Good to see UK wage growth well above house price growth

Today brings the UK inflation picture into focus and for a while now it has been an improved one as the annual rates of consumer, producer and house price inflation have fallen. Some of this has been due to the fact that the UK Pound £ has been rising since early August which means that our consumer inflation reading should head towards that of the Euro area. As ever currency markets can be volatile as yesterdays drop of around 2 cents versus the US Dollar showed but we are around 12 cents higher than the lows of early August. The latter perspective was rather missing from the media reporting of this as “tanks” ( Reuters) and “tanking” ( Robin Wigglesworth of the FT) but for our purposes today the impact of the currency has and will be to push inflation lower.

The Oil Price

This is not as good for inflation prospects as it has been edging higher. Although it has lost a few cents today the price of a barrel of Brent Crude Oil is at just below US $66 has been rising since it was US $58 in early October. Whilst the US $70+ of the post Aramco attack soon subsided we then saw a gradual climb in the oil price. So it is around US $8 higher than this time last year.

If we look wider then other commodity prices have been rising too. For example the Thomson Reuters core commodity index was 167 in August but is 185 now. Switching to something which is getting a lot of media attention which is the impact of the swine fever epidemic in China ( and now elsewhere ) on pork prices it is not as clear cut as you might think. Yes the Thomson Reuters Lean Hogs index is 10% higher than a year ago but at 1.92 it is well below the year’a high of 2.31 seen in early April

Consumer Inflation

It was a case of steady as she goes this month.

The Consumer Prices Index (CPI) 12-month rate was 1.5% in November 2019, unchanged from October 2019.

This does not mean that there were no changes within it which included some bad news for chocoholics.

Food and non-alcoholic beverages, where prices overall rose by 0.8% between October and November 2019 compared with a smaller rise of 0.1% a year ago, especially for sugar, jam, syrups, chocolate and confectionery (which rose by 1.8% this year, compared with a rise of 0.1% last year). Within this group, boxes and cartons of chocolates, and chocolate covered ice cream bars drove the upward movement; and • Recreation and culture, where prices overall rose between October and November 2019 by more than between the same two months a year ago.

On the other side of the coin there was a downwards push from restaurants and hotels as well as from alcoholic beverages and tobacco due to this.

The 3.4% average price rise from October to November 2018 for tobacco products reflected an increase in duty on such products announced in the Budget last year.

Tucked away in the detail was something which confirms the current pattern I think.

The CPI all goods index annual rate is 0.6%, up from 0.5% last month……..The CPI all services index annual rate is 2.5%, down from 2.6% last month.

The higher Pound £ has helped pull good inflation lower but the “inflation nation” problem remains with services.

The pattern for the Retail Prices Index was slightly worse this month.

The all items RPI annual rate is 2.2%, up from 2.1% last month.

The goods/services inflation dichotomy is not as pronounced but is there too.

Housing Inflation ( Owner- Occupiers)

This is a story of many facets so let me open with some good news.

UK average house prices increased by 0.7% over the year to October 2019 to £233,000; this is the lowest growth since September 2012.

This is good because with UK wages rising at over 3% per annum we are finally seeing house prices become more affordable via wages growth. Also you night think that it would be pulling consumer inflation lower but the answer to that is yes for the RPI ( via the arcane method of using depreciation but it is there) but no and no for the measure the Bank of England targets ( CPI) and the one that our statistical office and regulators describes as shown below.

The Consumer Prices Index including owner occupiers’ housing costs (CPIH).

Those are weasel words because they use the concept of Rental Equivalence to claim that homeowners pay themselves rent when they do not. Even worse they have trouble measuring rents in the first place. Let me illustrate that by starting with the official numbers.

Private rental prices paid by tenants in the UK rose by 1.4% in the 12 months to November 2019, up from 1.3% in October 2019.

Those who believe that rents respond to wage growth and mostly real wages will already be wondering about how as wage growth has improved rental inflation has fallen? Well not everyone things that as this from HomeLet this morning suggests.

Newly agreed rents have continued to fall across most of the UK on a monthly basis despite above-inflation annual rises, HomeLet reveals.

Figures from the tenancy referencing firm show that average rents on new tenancies fell 0.6% on a monthly basis between October and November, with just Wales and the north-east of England registering a 1.1% and 0.4% increase respectively.

Both the north-west and east of England registered the biggest monthly falls at 0.8%.

Rents were, however, up 3.2% annually to £947 per month.

