UK inflation begins its rise whilst the Bank of England looks away

Today is in terms of statistics inflation day in the UK as we receive pretty much all of our inflation data in one burst. It did not use to be that way but the powers that be decided that it was better to have all the bad news in one go rather than have several days of high inflation being reported. As ever their sense of timing saw inflation actually go below target! However we will see the seeds of change today as I forecast back on the 2nd of March.

There is also the issue of the UK Pound £ which has been falling in 2016 against the US Dollar which is the currency the majority of commodities are priced in. It is down just over 9% on a year ago……….Also UK services inflation has been more persistent than in the Euro area and currently it matters little which measure you use.

I was expecting these two more domestic factors to add to the end of the impact of lower oil prices.

But whatever happens we are now unlikely to see a continuation of this reported by Eurostat in its consumer prices release….energy (annual rate) -8.0%, compared with -5.4% in January.

It fell to -3% on an annual basis yesterday and rose by 1% on a monthly basis.

Thus I was expecting this.

However from now they need to look a year or two ahead and after a few months of continued oil price disinflationary pressure we see an increasing chance of inflation rising.


What has happened since then has been the further fall in the UK Pound £ post the EU leave vote which will put more pressure on inflation. Regular readers will be aware that I expect a boost to inflation of the order of 1.5% from this impact although we do not know yet where the value of the UK Pound will settle. Many prices will take some time to change so we will not see their impact until 2017 but the area which changes quickly is petrol prices which have had a double whammy. Firstly the oil price has risen to US $52 per barrel and secondly the exchange-rate of the UK Pound has fallen quite a bit against the US Dollar and is now 20% lower than a year ago. So we see this.

The price of ULSP is 3.4p/litre higher, with the price of ULSD 3.6p/litre higher than the equivalent week in 2015.

Today’s numbers

As you can see from the points made above it was no great surprise when this was reported today.

The all items CPI annual rate is 1.0%, up from 0.6% in August…….The all items CPI is 101.1, up from 100.9 in August.

Actually it could have been more as I note that something I have been flagging all year had a slight dip.

The CPI all services index annual rate is 2.6%, down from 2.8% last month.

Interestingly a lot of the move was in clothing and footwear and I would be interested in readers views on this.

the upward effect came primarily from garments (in particular women’s outerwear), for which prices rose by 6.0% between August and September 2016, compared with a rise of 3.3% a year ago.

The only article which got cheaper for women was coats,everything else got more expensive.

What is in prospect?

We see that the producer price numbers are also suggesting a rise in inflation going forwards.

Factory gate prices (output prices) for goods produced by UK manufacturers rose 1.2% in the year to September 2016, compared with a rise of 0.9% in the year to August 2016.

This is the third month of rises in this indicator which previously registered a couple of years of declines. In turn it will be pushed higher by this.

The overall price of materials and fuels bought by UK manufacturers for processing (total input prices) rose 7.2% in the year to September 2016, compared with a rise of 7.8% in the year to August 2016.

So input prices will put upwards pressure on output prices and the largest riser was the price of imported metals which rose by over 19% on a year before. Also at this stage of the chain the value of the UK Pound is a major factor.

In trade weighted-terms, sterling depreciated by 14.4% in the year to September 2016.

Actually the main driver is of course the US Dollar but in this instance it had a similar decline.

What about the RPI?

Our old inflation measure which is still used for index-linked Gilts amongst other things did this in September.

Annual rate +2.0%, up from +1.8% last month

The version we used for inflation targeting edged quite close to its old target of 2.2%.

Annual rate +2.2%, up from +1.9% last month

This meant that the wide divergence between it and out new official measure of inflation continues.

The difference between the CPI and RPI unrounded annual rates in September 2016 was -1.08 percentage points, narrowing from -1.11 percentage points in August 2016.

In other words changing the inflation target by only 0.5% back in 2003 was a loosening of policy which many places which should know better simply ignore.

What about housing costs and house prices?

The main way the official UK inflation measure is kept low is by its exclusion of owner-occupied housing costs. This means that the numbers reported today are ignored.

Average house prices in the UK have increased by 8.4% in the year to August 2016 (up from 8.0% in the year to July 2016), continuing the strong growth seen since the end of 2013.

There is an official version which includes such costs but as I argued from the beginning it is the equivalent of a chocolate teapot. This is because it uses rents and thereby end up with this.

