Inflation reality is increasingly different to the “preferred” measure of the UK

Today brings us a raft of UK data on inflation as we get the consumer, producer and house price numbers. After dipping my toe a little into the energy issue yesterday it is clear that plenty of inflation is on its way from that sector over time. I have a particular fear for still days in winter should the establishment succeed in persuading everyone to have a Smart Meter. Let us face it – and in a refreshing change even the official adverts now do – the only real benefit they offer is for power companies who wish to charge more at certain times. The “something wonderful” from the film 2001 would be an ability to store energy on a large scale or a green consistent source of it. The confirmation that it will be more expensive came here. From the BBC quoting Scottish Power.

We are leaving carbon generation behind for a renewable future powered by cheaper green energy.

We will likely find that it is only cheaper if you use Hinkley B as your benchmark.

Inflation Trends

We find that of our two indicators one has gone rather quiet and the other has been active. The quiet one has been the level of the UK Pound £ against the US Dollar as this influences the price we pay for oil and commodities. It has changed by a mere 0.5% (lower) over the past year after spells where we have seen much larger moves. This has been followed by another development which is that UK inflation has largely converged with inflation trends elsewhere. For example Euro area inflation is expected to be announced at 2.1% later and using a slightly different measure the US declared this around a week ago.

The all items index rose 2.3 percent for the 12 months ending September, a smaller increase than the 2.7-percent increase for the 12 months ending August.

There has been a familiar consequence of this as the Congressional Budget Office explains.

To account for inflation, the Treasury Department
adjusts the principal of its inflation-protected securities each month by using the change in the consumer price index for all urban consumers that was recorded two months earlier. That adjustment was $33 billion in fiscal year 2017 but $60 billion in the current fiscal
year.

The UK was hit by this last year and if there is much more of this worldwide perhaps we can expect central banks to indulge in QE for inflation linked bonds. Also in terms of inflation measurement whilst I still have reservations about the use of imputed rents the US handles it better than the UK.

The shelter index continued to rise and accounted for over half of the seasonally adjusted monthly increase in the all items index.

As you can see it does to some extent work by sometimes adding to inflation whereas in the UK it is a pretty consistent brake on it, even in housing booms.

Crude Oil

The pattern here is rather different as the price of a barrel of Brent Crude Oil has risen by 41% over the past year meaning it has been a major factor in pushing inflation higher. Some this is recent as a push higher started in the middle of August which as we stand added about ten dollars. Although in a startling development OPEC will now be avoiding mentioning it. From Reuters.

OPEC has urged its members not to mention oil prices when discussing policy in a break from the past, as the oil producing group seeks to avoid the risk of U.S. legal action for manipulating the market, sources close to OPEC said.

Seeing as the whole purpose of OPEC is to manipulate the oil price I wonder what they will discuss?

Today’s data

After the copy and pasting of the establishment line yesterday on the subject of wages let us open with the official preferred measure.

The Consumer Prices Index including owner occupiers’ housing costs (CPIH) 12-month inflation rate was 2.2% in September 2018, down from 2.4% in August 2018.

For newer readers the reason why it is the preferred measure can be expressed in a short version or a ore complete one. The short version is that it gives a lower number the longer version is because it includes Imputed Rents where homeowners are assumed to pay rent to themselves which of course they do not.

The OOH component annual rate is 1.0%, unchanged from last month.

As you can see these fantasy rents which comprise around 17% of the index pull it lower and we can see the impact by looking at our previous preferred measure.

The Consumer Prices Index (CPI) 12-month rate was 2.4% in September 2018, down from 2.7% in August 2018.

This trend seems likely to continue as Generation Rent explains.

The experience of the past 14 years suggests rents are most closely linked to wages – i.e. what renters can afford to pay.

With wage growth weak in historical terms then rent growth is likely to be so also and thus from an establishment point of view this is perfect for an inflation measure. This certainly proved to be the case after the credit crunch hit as Generation Rent explains.

As the credit crunch hit in 2008, mortgage lenders tightened lending criteria and the number of first-time buyers halved, boosting demand for private renting – the sector grew by an extra 135,000 per year between 2007 and 2010 compared with 2005-07.  According to the property industry’s logic, the sharp increase in demand should have caused rents to rise – yet inflation-adjusted (real) rent fell by 6.7% in the three years to January 2011.

Meanwhile if we switch to house prices which just as a reminder are actually paid by home owners we see this.

UK average house prices increased by 3.2% in the year to August 2018, with strong growth in the East Midlands and West Midlands.

