With UK inflation heading above target why are we getting more Bank of England QE?

Today we arrive at the latest UK inflation data series and the Bank of England will be facing a situation it has not been in for a while. This is that consumer inflation is now quite near to its official target as the CPI ( Consumer Prices Index) gets near to 2%. This poses yet another question about its policy as we see that the Bank of England is buying another £775 million of UK Gilts today. Even worse these are longs and ultra longs as it will be making offers out into the 2060s. So it will be creating a problem for our children and grandchildren all in the name of boosting an economy which has so far down well and boosting inflation which is now pretty much on target.

Of course the Bank of England thinks that inflation will rise further in 2016 as it explained at its Inflation Report earlier this month.

Beyond that, inflation is expected to increase further, peaking around 2.8% at the start of 2018, before falling gradually back to 2.4% in three years’ time. This overshoot is entirely because of sterling’s fall, which itself is the product of the market’s view of the consequences of Brexit.

The Sterling fall was exacerbated by the policy easing from the Bank of England which drove it lower when the UK economy was already getting a substantial boost. To be specific it was expectations of easing which drove it lower after Governor Carney’s rhetoric promised it and ignored the fact that there are 8 other voting members.

As an aside I await the views of the inflationolholics who want a 4% inflation target such as Professor Tony Yates and Professor Wren-Lewis. No doubt their Ivory Tower models love the inflation rise as their economic models tell them that wages will rise in response although of course the real world is apt to remain so inconvenient and inconsiderate. Of course I suppose Professor Yates has a model which shows he was right when he and I debated monetary policy last September on BBC Radio 4’s Moneybox whereas of course the real world shows exactly the reverse.

Today’s data

Let me first open with an alternative universe.

The annual rate for RPIX, the all items RPI excluding mortgage interest payments (MIPs) index, is 2.9%, up from 2.7% last month.

So this has gone even further above its old target of 2.5% and would now be signalling that it was time for the Bank of England to consider reducing all its monetary stimulus rather than adding to it. No wonder it was scrapped! However we do learn something by looking at the new measure.

The all items CPI annual rate is 1.8%, up from 1.6% in December.

So we immediately learn two things the first is that there is a gap of 1.1% between two measures which are supposed to both measure UK inflation. You will no doubt not be surprised that the lower number has got the official nod or we have seen an “improvement”. But there is the secondary issue of the fact that the target was only changed by 0.5% or less than half. So there was a monetary policy easing that gets little publicity. Some of the difference is that in spite of the fact that mortgage costs are excluded RPIX still has an influence from owner occupied housing costs which the official CPI turns its blind eye to.

What are house prices doing?

Here are the numbers.

Average house prices in the UK have increased by 7.2% in the year to December 2016 (up from 6.1% in the year to November 2016), continuing the strong growth seen since the end of 2013.

Many of you will no doubt be having a wry smile at the way these were moved out of the headline inflation number (2003) just ahead of a boom in house prices. But the UK establishment is about to claim it is including them whilst not actually doing so. I explained in full detail on the 15th of November last year.

There is another issue which the National Statistician has attempted to fudge by writing “the inclusion of an element of owner occupiers’ housing costs”. How very Sir Humphey Appleby! I have noted that many people have reported that house prices are being included but you see they are not. Instead there is a statistical swerve based on the Imputed Rent methodology where they assume house owners receive a rent and then put growth in that in the numbers. The same rental growth measurement that according to their own missives  they need to “strengthen”.

Let us look at this month’s number.

The all items CPIH annual rate is 2.0%, up from 1.7% in December.

Lets is start with the good which is that when it becomes the first measure on the statistical bulletin next month it will give a higher number than the one it replaces. The bad is that if you look at  house prices it is still way behind them because the number it makes up or “imputes” tells us this about housing costs.

The OOH component annual rate is 2.5%, down from 2.6% last month.

Apologies to any first time buyers who are now choking on their coffee or tea. The ugly is that this made up number is not even a national statistic because of their failures in simply measuring rents. This has led to revisions and an abandonment of the past rental series.

I made these points to the UK National Statistician John Pullinger in late January as I reported on the 31st.

I was pleased to point out that his letter to the Guardian of a week ago made in my opinion a case for using real numbers for owner-occupied housing such as house prices and mortgage-rates as opposed to the intended use of an imputed number such as Rental Equivalence.

What drove things this month?

