Inflation is present in UK services and bubbling away in house prices

Today we receive the last UK consumer inflation report in 2015 albeit that it takes us only up to the end of November. What we now know is that this has been an extremely docile and indeed in my view welcome year for UK consumer inflation which has been pretty much zero on the official measure. The Consumer Price Index was 128.2 in both November and December last year and was 128.3 in November this. The downwards push provided by oil and commodity prices gained a second wind towards the end of the year and so we have seen a disinflationary burst which will affect all of 2015 and seems set to influence the spring of 2016 too.

What about oil and commodity prices?

The last fortnight or so has seen yet another plummet in oil prices such that a barrel of Brent Crude Oil costs US $38 now. The post OPEC meeting disarray means that apart from the dip in January then such a price will see us experience annual oil price falls again especially in late spring and early summer when this year we saw Brent Crude push above US $60 per barrel. So rather than being in Taylor Swift terms “like,over” in fact we will see a reduction in oil price based disinflationary pressure as we stand. If you want some perspective you can see that in terms of diesel prices at the pump we have had disinflationary pressure for some time. End November 2012: 141 pence, 2013: 138 pence, 2014: 128 pence, 2015: 110 pence.

A similar pattern can be seen from commodity prices which have also seen something of a second wind on the downside. The CRB (Commodity Research Bureau) Index is at 380 now as opposed to the 438 at which it started 2015, and that does not give the full picture as it bounced to 430 in May. So since then we have been slip-sliding away. The overall fall has been since the peak of 505 in May 2014 to give an idea of scale. In the headlines we see this as reports of new lows in prices for basic commodities like Iron Ore and Copper.

Producer Prices

This morning’s data release has confirmed the trends described above.

Factory gate prices (output prices) for goods produced by UK manufacturers fell 1.5% in the year to November 2015, compared with a fall of 1.4% in the year to October 2015.

So we see that the immediate prospect is for more good price disinflation and what do we see further up the chain coming our way?

The overall price of materials and fuels bought by UK manufacturers for processing (total input prices) fell 13.1% in the year to November 2015, from a fall of 12.3% in the year to October 2015.

As you can see the heat remains on and returning to the trends for oil and commodity prices seems set to remain with us into early 2016.

Those who look at the data will note that we now have core PPI numbers. This is you think about it are perhaps the silliest effort on this front we have seen. Let us try to measure trends for manufacturers costs whilst excluding the main costs…. what could go wrong?

Official Consumer Inflation

This nudged its way out of outright disinflation in November.

The all items CPI annual rate is 0.1%, up from -0.1% in October.

The main factors in this were that petrol and diesel prices fell more slowly than last year, prices of spirits and wines rose and the Insurance Premium Tax rose from 6% to 9.5%.

We also see that we have a dichotomy in our inflation position or for football fans a story of two halves. The first half is in line with the updates above.

The CPI all goods index annual rate is -1.9%, up from -2.1% last month.

Whereas the second half begins to return us to my theme that the UK is basically an inflation nation, or if you prefer has a strong tendency towards institutionalised inflation.

The CPI all services index annual rate is 2.4%, up from 2.2% last month.

Clothing and Footwear

This has been a problematic area for the UK Office for National Statistics for some time and the issues were used as an excuse for the establishment attack on the RPI. However just like with the rentals series the pack of cards tends to behave like well a pack of cards.

This is the first fall in prices between October and November since official records began in 1996 and follows the largest September to October price increase on record. It continues the trend seen since the summer of atypical monthly price movements……..

The average person is not convinced

Only last Friday we were told this by the Bank of England’s own inflation expectations survey.

Asked to give the current rate of inflation, respondents gave a median answer of 2.0%, compared to 2.1% in August.

So lower but hardly overall disinflation and if we look ahead?

Asked about expectations of inflation in the longer term, say in five years’ time, respondents gave a median answer of 2.9%, compared with 2.8% in August.

So we see that they are not convinced by the official consumer inflation numbers and we see a reason why the Retail Price Index continues to retain support.

The annual rate for RPIX, the all items RPI excluding mortgage interest payments (MIPs) index, is 1.1%, up from 0.8% last month

The modernised version remains above CPI too.

The all items RPIJ annual rate is 0.3%, up from 0.0% last month.

The RPI is now 1% above the CPI (0.91% to 2 decimal places) which poses its own questions not only for the inflation target which was only moved by 0.5% when the latter replaced the former. That as I have pointed out often in the past was a type of loosening of monetary policy.

