UK Inflation is back on the rise

Today brings us the full panoply of official UK inflation data. But before we look domestically an international perspective has again emerged overnight. This has come from Governor Kuroda of the Bank of Japan.

JPY BoJ Kuroda: BOJ still wants to achieve 2% inflation target as soon as possible ( @DailyFXTeam )


In spite of an enormous monetary effort involving negative interest-rates and a bulging balance sheer Abenomics continues to fail to get consumer inflation to its target of 2% per annum. Whereas we in the UK pass it regularly and will today discover we are above 2% on the official measure and 3% on others. Abenomics has driven asset prices higher but not consumer inflation giving us a reminder that whilst there are similarities between Japan and ourselves there are also differences.

The Inflation Outlook

A factor providing some upwards pressure in 2018 has been the price of crude oil. The current price of US $79 for a barrel of Brent Crude replaces the US $56 of a year ago. The Russian energy minister has via Platts updated us on why this has happened.

“According to estimates by experts and companies, oil price will be at around $50/b in the long-term. That means that the current situation, when oil prices have risen to $70-80/b, is linked to the temporary situation on the market and includes a premium to the price linked to various risks associated with the introduction of sanctions and oil supply cuts,” Novak said, as reported by Russia’s Prime news agency.

The higher oil price has fed into the cost of petrol and diesel.

Fuel prices have risen for a 10th successive week. The average cost of a litre of unleaded stands at more than £1.30 at UK forecourts, with diesel exceeding £1.34, Government figures show. Fuel has not been more expensive than current levels since July 2014. Since April, the cost of filling up a typical 55-litre family car that runs on unleaded or diesel has risen by around £6. ( I News)

That trend continued in the latest data so it is now eleven weeks and the annual comparison is shown below.

The price of ULSP is 11.7p/litre higher and the price of ULSD is 14.0p/litre higher than the equivalent week in 2017.

It has also had an effect on domestic heating and lighting costs with this change included in this months numbers.

E.ON has announced that it is increasing its standard variable electricity and gas prices. On 16 August, the unit price of E.ON’s standard variable tariff will increase by an average of 4.8% or £55 for customers taking both fuels, 6.2% or £36 for electricity only customers and 3.3% or £19 for gas only customers

There are others already announced from EDF Energy which will be in the September numbers and British Gas which will be in October.

The UK Pound £

The recent performance has been quite good as shown below.

So far this month, GBP has been the best performing major vs. USD with +3.20% total-returns while JPY has been the worst with -1.66% ( @DailyFXTeam)

Sadly for the August numbers the turn came just about when the survey is made but it should help the September numbers. Looking backwards we were around 2.5% higher a year ago but the differences are now much smaller than the period after the EU Leave vote. I note that the recent Brexit report suggested that raised inflation by 1.7% which is slightly higher than my calculations (1.5%).

Another way of looking at the state of play here is to compare our inflation number with the Euro area one for August which was 2%.

Today’s data

We got confirmation that the rally in the Pound £ came too late for the August data from this.

The Consumer Prices Index (CPI) 12-month rate was 2.7% in August 2018, up from 2.5% in July 2018.

Some of that was confirmed by the detail as the number below was influenced by the price of package holidays.

Prices for recreation and culture rose by 3.6% between August 2017 and August 2018, the highest 12-month rate since January 2010.

Also there was this.

Transport continues to make the largest upward contribution to the rate, with prices rising by 6.0% in the year to August 2018, the highest 12-month rate since April 2017. The largest contribution within the transport group continues to come from motor fuels.

What is on the horizon?

There was some better news here which started with this.

The headline rate of output inflation for goods leaving the factory gate was 2.9% on the year to August 2018, down from 3.1% in July 2018.

So a weakening of pressure around the corner which was accompanied by a weakening further up the road.

The growth rate of prices for materials and fuels for manufacturing (input prices) slowed to 8.7% on the year to August 2018, down from 10.3% in July 2018.

So much of this is driven by a factor we looked at earlier which is the price of crude oil.

The annual rate was driven by crude oil prices, which fell to 39.4% in August 2018 from 49.6% in July 2018, but maintains 26 months of positive annual inflation.

What about house prices?

Average house prices in the UK have increased by 3.1% in the year to July 2018 (down slightly from 3.2% in June 2018). This is the lowest UK annual rate since August 2013 when it was 3.0%. The annual growth rate has slowed since mid-2016 and has remained under 5%, with the exception of October 2017, throughout 2017 and into 2018.