If we look at the detailed data then it was clothing and footwear which held inflation back.

Overall, prices fell by 4.2% between December 2016 and January 2017, compared with a smaller fall of 3.1% last year

That tugged it back by 0.1% on the annual rate and offset some of the 0.29% rise from transport costs.

What is coming over the hill?

I am sorry to say that our valiant professors will be pleased by this.

Factory gate prices (output prices) rose 3.5% on the year to January 2017, which is the seventh consecutive period of annual price increases and the highest they have been since December 2011.

So as you can see the heat is on and that is being pushed by prices further up the chain.

Prices for materials and fuels paid by UK manufacturers for processing (input prices) rose 20.5% on the year, which is the fastest rate of annual growth since September 2008.

These only impact on some of the numbers and so get filtered out as well as reaching consumer inflation but they will continue to nudge consumer inflation higher as we move into the spring of this year.


There is much to consider here as we note that under our old regime inflation would be above target rather than just below it. However where we are poses a serious question for the Bank of England as it is pushing inflation higher with its ongoing monetary easing which even the inflationistas must now question. Indeed even the CPIH measure which next month will be first in the statistical bulletin with its imputed rents would if it had a 2% annual target be on it. I do hope that Governor Carney and Chief Economist Andy Haldane will soon be available to explain why a solidly growing economy with inflation heading above target needs a “Sledgehammer” of monetary easing. Actually Andy has been quiet of late has he been put back in the cellar he has spent most of the last 28 years in? How can he build an Ivory Tower from there?

Meanwhile the rest of us face higher inflation and I fear we will see 3% inflation on the CPI measure and 4% on the RPI measure as 2017 develops. I can say that I will be having more contact with the UK statistics establishment on the subject of their planned changes and will express my views to the best of my ability.

Seer of the year

There are many candidates for this but to be so wrong in only 24 house deserves a special mention. So step forwards European Commissioner Pierre Moscovici only yesterday.

After returning to growth in 2016, economic activity in is expected to expand strongly in 2017-18.

And the Greek statistics authority today.

The available seasonally adjusted data1 indicate that in the 4 th quarter of 2016 the Gross Domestic Product (GDP) in volume terms decreased by 0.4% in comparison with the 3 rd quarter of 2016,

To coin a phrase Pierre is a specialist in failure. Still he does have a famous song to sing.

Yesterday all my troubles seemed so far away.
Now it looks as though they’re here to stay.
Oh, I believe in yesterday.



24 thoughts on “With UK inflation heading above target why are we getting more Bank of England QE?

    • Hi Forbin

      Pierre Moscovici has been forecasting an economic improvement in Greece in 2012,13 ,14, 15, 16 and now 17. Eventually something will come his way and no doubt he will shout it from the rooftops. Meanwhile the poor Greeks have seen an economic depression inflicted on them.

    • yup, nothing changed has it ?

      does this mean we’ve gone beyond farce now ?

      if this the “best talent” then I’d hate to see average talent yet alone the mediocre……


  1. Genuine question from a non-economist…..apart from raising interest rates (which I guess isn’t going to happen for a very long time, apparently regardless of CPI figures) – what could the BoE do to bring down inflation? (Obviously they could cut back on the easing explained in the article above, but is there anything else?)

    • nothing really – these “tools” have about two tools

      1, interest rates – up or down

      2, printing money – more or less printing ( its called QE or other innovative names but its money printing by keystroke these days)

      and oh , inflation is what ever they say it is at the time they say it

      you see they are the master of the word……….


  2. Shaun,
    The CO-OP bank saga highlights that the banks still need BoE support hence continued QE as they dare not consider unwinding it !
    Meanwhile stamp duty on property purchases and VAT on fuel bring in extra cash to HMG.

    • Hi Chris

      Yes the establishment do pretty well out of this particular merry go round. Meanwhile the ordinary worker and consumer sees house prices getting ever more unaffordable and those looking to get on the housing ladder will reasonably wonder how this is described as a wealth effect leading to economic growth?

  3. Listening to Mr Gompertz on the world at one he explained at length that the increase in inflation was due to the fall in the pound and he said that interest rates must go up I order to choke off inflation. He did not explain how it would work but I presume he thought that increasing interest rates would reverse the fall in the pound. But I am no economist. As far as I can see if interest rates go up house prices go down and the banks go even deeper into the doo-doo. Heads we lose tails we lose.

