The good news from lower UK inflation ( think real wages) may not last

Today brings the various UK inflation numbers into focus as we get the updates for consumer, producer and house prices. Already though the Bank of England has given its view on the general outlook.

Second, the most likely outlook is a further period of subdued growth, and hence a disinflationary backdrop
of a persistent – albeit modest – output gap.

That is from Michael Saunders who is giving a speech in Northern Ireland and we see him backing up the previously expressed view of UK inflation falling towards 1.25% in the early part of this year. It is sad though that he still uses the “output gap” that has worked so poorly even some ex-central bankers are being forced to admit it has been a failure. Here is the former Vice-President of the ECB ( European Central Bank) Vitor Constancio.

In “FED listens” events, they found that:..”there is more “slack” than the Fed had thought — more people who could still come into the labour force, particularly in poorer areas”. I am sure the same is true in Europe. Forget output gaps

If only those still in power would see the light and accept reality!

There is an irony in all of this as we note that whilst the Bank of England expects lower inflation it is presently trying to raise it and Micheal Saunders has another go.

Fourth, against this backdrop, it probably will be appropriate to maintain an expansionary monetary policy
stance and possibly to cut rates further, in order to reduce risks of a sustained undershoot of the 2% inflation
target. With limited monetary policy space, risk management considerations favour a relatively prompt and aggressive response to downside risks at present.

This is via the impact of their words on the value of the UK Pound £ and the way a lower value ( mostly via the role of the US Dollar in setting commodity prices) tends to raise subsequent inflation. You may note that the bi-polar view of monetary policy space continues to be in play as he joins Mark Carney’s statement that it is limited from last Wednesday which morphed into the equivalent of a Bank Rate cut of 2.5% as quickly as Thursday. What a difference a day made!

twenty four little hours
Brought the sun and the flowers where there use to be rain ( Dinah Washington )

If we complete the points made by Michael Saunders we see something of an obsession with output gap theory.

First, with softer global growth and high Brexit uncertainty, the UK economy has remained sluggish. The
slowdown has created a modest output gap, and there are signs that the labour market is turning.

Also something perhaps even sillier.

Third, the neutral level of interest rates may have fallen further over the last year or two, both in the UK and

Or, of course, it may not.

Consumer Inflation

The backdrop was worrying because US consumer inflation had risen yesterday and Euro area inflation had risen last week and that is before we get to this.

Also, Zimbabwe’s annual inflation rate (the one that is officially concealed) rose to 521% in December. ( Joseph Cotterill)

But the numbers were good possibly showing that a little knowledge is a dangerous thing.

The Consumer Prices Index (CPI) 12-month rate was 1.3% in December 2019, down from 1.5% in November 2019.

There were two main factors at play and I wonder if any of you spotted this one?

Restaurants and hotels, where prices for overnight hotel accommodation fell by 7.5% between November and December 2019, compared with a rise of 0.9% between November and December 2018;

Also the next one may have affects elsewhere because the last time we saw a burst of this as we saw retail sales rise in response ( thank you ladies) which is against the present consensus.

Clothing and footwear, where the largest individual downward contributions came from women’s casual jackets and cardigans, where prices fell between November and December 2019 but rose between the same two months in 2018. There were also small individual downward contributions from formal trousers and formal skirts

Also if we continue to look wider we see a possible impact from the slow down in car sales.

There was also a smaller downward contribution from the purchase of vehicles where prices overall were little changed in 2019 but increased by 0.7% in 2018.

Let us move on but not without noting that the impact of the UK Pound £ is for once zero compared to the Euro as we have the same inflation rate.

Euro area annual inflation is expected to be 1.3% in December 2019,

What Happens Next?

There is still a slight downwards push but the impetus has gone.

The growth rate of prices for materials and fuels used in the manufacturing process was negative 0.1% on the year to December 2019, up from negative 1.9% in November 2019.

Indeed if we switch to output prices we see that there are ongoing albeit small rises in play.

The headline rate of output inflation for goods leaving the factory gate was 0.9% on the year to December 2019, up from 0.5% in November 2019.

If we look to future influences we know that 70% of the input number comes from the £ and the oil price. As we stand at US $64.40 for a barrel of Brent Crude that is where it roughly was in mid-December so maybe not much influence. With the Bank of England engaging in open mouth operations against the £ it may come into play.

House Prices

There was a worrying change here.

UK average house prices increased by 2.2% over the year to November 2019, up from 1.3% in October 2019……Average house prices increased over the year in England to £251,000 (1.7%), Wales to £173,000 (7.8%), Scotland to £155,000 (3.5%) and Northern Ireland to £140,000 (4.0%).

This adds a little credibility to the Halifax 4% reading for December although we await the official December data. As to the breakdown we have observed parts of the Midlands leading the line in recent times.

The annual increase in England was driven by the West Midlands and North West…..The lowest annual growth rate was in the East of England (negative 0.7%) followed by London (positive 0.2%).

