Welcome relief for UK real wages from lower inflation numbers

Today is inflation day in the UK as we get the official data for consumer, producer and house price inflation. In case you were wondering why they all come out on one day  meaning that some details get ignored in the melee ( mostly producer price inflation) well that is the point! Previously when the data were released separately there were potentially three days of embarrassment for the government and establishment which they have reduced to just one. Job done in a way.

However even before we get today’s numbers the subject is in the news in several ways. From the BBC.

Motorists are being saddled with the fastest year-on-year rise in insurance premiums since records began five years ago, the industry has warned. Average car insurance premiums have gone up by 11% in the past year, according to the Association of British Insurers (ABI). The typical bill for an annual policy is now £484, it said.

One of my themes which is institutionalised inflation is on the march here.

The ABI says the change in the discount rate is the main reason behind the rise, but also blames the latest increase in insurance premium tax which went up from 10% to 12% on 1 June…….That is why the government reduced the discount rate to -0.75%.

I have included the discount rate as it is a consequence of the way Bank of England QE has driven real bond yields into negative territory. Oh what a tangled web, and that is before we get to the plague of false claims and deliberate accidents which mar this area and drive up premiums.

Buttering us up

An odd feature of the current phase is high butter prices which stretch well beyond the UK as this from @Welt indicates.

price has risen this week in Germany by another 30 Cent or 20% to 1.79€, highest price ever after WWII.

In France there are worries about rises in croissant prices and maybe even a shortage of them. The causes are in essence the farming boom/bust cycle combined with a rise in demand as the Financial Times explains.


The combination of falling milk output in key producing countries and adverse weather sent the international butter price to a record high in June, according to the UN Food and Agricultural Organization…..


Raphael Moreau, a food analyst at Euromonitor, says that butter consumption has been lifted by demand for “natural” products among shoppers as they move away from spreads such as margarine. “In the UK, butter consumption has also been supported by the home-baking boom,” he says.

So far this has yet to be fully reflected in consumer prices but as supply is inelastic or inflexible in the short-term this could carry on for the rest of 2017.

The other side of the coin

On the 13th of June I pointed out this about the trend for producer prices.

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

Also adding to this is that the UK Pound has been improving against the US Dollar. Friday’s surge that took it to US $1.31 is of course after today’s numbers were calculated but the lower UK Pound will be a decreasing effect as we go forwards.

Today’s Numbers

There was a very welcome change today.

The Consumer Prices Index (CPI) 12-month rate was 2.6% in June 2017, down from 2.9% in May 2017.

The drivers of this were as follows.

Fuel prices fell by 1.1% between May and June 2017, the fourth successive month of price decreases. This contrasts with the same period last year, when fuel prices rose by 2.2%. Taken together, these movements resulted in prices for motor fuels making a large downward contribution to the change in the rate………Recreational and cultural goods and services, with prices overall falling by 0.1% between May and June 2017, compared with a rise of 0.6% a year ago.

If we look at the pattern actually there was no inflation in the month itself.

The all items CPI is 103.3, unchanged from last month.

Oh and the period where the oil price drove goods prices lower is over as we see that goods and services inflation are now pretty much the same.

The CPI all goods index annual rate is 2.6%, down from 2.9% last month. ……..The CPI all services index annual rate is 2.7%, down from 2.8% last month.

Looking Ahead

As we noted last month the pressure coming from higher producer price inflation is looking like it is fading.

Factory gate prices (output prices) rose 3.3% on the year to June 2017 from 3.6% in May 2017, which is the slowest rate prices have increased since December 2016…….Input prices rose 9.9% on the year to June 2017 from 12.1% in May 2017, meaning the annual rate has fallen 10 percentage points since January 2017.

This is mostly about one thing.

Inputs of crude oil is the main driver of the recent slowing of input price inflation as annual price growth for crude oil fell from 88.9% in February 2017 to 9.1% in June 2017.

Two factors are at play here as we see the impact of the oil price no longer falling and the UK Pound/Dollar exchange rate which has risen from its lows of January.

Housing Inflation

We have an official measure that includes imputed rents as a way of measuring housing costs for owner-occupiers. As you can see they are in fact reducing the level of inflation measured.

The all items CPIH annual rate is 2.6%, down from 2.7% in May. …….The OOH component annual rate is 2.0%, down from 2.1% last month( OOH= Owner Occupied Housing Costs)……..Private rental prices paid by tenants in Great Britain rose by 1.8% in the 12 months to June 2017;

The problem for our official statisticians is that few people have bothered much with the change in its headline measure as this from Adam Parsons the Sky News business correspondent indicates.

