Imputed Rents do their job of slowing rises in UK inflation

Today we find ourselves reviewing the data on the rise in inflation in the UK in 2017. This has been caused by a couple of factors. The first is something of a world-wide trend where the price of crude oil stopped falling and being a disinflationary influence. The second has been the fall in the value of the UK Pound which accelerated following the vote for the UK to leave the European Union just over a year ago. If we look back a year then the current US $1.269 has replaced the US $1.411 back then. So the inflation which was supposedly dead ( if you recall the Deflation hype and paranoia..) came back on the menu.

The UK establishment responds

If you do not want the public to realise that inflation is rising but do not wish to introduce any policies to stop it then the only option available to you is to change the way the numbers are measured. Last Autumn the UK statistical establishment began quite a rush to increase the use of rents in  a new headline UK inflation measure. There is of course a proper use for rents which is for those who do rent, however the extension was for those who own their house and do not actually rent it out. So yes imputed rents were required to fill the gap. Here is the official explanation.

However, it does not include the costs associated with owning a home, known as owner occupier housing costs. ONS decided that the best way to estimate these costs is a method known as ‘rental equivalence’. This estimates the cost of owning a home by calculating how much it would cost to rent an equivalent property. A new index based on CPI but including owner occupier housing costs – CPIH – was launched in 2013.

How has that gone?

This new index had some problems in 2014,

Also there is this.

We have still not yet addressed all of the necessary requirements for CPIH to become a national statistic.

So why the rush? Well last week’s numbers on rents from Homelet will have raised a wry smile for many.

UK rental price inflation fell for the first time in almost eight years in May, new data from HomeLet reveals. The average rent on a new tenancy commencing in May was £901, 0.3% lower than in the same month of 2016. New tenancies on rents in London were 3% lower than this time last year…..May’s decrease in average rental values marks a significant moment for the rented property sector. This is the first time since December 2009 the HomeLet Rental Index has reported a fall in rents on an annualised basis.

So rents were rushed in as part of the “most comprehensive measure” of UK inflation just in time for them to fall! Those who believe that rental inflation is related to wage growth will no doubt be thinking that wage growth and hence likely rental growth is lower these days. This is all rather different to house prices where lower mortgage rates can set off more price rises and inflation. I have met those responsible for this and pointed out that the word “comprehensive” is misleading as they do not actually measure the owner occupied housing market they simply impute from the rental one.

Today’s data

We see this.

The Consumer Prices Index (CPI) 12-month rate was 2.9% in May 2017, up from 2.7% in April………The Consumer Prices Index including owner occupiers’ housing costs (CPIH, not a National Statistic) 12-month inflation rate was 2.7% in May 2017, up from 2.6% in April.

So not only is the new measure again below the older one we see that the gap has now widened from 0.1% to 0.2%. As the difference must be the imputed rental section let us take a look.

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

As you can see whilst the official data does not have the falls indicated by Homelet it is a drag on the overall inflation measure. Sir Humphrey Appleby would have a broad smile on his face right now. Oh and the reason why it is not showing falls is that the numbers are what might be called “smoothed”. The actual monthly  numbers are quite erratic ( which of course would lead to doubts if people saw them) so in fact the numbers are over a period of time and then weighted. The ONS has been unwilling to reveal the length of the period used but it used to be around 18 months. This is of course another reason why this methodology is flawed and a bad idea because rents from a year ago should be in last years indices not this months.

I have argued for a long time ( this debate began in 2012) that house prices should be used as they are of course actually paid rather than being imputed. Also they behave very differently to rents as a pattern and are more timely which is important. So what are they doing?

Average house prices in the UK have increased by 5.6% in the year to April 2017 (up from 4.5% in the year to March 2017).

As you can see house price inflation is currently treble that of rental inflation. Can anybody think why the UK establishment wanted rents rather than house prices used in the consumer inflation measure?

Our past measure

The Retail Price Index used to be used in the UK.