The OOH component annual rate is 2.4%, unchanged from last month. ( OOH is Owner Occupied Housing )

The plan is for this to be our main measure of inflation although frankly such a recommendation did a lot of damage to the soon to be Sir Paul Johnson of the Institute for Fiscal Studies. Let me highlight yet another problem with the series which begs belief in many ways.

OOH currently accounts for 16.5% of the expenditure weight of CPIH. This compares with a weight of 19.5% in 2005.

There have been a lot of revising of such numbers which applies also to the imputed rent numbers which mean that no-one can even be sure what the past was from one year to the next. The Alice In Wonderland critique applies.

“How puzzling all these changes are! I’m never sure what I’m going to be, from one minute to another.”


We see that as pointed out in the spring UK consumer inflation is heading on an upwards path. There is statistical noise in the exact monthly numbers but the trend was already clear back then although we know now that it will go higher and be more sustained because of the additional impact of the lower UK Pound £. We will head towards 3% on the CPI and 4% on the RPI if things remain as they are.

The Bank of England should of course respond to this for two reasons. It is supposed to target annual CPI inflation of 2% and also because higher inflation will reduce and perhaps eliminate real wage growth and thus have a contractionary impact on the economy. In response to this we have been told this by Governor Carney. From the BBC.

Earlier, Mr Carney said that the Bank of England was willing to see an “overshoot” of its 2% inflation target if it meant supporting economic growth and protecting jobs.

Perhaps our dedicated follower of fashion has been listening to Janet Yellen of the US Federal Reserve. From MarketWatch.

Fed’s Yellen sees benefits in letting inflation exceed central bank’s 2% target

Benefits for who exactly? Certainly not workers or consumers….

Women’s Coats

Lucy Meakin of Bloomberg has given us a hint of a quality change here.

Possibly because this season most of them don’t have lining for some reason


24 thoughts on “UK inflation begins its rise whilst the Bank of England looks away

  1. You ask who benefits from inflation. My guess is that it benefits all the can-kickers, as they:
    1. See debt falling in real terms;
    2. Avoid disasters at the banks if falling prices led to house price falls;
    3. Are terrified at the prospect of consumers deferring purchases if they expect prices to come down.
    I am increasingly of the opinion that our great economics leaders have no more idea than our great political leaders as to what to do. We have the accelerator pushed to the floor fiscally and monetarily and still haven’t reached nirvana. This was expected to stimulate growth in a virtuous circle, but looks more like pushing on one end of a piece of string to me.
    The one thing that seems to unite them is the fear of deflation, as they call it, or disinflation as you call it. “Looking through” inflation is just one more example of this.

    • Super post James.

      Particularly this
      ‘I am increasingly of the opinion that our great economics leaders have no more idea than our great political leaders as to what to do. ‘

      They pulled out the Greenspan/Bernanke playbook and assumed that the velocity of money would stay constant during an era of unrestrained money printing.

      As a plan,it was always flawed.Now their solution has created an even bigger problem than the one they hoped to solve.

    • You think the accelerator is pushed to the floor fiscally?

      Wait till you hear the Autumn statement. Hammond will be singing along to Bachman Turner Overdrive’s “You aint seen nuthin yet”

      • You are right, of course. I should have said that we have our foot to the floor “by historical standards”.
        IMHO, MSM has just become stunned by the scale of debt/QE/deficits to the point where it can no longer analyse anything, which is why:
        1. Hammond will get away with even more debt/higher deficit
        2. I read this blog

        • Very good James. “Foot to the floor and not reached Nirvana ..’ sums it up well. The wheels are hardly moving because the transmission is broken.
          The money transmission system was broken by the banks years ago and no one knows how to fix it.
          Yet everyone knows the false economy of pouring money into an old broken car – only the mechanic profits.