CPIH – the stat that nobody wants, and nobody quotes

Oh and it is still not a national statistic which were the grounds for demoting RPI but seem to be ignored in the case of CPIH.

Meanwhile house price inflation is rather different to rental inflation.

Average house prices in the UK have increased by 4.7% in the year to May 2017.

This is why they put imputed rents into the new headline inflation measure! It was always likely to give a lower number because house prices can and indeed have been inflated by the way that mortgage costs have been driven lower by the Bank of England. As to troubles here we saw another sign last week. From whatmortgage.co.uk.

The Bank of England has warned mortgage lenders of the possible risks posed by the recent trend of longer loan terms………Woods highlighted the recent trend of mortgage terms rising from 25 years to 35 years or “even longer”.


First let me welcome the better inflation data which will help with the economic issue of the day which is real wage growth. Or to be more specific it is seems set to be less poor than it might have been. Good.

In terms of inflation I would like to draw your attention to a problem which the UK establishment does its best to try to sweep under the carpet. This is that the old inflation target called RPIX is at 3.8% but the newer CPI is at 2.6% with the gap now being 1.2% which is very significant. Also there is the issue that we pay things at RPI ( Retail Price Index) currently at 3.5% but only receive CPI currently at 2.6% which is quite an establishment scam. This particularly affects students who find that costs in their loans are escalating into the stratosphere with implications for matters such as mortgage affordability if not final repayment as so many of these will never be repaid.

Looking ahead we are certainly not out of the inflation woods as there are still dangers of higher numbers in the autumn as we note the butter and insurance effects discussed earlier. We do not know what the Pound £ and the oil price will do. As to comparisons with Euro area inflation at 1.3% we get a guide to how much the lower Pound £ has affected our inflation rate which has turned out to be pretty much along the lines I suggested back on the 19th of July last year.

I expect a larger impact on the annual rate of inflation than the Draghi Rule implies and estimate one of say 1%.



16 thoughts on “Welcome relief for UK real wages from lower inflation numbers

  1. The last time motor insurance costs shot up I noticed that one of the major insurers (the only one I looked at) increased its profit by almost double over the previous year. Does the media pick that up? No they continue to trot out the line that it is all due to imposed costs. I shall be watching more closely this time.

    • Hi Eric

      We are seeing the oil price moves reflected across so many different countries. I have to confess I was wondering about any impact from butter with dairy being a big part of the Kiwi economy but all I found was this.

      “Higher vegetables prices pushed food inflation up 0.7 percent in the June 2017 quarter to 2.0 percent for the June 2017 year. Vegetables prices rose 19 percent for the year, with higher prices for lettuce, kumara, and broccoli.”

      So dearer broccoli is not just a UK thing…..Oh and hang on as I got there in the end.

      ” Dairy prices rose over the quarter, with prices for butter reaching their highest price since the series began. ”

      Meanwhile something else was familiar.

      “newly built houses, excluding land (up 6.4 percent)  actual rentals for housing (up 2.1 percent), with a 2.9 percent increase in Auckland and a 2.8 percent increase in Wellington  local authority rates (up 3.2 percent). “

  2. Just a few points on these inflation numbers, and the fact that the government has caused the increases either diretly or indirectly, specifically the butter and car insurance elements.

    For years the UK government has colluded with supermarkets to keep items such as milk and bread prices artificially low since these are classed as “KVI’s” by shoppers – known value items – they cannot remeber all the prices of their weekly shop but tend to always remember bread and milk. The end result has been a massive increase in the number of dairy farmers 1.commiting suicide due to years of oppressive of artificially low prices combined with soaring feed and other costs.2.Many dairy farmers have decided to just close down or sell off thier business as it becomes increasingly unviable. This I believe has now added to the shortages and sharp increases seen recently in butter.
    Car insurance premiums have as Shaun has pointed out risen massively due to the ZIRP(insurance companies get a lower return on the bonds they have to purchase) and the discount rate changes dropping from 2.5% to minus 0.75% which will add about £75 to the average policy and the increase in premium tax from 10% to 12%.

