Take your pick as UK Inflation rises via CPI and falls via RPI whilst staying the same via CPIH

The issue of UK inflation being above target is obviously troubling the UK establishment so much so that this morning HM Treasury has decided to tell us this.

Latest data from comes out today. Find out more about how the UK brought inflation under control:

There is a problem here as you see when we introduced inflation targeting in late 1992 the targeted measure called RPIX was below 4% and around 3.7% if the chart they use is any guide. It is currently 4% after 4.2% last month which is of course higher and not lower! So this is not the best time to herald the triumph of inflation targeting to say the least! Even worse if you look at the longer-term inflation charts in the release it is clear that the main fall in inflation happened before inflation targeting began. I will leave readers to mull whether the better phase was in fact the end of an economic mistake which was exchange-rate targeting.

The Forties problem

There will be a burst of inflationary pressure when we get the December inflation data from this issue. From the Financial Times.

The North Sea’s key Forties Pipeline System, which delivers the main crude oil underpinning the Brent benchmark, is likely to be shut for “weeks” to carry out repairs to an onshore section of the line, a spokesman for operator Ineos said on Monday. The move follows the worsening of a hairline crack in the 450,000 barrel-a-day pipe near Red Moss in Aberdeenshire over the weekend……..The FPS transports almost 40 per cent of the UK North Sea’s oil and gas production by connecting 85 fields to the British mainland.

If I was Ineos I would be crawling over the contract to buy the pipeline as they only did so in October and may have been sold something of a pup by BP. But in terms of the impact we have seen Brent Crude Oil move above US $65 per barrel in response to this. Also a cold snap in the UK is not the best time for gas supplies to be reduced as we wait to see how prices will respond. No doubt some of the production will get ashore in other ways but far from all. Also other news is not currently helping as this from @mhewson_CMC points out.


Today’s data

This will have received a particularly frosty reception at the Bank of England this morning.

CPI inflation edged above 3% for the first time in nearly six years, with the price of computer games rising and airfares falling more slowly than this time last year. These upward pressures were partly offset by falling costs of computer equipment.

The annual reading of 3.1% means that Governor Mark Carney will have to write a letter to the Chancellor of Exchequer Phillip Hammond to explain why it is more than 1% over its target. I have sent via social media a suggested template.

Of course the official version could have been written by Shaggy.

I had tried to keep her from what
She was about to see
Why should she believe me
When I told her it wasn’t me?

We will not find out precisely until February as one of the improvements to the UK inflation targeting regime was to delay the publication of such a letter until it was likely to be no longer relevant.

How can we keep the recorded rate of inflation down?

This will have troubled the UK establishment and they came up with the idea of making a number up based on rents which are never paid. They rushed a proposal in last year as they noted that it was likely to be a downwards influence on inflation in 2017. How is that going? I have highlighted the relevant number.

The CPI rate is higher than the CPIH equivalent principally because the CPI excludes owner occupiers’ housing costs. These rose by 1.5% in the year to November 2017, less than the CPI rate of 3.1% and, as a result, they pulled the CPI rate down slightly, to CPIH.

That number which is a fiction as the Imputed Rents are never actually paid has a strong influence on CPIH.

Given that OOH accounts for around 17% of CPIH, it is the main driver for differences between the CPIH and CPI inflation rates.

This is like something straight out of Yes Prime Minister where a number which is never paid is used to reduce the answer. Just for clarity rents should be in the data for those who pay them but not for those who own their home and do not. Those who own their homes will be wondering why actual real numbers like the ones below are not used.

Average house prices in the UK have increased by 4.5% in the year to October 2017 (down from 4.8% in September 2017). The annual growth rate has slowed since mid-2016 but has remained broadly around 5% during 2017.

What do you think it is about a real number that would INCREASE the recorded inflation rate that led it to be rejected for a fake news one which DECREASES the recorded inflation rate?

House Prices

Tucked away in the release was this which may be a sign of a turn.

The average UK house price was £224,000 in October 2017. This is £10,000 higher than in October 2016 and £1,000 lower than last month.

A 0.5% monthly fall. As the series is erratic we will have to wait for further updates.

What is coming over the hill?

We are being affected by the higher oil price.

The one-month rate for materials and fuels rose 1.8% in November 2017 (Table 3), which is a 0.8 percentage points increase from 1.0% in October 2017, driven by inputs of crude oil, which was up 7.6% on the month.

This meant that producer price inflation rose on the month.