As you can see 3.2% which is actually paid finds itself replaced with 1% which is not paid by home owners and the recorded inflation rate drops. This is one of the reasons why such a campaign has been launched against the RPI which includes house prices via the use of depreciation.

The all items RPI annual rate is 3.3%, down from 3.5% last month.

There you have it as we go 3.3% as a measure which was replaced by a measure showing 2.4% which was replaced by one showing 2.2%. Thus at the current rate of “improvements” the inflation rate right now will be recorded as 0% somewhere around 2050.

The Trend

This is pretty much a reflection of the oil price we looked at above as its bounce has led to this.

The headline rate of output inflation for goods leaving the factory gate was 3.1% on the year to September 2018, up from 2.9% in August 2018….The growth rate of prices for materials and fuels used in the manufacturing process rose to 10.3% on the year to September 2018, up from 9.4% in August 2018.

So we have an upwards shift in the trend but it is back to energy and oil again.

The largest contribution to both the annual and monthly rate for output inflation came from petroleum products.

Comment

It is indeed welcome to see an inflation dip across all of our measures. It was driven by these factors.

The largest downward contribution came from food and non-alcoholic beverages where prices fell between August and September 2018 but rose between the same two months a year ago…..Other large downward contributions came from transport, recreation and culture, and clothing.

Although on the other side of the coin came a familiar factor.

Partially offsetting upward contributions came from increases to electricity and gas prices.

Are those the cheaper prices promised? I also note that the numbers are swinging around a bit ( bad last month, better this) which has as at least a partial driver, transport costs.

Returning to the issue of inflation measurement I am sorry to see places like the Resolution Foundation using the government’s preferred measures on inflation and wages as it otherwise does some good work. At the moment it is the difference between claiming real wages are rising and the much more likely reality that they are at best flatlining and perhaps still falling. Mind you even officialdom may not be keeping the faith as I note this announcement from the government just now.

Yes that is the same HM Treasury which via exerting its influence on the Office for National Statistics have driven the use of imputed rents in CPIH has apparently got cold feet and is tweeting CPI.

20 thoughts on “Inflation reality is increasingly different to the “preferred” measure of the UK

  1. Food prices have fallen? Can somebody please tell Sainsburys et al because I don’t think they got the message. Once again the official figures fly directly in the face of my day to day reality and that of everyone else I know. Does anyone have any examples of this cheaper food?

      • That’s probably how it works.As soon as prices rise in Sainsbury’s they start shopping at Aldi.
        Which will work for only so long.

    • How much is a Terry’s Chocolate Orange (TM) [ Other chocolate bars are available). RRP 3.95. Most supermarkets sell them at 2.00 or 1.95. Some do 1.50. Occasionally they will drop them to 1.00. This week one of the big four has then at 0.75p each. They once did 1 for 2.00 but get 2 free so 0.67 if you buy bulk. How do you even go about working out what the price of this item is over the period of 1 year?

      You can replace the above with pork pies ( UK pork ones cost more remember ) and humous if you like. The same issues apply.

      • This kind of manipulation should be banned. How about we enforce limits to price change per annum. Maximum 4x per annum for same product/brand size pack. I notice a plethora of pack sizing though as part of the game. 227gram 190gram 250 gram

      • bootsy,

        They don’t need to do an actual shop just go to one of those compare the market sites and see who is selling eggs the cheapest then bread and if the inflation rate not fallen enough instead of getting eggs in the basket see if bacon is cheaper on the day you do the ONS shop.

        The person responsible for compiling the data told to look for special or half priced items because the government is under pressure to make the public believe they are better off.

        lol

      • Hi bootsy

        I can help here as ( you may not be surprised to learn) I have read the rules. All of the prices would be counted except this one.

        ” They once did 1 for 2.00 but get 2 free so 0.67 if you buy bulk.”

        These sort of offers get ignored so the price recorded would be £2. Same as recently as when Tesco did a 3 for 2 offer on things like shampoo which I took advantage of recently but the inflation index price will be calculated on 2 and not 3.

    • I don’t no either

      gas /leccy 11%/16% and food 12/15% over the year

      even over five years its looking like food is 6-7% instead of 5%

      wages for my kind of job are still being offered at substantial reductions…..no increases here

      not good, not good at all

      Forbin

  2. Shaun, I welcome how you highlight the difference between the preferred measures and reality. The Govt is just making a media narrative to deflect and confuse.

