UK Inflation is hitting the poorest hardest

As we advance on a raft of UK inflation data there has already been a reminder of one of the themes of this website which is that the UK is an “inflation nation” where the institutional bias is invariably one way. From the BBC.

Drivers saw their car insurance premiums rise by an average of £110 in the last year, a comparison site says.

More expensive repairs and recent government changes to injury payouts pushed up annual insurance costs by 16%, according to Confused.com.

It found drivers paid on average £781 on comparison sites for a comprehensive policy in the year to March 2017.

Average premiums are set to rise to a record high and could pass £1,000 next year, it added.

Up,up and away! I guess those pushing for driverless cars will be happy with this but few others. Some of this is that cars are more complex and thereby more expensive to repair but little or nothing was done about the rise in “whiplash” claims and there has been something of a stealth tax campaign.

IPT went up from 6% to 9.5% in 2015, to 10% in 2016, and will rise to 12% in June 2017. ( IPT = Insurance Premium Tax)

Inflation outlook

We get much of this from commodity prices and in particular the price of crude oil. If we start with crude oil it has returned to where it has mostly been for the last few months which is around US $55/6 for a barrel of Brent Crude Oil where the OPEC production cuts seem to be met by the shale oil producers. However today’s data will be based on March where the oil price was around US $5 lower so this is for next month.

Speaking of the price of oil and noting yesterday’s topic of a rigged price ( Libor) there was this on Twitter.

In 2 years oil price/bbl gyrated from $80->$147->$35->$80 while physical demand for consumption varied by less than 3%……..I recommended to Treasury Select Committee in July 2008 a transatlantic commission of inquiry into the completely manipulated Brent market…..I blew the whistle on LIBOR-type oil futures market manipulation in 2000 & lost everything I had. Treasury/FSA were complicit in a whitewash

I have speculated before about banks manipulating the oil price but how about the oil price rise exacerbating the initial credit crunch effect?

One area of interest to chocoholics in particular is cocoa prices as I pointed out last week. If we look at them in detail we see that London Cocoa has fallen from 2546 last July to 1579 with 2% of that fall coming this morning. How many chocolate producers have raised prices claiming increasing costs over the past few months? Even allowing for a lower UK Pound £ costs have plainly fallen here as we wait to see if Toblerone will give us a triangle back! Or will we discover that the road is rather one-way……

We get little of a signal from Dr. Copper who has been mostly stable but Iron Ore prices have moved downwards. From Bloomberg.

Iron ore dropped into bear-market territory, with Barclays analysts pinning the blame on lower demand from China……Ore with 62 percent content in Qingdao fell 1 percent to $74.71 a dry ton on Monday, according to Metal Bulletin Ltd., following a 6.8 percent drop on Friday.

So as we wait to see what the price of crude oil does next some of the other pressure for higher inflation has abated for now. This was picked up on the forward radar for the official UK data today.

Input prices for producers increased at a slower rate in the 12 months to March compared to the beginning of 2017………PPI input price increased by 17.9% in 12 months to March 2017, down from 19.4% in February, as prices remained fairly flat on the month and prices increased in the previous year.

There was also a slight fading of output price inflation.

Factory gate prices (output prices) rose 3.6% on the year to March 2017, from 3.7% in February 2017, which is the ninth consecutive period of annual price growth.

Our official statisticians point us to higher food prices which has been a broad trend.

In the 12 months to February 2017, vegetable prices in the EU 28 countries increased by 12.4% and in Germany they increased by 22.5%.

However whilst this was true this may well be fading a little as well. We had the issues with broccoli from Spain earlier this year but more recently I note there are cheaper prices for strawberries from er Spain. So whilst there was an impact from the lower Pound £ we wait to see the next move.

CPIH 

This is the new headline measure of inflation for the UK although those who remember the official attacks on the Retail Price Index for being “not a National Statistic” will wonder how a measure which isn’t one either got promoted?! Or why it was done with such a rush?

Some may wonder if this news was a factor? From the London Evening Standard a few days ago.