The all items RPI annual rate is 3.7%, up from 3.5% last month.

So the pattern of higher inflation measures being retired continues. Although it does at least serve two roles. The first is for indexation of things people pay such as mobile phone bills as my contract rises by it as of course do student loans. The second is for the indexation of Bank of England pensions where it seems strange that the establishment attack on RPI somehow got forgotten

Looking ahead

Fortunately we see that the main push is beginning to fade.

The annual rate of factory gate price inflation (output prices) remained at 3.6% for the third consecutive month and slowed on the month to 0.1%, from 0.4% in March and April……….The annual rate of inflation for materials and fuels (input prices) fell back to 11.6% in May, continuing its decline from 19.9% in January 2017 following the recent strength of sterling.

There is still momentum to push the annual rate of inflation higher which will not be helped if the post General Election dip in the value of the UK Pound persists. But the main push has now been seen. We should be grateful that the price of crude oil is around US $48 per barrel in Brent Crude terms.


The latest attempt by the UK establishment to “improve” the UK measurement of consumer inflation is being shown up for what it is, an attempt to manipulate the numbers lower. I guess things we receive will no longer be indexed to CPI they will be switched to CPIH! Also will the Bank of England switch its inflation target? If so it will complete a journey which has lowered the measure from 3.9% ( where what is called RPIX now is) to 2.7% or a 1.2% change when the target was only moved by 0.5%. In these times of lower wage rises, interest-rates and yields then 0.7% per annum matters quite a bit over time.

An answer to this would be to put the asset price which the Bank of England loves to inflate, house prices, in the inflation index. Let me leave you today with the price of a few basic goods if they had risen in line with them.


As I am off later to buy a chicken for dinner I am grateful it has not risen at such a rate.


15 thoughts on “Imputed Rents do their job of slowing rises in UK inflation

  1. Charade – the Skids

    CPI = Creative Price Index
    CPIH = Creative Price Index Hacked

    I guess the Whitehall wonks will still have their pensions on RPI ( and tax rises too !)

    what ever happened to trying to get our economic figures the best in class , instead of some fictional fake news ?

    ( since joining the EU perhaps? )


      • HI Forbin

        Who would have thought that the proliferation of information we get these days would lead us down a fake news alleyway? But I guess the establishment has always been the same it is just we are able to discover more about how it is operating.

    • “what ever happened to trying to get our economic figures the best in class , instead of some fictional fake news ?”

      Certainly not since 1968 so the EU has nothing to do with it but the UK has EVERYTHING to do with it.

  2. Hi Shaun
    The future problem for TPTB
    will come when the massaged statistics
    are so far out of kilter that Mr Average
    will get a nose bleed.
    I suppose if a politician, a Sir
    Humphrey or an ONS statistician were
    asked what comes first, the chicken or
    the egg, their answer would be whichever
    one they want.

    It really is a masquerade.

  3. Great blog as always, Shaun.
    As you write, the CPIH is a dysfunctional index that will never gain traction as an inflation measure. The household cost index, on the other hand, that the ONS is now in the process of calculating, is potentially a much better measure for upratings, wage bargaining and the other traditional uses to which consumer price indices have been put, than the RPI ever was. It could serve, not only as a better inflation measure for the UK, but as a model for the world. Unlike the CPIH, its broadly defined payments index for owner-occupied housing would include housing prices.
    You and your readers may be interested in the attached paper that I presented at the annual meeting of the Canadian Economics Association at St. Francis Xavier University in Antigonish, Nova Scotia, in the first week of this month:
    I had asked John Astin and Jill Leyland, as the developers of the Household Inflation Index, to submit a paper to a session on consumer price indices. They kindly added my name to their paper in case John, who was registered for the conference, was unable to attend.
    We were lucky to get Angella MacEwen, the chief economist of the Canadian Labour Congress, Canada’s leading labour organization, as a discussant, and she was very positive in her comments about a household inflation index.
    As you say, every new update of the consumer price indices by the ONS shows that it took the wrong path with the CPIH, but John and Jill’s work points the ONS the right way forward.
    (This song, by Nova Scotia’s celebrated Barra MacNeills, is in Scots Gaelic. The province is called Nova Scotia for a reason.)