    Also there is the matter of so called “crash for cash” and “flash for crash”, the cost of which seems to virtually impossible to find, as the most often quoted figure £340m is from 2012 when it was a fraction of the problem it is today, but is totally avoidable as it is committed mainly by one ethnic group that the government bends over backwards to avoid causing “offence”(I’m sure we all know who) , one postcode Birmingham B9 is the worst in the country for it and it has become big business, recent sentences for the perpetrators were laughable, suspended sentences and small fines and community service.

    • Hi Kevin

      In case you or others reading this have not seen it here is an example of someone who was caught out by a dashcam.

      Sadly the driver told them rather than letting it play out.

      The bread and milk examples are intriguing because I recall some politicians being asked I think as part of the election before the last one. They were pretty hopeless about the KVIs

      • That is massively funny, especially the way the guy blatantly leaps backwards and throws himself onto the bonnet of the car.

  3. hello Shaun,

    from the things we can no longer afford

    prison services
    public services of any kind
    buying a house
    paying off student debt
    saving for a pension

    I could go on

    apparently my wages are increasing faster than inflation – no , they’re not , sorry fake news
    try over 5 years and I am most certainly poorer , giving rise to my utter contempt of ” official” inflation figures – making 1984 double speak kinda crude

    do I get any kind of traction from MSM over these issue? heck I do……


    still just able to afford some popcorn

    • I just about work in the oil industry so compete with people from the rest of the world for work. Service companies are almost exclusively hiring Indians/Asians instead of Brits with the day rate down 20-30% from just a few years ago (if you can get infrequent work thats available for westerners). I wonder what will happen when Chinese are allowed out the country to work.

      My industry shows in blatant fashion whats been happening and whats going to happen to peoples wages and jobs unless we get some form of protectionism to slow this race to the bottom western govts. have entered us in.

      As for food, for years my local garage has had an offer of a loaf of bread & 4 pints of milk for £2 .. last month this went up to £2.40 … and yesterday the offer is over with the price of bread at £1.55 & £1.40 for the milk. So close to 50% inflation on staple goods in a matter of weeks.

      Still its nothing compared to the houses i was watching at £215k a few years back that are now £300k +.

      Popcorns still £1 though!

      • I have often wondered that the super markets shopping deals are tied with the actual date that the HMG gathers data for their CPI figures ( or the supermarkets lower the prices then ) thus massaging the actual inflation figure

        as for RPI , well thats the Real Prices Index as opposed to the Creative Prices Index …..


        PS: then add in gas & leccy with surcharges for the poor who dont pay and green subs and now not-so-SMART meters….. hey just like Greece – we can only collect tax through utility bills !!

      • It’s called capitalism , free enterprise and open markets, i.e. open labour markets.

        You can’t have it all ways – capitalism for the wealthy west when it exploits the poor east but socialist protectionism for the wealthy west when the capitalist pendulum swings the other way allowing the poor east to exploit the wealthy west.

        Time to make your mind up which side of this particular fence you are sitting on.

        • Get your self out to Qatar/Saudi etc.. and tell me whats going on is capitalism. Slavery and exploiting the endless millions of poor from India/ Pakistan/ Bangladesh /Philippines is closer to the mark.

          But i’ve no issue with being undercut, its not my country they have to do whats best for the Sheikhs, Brazilian footballers don’t come cheap.

          And to claim we live in a capitalist country is utter nonsense, i’ll let you figure out why.

      • Wake up and smell the coffee. Exploitation and slavery IS capitalism – even back in the 1800’s. Mill owners working the wage slaves 70 hrs a week and then most of the wages returned to the mill owners via rent paid on houses owned by the mill owner and food bought from mill owned shop at prices set by the mill owners.

        You’re going to have to explain to me why the UK is not a capitalist country where employers MAKE A PROFIT and PAY TAX on that profit.

        Profit is the main element of capitalism. So please explain to me how in a country where private companies exist (not state owned) which make profit (state owned don’t have to make a profit and if they do all profit is handed back to the Government) and which pay a portion of that profit but not all of it to the Government, how that country is not a capitalist country.

  4. Shaun,

    Euro strength vs Anglo currencies unlikely to help EU ie German exports more action from ECB required?
    Your estimate for UK inflation from Euro revaluation may be too low as Brexit talks falter during holidays.


    • Hi Chris

      I think I revised it up to 1.25% last autumn when the UK Pound £ fell further. It’s level is of course a moving target! As to the ECB I think it is waiting for the elections to finish but for now the fall back in inflation in the Euro area means a lot of pressure is off it. So Thursday looks set to be a see you after the August holidays style meeting.

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