Good News on UK inflation but not on house prices or for those predicting Cauliflower inflation

This morning has opened with some bad news for the Office for National Statistics and the UK Statistics Authority. They have placed what little credibility they have left on what is called the Rental Equivalence method where you use fantasy imputed rents as a way of measuring owner-occupied inflation. Apart from the obvious theoretical flaws there have been all sorts of issues with actually measuring rents in the first place which led to one of the worst things you can have in statistics which is a “discontinuity” leading to a new method being required. It tells us that rental inflation is of the order of 1% per annum. So let me hand you over to a new report from Zoopla released today.

Average rents increased by 2% to stand at £876 in the 12 months to the end of September……..But despite the overall improvement in affordability, the rate at which rents are rising has accelerated from 1.3% a year earlier to reach a three-year high of 2%, although it still remains below the 10-year average of annual growth of 2.3%

Regular readers will be aware that I have posted research from the Royal Statistical Society website which argued that the official measure of rental inflation is around 1% per annum too low. The reason for this is an incorrect balance between new and old rents. Zoopla with their measure suggests that a rise in rental inflation has been missed by the official data. There is a logic to this for those of us who think that rents are influenced by wages growth as we have seen a rise in wages growth over this period.

Affordability

Whilst the official measure of rental inflation is in yet more disarray we should tale time to welcome this.

Our director of research and insights, Richard Donnell, said: “Renting is more affordable today than the 10-year average. This follows weak rental growth over the last three years, and an acceleration in the growth of average earnings.”………..As a result, the typical renter now spends 31.8% of their earnings on rent, down from a peak of 33.3% in 2016, according to our inaugural Rental Market Report, which records trends in the often-neglected private rented sector.

Propaganda

In a rather ironic twist the establishment has been trying to bolster its case. Here is Mike Hardie of the ONS in Prospect Magazine from earlier this month.

A recent House of Lords Economic Affairs Committee inquiry highlighted that the strategy was not working, with RPI use remaining widespread. In March, David Norgrove, chair of the UK Statistics Authority, wrote to the then chancellor of the exchequer requesting his consent to bring the methods of RPI into line with CPIH.

Meanwhile back in reality here is the actual point the EAC made.

We disagree with the UK Statistics Authority that RPI does not have the potential to become a good measure of inflation.

The truth is that out official statisticians have deliberately not updated the RPI and then blamed it. Next from the EAC came something that was incredibly damning for the official approach.

We are not convinced by the use of rental equivalence in CPIH to impute owner-occupier housing costs.

Returning to the official view in Prospect Magazine there seems to have been an outbreak of amnesia on this subject.

Our headline consumer prices measures, which include the Consumer Prices Index (CPI) and CPI plus owner occupiers’ housing costs (CPIH), for the most part reflect the change in price of acquiring goods and services—in other words, we record the advertised price for an apple or a new car.

Also that explanation is exactly what they do not do with owner occupied housing costs! In a further twist you may note that even their example backfires. Because of the proliferation of rental and leasing deals in the car market it is one area where you probably should now use a rental model and even a small imputed bit.

Regular readers will know I have been a fan of the new Household Cost Indices suggested by John Astin and Jill Leyland. However I note from the Prospect Magazine article that the development process that is taking ages is neutering them.

we also capture mortgage interest costs, which are excluded from other measures of inflation, such as CPI and CPIH.

No mention of house prices which were in the original prospectus and were one of the strengths of the measure? Also take a guess as to which inflation measure right now does have mortgage costs? It is the officially villified RPI.

I am afraid this could not be much more transparent. I have contacted both Prospect Magazine and its editor on Twitter to request a right of reply but so far nether have responded.

Today’s Data

There was some good news as inflation did not rise.

The all items CPI annual rate is 1.7%, unchanged from last month.

As it happens the CPIH measure comes to the same answer in spite of 17% representing a lot lower number that does not exist in CPI.

The OOH component annual rate is 1.1%, unchanged from last month…..Private rental prices paid by tenants in the UK rose by 1.3% in the 12 months to September 2019, unchanged since May 2019.

I will leave explaining that to the official number-crunchers but we have returned to my original point that as well as the theoretical problems in using fantasy imputed rents they do not seem able to measure rents properly. If they had the data they could delve into it but in another error they do not.

An especially welcome development was this.

The all items RPI annual rate is 2.4%, down from 2.6% last month.

Especially as on the month prices actually fell.

The all items RPI is 291.0, down from 291.7 in August.

It might be best to keep that quiet or the deflationistas will be back spinning along with Kylie.