    • Hi Andrew and thank you.

      I am a fan of the HII ( Household Inflation Index) which as you say has much better methodology than CPIH. So best of luck for your proposal for Canada and I hope the support from your trade unions gives you some traction.

      As to your music it has got a couple of mentions on twitter ( from Scotland I think) . We have quite a variety today with you and JRH on the music front 🙂

  4. Shaun, Thanks for highlighting how their manipulation has been effective. I propose as an intermediary treatment, whilst measures are corrected that homeowners are made to pay the above common basket prices at the till as “compensation” for their good fortune. I am sure our principled Corbyinistas would agree.

    Paul C.

    • Hi Paul C

      I am glad I bought my chicken in advance of that as I have saved a tidy sum. Actually as someone who likes a glass of milk and often has a banana for breakfast I am rather grateful that prices are what they are! I was wondering if my shopping basket was being trolled….

    • Yeah, that’d be interesting given that the cost of borrowing was 5.5 times greater in 1983 than now –

      Rates in them thar days were always about 2% – 3% above the base rate, so about 11% – 12% on a 60% ltv mortgage (they didn’t count the value of the land in them days like they do now so although they said it was a 80% mortgage that was on the value of bricks and mortar only) as compared to a rate of circa 2% nowadays –

      Then we’d have to make an adjustment for the fact that back then most houses didn’t have UPVC double glazing , just single glazed wood framed windows, nor did they have cavity wall insulation or central heating so shall we say a further adjustment of 1 to be added to the adjuster of 5.5 above related to interest costs?

      So that leaves us with a divider of 6.5 to give the real cost today, well actually, that would seem to yield a cost for a loaf of bread today of £0.67 (too low by half) alongside a cost of £7.90 for a chicken (too high by double) with £0.77 for 6 medium eggs (about right), a price of £1.30 for 6 bananas (too high by double) and £1.61 for 4 pints of milk (again too high by about 50%).

      Er, hang on, that objective analysis of housing costs of then to now overlaid onto food prices seems to have proved the opposite of the claim! Doh!!……

  5. Perhaps it’s silly to try to include housing in any of the inflation measures. Prices of goods and services are more or less even across the UK as a whole while housing costs vary widely in a geographical sense eg house prices in a lot of the country have been more or less stable for a few years while prices in London and SE England have roared upwards. So it is very misleading to include either actual house prices or imputed rents in measures of inflation for goods and services. It is also misleading to have an average houseprice/rent inflation index for the UK as a whole.

    Maybe it would be more informative to have separate indices for different areas of the country for both rents and house prices and leave CPI/RPI etc for goods and services excluding housing. We did it for northern Ireland when house prices there were falling fast so it’s not unprecedented.

    • exclude housing , with food , fuel and rent

      why not ?

      depends on what you want the index to measure doesn’t it

      we already have a Gerry Mandered CPI/RPI so why not just count the price of eggs ?

      or Ipads only

      “….We did it for northern Ireland when house prices there were falling fast …..”

      darn it ! missed opportunity !! 😉


  6. ‘I have argued for a long time ( this debate began in 2012) that house prices should be used as they are of course actually paid rather than being imputed.

    Pushing the case for integrity in our economic statistics is the strength of this blog.You really don’t read anything in the MSM about it.

    The BoE are a disgrace in the way they’ve run monetary policy for the benefit of the banks rather than the people.

    • Think about the name “BANK of England”. Of course their first allegiance is to regulate and look after the banks like a parent is supposed to regulate and care for their children.

      It’s not their job to look after the people, that’s the job of the politicians , Oh boy, now we really had better start panicking!

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