This is at more than double the 1.5% inflation rate for November.

As you can see in spite of a weak November they have annual rental inflation at more than double the official rate. This adds to the Zoopla numbers I noted on October 16th which had rental inflation 0.7% higher than the official reading at the time.

So there is doubt about the official numbers and part of it relates to an issue I have raised again with the Economic Affairs Committee of the House of Lords. This is that the rental index is not really November’s.

“The short answer is that the rental index is lagged and that lag may not be stable.I have asked ONS for the detail on the lag some while ago and they have yet to respond.”

Those are the words of the former Government statistician Arthur Barnett. As you can see we may well be getting the inflation data for 2018 rather than 2019.

The Outlook

We get a guide to this from the producer price data.

The headline rate of output inflation for goods leaving the factory gate was 0.5% on the year to November 2019, down from 0.8% in October 2019……..The growth rate of prices for materials and fuels used in the manufacturing process was negative 2.7% on the year to November 2019, up from negative 5.0% in October 2019.

So the outlook for the new few months is good but not as good as it was as we see that input price inflation is less negative now. We also see the driving force behind goods price inflation being so low via the low level of output price inflation.


In many respects the UK inflation position is pretty good. The fact that consumer inflation is now lower helps real wage growth to be positive. Also the fall in house price inflation means we have improved affordability. These will both be boosting the economy in what are difficult times. The overall trajectory looks lower too if we add in these elements described by the Bank of England.

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.

However as I have described above these are bad times for the Office for National Statistics and the UK Statistics Authority. Not only are they using imaginary numbers for 17% of their headline index ( CPIH) the claims that these are based on some sort of reality ( actual rental inflation) is not only dubious it may well be based on last year data.

The Investing Channel


12 thoughts on “Good to see UK wage growth well above house price growth

  1. In summary, house prices have roughly doubled since 2008 and stock prices tripled.
    Anyone do the math as to how soon wages will get back to 2008 levels compared to either?
    My rough guestimate, if we stay at current wages vs inflation levels, is about 20 years?
    One wonders at what point Jo Public is going to get upset……

  2. If the data is to be believed the average worker better off, with a caveat that RPI is rising and wage inflation is falling!

    The data is also good for house buyers again with a caveat that house prices are still growing in the North West above wage increases in some areas.

    However its not so good for renters and there are more people in rented accommodation now for decades.

    This link provides more data:

    I have a friend who is trying to rent a house in the North West and he hasn’t been able to rent it out yet and told by his agent the rental market went flat from October and it hasn’t picked up. Maybe the average rise in rentals now peaked as they are getting above wage inflation in some areas.

    • Hi Peter

      Is the property in an area where you would expect rental demand?

      As to the pattern for rentals there is quite a variation from the 5.2% in Wales to the 1.9% in the West Midlands. I would not have expected the latter because it was only a few months back comments on here were reporting relatively strong house price growth there. Actually I wouldn’t have expected the 5.2% in Wales either….

      • The property is in Burscough close to a motorway network, however its not a large town, so its difficult to give you an answer on that one.

  3. HPI is affected by changes in multiples and eligibility for mortgages.

    If all houses were sold based on mortgages of 3x the main earner since 1980, I don’t expect there to have been very much excess housing inflation above wage inflation over that period.

    Increased multiples, increased eligibility for 2 person households, the buy-to-let mortgage have all massively driven house prices higher.

    This means once house prices have risen to accommodate any increase in eligibility, it becomes much tougher for hpi to outstrip wage inflation. With tentative steps to clip the wings of buy-to-let, overseas buyers and obscene multiples for loans through capital requirements, it means one should expect the reverse effect to slowly take hold. Of course the ideal for the government and the private banks is that this is undertaken slowly to de-risk the process….so, not nominal falls but real falls.

    • demand by single people – divorces plays a part too

      1980 we have approx £24000 average price and today its about £233,000

      average wage was £ 6214 ratio approx 4
      average wage 2018 30400 , ratio approx 7.5

      London average price is approx £480000 – ratio 16 – no wonder people are moving out if they can! *

      * And of course we have to note that these days both partners earn

      and you’re getting less for your money too

      “Home sizes grew steadily over the early part of last century, hitting a peak of 83.3 square metres in the ’70s – meaning new homes now are around 18% smaller than they were then.

      In fact, houses from the 2010s are just below the previous low-point in 1930, when the average house was 68.3 square metres.”