I’m spinning around
Move outta my way
I know you’re feeling me
‘Cause you like it like this
I’m breaking it down
I’m not the same
I know you’re feeling me
‘Cause you like it like this

The Trend Is Your Friend

If we look at the producer price output data the future is bright.

The headline rate of output inflation for goods leaving the factory gate was 1.2% on the year to September 2019, down from 1.7% in August 2019.

Even better news comes further up the chain.

The growth rate of prices for materials and fuels used in the manufacturing process was negative 2.8% on the year to September 2019, down from negative 0.9% in August 2019.

Here is the main factor at play.

Crude oil provided the largest downward contribution to the annual rate of input inflation.

Comment

If we start with today’s figures we have received some welcome news as inflation was expected to rise. Indeed those who follow the RPI have just seen a fall which changes the real wages picture positively although of course we await the wages data for September. Should the UK Pound £ remain in a stronger phase ( it is over US $1.27 as I type this) then it and the lower oil price we looked at above will give UK inflation a welcome downwards push. Mind you as we observe those factors it is hard to avoid wondering how the economists surveyed thought inflation would be higher!

As we step back we are reminded of the utter shambles created by the use of rental equivalence and today it has come from an unusual source. If we look into the detail of the RPI we see this.

Mortgage interest payments, where average charges rose this year but fell a year ago; and  House depreciation, with the smoothed house price index used to calculate this
component rising this year by more than a year ago.

As it happens not much difference to the rental measure but to get imputed rents into CPIH at a weight of 17% other things had to be reduced and RPI fell because it does not have this effect amongst other things.

Other differences including weights, which decreased the RPI 12-month rate relative to the CPIH 12-month rate by 0.28 percentage points between August and September 2019. The effect came mainly from air fares; sea fares; second-hand cars; games, toys and hobbies and equipment for sport and open-air recreation; food and non-alcoholic
beverages; and fuels and lubricants. This was partially offset by a widening effect from furniture and furnishings, carpets and household textiles.

You see another flaw in the CPI style methodology is that via the way better off people spend more it represents people about two-thirds of the way up the income stream as opposed to the median.

Cauliflower

Remember when the lack of UK Cauliflowers was going to make us have to pay much more for ropey ones? Below is the one I bought for 59 pence last week.

 

 

12 thoughts on “Good News on UK inflation but not on house prices or for those predicting Cauliflower inflation

  1. “Our headline consumer prices measures, which include the Consumer Prices Index (CPI) and CPI plus owner occupiers’ housing costs (CPIH), for the most part reflect the change in price of acquiring goods and services—in other words, we record the advertised price for an apple or a new car.”

    Is this supposed to be laying out the argument that they should only be tracking new rentals? Obviously new rentals are a very small part of the overall rental market. Existing rentals may not go up at all (I haven’t had an increase since I moved here 13 years ago!) or may have RPI indexing or whatever set out in the contract. There is definitely a dichotomy re inflation for newly advertised rentals and existing. I am sure they would argue that eventually all rentals eventually become advertised to attract new tenants and there may be a jump at that point to make up for any lag in inflation in the intervening period. But I don’t know what the overall effect is.

    I would interested to hear how they treat modern forms of subscription services that act like the rental market. Do they for instance only look at the cost of new subs on Spotify, Microsoft Office, the FT etc etc etc. or even broadband, utilities like gas/water etc. Many of these have teaser deals to attract new customers. Do they just look at these introductory offers?

    It seems to me it is just easier to ask the likes of Zoopla to send them a data file and that is the reason they want to use it….it is easier for them than trying to gauge the true cost of existing rentals.

  2. On the face of it, the data suggest wages are rising at 3.7% are well ahead of inflation at 1.7% however RPI is 2.4%.

    However many jobs aren’t seeing wages rising at anything like 3.7% and real wages are no higher than they were in 2008.

    With inflation falling whichever data one takes account of, these figures suggest to me a BOE rate cut on the cards as inflation isn’t the worry at the moment and wage figures yesterday showed a fall.

    So when does the BOE meet next and when is the BOE ready to cut rates and how much by? Any thoughts Shaun?

    I suppose all of the above depends on what happens to BREXIT today or the next few days.

    • Carney yesterday:

      “BoE Gov Carney: We Can Cut The Bank Rate Close To But Slightly Above Zero If Needed”

      Danny Blanchflower thinks we are already in recession presumably because data lags the current situation. He would cut now as it takes time for rate cuts to make a difference.
      Next meeting 7 November what are the bets Shaun and if so by how much?

        • Hi Peter

          I think that a 0.25% cut by the Bank of England in a few weeks is indeed a possibility. For the moment though things are on hold because of the Brexit developments. Even such a political Governor as Mark Carney may hold back. Also bond markets have been heading the other way with yields rising and they may like to let that settle.

