UK Inflation continues its ascent in spite of the measurement “improvements”

Today we will find ourselves updated on the latest official data for UK inflation. Sadly we will see it move further above target and there have been two main drivers of this. Firstly it is the fact that the price of oil stopped falling. This will impact on April’s inflation data as the price of a barrel of Brent Crude Oil was around US $10 per barrel higher than in the same month last year. Here is the Office for National Statistics on the subject.

Oil rose further above $55 (44.22 pounds) a barrel, supported by another shutdown at Libya’s largest oilfield and heightened tension over Syria. Libya’s Sharara oilfield was shut after a group blocked a pipeline linking it to an oil terminal, a Libyan oil source said. The field had only just returned to production, after a week-long stoppage ending in early April. Brent crude LCOc1, the global benchmark, rose 48 cents to $55.72, not far from the one-month high of $56.08. U.S. crude CLc1 was up 37 cents at $52.61.

In addition the next factor then arrives which is the lower level of the UK Pound £ which spent much of last April in the mid US $1.40s compared to the mid US $1.20s this year. Actually later this April the UK Pound £ rose to the current level of around US $ 1.29 so the exact annual difference depends a fair bit on which day in the month is used  but the underlying issue is that the cost will have risen. For the price of crude oil there is a double whammy effect as the two changes combine. Also it impacts on domestic fuel costs although the two main rises in April ( SSE and E.ON ) were on the 26th and 28th of the month so are more likely to be in the May data.

The UK Budget will also give prices an upwards nudge.

The measures that will be implemented in the financial year ending 2017 are estimated to increase the CPIH 1-month rate by approximately 0.16 percentage points, the CPI 1-month rate by approximately 0.18 percentage points and the RPI 1-month rate by approximately 0.23 percentage points.

This compares to 0.04% last year for CPIH and 0.06% last year for RPI.

A Space Oddity

Remember the official campaign against the Retail Price Index measure of inflation saying it does not meet international best practice? It looks like someone has let their greed for higher rises to create a bit of amnesia on that subject.

The March 2017 Budget announced that from 1 April 2017 VED rates will increase in line with the RPI for cars, vans and motorcycles registered between 1 March 2001 and 1 April 2017.

A direct impact

The producer price or PPI inflation measure shows us the impact of the factors analysed above as we look at the impact on input prices.

Crude oil provided the largest contribution of 5.82 percentage points to the annual rate and on the month it provided a contribution of 0.32 percentage points.

The overall picture is as shown below.

The monthly rate of inflation for goods leaving the factory gate (output prices) was unchanged at 0.4% in April 2017, while input prices rose 0.1% following 2 months of no growth….The annual rate for factory gate price inflation was positive but unchanged at 3.6%, while the annual growth rate for input prices fell back to 16.6% from a peak of 19.9% in January 2017.

As you can see some of the input price effect is fading but output prices will continue to be affected and therefore will exert an upwards pull on the consumer inflation indices.

The headlines

These raised a wry smile and I will give you just one example which is from the Press Association which was repeated by many other media and news outlets.

#Breaking Rate of Consumer Price Index inflation rises to 2.7% in April, from 2.3% in March, the Office for National Statistics says

The wry smile was caused by the fact that the new official inflation series is now CPIH and as someone who has led a campaign against it then perhaps more people were listening than I realised. For newer readers the CPIH is where H= Housing Costs, and so far so good. But it all goes wrong when a number is calculated for what houses which are owner-occupied would be rented out for based on Imputed Rent methodology. So a theoretical construct or made up number is used as opposed to actual real world numbers such as mortgage rates and house prices. Oh and the RPI index was downgraded for not being a national statistic whereas CPIH was upgraded for being.

CPIH is not currently a National Statistic.

If we look at the numbers we see that there is another reason to raise a wry smile.

The Consumer Prices Index including owner occupiers’ housing costs (CPIH, not a National Statistic) 12-month inflation rate was 2.6% in April 2017, up from 2.3% in March.

Conspiracy theorists will have noted that it has become the headline measure just in time to give a lower inflation reading than its predecessor! I tend to downplay such thoughts although the rush to make it the new headline measure at the end of last year does give some support to them. After all I was pointing out back then that I expected rents to struggle this year as opposed with what I considered hype from the real estate industry. This is now being borne out by the official data.

Private rental prices paid by tenants in Great Britain rose by 1.8% in the 12 months to April 2017; this is down from 2.0% in March 2017.

So the housing market has arrived in the numbers just in time to lower them after all the years of ignoring it as it surged. Some perspective on this has been provided by the Resolution Foundation today.

