The UK sees some welcome lower consumer,producer and even house price inflation

Today we complete a 3 day sweep which gives us most of the UK economic data with the update on inflation. Actually the concept of “theme days” has gone overboard with Monday for example giving us way too much information for it to be digested in one go. Of course the apocryphal civil servant Sir Humphrey Appleby from Yes Prime Minister would regard this as a job well done. Actually in this instance they may be setting a smokescreen over good news as the UK inflation outlook looks good although of course the establishment does not share my view of lower house price growth.

The Pound

This has been in a better phase with the Bank of England recording this in its Minutes last week.

The sterling exchange rate index had increased by around 3% since the previous MPC meeting

If they followed their own past rule of thumb they would know that this is equivalent to a 0.75% Bank Rate rise or at least used to be. Then they might revise this a little.

Inflationary pressures are projected to lessen in the near term. CPI inflation remained at 1.7% in September
and is expected to decline to around 1¼% by the spring, owing to the temporary effect of falls in regulated
energy and water prices.

As you can see they have given the higher value of the UK Pound £ no credit at all for the projected fall in inflation which really is a case of wearing blinkers. The reality is that if we switch to the most significant rate for these purposes which is the US Dollar it has risen by around 8 cents to above US $1.28 since the beginning of September. Actually at the time of typing this it may be dragged lower by the Euro which is dicing with the 1.10 level versus the US Dollar but I doubt it will be reported like that.

For today’s purposes the stronger pound may not influence consumer inflation much but it should have an impact on the producer price series. This was already pulling things lower last month.

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.

Oil Price

The picture here is more complex. We saw quite a rally in the early part of the year which peaked at around US $75 for Brent Crude in May. Then there was the Aramco attack in mid=September which saw it briefly exceed US $70. But now we are a bit below US $62 so there is little pressure here and if we add in the £ rally there should be some downwards pressure.

HS2 and Crossrail

If you are looking for signs of inflation let me hand you over to the BBC.

A draft copy of a review into the HS2 high-speed railway linking London and the North of England says it should be built, despite its rising cost.

The government-commissioned review, launched in August, will not be published until after the election.

It says the project might cost even more than its current price of £88bn.

According to Richard Wellings of the IEA it started at £34 billion. Indeed there also seems to be some sort of shrinkflation going on.

These include reducing the number of trains per hour from 18 to 14, which is in line with other high-speed networks around the world.

Here is the Guardian on Crossrail.

Crossrail will not open until at least 2021, incurring a further cost overrun that will take the total price of the London rail link to more than £18bn, Transport for London (TfL) has announced.

According to the Guardian it was originally budgeted at £14.8 billion.

If we link this to a different sphere this poses a problem for using low Gilt yields to borrow for infrastructure purposes. Because the projects get ever more expensive and in the case of HS2 look rather out of control, How one squares that circle I am not sure.

Today’s Data

This has seen some welcome news.

The Consumer Prices Index (CPI) 12-month inflation rate was 1.5% in October 2019, down from 1.7% in September 2019.

Both consumers and workers will welcome a slower rate of inflation and in fact there were outright falls in good prices.

The CPI all goods index is 105.6, down from 106.0 in September

The official explanation is that it was driven by this.

Housing and household services, where gas and electricity prices fell by 8.7% and 2.2%, respectively, between September and October 2019. This month’s downward movement partially reflected the response from energy providers to Ofgem’s six-month energy price cap, which came into effect from 1 October 2019……Furniture, household equipment and maintenance, where prices overall fell by 1.1% between September and October this year compared with a fall of 0.1% a year ago.

That is a little awkward as the official explanation majors on services when in fact it was good prices which fell outright. Oh dear! On the other side of the coin have any of you spotted this?

The only two standout items were women’s formal trousers and branded trainers.

Perhaps more are buying those new Nike running shoes which I believe are around £230 a pair.

There was an even bigger move in the RPI as it fell by 0.3% to 2.1% driven also by these factors.