  2. Hi Shaun. Good analysis as ever.
    To pick up over the clothing issue. Clothing prices are always a big problem for the ONS. The short duration of fashion lines and frequent sales make measuring real changes in clothing fraught with problems. Trying to do like-for-like comparisons on a monthly basis often appears to show wild changes that then get reversed the following period. Furthermore, the high variability in unit pricing also means that using traditional means and ratios to calculate indices often over-estimate price changes. For example RPI, which uses this method, reckons clothes have increased 50% in the last five years. In contrast CPI, which uses hedonic means, often underestimate inflation on clothes and indeed CPI thinks there has been zero clothes inflation since 2008! Neither is right with the truth lies somewhere in between.
    In conclusion: clothing inflation is a bit of mess and CPI today should probably have been just 0.8%. (Maybe we should have a new CPI index without it to add to the plethora of inflation indices – haha!)
    Pete (

    • Hi Pete and thank you

      For those who are unaware the issue of clothing and footwear inflation was the driver behind the “improvements” suggested for UK inflation measurement such as CPIH. In essence a change was made back in 2010 to how clothing prices were collected and it widened the “formula effect” . Hence the starting gun was fired…

      Just to add that whilst the establishment keeps pressing the case for CPI in many respects the RPI data looked more realistic.

  3. Shaun
    I see that there is a beginning of a fightback against the B of E by politicians.
    In todays Telegraph there is an article by William Hauge suggesting that the B of E is not doing a very good job and may have to be taken back over by the politicians.

    • You can hear the pundits prepping arguments about
      ‘they’re the experts’…..etc

      Experts at what,digging an even bigger hole.

      Put it back in the hands of someone who gets elected

  4. Shaun, what’s the difference between raising the inflation target and announcing that you intend to exceed the target for an unspecified period? If the answer is, as I suspect, none, who gave Mr Carney authority to raise the inflation target?

  5. Hi Shaun and thanks for this interesting blog along with those on bonds and interest rates.
    Inflation has really set in and will hammer savers again.However those holding NS& I inflation linked products will feel a lot happier.
    You warned of oncoming inflation well before the referendum result was known and that has endorsed your belief.
    So early next year as some very low oil prices drop out of the indexes inflation could rise sharply.
    As you have said it does depend on the standing of oil prices and GBP.
    I know some of the smaller electricity sellers have raised their prices recently and I presume the wholesale price is still high which might also be inflationary.

    • “those holding NS&I inflation linked products will feel a lot happier” also BoE employees as their pensions are linked to RPI……

  6. carney forecasts inflation

    who’s ?

    leccy been rising by 3.8% for the past 5 years regardless of oil price

    foods up too

    housing – well…..

    and his pension is on RPI – a case of I’m alright jack for sure !!

    all the real stuff is non core ……… har har


    • Once again, you are showing disrespect to our great leaders. Our place is to admire, thank and congratulate these mighty geniuses as they lead us to the best of all possible worlds. I am absolutely certain that they have no regard for their personal financial position and that the inflation measures rightly exclude peripheral fripperies such as housing, whereas the GDP figures equally correctly include that rock of real output known as imputed rents.

      • LoL

        almost choked on my popcorn …… wait a minute that means I need to buy more

        ergo more GDP !

        no doubt, its true !, I have to choke with laughter more often to save the economy!!


  7. Great blog as usual, Shaun.
    The CPIH can’t be taken seriously as a potential replacement for the CPI as the Bank of England’s target inflation indicator, even if it is tracking higher than the CPI now. It is really no substitute for a CPI that includes an owner-occupied housing (OOH) component based on the net acquisitions (NA) approach. The best monthly measure the ONS produces now that approximates this is the RPI excluding mortgage interest and council tax. Without adjustment for the formula effect, that series shows an annual inflation rate of 2.1% in September, up from 1.9% in August. Even if you adjust for the formula effect (I just took the difference between RPIJ and RPI inflation rates), the annual inflation is 1.4% in September, up from 1.1% in August. Both rates would be higher if stamp duty were included in the RPIJ as it should be.
    The annualized three-month rate of change gives one a more current inflation rate than the 12-month rate of change that is the basis for the headline inflation rate. It is problematic since there are no seasonally adjusted estimates published by the ONS to draw on, and the adjustment for the formula effect is a little arbitrary. Just the same, I estimated that on this basis the annualized inflation rate for September was 2.5%, down from 3.5% in August. (The down side of these more current inflation rates is that they are also bumpier. The rate falls because the big 0.4% monthly increase for June (unadjusted) drops out of the September measure, to be replaced by the smaller 0.2% monthly increase for September.)
    In any case, properly measured, and using a more current rate of inflation based on three-month changes, the UK inflation rate is not headed towards overshooting 2%. It has already done so.

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