House Prices

These are the two words which must not be mentioned along the lines of the rules of Fight Club in UK inflation measurement. We get to see why just by observing the numbers they provide.

On a seasonally adjusted basis, average house prices increased by 0.8% between September and October 2015……UK house prices increased by 7.0% in the year to October 2015, up from 6.1% in the year to September 2015.

Plenty of inflation here if we bothered to officially look! If we look at the change in the credit crunch era then the official line that it is pure wealth is simply laughable.

In October 2015, the UK mix-adjusted house price index increased by 0.1% from the previous record level witnessed in September 2015 to reach a new record of 220.1 (Figure 2). The UK index is 18.7% higher than the pre-economic downturn peak of 185.5 in January 2008.


The UK inflation experience has been extremely favourable over the past couple of years or so. First we had the ongoing appreciation of the UK Pound £ -often hidden by the rise of the US Dollar- which began in March 2013 and more latterly we have had the fall in oil and commodity prices. However if we bother to look there are signs of inflation in the services sector and the housing market which are very familiar from UK economic history. Thus if the Bank of England applies the 18 month lag rule for monetary policy it has some thinking to do.

Yesterday Deputy Governor Minouche Shafik gave a speech which was not a lot of help.

So when the time does come to raise Bank Rate, it will be important to retain the flexibility to change course if needs be, either by tightening policy more quickly than originally envisaged or by being prepared to loosen again.

That more or less covers everything! Oh and did she mean the credit crunch here?

The flexibility the MPC has had to pursue its target independently since 1997 has brought great benefits.

As we wait to see if Janet Yellen and the US Federal Reserve back up their hints and promises I note that for the Bank of England there is a choice to be made too. Are they targeting inflation two years ahead or not?


Regular Readers will recall that earlier this year Paul Johnson of the IFS recommended that the UK use CPIH (where H= a watered down version of housing costs using rents) as its main inflation measure. How is that going? On Twitter not too well as the only non-official mention is pointing out it is a bad measure.

Hold that knighthood…….







21 thoughts on “Inflation is present in UK services and bubbling away in house prices

  1. I used to have very little faith in the Govt’s inflation numbers generally.

    Then I started reading this blog and it pretty much destroyed what little optimism there was left.

    The stats matter to the CBers and the people setting pension/wage increases but they bear little relevance to a lot of people’s lives.

    • Yes quite right Dutch. I use RPI to set pay rises for my staff but know that even RPI has it’s problems and wonder if they’re receiving an adequate rise.

        • Always worried about what next year will bring, preferring to keep them employed on “lower” wages than making redundancies with those remaining on “higher” wages.

          Not sure what their reaction would be to a wage cut suggestion to keep everyone employed if facing hard times. Ever tried taking candy from a child?

  2. Just to add,what I find particularly depressing is that even in the face of some compelling and pretty straight forward evidence that things aren’t representative of the costs of living for a lot of people,the Govt has continued on it’s previous path,at best misleading the public but at worst deceiving them.

    This is before we get into the whole GDP/imputed rents debate and assorted other problems.

    • Hi Dutch

      As long as too much pressure does not emerge this state of play suits the government to a T especially as they can often get away with RPI for things we pay and CPO they so. Sadly my profession is amongst the list who rush to cheerlead for the CPI numbers. I guess if you do that like the economics editor of the Financial Times Chris Giles has done then you get the juicy Bank of England Governor interviews like he has tonight.

      Oh and on the subject of the Bank of England Governor, if Forward Guidance (version 8) is going so well why does he need to expalin that in the FT?

  3. As drugs and prostitution are now in the calculation of GDP, should not the variation in the price of these commodities be in the inflation figures? Not doubt one or two ex MPs have some “hands on ” experience of these fluctuations!

    • I understand, from some who would know, that the price of both commodities has gone down. In both cases supply has increased, and therefore competition has lowered prices.

      On that basis both will shortly be included in the inflation figures!

      • I thought most HMG MP were into self-eroticisism

        theres even a video ! ( god bless google !! )

        musical link

        Winkers song ( misprint ) Ivor Biggun


        ( as the song goes “…and its absolutely free” I guess they “impute” it 😉 )

        PS: sorry Shaun ….

    • Hi Foxy

      You made me think that I had not seen the numbers so I went at took a look in the Recreation and Culture section although culture is rather stretching it even these days! If it is there is is well hidden as one wouldn’t really expect to find it in the “other” next to gardens and pets but I will ask….