In London, where rents are by far the most expensive in the country, prospective tenants saw prices fall 4.2 per cent year on year………The average cost of renting a home in the UK remained almost the same as at the start of 2016, rising just 1.8 per cent, compared to the 3.9 per cent annual growth recorded a year ago, thanks to a significant increase in the number of properties available.

It does make you wonder if they thought the buy-to let rush of early 2016 might depress rents? Anyway even the official numbers published today are seeing a fading.

Private rental prices paid by tenants in Great Britain rose by 2.0% in the 12 months to March 2017; this is down from 2.1% in February 2017………London private rental prices grew by 1.6% in the 12 months to March 2017, which is 0.4 percentage points below the Great Britain 12-month growth rate.

If London leads like it usually does…

Oh and Scotland is seeing rent disinflation albeit only marginal.

Scotland saw rental prices decrease (negative 0.1%) in the 12 months to March 2017.

So we see that rents are currently a downwards pull on the annual inflation rate.

The all items CPIH annual rate is 2.3%, unchanged from last month.

Whereas if we look at house prices we see this.

Average house prices in the UK have increased by 5.8% in the year to February 2017 (up from 5.3% in the year to January 2017).

The weasel words here are “owner occupied housing costs” which give the impression that house prices will be used without actually saying it. For newer readers this inflation measure assumes the home is rented out when it isn’t and then estimates the rent and uses that.

Comment

Whilst the headline number is unchanged there is a lot going on under the surface. For example the apparent fading of rents means that the new promoted measure called CPIH seems likely to drop below its predecessor or CPI in 2017. However under the surface there are different effects in different groups. Take a look at this from Asda.

The strongest decrease in spending power has been felt by the poorest households, whose weekly discretionary income in February was 18% lower than in the same month before, falling from -£20 to -£23. This implies that the basket of essential products and services is even less affordable than previous year for the bottom income group.

The clue here is the term essential products and services which of course is pretty much what central bankers look away from as for them essential means non core. You could not make it up! But what we are seeing here is the impact of higher fuel and food prices on the poorest of our society. Those economists who call for higher inflation should be sent to explain to these people how it is benefiting them as we wonder if there will be another of these moments?

I cannot eat an I-Pad!

Meanwhile the UK establishment continues its project to obfuscate over housing costs. The whole area is an utter mess as I note that @resi_analyst ( Neal Hudson) has been pointing out inconsistencies in the official price series for new houses. Back months are being quietly revised sometimes substantially.

A challenge to our statisticians

With the modern GDP methodology we see that the explosion in Airbnb activity has had a consequence.

Colin (not his real name) contacted the BBC when he discovered the flat he rents out on Airbnb had been turned into a pop-up brothel.

You see the ladies concerned were no doubt determined to make sure the UK does not go into recession.

Looking at both their ads, some of the rates were about £1,300 a night. So if they were fully booked for the two nights that’s £2,600 each – £5,200 in total.

But as we mull the issue and wonder how our statisticians measure this? There is a link to today’s topic as the inflation numbers ignore this. Meanwhile if there was evidence of drug use as well would they be regarded as a modern version of Stakhanovite workers by the Bank of England? As Coldplay so aptly put it.

Confusion never stops

 

 

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14 thoughts on “UK Inflation is hitting the poorest hardest

  1. Perhaps we should take a step back and think about what the point of the inflation figure is. It seems to me that you could argue for it to be used for lots of different things, such as:
    1. An indicator of when to raise interest rates to prevent overheating of the economy. I cannot even remember when this applied, but certainly not since QE;
    2. A means to assess how much of a pay rise to ask for, as in the seventies. Again, I cannot remember when employees last tried this approach, although the triple ratchet for pensioners is similar;
    3. A measure of how much poorer we are if we don’t get a rise. If this is what it is for, then it does a spectacularly bad job, since, as your blog points out, the basket is not representative for whole sections of society (normal people, in fact).
    As a moving, annual figure, it also fluctuates as things drop out from a year before.
    So, perhaps the real reason why thinking is so muddled on inflation is that no-one really knows what the measure is supposed to be for.
    I am not, however, an economist, so may have missed the rationale completely.