          Moving to Danny Blanchflower then his tweet about a recession has at the time of typing got a 100% rejection rate. Some point out that the IMF forecasts faster growth for the UK than Germany or France and one has just used one word “Clueless!”. There are more than a few along the lines below,

          “Poor sad old Danny. Still forecasting recessions in the fervent hope it might finally happen. Then he will shout “told you so””

  3. Hello Shaun

    re : ” how the economists surveyed thought inflation would be higher!”

    put 12 economists in a locked room and ask for their opinions and you’ll get 13 different answers ( possibly 14 ) .

    and Economists forecasts are there to make Astrology look good 😉

    Forbin

  4. Great blog as usual, Shaun.
    Since you bring up where mortgage interest is and isn’t in the UK consumer price indices, you and your readers might be interested in knowing just what a non-issue mortgage interest costs seem to be in the ongoing Canadian federal election. I asked the first question from the general audience at the final candidates’ debate for Ottawa Centre, where Environment Minister Catherine McKenna is the sitting member of the House of Commons. It is at the 58 minute mark of the video link below:

    We were all asked to address a question specifically to “one or two candidates out of the nine candidates on stage, so I chose Ms. McKenna and the candidate for the Official Opposition Party, Conservative candidate Carol Clemenhagen. Other candidates were however, able to respond if they chose. None of them did so. Note that neither candidate addressed my question, although Catherine McKenna at least admitted that she wasn’t qualified to do so, and invited me to take it up with her. I wasn’t speaking into the microphone properly, so my question was a little garbled. This is what I actually said: “The 2016 renewal of the inflation-control agreement between Liberal Finance Minister Bill Morneau and the Governor of the Bank of Canada was the worst renewal agreement ever. Among its unwelcome changes was the replacement of the CPIX, which excluded mortgage interest cost, as the operational guide with three new measures, which did not. The Bank of Canada is now the world’s only central bank with the Bank of Canada where the operational guide will once again include the mortgage interest component?”
    There are some advantages to the British practice of having the remit of the central bank determined by the Chancellor of the Exchequer, rather than negotiated between that person and the Governor of the Bank of England. At least, the decisions are squarely in the political sphere, and obviously matters for public debate. Unfortunately here, as former Governor John Crow observed: “The Bank may write as much as it wants about inflation, inflation dynamics, and price stability, but as the inflation target renewal exercise demonstrates, it is the government’s political decision, not the Bank’s voluminous research, or even the actual better-than-target performance over the past decade, that call the shots for the inflation that is in our future. At the same time, Ottawa chooses not to spell this out. After all, to present the relationship as it really is would eliminate the ability for the government to disclaim responsibility when convenient.” Crow wrote this in 2002, but it is just as pertinent today as when he wrote it.

    • Hi Andrew and thank you

      Good on you for asking the question which as you say got s little garbled. I do not know anything about the two women but Ms. McKenna wins for being honest as after all candidates are never going to know everything. Whereas Carol Clemenhagen takes the Ben Broadbent approach of answering a question she would like to have been asked which had nothing to so with yours, which is poor I think.

      For readers who do not understand what is going on here the issue of having “mortgage costs” in a targeted inflation measure is that they are directly under the control of the central bank itself via the official interest-rate and QE type policies. Also if you raise interest-rates to combat inflation you are raising the recorded level of inflation. oops!

      As to the way politicians take charge of inflation targets well they get us…

      • Thank you for your reply, Shaun.Sorry, I transcribed my question improperly for the last part of it. This was what I actually said: “The 2016 renewal of the inflation-control agreement between Liberal Finance Minister Bill Morneau and the Governor of the Bank of Canada was the worst renewal agreement ever. Among its unwelcome changes was the replacement of the CPIX, which excluded mortgage interest cost, as the operational guide with three new measures, which did not. The Bank of Canada is now the world’s only central bank whose preferred measure of core inflation is sensitive to changes in mortgage rates. This is ridiculous. Is your party committed to negotiating a 2021 renewal agreement with the Bank of Canada where the operational guide will once again exclude the mortgage interest component?” I was pleasantly surprised that Ms. McKenna seemed receptive to more information about the issue, even though in my preamble I slammed her cabinet colleague for negotiating the worst renewal agreement ever. I will send her office some more background on it. I wanted to include an explanation something like yours about why it made no sense to include mortgage interest rates in a central bank’s preferred core inflation measure (or in its target inflation measure for that matter) but with a one-minute time limit it just wasn’t possible.

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