How leaving house prices out of inflation leads to negative interest-rates

One of the recurring features of these troubled times is the way that the establishment and much of the media present higher inflation as some sort of Holy Grail. It is as if raising the inflation target (usually to 4%) would allow us to escape our economic problems with one bound. This is of course a direct contradiction to a very large part of UK economic history where persistent inflation was a curse but also one which ignores 2011 when inflation of 5%+ which was claimed as a stimulus turned out to be deflationary in terms of aggregate demand via the consequent lower real wages.

The Financial Times is a regular hiding place for such thoughts and here is the title of a piece over the weekend from David Oakley the corporate affairs correspondent in the last word section.

Don’t let the ‘inflation nutters’ get to you

There is something of a litany of assertions on this subject.

Today, some economists, such as James Carrick at Legal & General Investment Management, say inflation is being overestimated as disruption from technology distorts the economic data.

An interesting point and in certain areas there is probably some truth to it but let us note it is a specific area and you will search the article in vain for examples of inflation higher than what we are being told. Indeed apparently this one specific example leads to this later in the article.

Another plus is that if inflation is lower than official estimates, then real growth is higher. The world, therefore, may not be in such a bad place.

As the article is about negative interest-rates there is an obvious begged question here because if growth is indeed higher than we are told why do we have so many central banks opted for negative interest-rates? But of course as I have replied to the article in the UK we have already made such a move.

As to lowering the inflation measure to raise recorded growth well the UK did that from around 2011/12 when we switched from using RPI for some of the GDP deflator to CPI for all of that relevant section which is around 24% of it. That has raised UK GDP growth by around 0.5% per annum since then according to estimates I have seen. The problem is getting people to believe it!

We were actually all better off through the credit crunch era than we thought and inflation was much lower is what Sir Humphrey Appleby would call a “brave and courageous” line to take!

What about examples of higher inflation?

As I replied to the article they can be found quite easily.

As to the numbers in the UK well services inflation under the official CPI measure is at 2.8% so inflation is not as dead as some might say.

I thought that services were taking over the world! But of course there is another matter where inflation has indeed been very high but does not get publicity as apart from readers of this blog many will be unaware that UK and indeed Euro area inflation ignores owner-occupied inflation. On this we have news only this morning. From Estate Agency Today about Rightmove.

The average price of a property coming to market has risen 1.3 per cent in the past month – equivalent to £3,843 – to set a record high of £307,033…….The portal says it recorded its busiest ever first quarter of a year for enquiries to estate agents.

There are issues of course with using asking prices but it merits further investigation which we can do via LSL Acadata who released this at the end of last week.

House prices have also reached a new record in March, with the value of the typical home rising 6.9% (£18,745) year-on-year. This is an acceleration from the previous month’s 6.5% annual growth and represents the largest year-on-year growth since February 2015.

For them these are “green shoots” a phrase which first time buyers and indeed anyone who is trading up is unlikely to agree with. We get some further perspective here.

The capital is once again leading the way with the largest house price growth of any region for the first time in over a year. The average value of a home in London is now 8.2% (£44,548) higher than a year ago. This growth equates to an uplift of £122 each day, more than double the £58 earned from eight hours working at the Government’s new living wage.

Whilst London is the peak it is interesting to compare the effect of house price rises to the living wage. After all if there is no inflation and wages are going up should not it be easier to buy a house or flat? Actually there are of course areas in London where oversupply has seen a change in the trend and there may even be falls but my point is that we have had an over 3 year surge in house prices which the official inflation numbers or CPI have turned a blind eye to. It is not as if the official house price data is not telling the same story.

UK house prices increased by 7.6% in the year to February 2016, down from 7.9% in the year to January 2016……Excluding London and the South East, UK house prices increased by 5.0% in the 12 months to February 2016.

Even Northern Ireland – which was the worst hit area following Eire lower – is seeing gains now. Now the article in question is aware of this although it does its best to slip by the issue using a euphemism in reference to QE or Quantitative Easing.

After helping to boost asset prices over the past seven years, it has arguably found its limit.

That is presented as a gain which to many readers of the FT of course it is as the investment community are net well in profit from this. But the ordinary Joe six-pack as the Americans put it will have a different perspective if he or she looks to buy a property or help their children do that. Yet we are told again that there is no inflation in spite of this.

It suggests talk of a bond bubble is off the mark, with the government fixed income markets simply reflecting the reality of extremely benign inflation.


Let me widen the issue from just the UK by pointing out that services inflation is around 3% in the United States and even in the Euro area it is 1.4%. When you see that then this well speaks for itself.

Take the ECB. Can Mario Draghi, the president, realistically expect to hit his just under 2 per cent target in the medium term? It seems unlikely,

Well actually if the oil price stopped falling he would be heading in that direction right now! I am aware that today has seen falls in oil prices which were 7% and are now 3% as I type this but for such thoughts above to be true I am reminded of the analysis that it will have to be priced at zero in 2019!

Also if inflation is being underestimated then this backfires.

If inflation is being overestimated, then German two-year bond yields at minus 0.5 per cent do not look such bad value, particularly in an uncertain world.

After all according to Deutsche Bank house prices have been and will continue to motor.