Although that is for just England so we should also look wider and whilst it looks an anomaly there was this.

House price growth in Wales increased by 7.8% over the year to November 2019, up from 3.6% in October 2019, with the average house price in Wales at £173,000.


There is some much needed good news in today’s report for real wage growth as we see inflation dip. However we need context because if we switch to the UK’s longest running measure of inflation there is a different story in play.

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

The difference neatly illustrates my major theme in this area.

Other housing components, which increased the RPI 12-month rate relative to the CPIH 12-month rate by 0.06 percentage points between November and December 2019. The effect came mainly from house depreciation.

As you can see our official statisticians are desperate to make everyone look at their widely ignored favourite measure called CPIH which I will cover in a moment. But for now we see that past house prices via depreciation are exerting an upwards pull on the RPI and November’s number suggests this may continue. Most will understand that for many house prices are a big deal but the fact that they usually pull inflation higher means the establishment has launched an increasingly desperate campaign to ignore them.

If we now cover the official CPIH measure it indulges in a fleet of fantasy by assuming that owners pay themselves rent and then includes this fantasy in its inflation reading. Even worse there have been problems in measuring rents so it may well be a fantasy squared should such a thing exist. Anyway the effort to reduce the inflation reading has backfired this month as CPIH is above CPI due to this.

In December 2019, the largest upward contribution to the CPIH 12-month inflation rate came from housing and household services. The division has provided the largest upward contribution since November 2018.

Oh well…..

19 thoughts on “The good news from lower UK inflation ( think real wages) may not last

  1. Hello Shaun,

    I had to smile at this –

    “The lowest annual growth rate was in the East of England (negative 0.7%) ”

    just can’t say the word beginning with “S” can they ?

    definite Orwellian tendencies – ” chocolate ration has increased from 4 oz to 2 oz …”

    oh well


  2. Whether it be the right thing to do or the wrong thing to do but today’s evidence fuels the debate as to when the BOE will cut rates and the odds are getting more to the downside as to a rate cut.

    Inflation is not the worry not just here but in Europe as well.

    Now I know many don’t think a cut will make much difference but I beg to differ. There has to be some correlation between growth, inflation and interest rates adjustment, growth is flat, inflation is low therefore a cut should come.

    I would have cut months ago now as the trend was for a weaker economy and little inflation.

    As a variable interest this will help me some would say I am talking my own book but there we are. One has to take account of interest rates abroad as well and its cheap to borrow money, we should be following imo.

    Now for the down-posts but my helmet is thick !

    • Andrew Verity from the BBC says there is now a 62.5% chance of a rate cut to 0.5% at end of moth quoting less inflation in the pipeline due to PPI fallen to -01%.

      £ to $ still over 1.3 !

    • So Peter, taking your policy of cutting rates to its logical conclusion, if house prices fall and cause a drop in consumer sentiment and the economy also takes a dive, you would cut rates yes? This would last until its stimulative effect wore off: the money borrowed at the lower rate spent(predominantly on Chinese tat giving little stimulus to the UK economy), the boost to house prices now tailing off and fizzling out completely, now the economy is showing signs of recession again, prices are rising faster than wages so cutting consumer demand further, the £ having fallen due to the last cut in rates and increase in government borrowing has now caused inflation to spike up further depressing consumer demand and house prices are falling faster.

      What do you do? Cut rates again?By how much? OK you have done this six times now and rates are minus 2%, how low should we go? minus 5%?, minus 10%?, minus 20%?.

      You see where we are going with this don’t you and how eventually it has to stop.We have seen in Germany the imposition of real negative rates on investors has caused them to save MORE to compensate for the loss in interest they have had stolen from them, exactly the opposite of the effect the EU were trying to achieve, so please try and stop drinking the Kool Aid and see what is really going on.

      • Hello Kevin,

        there is lower bound , thats when the public take fright. I have posit that negative rate would be over – 1% and when we see -2% is when it should be clear to everyone that all is not right in never never land.

        Alternatively the interest rate on loans and mortgages will not fall to those levels but son chicanery regarding the principle amount reducing over time might come in.

        I don’t think TPTB have seen the memo about savers , or they ignore it like they do about anything in the real world that doesn’t match their perfect models…..

        In any other branch of science if the data doesn’t match the theory you get new theories – which is why economics isn’t a science ,more of astrology….

        ah I see ……


        • Remember the definition of an economist Forbin.?
          Someone who sees something not working in practice , but thinks it will work in theory.
          A twist on the original , but I’m sure you get the idea.

          TPTB will never admit cutting rates below 2% and trashing the principle of the time-value of money was a mistake. A mistake of “down the rabbit hole” proportions.

      • Kevin,

        Would people stash their money away if negative rates went to -10% ?

        Japan negative rates quite small and each economy will react differently so one cannot just compare plant for plant some of my plants like acid soil some like alkaline soil !