    • Hi James

      These are things that are discussed at the Royal Statistical Society with my prompting! You have done a pretty good job and let me go through the situation in response to your points.

      1.This is in essence the argument for CPI and CPIH that they are consistent with economic principles such as Imputed Rent and GDP methodology. However in my opinion that road leads to an undermeasurement of inflation and an over measurement of GDP.

      2. RPI was originally a cost of living index for pay rises and in many ways still is.

      The new Household Inflation Index from the RSS looks to cover points 2 and 3 and I have hopes for it. However it may yet get muddled with by our statistical establishment. But it should offer something which measures as accurately as one can the cost of living which is what we should be aiming for.

  2. Well done Shaun for raising issues with the insidious IPT.

    The government loves double taxation (fuel), IPT and then charging VAT on top. iirc IPT is used in all insurance polices so you’re hit across the board.

    I wonder if this will have the unintended consequence of people not insuring? It will certainly cut discretionary spending.

    • I have just moved house and have been stung for more than £75 (for what I have no idea) to stop my insurance policy (buildings and contents) on the house I just sold! Unfortunately they have my new address!! As I’m now in rented I don’t need a buildings policy. I am seriously considering whether it’s worth it in the future if/when I buy a new place. Also car insurance is a complete rip-off and if it wasn’t illegal I would be seriously considering doing away with this too.

    • IPT, whatever they say, is just another way of raising tax. As they don’t want to be seen increasing income tax, they have to get the money from somewhere. IPT will be 20% before we know it, so we will be told it has to rise to be comparable to VAT.
      Just watch the number of uninsured rocket!

  3. Hi Shaun, A timely subject as I have renewed my car insurance for my fleet of 3 bangers. It went up despite no claims for 20 years, the excuses are multitude. IPT has gone up a few times in the last year, we call that Govt adminstered price inflation, like the railway tickets. Also the poor insurance company has been made to split out the agents fee from the underwriter fee, another cost for me.. aparently. Worst of aĺl however is the 100% increase because I’ve moved from surburbia to the centre of town, now can anyone explain that inflation to me…? I think it merits a call to the ombudsman, Ive a hefty £300 excess so if my wing mirror is kicked off there’s no claim, the insurance company says theres more cars in town and more accidents but how is that right, I still spend my time on the motoroway, just as before. Needless to say I had my insurance to the old address and the documents emailed to me.

    On your other subjects… well thanks for the headsup on iron ore, chocolate, oil it seems we have deflation again….. probably eed some QE to fix that very dangerous state 😉

    Housing, don’t get me started. So both nominal prices and rents are still increasing but its not called inflation…

    Paul C.

  4. To the average voter, this means nothing, they are totally transfixed and obsessed with house price inflation. It is their biggest asset, investment, in many cases they consider it their pension, and many have multiple properties which they consider an appreciating asset, which protects them from inflation.

    And why wouldn’t they? Successive governments and Bank of England governors since the end of WWII have convinced them of their entitlement to riches and now endless TV shows now re-enforce this mantra with repeated stories of property investors making guaranteed profits from just buying a property and waiting for the money to roll in.

    To them, inflation is a good thing, which only adds to their property riches as house prices always adjust upwards to compensate for inflation, and since the profits from their property holdings always exceed the inflation cost to them in their every day lives, every one is a winner!!!

    That is why there is almost a tacit agreement between the electorate and the UK government that each side “knows the score” and will go along with the “agreement”.

    When the UK govt is faced with a choice to take the difficult decisions to re-balance the economy or just drop interest rates and create another housing boom, we all know the result don’t we?

    Up until recently, it was almost a “victim-less crime”, as almost everyone gained, but now it is getting a bit messy. Savers are being thrown under the bus to effectively pay for the debt monkeys, borrowing massively beyond their true credit limits to keep the housing bubble going, aided by the BofE keeping rates below the real cost of borrowing in order to maintain the bubble, and the govt is being forced into more and more subsidies to the housing market in order to keep it going.

    Savers are now paying the new borrowers mortgages, via the loss in their deposit interest.