Other housing components, which decreased the RPI 12-month rate relative to the CPIH 12-month rate by 0.05 percentage points between September and October 2019. The effect mainly came from house depreciation………Mortgage interest payments, which decreased the RPI 12-month rate by 0.08 percentage points between September and October 2019 but are excluded from the CPIH

Regular readers will know via the way I follow Gilt yields that I was pointing out we would see lower interest-rates on fixed-rate mortgages for a time. Oh and if you look at that last sentence it shows how laughable CPIH is as an inflation measure as it blithely confesses it ignores what are for many their largest payment of all.

House Prices

There was more good news here as well.

UK average house prices increased by 1.3% over the year to September 2019, unchanged from August 2019.

So as you can see we are seeing real wage growth of the order of 2% per annum in this area which is to be welcomed. Not quite ideal as I would like 0% house price growth to maximise the rate of gain without hurting anyone but much better than we have previously seen. As ever there are wide regional variations.

Average house prices increased over the year in England to £251,000 (1.0%), Wales to £164,000 (2.6%), Scotland to £155,000 (2.4%) and Northern Ireland to £140,000 (4.0%).London experienced the lowest annual growth rate (negative 0.4%), followed by the East of England (negative 0.2%).


The “inflation nation” which is the UK has shifted into a better phase and I for one would welcome a little bit of “Turning Japanese” in this area. However the infrastructure projects above suggest this is unlikely. But for now we not only have a better phase more seems to be on the horizon.

The headline rate of output inflation for goods leaving the factory gate was 0.8% on the year to October 2019, down from 1.2% in September 2019…..The growth rate of prices for materials and fuels used in the manufacturing process was negative 5.1% on the year to October 2019, down from negative 3.0% in September 2019.

As I pointed out yesterday this will provide a boost for real wages and hence the economy. It seems a bit painful for our statisticians to admit a stronger £ is a factor but they do sort of get there eventually.

All else equal a stronger sterling effective exchange rate will lead to less expensive inputs of imported materials and fuels.

Meanwhile let me point out that inflation measurement is not easy as I note these which are from my local Tesco supermarket.

Box of 20 Jaffa Cakes £1

Box of 10 Jaffa Cakes £1.05

2 packets of Kettle Crisps £2

1 packet of Kettle Crisps £2.09

Other supermarkets are available…..



10 thoughts on “The UK sees some welcome lower consumer,producer and even house price inflation

  1. Great article as always Shaun.

    Carnage will not like this. People getting above inflation payrises, inflation and houseprices falling. You can guarantee he’ll start talking down the pound and droning on about dropping interest rates.

    As we know, he’ll be pushing on a string. Banks have very little margin and I’d be surprised if they pass the rate fall on, meanwhile trashing the currency will drive up imported inflation.

    The above will make sense if we acknowledge that his raison d’etre is to impoverish the public.

    Am I right in thinking that energy costs are not falling, just rising less than last year?


    • Hi Anteos

      I too was thinking that the likely lower phase for inflation might tempt the Bank pf England to cut again. As to your question there were outright falls as the category for all household fuels fell by 4.4% on the month and pulled the RPI lower by 0.25% in annual terms.

  2. shaun,

    Thanks for the reply yesterday and copied tweets on RPI.

    Back of the fag packet suggests to me workers are between £40-£50 worse off RPI was used to see what the real wage increases were compared to 2008 !

    I thought it would be much higher and that equates to something like 10% difference. No wonder Joe Public thinks they are worse off compared to the peak in 2008 and that is probably why the High Street is in a bad place, the public shopping on line to get the lowest price for goods.

    As to todays inflation figures yes they are falling but it depends which method one thinks is the most reliable. Joe Public better off but bear in mind it will all depend where you are working and what your own particular inflation is.

    In some news today it would appear women pay more rent than men and Joe Public paying far more renting than the cost of buying in some places. Its a problem in London but houses cheaper up north and for a £200,000 house its cheaper to buy than rent if one can get a fixed deal of 1.5% which some mortgage providers are offering.

    With import prices falling circa -5.5% and the £ reasonably strong at the moment and close to a 6 month high, it looks like inflation will still fall further and the BOE forecast we could see CPI closer to 1.2% early next year.