Staying with rents the official data is catching up on what has been going on in London which as usual is in the van of any changes.

London private rental prices grew by 1.4% in the 12 months to April 2017, 0.4 percentage points below the Great Britain 12-month growth rate.

If we return to my theme which is that house prices give a much better guide to inflation than rents let me point out that they continue to send a different message. Yes the inflationary burst is fading (good) but compare the number with the one for rents.

Average house prices in the UK have increased by 4.1% in the year to March 2017 (down from 5.6% in the year to February 2017).

Comment

The drumbeat in today’s numbers is that UK inflation is on the rise as was expected on here and that it is not good news. Indeed the news is more disappointing if we look at our old inflation measure.

The all items RPI annual rate is 3.5%, up from 3.1% last month.

With wage and indeed economic growth around 2% per annum the difference  between our old and newer inflation measures becomes more material. It is of course something the Bank of England should be looking into but apart from putting their own pensions in instruments benefitting from the RPI they are shamefully silent on the matter. What we can see is that each “improvement” in consumer inflation methodology seems to result in a lower number whereas other prices surge. I have already looked at house prices but whilst some of it is growth we have to wonder if inflation is also at play in this asset price as well.

The FTSE 100’s recent record breaking run showed no sign of ending as the UK’s main share index hit another record intra-day high.

In morning trade,the index climbed to 42 points, or 0.5% to 7,495.68 – meaning it is up 5% this year.

Vodafone led the way, with the mobile giant’s shares rising 4.1% as investors ignored news of a hefty annual loss and focused on its upbeat outlook.

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17 thoughts on “UK Inflation continues its ascent in spite of the measurement “improvements”

  1. Hello Shaun,

    Seems comical carney has blown it – he should have waited before that “unwise” cut in the emergency level IR .

    As for inflation – if its so good for us why don’t HMG drop CPI and go back to a RPI measure ( RPIX ? ) .

    but no, CPI for the masses and RPI for the powerful and for tax rises ……

    despicable

    Forbin

    PS: predictions are difficult but I sense a cut to 0% after the election – expect any old excuse for it . ( we both know that cuts when down at this level are only meaningful for the Banks)

    • Hi Forbin

      Governor Carney rather end gamed himself with his doom laden predictions for the UK economy should there be a leave the EU vote. So he then had to act or so he felt. As to the measures well they want plenty of inflation combined with a measure that tells us it is much lower!

  2. Great blog as always, Shaun. Thank you for keeping the heat up on the designation of CPIH as the headline measure of inflation.
    Although the RPIJ is no longer published by the ONS, the information provided on the change in the formula effect (see p. 37 of this month’s CPI briefing note) allows one to approximate it. The RPIJ annual inflation rate would have been 2.8% in April up from 2.4% in March. Stamp duty was never added to RPI/RPIJ, which might have raised both these inflation rates. It is quite easy to see why the ONS decided to discontinue this index rather than reform it. If it had been reformed and continued it would be showing 0.2 to 0.3 percentage points more inflation than the CPIH, their headline inflation indicator. Now the ONS plans to publish a household consumption index (HCI), The ONS plans to publish a Houshold Costs Index towards the end of this year that may provide a better measure of cost-of-living changes than the CPIH does. Let’s hope so. The CPIH is obviously not fit for purpose.

    • Hi Andrew and thank you

      I have also posted on Statsusernet ( for those unaware it is the Royal Statistical Society website ) about CPIH as the media mostly ignored it and carried on using CPI. In some places it was mentioned below the RPI. This is embarrassing to say the least for the UK National Statistician.

      I look forwards to the new index and hope that it does not get watered down or perhaps I should say “improved”.

  3. I have only one concern, if inflation figures from ONS cannot be trusted what other stats cam be? Every change to the unemployment figures always brings them down for some reason, or exagerates full time numbers. I don’t think we’re in a good place her.

    • Hi bill40

      The GDP figures are affected by the various inflation measures. For example switching from using RPI to CPI has been estimated to raise UK GDP by around 0.5% per annum by Dr. Mark Courtney. The trade figures are not a lot better than sticking your finger in the air and the construction ones have been troubled.

      In an irony the numbers which have been volatile for years ( Retail Sales) have seen at least a consistent trend in recent times.

  4. Hi Shaun
    I was under the impression that it was desirable
    to have 3%+ inflation to fund further borrowing and even
    with the 2.5% “temporary” VAT hike borrowing is not under
    genuine control and “The Precious” still have a firm grip
    of our vital soft tissue!
    “When will they ever learn.”