The second sentence will echo around the corridors of the Bank of England as that is when the Funding for Lending Scheme began to push house prices higher. First-time buyers will be pleased to note that prices may still be increasing but are not doing so at past rates.

How is this reflected in the headline inflation data?

We get plenty of rhetoric from the Office for National Statistics.

The CPIH is the most comprehensive measure of inflation. It extends the CPI to include a measure of the costs associated with owning, maintaining and living in one’s own home, known as owner occupiers’ housing costs (OOH), along with Council Tax.

Sounds good doesn’t it? But really it is a heffalump trap which is a national embarrassment. The catch is that the measure used does not exist and is never paid. What happens is that it is assumed that if you own your own home you pay rent to yourself and it is that “rent” which is used. Why? Well if you take a look at the number you will get a powerful clue.

Private rental prices paid by tenants in Great Britain rose by 0.9% in the 12 months to August 2018, unchanged from the 12 months to July 2018.

As the owner occupied housing sector is around 17% of the CPIH measure you can see why it has consistently been below the other inflation measures. Even worse there are more than a few statisticians who think that via a poor balance between new and old rents the official rents data is too low anyway. That is to some extent backed up by the way the official rents series has weakened when we are told wage growth is rising.

So a series which is under serious question ( rents) is then used to measure inflation for those who by definition do not pay rent.


The establishment view was that inflation was in modern language, like so over. For example the NIESR published some new analysis last month suggesting it was heading straight back to its target. Yet today reminds us that unlike Japan we are an inflation nation as we are prone to it. To my mind that is one of the reasons why there has been such a campaign against the RPI because it produces numbers like this.

The all items RPI annual rate is 3.5%, up from 3.2% last month

Rather than engaging with people like me who support the RPI we have got rhetoric and propaganda. Just because I support it does not mean I think it is perfect but it is better than the woeful CPIH which the UK establishment has lined up behind.

Another example of establishment’s being economical with the truth has been provided today by Andy Haldane of the Bank of England in Estonia.

The first is so-called “forward guidance” about monetary policy………. By contrast, if you are a company or household considering whether to spend, a general idea
of the direction and destination of interest rates is likely to be sufficient.

The problem though is what he omits from the bit below.

The MPC first used the words “limited and gradual” in 2014 when describing the likely future course of
interest rates rises……….When the MPC did come to raise interest rates, in November 2017 and again in August 2018, it is interesting to see how well these were understood by companies and households.

This view presents matters as being well handled via the omission of the interest-rate cut and QE of August 2016 which punished those who acted on the original forward guidance. But apparently it is all part of this.

Central banks were put on earth to serve the public


30 thoughts on “UK Inflation is back on the rise

  1. I think you’re fighting a losing battle here Shaun, there is no way any government will allow house prices to properly show on inflation figures because they depend on it. It is the only economic certainty they have, raising house prices = rising consumption.

    Now an old fashioned old codger like me still thinks that the best way to raise consumption is to improve the incomes of those at the bottom and work upwards. Entrepreneurs and businesses compete for the increased spending power and dream up fantastic new things to get it.

    I thought the word to describe this process was Capitalism. Apparently these days it makes me a socialist. Hey ho.

          • The problem is the lifeblood being drained is from the real economy and its real people who are taking the pain. All to keep the elite/1% or whatever you want to call them from realising the losses that they should have taken in 2008.

            The next crisis will really destroy the lot of us and what has been gained other than ten years to enable the crooks to get the wealth out and stashed away so they can weather the storm

  2. As you know RPI is consistently above CPI. By switching to CPI some years back (for probably quite specious reasons) huge amounts of money have been saved in the uprating of pensions and benefits. The deficits and national debt would look significantly worse if the change was made.

    I’m sure you’re right about RPI being a better basis but the only way the system will change is if RPI is lower than CPI and that is probably structurally impossible. Whatever the merits of RPI you are flogging a dead horse.

    • CPI for us plebs RPI for those with guilded lifestyles and pensions (BoE, Civil Service/MPs etc) but hey we’re all in this together aren’t we?

    • Bob, I don’t agree. The last time the RPI annual inflation rate was higher than the CPI inflation rate was December 2009, and it was higher continuously from September 2008. Of course in December 2009 the formula effect was a lot smaller, -0.54 percentage points as opposed to -0.86 percentage points in December 2009, so there is a bigger hurdle to surmount, but the RPI-CPI wedge peaked in April 2009 at 3.5 percentage points. It would likely require another housing bust and another recession to generate such an outcome.

