time on this blog learning and the more I learn,the more I realise that current measures are just not a reflection of reality for most people.How can you compute a figure that will work for the guy stacking shelves at Tesco with someone earning a city salary?Then on that basis adjust pension payments and welfare payments.

    As for commodity prices

    Jerry Maguire

    • Hi Dutch and thank you

      As to who the inflation numbers apply to it is something that is discussed at the Royal Statistical Society and the conclusion was that it was the 7th decile which poses its problems as you point out. To be fair to the UK ONS they did publish some numbers for each income decile so they realise that there is an issue.

      It was New Zealand who started inflation targeting in 1990. The New York Times takes up the story.

      “Mr. Brash and Mr. Caygill got a head start on an answer from an offhand comment made during a television interview in 1988. 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.”

      With Mr. Douglas’s figures as a starting point, Mr. Brash and Mr. Caygill agreed that it would be best to expand the range to give them more room to maneuver, but only a bit. New Zealand would aim for inflation between zero and 2 percent.”

      I agree with you that it would have been better to focus on the 0% rather than the 2% as it has turned out…

      • Meanwhile, Shaun, down here in Coldplay’s paradise dairy prices took another hit. From the NZ Hetald –

        “. Dairy prices dropped for the third time in a row at this morning’s GlobalDairyTrade auction, the GDT price index falling by 7.9 per cent since the last sale and putting more downward pressure on Fonterra’s farmgate milk price forecast for the current year.

        Whole milk powder prices, the key product for determining Fonterra’s farmgate milk price, fell by 11.0 per cent to US$2148 a tonne…. ”

        Inflation. In September 2002 the target was changed to 1-3%
        The current rate is 0.4%

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