      * ‘C’ Which


      • forbin,

        A quarter of families are classed as single families:

        However if one takes account of the younger generation not getting married while later in life and also divorce, then people living longer and possibly widowed, one can see the pressure on house supply.

        The above which is just part of the story which you mentioned.

        House sizes are also shrinking and 20% less than in the 1930’s

        When you look at some of the average houses today on some developments the planners must have had dolls houses when they were kids there isn’t enough room to swing a cat round the rooms.

        I live in an area where there are quite a lot of Victorian houses which had 2 good entertaining rooms and back kitchen and outhouse with 3 bedrooms. There were 2 large bedrooms on average on the upper floors and plenty of space around the bed to walk around. Some of the smaller houses built today are too small to accommodate furniture of any decent size. One of the tricks the show houses do is to place small double beds in the principle bedroom to make the bedroom look larger and place a small wardrobe in the room which wouldn’t allow for a couples clothes.

        Many new town houses don’t have large gardens, just a postage stamp of grass. Then the fronts are flagged over to allow for parking in front of the houses if you are lucky there may be a garage. But the new builds lack aesthetic appearance from the outside joe public doesn’t; bother with the gardens anymore they are too busy on their laptops twittering away, locked in their houses, most don’t know their neighbours apart from the ones either side. All the flags cause other problems there is no where for the rain to drain away, the minute there is a large rain fall the roads get flooded.

        The Victorians were far more advanced thinking than we are today the road and bridges built to last generations the sewer systems the same. This country needs a modern day Brunel but alas this wont happen the modern builders only interested in profit.

    • Hotairmail,

      One of the reasons multiples have increased is low interest rates and you are correct more households are now working than they were decades ago.

      Also buy to let has taken its part and government subsidies.

      In fact if interest rates go to zero or even negative house prices may still beat inflation going forward, with a caveat of course and that is unemployment doesn’t start to increase significantly.

      • The important point is that the BoE actually have the ability to limit multiples or even forms of lending according to their ‘macroprudential toolset’. They choose not to on the whole to ‘get credit into the economy’ (as house lending is the main way this occurs). It is only relatively lately they’ve started implementing differential capital requirements across their loan books.

        They talk a lot though but generally find after the event they are where they are but wish they had done something different:

        From the summary on the page I link to:

        “Nonetheless, simulations of a house price boom and subsequent correction suggest that macro-prudential tools could alleviate debt-deleveraging and help avoid zero lower bound episodes, even when macro-prudential tools themselves impose only occasionally binding constraints on debt dynamics in the economy.”


  4. Great blog as usual, Shaun.
    As you say, the CPI/CPIH inflation rate was the same in November as October, while the RPI inflation rate went up. This may seem strange given as you say that housing prices were down. The HPI went from an annual inflation rate of 1.3% in September to 0.7% in October, and its house prices are incorporated in the RPI with a one-month lag, so one might wonder why the RPI is not showing a deceleration in its inflation rate. However, as you say, house prices are incorporated in the RPI mainly via the depreciation component which is based on geometrically smoothed house prices. The annual inflation rate for the RPI for housing depreciation went up from 0.4% in October to 0.9% in November, not due so much to the monthly inflation rate for November 2019, which was just 0.1%, but to the rate for November 2019, a decrease of 0.4%, dropping out of the index. Also, the RPI for dwelling insurance and ground rent was up from 4.6% in October to 5.2% in November, fuelled by a strong 0.8% monthly change for November 2019.
    The RPI excluding mortgage interest and council tax adjusted for the formula effect had its annual inflation rate go from 1.4% in October to 1.6% in November. Now that the wedge between the inflation rates for this series and the CPI has shrunken so dramatically, it is hard to say with any certainty that the CPI is showing too little inflation for a macroeconomic consumer price series, but nevertheless the best assumption is that it is, by 0.1 percentage points.
    What happened to ONS’s Measures of owner occupiers’ housing costs, UK: July to September 2019? They were scheduled to be published today.

    • Hi Andrew and thank you

      Good spot on the OOH costs issue which I have just double-checked in case they were released later in the day. They were also somewhat tardy with some of the individual updates as I check the various pork related indices and it is only later on that I could see that Gammon prices were up 7.5% on a year ago.

      Your ground rent number is interesting as there has been something of a scandal about it in the UK. For leaseholders it is often a nominal amount but some developers then sell it on and guess what? I am sure you can fill in the gap. So in a way it is a good thing that the inflation numbers are reflecting this.

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