    JRH

    • Hi JRH

      We also projected economic growth of 3% or so per annum back in the day ( summer of 2010 election) which of course was never especially likely. Is there anything as permanent as a new tax described as “temporary”?

      • Good one Shaun.

        Wasn’t the 2.5% VAT increase to fill the hole created by the suspension/cancellation of ‘The Poll Tax’ a temporary measure? Maybe the memory is degrading its been so long.

        Oh, the days of 15%, even if that seemed extortionate after it had been 8%!

  5. “This time it’s different”, how many times have we heard that before, usually it coincides with a justification for extreme valuations of overpriced assets caused by central bank policies, subsequently followed by a crash that everyone then acknowledged as totally predictable but were unable to predict prior to the bubble bursting, which of course is a text book definition of a bubble.

    This time, inflation rears its ugly head at the same time as collapsing commodity prices, record levels of personal debt, both secured and non secured, and wages paradoxically falling in real terms, and yet house prices keep going up!!!These events should not happen at the same time!

    They are happening because massive interventions by central banks since the crisis of 2008 have caused massive distortions in financial markets.

    In the past(post WWII),the UK government has been able to somehow fudge boom and bust by always boosting the money supply and/or lowering interest rates/devaluing the pound. By the 1960’s unions were on the case and fought a never ending battle against the falling real wages imposed on them by the government and the Bank of England, they were on the whole successful, but in came Thatcher who saw the major threat to the UK economy as the unions, what followed were decades of anti union legislation that has with the further weakening of the economy, resulted in virtually impotent unions that have resulted in the current situation whereby they can only hope to negotiate below the fiddled bogus “inflation rate” pay rises, where most employers keep trying to aim to reduce wages down to the level of the minimum wage or just above.

    UK employers want rich consumers but poor workers, they cannot co-exist, the same selfish contradictory attitudes apply to training, no company wants to go to the trouble of training or paying for apprentices, they all think someone else should, they then just employ the newly qualified employee without the cost, that works until it doesn’t, which is why we now have huge shortages of skilled and qualified labour, but paradoxically, as I have pointed out before in other posts, these shortages do not result in a higher price for that labour.

    In a tour of a GM(I think) plant in the USA in the early 80’s by directors showing off the first production line robots, a director turned to the plant union official and said something along the lines of “try selling that a union card”, to which the union official responded ” try selling that a car”.

    No one can tell when this crazy, system will break down, but if the above is anything to go by, it can’t be vary far away.

    Central banks to me are now like the old music hall act of the spinning plates, just how long is left before the plates fall off, the huge falls in commodities prices are the canary in the coal mine, or is there another massive round of QE(and I mean in the order of 10 times the previous amounts) coming to save the day again?

    • Hi Kevin

      They will have to buy equities and property to get QE on the scale you mention as they will have run out of bonds to buy. Meanwhile on the subject of this time being different this may raise a smile. From The Irish Times.

      “Moody’s has played down the risk of another Irish housing bubble, suggesting the level of credit growth accompanying the current upturn in house prices was not enough to warrant concern.
      However, in its latest Irish credit analysis, the rating agency warns that house price inflation, which has accelerated to double digits in most parts of the State, needed to be monitored carefully.”

      Ah “monitored” like last time?

      • Hi Shaun,
        Yes, they just never learn, just keep repeating the same mistakes, and in the case of QE, like bleeding the patient in old days, if it hasn’t worked, it isn’t because it’s the wrong policy,it’s just that we haven’t done enough of it, so we must increase the dose!!!

        Re the Irish problem and the housing market taking hostage the government and the economy, house builders have virtually gone on strike in Ireland as they reckon they cannot make enough profit, putting tremendous pressure on the government due to the shortages of property and soaring rents especially in Dublin.

        Of course, the real problem is not the cost of construction, but the price of the land required to build the house has been bid up to unaffordable levels by ZIRP, courtesy of the ECB, but we can’t admit that can we?. The Irish government then introduced strict lending rules to prevent the bubble returning, and it worked well, prices stabilised, but of course the banking and building lobby were too strong, and now the lunatics have taken over the asylum again:

        http://www.independent.ie/business/personal-finance/property-mortgages/central-bank-told-to-change-lending-rules-35019430.html

      • In the run up to 2007 burst i had a business selling off plan property in Bulgaria.

        Probably sold 100 units in 2 years with 50% sold to Southern Irish buyers, me and my business partner just couldn’t understand where the Irish were getting all their money from to buy what i and he knew was poorly build over priced property with an oversupply of epic proportions …. then the tide went out and we found out!

        May be time to contact a few developers, create a website stick a few CG images with floor plans on and cash in again

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