    • Hi Peter

      Actually the damage was done much earlier in my opinion when post Brexit Mark Carney promised monetary easing and he and his 8 cronies at the Bank of England duly delivered it last August. This pushed the UK Pound £ lower than it needed to go and thereby fed the inflation he is supposed to control!

      So a simple start with be to reverse that policy error. As we were able to survive with a 0.5% Bank Rate for 7 years that should be okay and then over time we can begin to nudge rates up. Oh and we can scrap the QE and buying corporate bonds especially the ones of foreign companies.

    • Inflation won’t create wealth, it only rescues problem borrowers from their folly. It makes food, fuel and heating more expensive for most people.

      point 1. inflation makes people poor. (excluding the heavily leveraged BTLers)

      inflation can be difficult to control. Often rising inflation comes with worsening economic conditions – therefore requiring late rate rises just when it hurts most.

      point 2. Who wants a repeat of the 1980s 15% rates ?

      Sometimes inflation gets out of control and destroys whole economies.

      point 3. playing with inflation is like playing with fire

  4. Shaun,

    We are getting more QE because the state want rampant inflation on everything. The lower oil prices stopped them 2 years ago but as you point out the state has been very effective with nominal house prices and rents 7% and 10% respectively. Oil is no on their side. The drop in sterling is an aid too. The supermarket competition has been annoying but perhaps we could bust some of the niche players, convenience stores or hypermarket models.

    Britain is one big property fund and QE is a sure way of maintaining the excess, after all once EU citizens start to leave and more of the “non-green belt” is covered in boxes the truth might out that there are rather too many homes.

    Doesn’t make any difference though, once the Dutch & French move right, EU will stagger, Greece pushed out in July will be a black swan event and we get that reset we can blame on Trump. Yes 2017 is going to be exciting. Where is the popcorn?


    • Hi Paul

      I am not sure has Forbin cornered the market in popcorn? As to corn prices they have been rising for the past few months but are only just above where they were this time last year.The catch of course is that for those of us who buy it in £’s find ourselves replacing US $1.44+ with US $1.24+.Ouch!

  5. The gap between RPI all items (2.6%) and CPI including housing costs (2%) is now only 0.6%. It used to be 1% plus so convergence may be beginning to occur as CPIH rental equivalence starts to catch up with house prices although there will always be a lag, but for now, at least the gap is narrowing.

    • Just checked rents finding they only rose 1.2% in the year to January. This suggests my post above is probably wrong and the gap is about to widen again. A move to CPIH as the target may be the “right” thing to do in light of rents as CPIH may spend most of 2017 lower than CPI thereby allowing the BOE to tolerate higher CPI and RPI via the lower reading from CPIH and Philip Hammond is due to review the MPC’s remit next month.

  6. In six months they’ll be saying that the danger of Brexit to the economy was so dire; the threats so imminent, that we had to take immediate drastic action.
    This has caused inflation to massively over-shoot its target, but the very real possibility of catastrophe justifies our actions.
    Lying bastards. I can read them like a book.

  7. I am amazed. Does no one really understand what all this money printing (QE) is all about? Carnage, sorry, Mr. Carney to you, just spent the last 9 months effectively printing £250,000,000,000 more toilet paper following the brexit vote. Now he seems to be saying the BOE needs to print more! Did he do his sums wrong? Does he know what he is doing? Why is he still here? N0, the whole point is, by generating inflatiion by increasing the money supply at virtually insignificant cost, (paper is cheap and grows on trees), (ink is cheap too!) the government can tax the debt their mates down the bank created out of thin air at you’re expense!(expense as in your work time to earn that inflated cash, or what you might call, Money). Simples!! Do not be fooled by thinking the left, centre or right are on your side when it’s time to vote. They only want the power to stay in government by promissing some free handouts that they effectively thieved last year from the middle class, (or what’s left of it). Wake up and stop bickering!!!

  8. Does anyone know if there are any historical parallels to our current situation? It seems to me that as long wage inflation doesn’t pick up it will be difficult for the economy to inflate its way out of its over-indebted state. In the 1970s there were strong unions that forced up wages but with now with fewer much weaker unions, zero hours contracts, and the gig economy things are rather different. Even with low unemployment labour just doesn’t seem to have any pricing power.

    The wealth effects from housing are helping fewer and fewer people as home ownership declines. It seems like we are heading for a dead end.

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