The headline rate of inflation for goods leaving the factory gate (output prices) rose 3.0% on the year to November 2017, up from 2.8% in October 2017. Prices for materials and fuels (input prices) rose 7.3% on the year to November 2017, up from 4.8% in October 2017.

This is more than a UK issue as this from Sweden Statistics earlier indicates.

The rise in the CPI from October to November 2017 was mainly due to a price increase of vehicle fuels and lubricants (4.5 percent),


There is a lot to consider here as headlines will be generated by the fact that Bank of England Governor Mark Carney will have to write an explanatory letter about the way CPI inflation has risen to more than 1% above its annual target. He might briefly wish that the old target of RPIX was still in use.

The annual rate for RPIX, the all items RPI excluding mortgage interest payments (MIPs), is 4.0%, down from 4.2% last month.

Although actually he would soon realise that he would have had to have written a formal letter a while ago for it. For the thoughtful there is interest in one measure rising as another falls and here are the main reasons.

Other differences including weights, which decreased the RPI 12-month rate relative to the CPI 12-month rate by 0.15 percentage points between October and November 2017.

Ironically putting house prices into the inflation measure would have reduced it last month.

Other housing components excluded from the CPI, which decreased the RPI 12-month rate relative to the CPI 12-month rate by 0.06 percentage points between October and
November 2017. The effect came mainly from house depreciation.

Will the UK establishment do another u-turn and suddenly decide that house prices are fit for use ( now they may be falling) in the same way they abandoned aligning us with Europe by not using them or the way they dropped RPIJ?

The trend now sees two forces at play. The trend towards higher inflation from the lower UK Pound £ is not far off over. However we are seeing a higher oil price offset that for the time being and I am including the likely data for December in this. So we will have to wait for 2018 for clearer signs of a turn although the Retail Price Index may already be signalling it.

Meanwhile the “most comprehensive measure of inflation” and the Office for National Statistics favourite CPIH continues to be pretty much ignored. The punch may need fortifying for this years Christmas party.

Meanwhile I guess it could be (much) worse.

The Financial Times said Avondale Pharmaceuticals bought the rights to Niacor from Upsher Smith, a division of Japan’s Sawai Pharmaceutical, earlier this year. The company also bought the rights to a drug used to treat respiratory ailments, known as SSKI, and increased the price by 2,469 per cent, raising the cost of a 30ml bottle from $11.48 to $295.



16 thoughts on “Take your pick as UK Inflation rises via CPI and falls via RPI whilst staying the same via CPIH

  1. I’m expecting the letter to dance around their ‘one off currency related effects’ and point to ’embedded inflation’ (aka wages) as being depressed and therefore a great success. That and ‘core inflation’ excluding anything inconvenient a la the American model.

    • Hi Dutch

      What we would need is the expectation of a sustained period where house price growth was below rental growth. We might then be reminded that the whole point of CPI was to align with Europe ( something they have dropped with CPIH). Not so easy though but a scenario of both wage and interest-rate rises might do it.

  2. “Crypto is the perfect investment for the era when there’s nothing left worth investing in- make nothing into something, burn a shitload of energy mining the nothing, convince people the nothing is really something… ”

    Ok thats not my work but hey, why not put Bitcoin into CPI – wait until it starts falling of course

    then we’ll have very low inflation !! – job done !

    actually “convince people the nothing is really something…..”

    epitaph for Mark ?


    • Hi Forbin

      One way of declaring negative inflation would be to price everything in Bitcoin then they could cut interest-rates again and again. Let’s not give them ideas! As you say Bitcoin would then be dropped if it fell…..

      The energy situation with Bitcoin is curious as you say. It turns energy into what exactly?

      • Hi Shaun, Can’t recall where I saw this but –
        The maximum number of bitcoins is set at 21 million. To date about 17 million have be created (or mined). The remaining 4 million will take over 100 years to be mined. That’s one new Bitcoin every 15 to 20 minutes. That rate can’t change . More computing power or more miners just causes the maths involved to get more involved – and consume more energy. – but ramping up mining doesn’t produce a increase in production. Supply is inelastic.
        So the price is determined by demand.

        Unless of course I’ve got it all wrong.

  3. As Shaun has pointed out on so many occasions, inflation is whatever the government or the Bank of England say it is. In the unlikely event of one of their totally unrepresentative biased figures exceeds 3%, they will just say it is “temporary” or they are prepared to ignore it(look through it). At one stage Mervyn King had written no less than NINE consecutive letters to George Osborne, explaining why inflation was more than 1% above the 2% target. That was a period of TWO YEARS where inflation was permanently “temporarily” above the target(at one point it went to 5%) and nothing was done about it, why would this time be any different?