    Here is some reality.
    I went to a local meeting on the self-build initiative in Bristol last week. The statistics were shocking for young people or any people with housing challenge. The average rent as a proportion of income was 47% and 52% in Bristol and Bath. The House price to local earnings was x11 and x14 respectively. I think the Govt can manipulate inflation indicies all they want but they are clearly irrelevant to the truth of the situation on the ground near me.

    • Hi Paul C

      Thanks for the stats as I enjoy them as they give us an idea of the real state of play without all the official spinning. As to the inflation measurement debate it is ongoing as Ben Broadbent was called to give evidence to the House of Lords as it is under the section covered by his Deputy Governorship. I am glad I rattled the House of Lords cage as they posed some awkward questions for him such as pointing out no reform had happened on his watch.

      “”That process seems to have stalled.”

      Quite damning in their terms and they also asked him to answer their questions rather than the ones he was answering. So the fight is far from the knockout that they hoped it would be.

  3. So the ONS under-estimates inflation causing pay awards to appear to be ‘above inflation’, which puts pressure on the BoE to increase base rates. What could go wrong?

  4. Was CPI introduced to be, as stated, a more accurate measure than RPI or was it because it would yield a lower figure than RPI (presumably some modelling had been done)? The use of CPI instead of RPI has saved the government huge sums in the uprating of benefits since its introduction which, for a county which has a structural deficit, means more than just lower spending figures; it also means a lower cost of funding. We are talking huge sums here.

    Of course you are right about the issue of house prices but the introduction of an extra factor which will serve to increase the index significantly is likely to be as welcome as a return ticket on the Titanic; there are very substantial sums at stake here; this is not just a matter of statistical purity.

    It may well be that if house prices start to decline then the issue of including housing will be looked on far more favourably because it will reduce the index.If housing then recovers and we get a rinse and repeat (as is likely) there will be “technical adjustments” made which will render the index more fit for purpose (that is rein it back). BAU.

    • Hi Bob J

      The original purpose was to align us with Europe as we accepted the definition they use called HICP. The flaw which was known and accepted at the time was that owner-occupied housing was not in it which was a change to RPI which did and does have it. The claim was that we could take it and modify it later and Andrew Baldwin has in the past kindly put a link to the speech when Governor King told us that.

      Except it somehow got forgotten and when it turned up over a decade later the alignment with Europe was abandoned as they intend to put in house prices ( albeit in a watered down way) whereas we got cold feet and went for imputed rents. The Paul Johnson ( of the IFS ) Review recommended that but it is not Sir Paul because it has essentially failed. Yes they call it the preferred measure but it gets ignored and I am pleased to have played my part in that.

  5. Just keep an eye on the price of a Big Mac. McDonalds have no interest in fiddling the price of their most famous product and it goes up 10% year after year after year, which to me represents real world inflation better than any statistic produced by lying government.

  6. Hello Shaun,

    I think we all guessed that Creative Price Index – the one that chooses the lowest priced goods it can find , is no substitute for Real Price Index – otherwise why would HMG pensions and tax increases use RPI ? *

    in all of this the middle classes and lower classes are being right royally done over by the top 1%
    no mere 3% pay increases for them , no sir-ree!

    Forbin

    * why this seems to pass MSM is not really a mystery but proof of their complicit nature

    • Hi Forbin

      Sadly the MSM seem in the main to be too busy copy and pasting the official communiques to stop and think. I have just pointed out again to Kamal Ahmed who is the economics editor of the BBC that it is misleading to say wage growth is at 3.1% when total pay is only growing at 2.7%. At least most places have seen through CPIH.

  7. Shaun, you are right to be extremely sceptical about ‘cheaper’ electricity costs/prices. Almost a third of your bill now is made up of various ‘green’ subsidies. The more subsidised , costly and often completely useless ‘green’ generation is inflicted on the system , the more the price increases are baked into the system. Unfortunately when it reaches breaking point, and it most assuredly will, Hinckley will look cheap given the costs of keeping the lights on.
    The scam of AGW is going to cost the UK dear, whilst many other nations are now beginning to follow the US in rejecting the cost imposition on their power networks, or at least questioning and reversing their cliff-edge drive to ruination.

    • Hi JimW

      Yes it is ticking away each year and is perhaps the clearest case of institutionalised inflation around. A few with more expertise than me have joined the social media debate about the issues of batteries and wind and solar power. Interestingly those with the social media equivalent of loud voices have now disappeared as today with little wind around their fantasies have been rather exposed, Shame as there are some advances going on.

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