    • Hi therrawbuzzin

      The incidence of sunspots and the effect of them is not well understood. The Sky At Night has covered this a couple of times recently as a couple of satellites are going to be sent to find out what is going on as some of it breaks the rules of physics as we understand them. As Avril Lavigne put it “it’s complicated”….

      Thus we have a very imperfect understanding of what it is doing to us and the Earth’s climate.

      • Not as poorly understood as you’d think. There has been a lot of progress in the past year. This site updates daily on the sun.

        • Basically, the sun has an 11-year cycle a ~ 70 year cycle and many more, whereby its electic field intensifies and wains. Sunspots are most prevalent when the sun’s magnet field is strongest’ It also protects us best from cosmic rays, which are not only harmful to humans, but also cause clouds to precipitate and cool the planet:

          Click to access angeo-30-9-2012.pdf

          The 11-year cycles themselves wax and wain in intensity, and it is thought (even by Nasa) that we are heading into what is called a “Grand Solar Minimum” which will have effects like the “Little Ice Age” and the Maunder Minimum, The Spoorer Minimum and the Wolf Minimum

    • Hello therrawbuzzin,

      You are not the only one to spot the increase in food prices and the potential for a Solar Minimum. If extremes in weather occur – which they are doing – there will be crop failures – which is also happening.

      As Shaun points out – we do not fully understand exactly how the sun impacts our little earth, however, there was an exceptional paper written by Shepherd, Zharkov and Zharkova – published in 2014 in the Astrophysical Journal. I found it well worth a read, the “predictions” contained therein appear to be spot on – so far – unfortunately. You will see this in the chart on page 4 :

      Click to access shepherd_etal_apj14_795_1_46.pdf

  3. Shaun, thanks for highlighting the measured rises which I dont believe reflect the true and indeed actual higher rises. Is it not time for RockStar unreliable boyfirend to raise the interest rate? I suggest 2% would be a good start, very low by historical measures, lower than the USA and a necessary remedy to control inflation…

    • Hi Paul

      I agree that interest-rates should be higher but my issue with doing it now is one of timing. With the uncertainty around next March it might be best to hang on until the smoke clears. The problem is that the unreliable boyfriend made promises for higher interest-rates in 2014/5 that he did not keep. If he had then we could already have an interest-rate of say 1.5%.

  4. The main figures which hit me was the rise in RPI which is now 3.5%.

    Far higher than wage rises on a number of measures. Average workers spending power in a clear decline and we see that with the bleak state of the High Street, the latest to warn was Kingfisher today.

    What I cannot understand is the press were looking for a decrease in inflation due to lower petrol prices, I don’t know where they got that from?

    • Hi Peter

      The case for a lower number today was based entirely on the fact that last August saw a rise from 103.2 to 103.8 for the CPI. Actually motor fuels were a downwards influence in that the rise was weaker than last year. But it was only a small difference.

  5. Shaun,

    My Greenflag renewal premium ( including Eurpean cover) was quoted at £ 108 this week up from £87 last year on querying it I was offered £ 101 – needless to say I am shopping around but 2 or 3% inflation seems a gross underestimate!

    • Hi Chris

      It is a common insurance tactic these days to quote a high renewal premium then ask for a chance to make an offer if you say you are leaving. Usually I move on but this year it didn’t seem worth it once they made an improved offer.

  6. “E.ON has announced that it is increasing its standard variable electricity and gas prices. On 16 August, the unit price of E.ON’s standard variable tariff will increase by an average of 4.8% or £55 for customers taking both fuels, 6.2% or £36 for electricity only customers and 3.3% or £19 for gas only customers”
    Shaun I don’t know where you get these figures from but my real world bills are nothing like this.
    I was with Scottish power until April this year WITH A FIXED ONE YEAR CONTRACT and paying 14.936p/kwh for electricity and 3.561p/kwh for gas, if I was to renew now their fixed 1 year deal is quoted at electricity 18.029p/kwh and gas 4.130p/kwh.Daily charges are the same at 8.22p/day for both contracts.

    That is an increase of 20.7% for electricity and 16.0% for gas, this is REAL INFLATION, NOT THE MADE UP FIGURES OF THE BBC AND THE BANK OF ENGLAND!!!!

    Carney’s QE and ZIRP are certainly producing inflation but it isn’t being measured.