    What a complete and utter farce.And people are wondering why money is pouring into cryptocurrencies.


    • Hi Kevin

      Thanks for the link which as well as a reminder of the past contained this gem.

      “Even were inflation to come down more slowly than the Bank is anticipating, an increase in bank rate still looks a long way off.”

      Even after a period of inflation above target ( it peaked over 5%) nobody really believed that Bank Rate would be raised in response to this. It about sums it up really.

    • And now King has left office he calls for higher interest rates cut off the debt/housing bubble, and many lap what he has to say up and want him back.

      These people are blatantly corrupt.

  4. Shaun, I know you hate CPIH and why, but, If a reasonably accurate CPIH figure is the best measure of the cost of living then:-

    There are three classes of housing cost represented by Those who rent, Those with a mortgage and Those without a mortgage.

    If you know what rental costs are you can produce a CPIHR(ental). If you know the total cost of Mortgage Interest you can produce a CPIHM(ortgage) and also a CPIHO(wner outright). If you then know the numbers in each class you can then, perhaps, produce an overall figure if that is of any value.

    Is that too easy.

    • Hi Peter

      In principle there is nothing wrong with your last paragraph and it would be a better way of measuring UK consumer inflation. The exact mortgage/ownership ratio might not be known but near enough I think. The wink link is the rental data which the UK ONS still do not get directly and their methodology was changed only a couple of years or so ago.

  5. Great blog, Shaun, as usual.
    The RPIX annual inflation rate was 4.2% in August 1992, the last month available to Chancellor of the Exchequer Norman Lamont when he announced the move to an inflation targeting regime the first week of October, 4.0% in September and 3.8% in October. The ONS website only provides formula effect estimates back to February 2008, but it seems reasonable to assume that the formula effect then was around 0.3 percentage points, bringing adjusted estimates down to 3.9% in August, 3.7% in September and 3.5% in October. By contrast, adjusted for a formula effect of 0.8 percentage points, the annual inflation rate for October was 3.4% and for November was 3.2%. If one makes this adjustment, I think it is fair to say that inflation now is lower than when the inflation targeting regime was introduced, 25 years ago, but the difference is so trivial, it really should be a source of embarrassment.
    When you look back at the initial inflation targets established what is really most striking is just how unambitious the current inflation targets are compared to what was proposed then. There was no target rate, just a target range, but inflation was supposed to be in the 1% to 4% range until the spring of 1997, in the lower half of that range (i.e. between 1% and 2½%) after the spring of 1997, and the long term goal was a range between 0% and 2%. (This long term goal seems to have been quickly forgotten by virtually everyone. Even Norman Lamont, in his 1999 memoir, makes no mention of it.)
    If one takes the mid-point of the range as the target and adjusts for the formula effect, the inflation target for after the spring of 1997 was 1.45%, and the long term target was 0.7%. This contrasts with the first actual inflation target rate set in 1997, at 2.5%, or 2.2% with formula effect adjustment. As you have pointed out on several occasions, this target rate was implicitly raised considerably with the move to a CPI target indicator, So thе current target rate may be almost quadruple the implied long term target rate and is nearly double the target established for after the spring of 1997.

  6. Shaun, you write that “it is clear that the main fall in inflation happened before inflation targeting began. I will leave readers to mull whether the better phase was in fact the end of an economic mistake which was exchange-rate targeting.”
    In his book “In Office”, Norman Lamont basically agrees with you, writing (p.390): “In some ways fate delivered to Britain a not unsatisfactory outcome from its membership of the ERM. The two years of membership produced a rapid reduction in inflation. Just as the policy was becoming too severe, the markets intervened, and Britain was able to resume growth, unlike its Continental neighbours. The ERM was a tool that broke in my hands when it had accomplished all that it could usefully do.” He goes on to say that it would have been much better “if the Government itself had suspended its membership of the ERM in the summer of 1992” rather than having the financial markets force it out, and that the Government made a mistake in not firmly committing itself to staying out of the ERM after Black Wednesday. This was always the problem, I suppose. For Europhiles, joining the ERM was never just about exchange rate targeting to lower the inflation rate; it was about moving from the pound sterling to a common European currency. There were enough of them in the Government to prevent the kind of policy that Lamont suggested from being implemented; not enough of them to keep the UK in the ERM, with or without a devaluation

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