    Just don’t fight the trend, it’s been going for seventy years, what could go wrong?

    To return to the title”UK Inflation is hitting the poorest hardest”, the BofE could hardly care, as long as the mortgage book growth is healthy,everything is OK, as to them, this is THE economy.

    • I wouldnt agree that up until recently it was a victimless crime. Since circa 2002 people have been priced out by this insane mega bubble, now this group of renters are large enough to vote in or vote out a government.

      Theresa May and Philip Hammond dont seem to have the intelligence to realise the people voted out against this kind of crony capitalism when voting Brexit and they don’t seem to realise they have a very small majority and i for one will be voting Corbyn just to get the Tory party out … and i’ve never voted Labour or came close to it in my life.

      The housing crisis is arguably the biggest issue in the UK at the moment, even more so than Brexit yet the last budget it did not even get a mention. Truly astonishing from where i’m sat.

  5. You say CPIH is up 2.3% and imply it has been held down by flat rents and quote rising house prices to prove your point, but have conveniently failed to state explicitly that CPI (that’s the one without housing costs included) was also 2.3% this time around.

    I would also be interested to see exactly what Asda describes as essential products and services as their list may be as bizarre as a Central Banker’s core list.

    Pointing this up in the interest of complete disclosure for your readers.

      • “Your “up” is actually “unchanged” in the blog”

        Thanks for the sarcasm but 2.3% inflation is “up” .as it means prices have increased 2.3%. 0% would be unchanged prices, although there is the esoteric sense in which you appear to be speaking i.e. has the percentage increased from where it was previously..

        Thanks for the link to the report which I had already viewed including the full report before writing my first comment as it does not list the items Asda considers to be “essential products and services” or rather “items constituting basic or essential spending ” as mentioned in the report but states the list is “available on request”.

        I was hoping Shaun may have requested it and could supply it.

        In the interest of even more complete disclosure where the gaps in information are identified and still have not been filled.

    • Hello, Jive Bunny. Maybe Shaun should have mentioned that CPI and CPIH inflation rates were the same. However, surely his essential point is valid. With such strong housing price inflation one would expect an index that included OOH costs to show higher inflation than it does. The ONS no longer calculates an RPIJ, but I tried to estimate it anyway from the info in the CPI briefing effect on the formula effect. It probably showed an inflation rate of 2.4% in March, unchanged from February. Since the RPIJ has its own problems, like the omission of stamp duty, that mean it isn’t properly sensitive to rising housing prices, it is reasonable to believe that the CPIH inflation rate was lower than it should be in February and March by as much as 0.2 percentage points if one were looking for a cost-of-living measure.
      For central bank purposes the RPI excluding mortgage payments and council tax adjusted for the formula effect would probably be the best monthly measure for the moment. It had an inflation rate of 2.7% in March, unchanged from February. As with the RPIJ, this would currently be a downward biased measure of inflation as well, so the CPIH inflation rate for February and March may be low by as much as 0.5 percentage points if you want a macroprudential type measure of inflation. Shaun is surely right in thinking it was a mistake to make the CPIH the UK’s headline inflation measure.

      • Thank you for a well reasoned comment Andrew. Given that housing costs should be included in the “CB official” inflation measure imo I do not understand why you suggest RPI excluding mortgage payments and Council Tax over RPI all items?

        My criticism is that in the “CPIH” section Shaun makes an argument, in stages, suggesting CPIH has been deliberately chosen to depress the inflation measure as it measures rents rather than mortgage’s but fails to point out that even had the “old” CPI measure been used which excludes housing costs the rate would have been identical. This could have given rise to a discussion of the components of the OOH component of CPIH (which would have been educational as I doubt many on here including myself have knowledge of the exact components and how they are used and weighted) and it’s usefulness or otherwise and that perhaps they would have been as well off sticking to CPI.

        As I have stated earlier in this comment I believe the RPI all items should be used regardless of political pressure. As it is, Shaun’s discussion of CPIH appears to me as a cheap shot to discredit it without any proper treatment of the underlying issues, bearing in mind this post was all about “inflation”.

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