      • Inflation affects all differently OVO put their prices up a massive 12.4% and we know petrol gone up near 11%.

        I suspect the lower wage earners inflation hit the most due to most people needing money for travel whether it be by bus train or car.

        The BBC said on the 6 pm evening news with wage rises of 2.9% and CPI lower people were still better off. What a load of bullshi*!

        Real wages are lower and RPI is 3.5% this is the reason why people are spending more than they are earning and really struggling.

  7. Hello Shaun,

    the BoE targets wage inflation , not CPI or RPI

    when wages take off so will they

    in the mean time the greatest mis-allocation of resources into housing goes on

    and all western style countries are doing the same …… one has to ask why…


    PS: oil wasn’t cheap at $50 , it will be when its $20 and that price will only come of the Great Depression II …… and yes that’s likely as nothing has been changed since 2008


  8. Reminds me of Blankfein’s comment that “Goldman’s is doing God’s work” in 2009 in the wake of the sub prime mortgage disaster.

  9. Great blog as usual, Shaun.
    If you extend the passage you quoted about the recreation and culture CPI it reads: “Prices for recreation and culture rose by 3.6% between August 2017 and August 2018 [up from 3.1% in July], the highest 12-month rate since January 2010 when it was also 3.6%. Within this category, the contribution came from a wide range of goods and services, with the single largest contribution from package holidays.” The CPI for package holiday trips had an annual inflation rate of 5.4% in August, up from 5.1% in July. From Table C1 of the statistical bulletin one can see that the increase of 0.3 percentage points in the annual inflation rate for package holiday trips came from the 0.9% monthly increase in August 2017 exiting the annual inflation rate, being replaced by the 1.2% monthly increase in August 2018. This all seems quite normal except the annual inflation rates for package holiday trips don’t represent 12-month changes. The annual inflation rate for January 2018 is a meaningful number, but it means the annual average inflation rate for the fiscal year ending in January 2018 was 4.9% as compared to the year ending January 2017. That year ending in January 2017 showed a decline in prices of 1.0% as compared to the year ending January 2016. As for the rest of the annual inflation rates, and the monthly rates, they don’t mean anything really, as outlined in my paper: “Time To Start Calculating the Holidays RPI As Originally Planned”. (The ersatz seasonal-basket procedure used for holidays in the CPI is the same as the one used in the RPI, and it is also used for racetrack admissions in both cases.)

    Holidays have a small but growing basket share in the CPI, and as it is a volatile series it has an outsized impact on the annual CPI inflation rate. To go on using such a dysfunctional formula to measure its inflation rate is unacceptable. The reform that is required is to calculate the series using the much superior Rothwell formula. It is also a seasonal-basket formula. Only a seasonal-basket formula will do. Curling-and-whiskey tours of Scotland can be booked for December or January, and certainly sound delightful, but they don’t exist in June or July, so should be allowed to just drop out of the UK CPI. (As they do, if they are in the price sample at all, but the existing procedure has so many other drawbacks.) Since it is named in honour of Doris Rothwell, an economist who worked for the US Bureau of Labor Statistics, if the ONS moved to the Rothwell formula for holidays it might also be seen as striking a blow for feminism. It seems the only other well-known index formula named after a woman is the Iklé formula, a spatial index formula. Bizarrely, it also takes its name from an American economist whose given name is Doris.

  10. In August 2018, CPI, CPIH and zombie RPI all showed higher annual inflation rates, however some other zombie-RPI-related series of interest did not show any acceleration in inflation. For more than two years now, the formula effect difference between zombie RPI and zombie RPIJ has oscillated between -0.7 and -0.8 percentage points. In August it flipped to -0.8, so whereas the RPI inflation rate went from 3.2% in July to 3.5% in August, the RPIJ inflation rate, arguably the best monthly cost-of-living measure available, went from 2.5% to 2.7%, still an increase in inflation, but not such a strong one. If one looks at the RPI excluding mortgage interest and council tax adjusted for the formula effect, it shows an annual inflation rate that is stable at 2.5% in July and August. This is probably a better inflation indicator for the Bank of England to monitor since it includes house prices and more appropriately weights insurance services. Since the CPI inflation rate went from 2.5% in July to 2.7% in August, this RPI-related series is now showing a lower inflation rate than the CPI, for the first time since October 2013. This was of course largely due to the mortgage interest RPI, which went from 2.9% in July to 6.0% in August. The Bank of England’s current target inflation indicator is not fit for purpose, and has to be reformed.

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