  4. Hi Shaun

    CBs must be somewhat schizophrenic about this; on the one hand they want low inflation to give them an excuse to keep interest rates low but on the other they want inflation as a stealth debt default – with the vital caveat that this has to be reflected in wages.

    If you were a conspiracy theorist you’d have to conclude that they may be doing (largely) the right thing; official inflation is low so this gives them the excuse but “real world” inflation is much higher and this is likely to affect wage rises on the ground – except that it hasn’t – at least so far. Ah well, you can’t have everything.

    Frankly I don’t think it matters what the inflation numbers are, the BOE would still not increase IRs at the moment. It would only do so if there was a commensurate increase in earnings; inflation is a necessary but not sufficient condition for an increase.

    In any case, and as I have said before, there is too much debt around and increases in debt are inversely related to the sustainable interest rate and this to my mind is the ultimate brake.

    • Hi Bob J

      Mark Carney has pretty much proved your point tonight with the views he has had published in the FT. After all if Forward Guidance had really done so well he would have to be telling us! I also doubt he will point out that it is version 8 and counting….

      I also note that many are now quoting nominal GDP fIgures for Japan and the Euro area in particular. They could not be clearer in explailing that their objective is the debt burden and the consumer and worker will not only suffer they will probably be told it is good for them.

      • Your phrasing is apposite. “Published his views”. It was apparently an interview but doesn’t read like that. The FT seems to have been co-opted by the establishment to sing their songs.

  5. hehehe

    cause for a laff?

    well hoisted on their own petard I think

    Gerry Mandered GDP ( too high ) and CPI ( too low ) and for some reason these “Bankers” cannot fathom why wages are stagnant – fools!

    Now they get the golden scenario of low to no inflation that they have sought for decades ….. or so they told us

    Its a shame we cannot vote for them ! I’d vote the useless fools out ! ( for bigger fools? who knows) .

    ” I see no inflation” said lord nelson of the banks

    Wont be fooled again – the who


    • Hi Forbin

      You are right that as soon as we get the inflation they claimed they wanted suddenly they do not! After all if we put asset prices in the numbers properly then we would not be too far from the target with the likelihood of more to come so an interest-rate rise or two would be on the cards. Oh hang on….

      Not much action in corn futures which have been quiet for a while.

  6. “UK house prices continued to grow strongly in October, the Office for National Statistics (ONS) has said.”

    the 64million dollar question is – for how long ?

    given we are on the way to 100% value mortgages over 50 years and perhaps multi-generational , with HMG giving x% down

    and even claiming joint ownership is really “yours” of perhaps 75% bank , 25% yours ……

    £3 million pound 1 bed starter home ?

    crazy , just crazy


    • Never worry Forbin the MPC are keeping a keen eye on house prices and have all the tools and instruments to deal with the situation when necessary.
      The Bee Gees- I started a joke that had the whole world crying but I couldn’t see that the joke was on me.

  7. Another great post Shaun

    ONS say house prices in UK up by 7% to £287,000 we are on the path to debt slavery and total destruction of the economy.

    These increases are being financed by the Banksters,criminals (lost count of how many convictions they all have) they lend money they don’t have and then demand interest on the capital they didn’t have to begin with,then if you don’t pay they seize the asset.
    How can you make a loss yet these incompetent criminals manage it but not to worry when they manage the impossible the taxpayer bales them out courtesy of their politicial friends.

    Then we have a media who managed to convince the sheeple that the Conservatives were competent on the economy while increasing the national debt by 50% in just 5 years.

    Debt and lies are the seeds of our economic destruction total world debt has risen by $57 trillion since 2007

  8. ” a barrel of Brent Crude Oil costs US $38 now.” – JW where are you? I believe I owe you my hat! Lucky I didn’t undertake to bare nether regions in the Town Square if Brent Crude went below $40.00!!!

  9. “Are they (the BOE) targeting inflation two years ahead or not?” Quite clearly not, otherwise we would already have had a raise.

    On the subject of plummeting iron ore values, I find my mind turning once more to those indebted Chinese companies who have taken loans in the last couple of years using their iron ore stock piles as collateral………

    • Hi Noo2

      Good job you haven’t had to eat your hat as that remains the job of Paddy Ashdown if I recall correctly. ..

      As to possible large margin calls I agree entirely about the Chinese situation and currently also wonder what derivatives were written in the oil and gas sphere before the tectonic plates shifted. I would imagine Janet Yellen and colleagues are mulling that right now and taking a gulp before reminding themselves that they have pretty much promised an interest-rate rise tomorrow in the US.

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