In 2015, the prices for apartments in the 126 most important German towns and cities rose by 6% yoy again significantly outstripping rents……The anticipated price rises of 6% in 2016 are likely to bring the normalisation to an end.

The German house buyer will no doubt be wondering about the bond yields although of course it is interrelated with the price rises via low mortgage rates. But let me conclude this with some agreement with Mr. Oakley.

negative rates look like they are here to stay.

Except that with my view on inflation trends we will seem set for another “surprise” which as ever was for those implementing the policy “nothing to do with them”.

Are they getting the message?

It was pointed out to me that the UK ONS may well be getting my message on Friday by Shireblogger in regards to this release and the emphasis is mine.

the adjusted measure of real households and non-profit institutions serving households (NPISH) disposable income and the saving ratio which estimated disposable income less the parts that are imputed and unobserved by households.







13 thoughts on “How leaving house prices out of inflation leads to negative interest-rates

  1. ‘ It is as if raising the inflation target (usually to 4%) would allow us to escape our economic problems with one bound. ‘

    That’s what happens when academics in ivory towers on public sector pensions study the last twenty years of economic history instead of the last 300.Their failings are myriad.

    ‘The Financial Times is a regular hiding place for such thoughts’

    Look who advertises in it.I haven’t read the FT in years.A lot of very clever people who never mentioned the possibility of letting RBS fail in 2008 iirc.

    ‘That is presented as a gain which to many readers of the FT of course it is as the investment community are net well in profit from this.’


    • Hi Dutch

      Where in my opinion those who want to raise the inflation target go wrong is that they go back to a pre credit crunch world (like the one in their economic models) where wage growth would exceed the new higher target. Meanwhile back in the real world when inflation pushed to the sort of levels they want wages did not follow. Yet again they prefer theoretical modeling to what actually has taken place.

      As to the FT yes you are right it must be influenced by those who advertise in it.

  2. Shaun,another good piece today.Dare I suggest that an alternative title could have been

    ‘How leaving house prices out of inflation leads to an even bigger credit bubble.’

    Can I suggest a video for the day
    Rage against the machine-Bulls on parade.

  3. “How leaving house prices out of inflation leads to negative interest-rates”

    a deliberate policy I think , Shaun.

    As Dutch pointed out if the house inflation was included then they , the Banks , would have had their wish


    it was intentionally left out as to save the “world” , sorry the Banks, they decided on a policy of asset inflation ……

    And we have had that in spades .

    if you keep lying to yourself like the BoE and HMG ( IMF , Troika, et al ) then one day you will believe you are crossing a bridge and find yourself taking a dip instead …….. and it will be “surprise, surprise ! ” time again !

    and I do know they know the difference between RPI and CPI because taxes ( and Central Gov pensions ) got up by RPI and benefits by CPI !

    who do they think they are kidding ?

    MSM remain mute on the subject – again ask yourself why ( no copy ? Kim K inflationary bottom ? cut N paste scribblers? , you guess )

    Forbin ,

    PS shame about the job last week , I guess you were disqualified on the grounds of telling it how you see it 😉

    • Hi Forbin

      Thanks I guess the Bank of England decided there was a shortage of bank representatives on the Monetary Policy Committee and so they filled the gap :). By the way the plan to introduce more women seems to have faded away once they got the favourable headlines!

      But yes the “solution” is higher equity and house prices which to be claimed as growth need to be kept out of the inflation indices. Oh and that was a strong post Doha meeting effort by the price of oil today as it has crawled its way back to pre weekend levels. Much more of that and Mr.Oakley will have to eat the words below.

      “Take the ECB. Can Mario Draghi, the president, realistically expect to hit his just under 2 per cent target in the medium term? It seems unlikely,”

  4. Hi Shaun,

    great blog, as usual.

    Of course, were price inflation statistics to correctly mirror rising property prices, then the establishment’s argument for ZIRP/NIRP would be severely dulled. Perhaps it is more tragic that UK home owners don’t consider the higher prices as inflationary, but as an increase in their wealth.

    Interesting concerning DB’s report on German 6% yoy, as it is (prohibitively) expensive to buy property in Germany – additional costs (dependent on County) running higher than 10%!

    Thus a (large) movement in prices over here (Germany has very stable property prices) would suggest to me that “money” is moving quickly into property in order to “preserve wealth”. Rather perverse, when someone willingly takes a 10% hit on their cash in order to “preserve” it – and, when I last bought property over here in 2005, the additional costs had to be paid from savings and couldn’t be financed as part of the mortgage.

    • UK home owners don’t consider the higher prices as inflationary, but as an increase in their wealth.

      I dont , excessive house prices have pushed me out of the market , no matter how much my house goes up – the next one along gets further and further away

      same effect as first time buyers see .

      its only my BTL friends who get upset when I say house prices need to fall

      and thats the issue , isnt it?


      • I would add that:
        1. Old people downsizing may care;
        2. Old people turn out to vote
        3. Attacking house prices, however justified, is like attacking the NHS (however justified). It is the end of your career as a politician.

      • “UK home owners don’t consider the higher prices as inflationary, but as an increase in their wealth.

        I dont ,….”

        Unfortunately most do see it as an increase in their wealth Forbin as songandverse says and most aren’t BTL artistes.

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