UK inflation is simultaneously near-zero, mild and high!

Today sees the announcement of the official inflation data for the UK and they will confirm that we remain in something of a sweet spot. What I mean by that is that particularly by its own standards the UK is seeing a consistent period of low near zero inflation on the official Consumer Prices Index that makes a welcome change. Domestic energy consumers will particularly have welcomed the price falls that will have impacted the data.

EDF Energy has announced a 5% cut to its standard gas price effective from 24 March 2016…. npower has announced an average 5.2% or £32 average annual reduction to its standard domestic gas tariff…. SSE will reduce domestic gas prices on its standard tariff by an average of 5.3%, effective from 29 March 2016.

Well the ordinary worker and consumer will welcome the lower prices although central bankers and their media acolytes will tell you it is a bad thing. Has there ever been any evidence of them backing up their rhetoric with words and insisting on paying more? This period of lower inflation has provided quite an economic boost to the UK via the way that it has led to a much improved series of real wage numbers followed by strong retail sales in particular.

Bank of England

The Chief Economist Andy Haldane did not offer a lot of insight here.

Humans are sentient, water-filled whoopee cushions moulded over millions of years of evolutionary experience.

So let us switch to the inflation report.

As inflation remains more than 1 percentage point away from the MPC’s 2% target, the Governor has written a sixth consecutive open letter to the Chancellor as required by the MPC’s remit.

It is hard not to have a wry smile at the fact that the Bank of England has been about as successful changing low inflation as it was with high! After all as I explained earlier we are much better off this way around.

the vast majority of the current weakness in inflation relative to the target is accounted for by past falls in energy and food prices

Yes please! I am reminded of this bit from the Dickens novel Oliver Twist at this point.

Please,Sir, I want some more

To which the Bank of England responds.

The master was a fat, healthy man; but he turned very pale. He gazed in stupefied astonishment on the small rebel for some seconds; and then clung for support to the copper.

As ever they predict that a couple of years ahead inflation will be on target.

rising domestic cost growth returns inflation to the 2% target by the middle of 2018.

Life is seldom that convenient especially with their appalling forecasting record. Indeed wherever inflation is we get told this.

The MPC judges that inflation expectations remain well anchored,

Nothing to see here move along is the message as they skip away avoiding the fact that the low inflation they do not want has boosted the UK economy. Oh and if there is Brexit then the world will end partly via the inflation they want! I will leave them with that particular contradiction.

Today’s Numbers

We saw a dip in inflation mostly due to the Easter effect on airfares.

By far the largest downward effect came from air transport, with prices falling by 14.2% compared with a rise of 4.5% between the same 2 months last year. This is influenced by the timing of Easter.

Clothing prices fell and also an impact from social housing rent where increases have been capped. Thus we got this.

The all items CPI annual rate is 0.3%, down from 0.5% in March.

Actually it might have dipped some more. As regular readers will be aware I look carefully into the UK inflation infrastructure and have spotted this.

The CPI basket captures only variable-price tariffs, so if variable-price tariffs continue to fall by less than fixed-price tariffs, measured CPI inflation may not reflect the overall fall in retail gas prices.

That I am afraid is a basic fail and should see ch-ch-changes.

CPIH

This is the inflation index that the UK establishment wishes to enforce on us. So far it is not going well as 30 minutes after the data release there has not been one tweet on it. Oh well! Let me help out.

The all items CPIH annual rate is 0.6%, down from 0.7% in March.

Even the establishment have not been able to avoid this embarrassment “not a National Statistic”. Mostly that comes from their inability so far to measure the rents reliably. Even worse is the fact that the idea of using rents to measure owner occupied inflation in the UK teaches you nothing useful as for example the changes are slow (circa 3 years) meaning they tell you something too late on the rare occurrence that they tell you anything at all.

Back in the day when CPIH was mooted this was known if you bothered to investigate and I pointed it out. But it was like an episode of “Carry On Regardless” which the National Statistician and Paul Johnson of the IFS have recently added new chapters.

The Retail Prices Index

The RPI used to be our inflation target after mortgage costs have been deducted in a version called RPIX. You will see why I raise this if you look at the numbers.

The annual rate for RPIX, the all items RPI excluding mortgage interest payments (MIPs) index, is 1.4%, down from 1.6% last month.

That is quite a difference as we see that there is a 1.1% per annum divergence between the old and the new. This poses a lot of questions which are not answered by the flood of official rhetoric on the subject and cries of “formula effect”. Back in 2010 the formula effect was officially estimated to be 0.1% so the situation is in my view more complex.

Also the “improved” version is apparently on its way to being scrapped which adds another section to my financial lexicon for these times.

The all items RPIJ annual rate is 0.7%, down from 0.8% last month.

It too is not doing well on the tweet count having the same round number of 0 as CPIH.

House Prices

A problem for the UK establishment comes here via the machinations and misrepresentations and contortions they undergo to keep the biggest purchase of all for most which is buying a house out of the inflation data. How is that going?

UK house prices increased by 9.0% in the year to March 2016, up from 7.6% in the year to February 2016.

So it is going dreadfully and it is even worse for first time buyers.

In March 2016, prices paid by first-time buyers were 9.7% higher on average than in March 2015.

We are due the monthly update on wage growth but we know that it is around 2% or about a fifth of the extra first time buyers have had to pay in the past year. This only adds to the existing problem.