    With inflation falling in most places around the globe and also interest rates being cut further as well, it looks to me like the BOE will cut sooner than later. Possibly in December but the likely date January 2020, but all depends how the election goes. If it doesn’t go well the BOE will think of a deeper cut.

    I take some of the data with a pinch of salt, there is very wide margin between CPI and RPI and as I indicated above if RPI had have been the methodology used in wage price increases some workers are possibly £50 per week worse of today than in 2008.

    What I also noticed in the recent data was the self employed percentage quite high now, I forget the exact figure, and some self employed are worse off than if they were in work due to overheads of running a small business and not receiving holiday pay !

    I don’t think the self employed are used to calculate wage growth and that muddies the water further!

    Readers have probably gathered I am very sceptical of the data and methodology used, things look quite bright when you read the data but somehow I don’t think Joe Public sees things that way, and that is why people are shopping more at AlDI & LIDL in order to save money !

    • Hi Peter

      I am a fan of the RPI and wish it had been reformed properly then we need not be messing around with dead-ends like CPIH. As to the self-employed they are ignored in the wages numbers. I make a point of mentioning that from time to time in my wages updates but think it would be overkill to put it in every month.

      There is a LIDL not that far from me and it is not only the price that takes me there as some of their stuff is genuinely nice.

  3. Hello Shaun,

    with some dis-inflationary results coming in I do wonder how the government and BoE will react. It’s on the cards in my opinion that next year will be recessionary , how bad is yet to be seen . And Brexit will just complicate matters whether it happens or not .


    • forbin,

      This article below from the Mail will interest some and depress others. Saville’s think house prices will still be rising once BREXIT is out of the way, some areas 15% and here in the North West circa 25%.

      I had mentioned a few times recently the North West doing quite well recently, why I live in the North West estate agents under £250,000 seeking in some cases offers over asking price.

      There are numerous mortgage providers giving mortgage rates of circa 1.5% fixed in one case for five years, and with rents of circa £800 per month its far cheaper to rent than buy.

      There are of course fees added on top which makes the APR higher but nevertheless its still cheaper to buy if one can afford a deposit. The only downside is the cheaper deals need a bigger deposit.

      Londoners would be far better selling up if they are retired and move up North where you can have a better life style, getting away from the traffic noise and cleaner air. The only downside is there aren’t as many theatres but there are plenty of good restaurants up north and places of intertest. Liverpool and Manchester excellent amenities and only a few miles from lovely countryside.

      The North West of the UK buzzing at the moment and is set to improve going forward with some of the best motorway networks in the UK.

      But not to smash the dream will it all end and all fall down like a pack of cards?

      I just don’t know to be honest we are in a new world of economics with low interest rates, in prior years a house price fall has happened when interest rates were far higher and unemployment higher as well.

      But in any event a retired Londoner with good property to sell it would be the best thing to do imo.

  4. “If we link this to a different sphere this poses a problem for using low Gilt yields to borrow for infrastructure purposes. Because the projects get ever more expensive and in the case of HS2 look rather out of control, How one squares that circle I am not sure.”

    Answer. A short Act of Parliament that requires the Government of the day to treble the estimated cost of a project and then try and justify it on cost grounds.

  5. Great blog as usual, Shaun.
    If one looks at the RPI excluding mortgage interest and council tax adjusted for the formula effect as an alternative to the CPI as a target inflation indicator for the Bank of England, its annual inflation rate for October was 1.4%, down from 1.8% in September. This is the first time it showed a lower inflation rate than the CPI since February, and it is partly because the formula effect adjustment has gone from -0.5% to -0.6%. While you have already noted the depreciation component’s contribution to decelerating the RPI annual inflation rate (it went from 0.9% in September to 0.4% in October) the RPI for dwelling insurance and ground rent also played a role, declining from 5.6% in September to 4.6% in October. By the way, conceptually speaking mortgage interest costs, dwelling insurance and depreciation are also supposed to be subsumed in the imputed rents component of the CPIH, although there is precious little evidence that this is so, certainly not looking at short-term movements in the series.

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