In March 2016, the UK mix-adjusted house price index increased by 2.9% on February 2016 to reach a record high of 228.6 (Figure 2). The UK index is 23.2% higher than the pre-economic downturn peak of 185.5 in January 2008.

This is the major reason why for so many Gwen Guthrie is on their I-Pods and MP3 players.

Aint nothin goin on but the rent

Comment

It is a sad state of affairs when the UK inflation statistics generate as much heat as light. Officially we have if you take a broad sweep no inflation whereas if you take the trouble to look at our previous measure it switches to mild inflation. This may seem no big deal but if we switch to the main economic indicator of these times which is real wages it impacts a lot. The RPI tells us we have very little real wage growth right now which fits with the apparent slowing of our economy whereas using CPI misses that reality.

There is also the situation for those who are looking to buy a house to whom the inflation numbers must look a joke as they see ever more rises! If my suggestion of putting them into CPI had been used then right now CPI and RPI would be giving very similar answers between 1% and 1.5%. This would control a lot of the “deflation nutter” paranoia and help us going forwards. For once the word “improved” would indeed be appropriate.

 

 

 

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12 thoughts on “UK inflation is simultaneously near-zero, mild and high!

  1. Great blog as usual. The whole thing reminds me of a wonderful definition in Chambers dictionary. It defines “middle-aged” as an age “variously reckoned according to the reckoner”, which would neatly apply to the inflation stats!

  2. So inflation is down due to lower airfares. Wow, no wonder I am feeling rich as this vital part of our day to day life is cheaper!
    What a joke, it just shows what an irrelevance these figures are.

    • I would love to meet the person who actually buys the inflation basket. Perhaps they have an employee at the bank of England who has to buy the basket every month and he just reports back how much it cost him.

  3. ‘A problem for the UK establishment comes here via the machinations and misrepresentations and contortions they undergo to keep the biggest purchase of all for most which is buying a house out of the inflation data. ‘

    Westminster Political Class First Rule
    If you don’t mention it then it’s not happening.

    • Hi Dutch

      They have gone to quite an extraordinary effort on this front. Even abandoning their previous rational which was alignment with Europe via using CPI like them. Now Eurostat wants to put house prices in its CPIH we change course and use rents. That is very embarrassing for all those who follow the establishment line to say the least.

  4. Great blog as usual, Shaun. It is good to see that you continue to hold the UKSA to account for its treatment of housing prices in its official series.
    Thank you for your discussion of the RPIX. As I note in my 2013 paper, ‟Twenty Years of Inflation Targeting by the Bank of England“, Her Majesty’s Treasury considered making the “RPI ex-MIPs [mortgage interest payments] and similar measures ex-community charge etc.” the target inflation indicator instead of RPIX. I’m not sure what was implied by ‘etc.“ but the RPI ex mortgage interest payments and council tax (hereafter RPIXX) comes closer in scope to owner-occupied housing costs as they would be measured under the net acquisitions approach mandated by Eurostat. The quarterly OOHPI series calculated by the ONS also doesn’t include council tax.
    Normally the differences between the two series are very small but April is the month when ONS registers the annual increase in council tax, so for this update at least it does make a bit of a difference. There was a 2.8% increase in April, as opposed to a 1.1% increase last April, which supports the point you have often made in your blogs that while the headline inflation rate may be low, institutional inflation is still rampant. Whereas the RPIX inflation rate for April is 0.1%, the RPIXX shows a decline in the annual inflation rate from 1.7% in March to 1.3% in April, as opposed to the RPIX, which as you noted shows a decline from 1.6% in March to 1.4% in April.
    Of course, neither series contains stamp duty, which even Paul Johnson in his report admitted seemed logically to be in scope for the RPI/RPIJ, and both series would surely be boosted if they did.
    With a few caveats, I basically supported ONS’s move (very short-term as it turned out) to an RPIJ, so if you adjust for the formula effect using the difference between RPI and RPIJ inflation rates, the adjusted RPIXX inflation rate would be 0.7% in April, down from 0.9% in March. Once you adjust for exclusion of stamp duty and other factors (e.g. the lag in the house price index) that keep the RPIXX inflation rate from properly taking account of house price inflation, the inflation rate would be somewhat higher. I don’t think it would be quite in the 1% to 1.5% range as you say, but it would be if one thought the whole adjustment for the formula effect was bogus. Perhaps we have a difference of opinion about this.
    If I understood the thrust of the National Statistician’s March letter correctly, when the April 2017 CPI update comes around, the kind of analysis I did will no longer be possible. There will still be an RPI and an RPX, but no published RPIXX, or RPI for council tax, and no published RPIJ.

    • Hi Andrew and thank you

      Today’s headline number of 0.3% was in basketball terms something of a head fake I believe. It was depressed – although not as much as it should have been- by domestic energy costs and the Easter effect which will fade as we go forwards. Meanwhile I note that Brent Crude Oil is above US $49 as I type this so the annual fall is now a quarter rather than two fifths. As we go forwards the oil price will have to drop a fair bit just to maintain the 25% fall so the “experts” are in danger of being wrong footed again! Of course I do not know the future but the balance of risks is clear.

      Thanks for the numbers and I agree that the exclusion of Stamp Duty is simply inexcusable. As to our differences about inflation measurement they are minor compared to the problems that are faced.

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