        • Peter,

          It has been one of the reasons why we think the War on Cash is being waged.

          no more notes , mind you all you have to do is re-issue them but then people will think we’re in Zimbabwe …… perhaps we will be soon 😉


          • forbin,

            “I don’t think TPTB have seen the memo about savers , or they ignore it like they do about anything in the real world that doesn’t match their perfect models…..
            In any other branch of science if the data doesn’t match the theory you get new theories – which is why economics isn’t a science ,more of astrology….”

            I agree we have had a number of economic theories proved to be flawed, there are too many different fundamentals to be taken account of that react in different ways and although we can compare what has happened in Japan, its a completely different economic system and than the UK the US or Europe for that matter and different demographic and resources one cannot make a true comparison.

            Until these things have been tried en-masse and at far different rates they cannot be proved to be flawed.

            As for property prices at some its partly supply and demand, financial support and low interest rates.

            The balance always gets of kilter at some stage I remember in the 70s gold reaching a new high then I forget when but it did nothing for years.

            The balance is now tipping with out older generation and not enough younger population to support but what happens after the next 30 to 50 years when they have all died off?

            Nature has a way of resolving matters in the end and I will not dismiss negative interest rates at this stage without further proof far lower negative rates have been tried before hand.

            Now some would say we are kicking the can down the road but in fact we are in fact trying different methodology to see how things will pan out and we do that all the time, as you rightly said earlier economics isn’t a precise science.

          • Peter Pan: “In any other branch of science if the data doesn’t match the theory you get new theories…”

            Not climate “science,” which is now openly chicanery too:

        • So no amount of theft is unacceptable to you then of savers money to fund the likes of Mr Red Suit from yesterday, in the words of Mr Draghi – “Whatever it takes”?Have I got that right? Some countries will require more theft than others to achieve perpetual house price inflation but as long as it is achieved that is the main thing?.

          • Kevin

            Where do you prefer the theft -5% on an investment for the rich or -30% interest rates on a bank overdraft for the poor?

            If we are talking about compassion and morality I would say the worst theft is on the poor and its been widely held for a long time the poor are kept down by the rich.

            The vast majority of people who were born in council houses remain in poverty, a number manage to climb out the mire like Philip Day and become mega rich but part is to skill, intelligence and good luck.

            The poor however are normally held back in society, a few of the lucky ones manage to get out the gutter by looking at the stars!

            Now don’t get me wrong, I am not saying the astute should not be rewarded for their efforts but a number of Oligarchs not got their wealth by honest methods and they have sough sanctuary in the UK to maintain their wealth and good fortune in a reasonably safe county like the UK.

  3. Hi Shaun

    Great article as always.

    I’ve been keeping an eye on the housing market in s. manchester and it is truly horrendous. Over xmas the stock dropped to low levels which although this was expected I was surprised at the few properties available.

    Unextended 3 bed semis (the bellweather of the area) are now between 275k – 300k. Truly appaling. The market above (400k – 600k) seems to have stalled as the ladder is broken and I expect people are shirking at paying 16k stamp duty. The ladder is truly broken as I think people can no longer afford to trade up. Although having said that a 575k detached which went on in new year went under offer in 1 day.

    There’s a lot of overpriced rubbish that stays on the market permanently. There are semi new builds (town houses) with tiny gardens on at 650k – 750k and unsurprisingly, these have not sold.

    A truly terrible market to be in and all thanks to the boe.Shame on them.

    As to inflation I recieved my house insurance bill, a third of which was taxation. Again the government doing their best to impoverish the people.


    • Hello Anteos,

      thanks for the info, seems that your area is like Surrey is now and was going that way end of last year.

      Sellers believe the hype from Halifax and Zoopla ( rolls eyes !!) and are finding that buyers are just not there, get a few viewings then phut! nothing.

      those in the game still tell me some properties are moving if they are pristine and lower end .. Middle struggles and high end is very iffy .

      Again anything that the BoE and HMG should have done should have been done months ago….. the ship has sailed I’m afraid .

      All we need now is some Event and the stagnation , sorry , sustainable prices will tumble as the fear sweeps in . A gradual decline would be preferable but the housing market doesn’t appear to work that way.

      we shall see



      • I too live in the North West on the coast and anything under £200k is sold quick and the agents wanting over the asking price and normally getting it as well particularly in a reasonable area with good schools, a local ALDI or LIDL and good transport links as well as low crime figures. In fact I know of at least 3 houses which went in about a couple of weeks very fast indeed. I suspect HPI for anything under 200K was at least 20% in two of the cases.

  4. Great blog as usual, Shaun.
    Although the CPI inflation rate fell from 1.5% in November to 1.3% in December, there was a big hike in the inflation rate for package holiday trips increased from 3.4% to 3.9%. As is usually the case with this component, the change resists analysis. The monthly change from November to December was 0.6%, this tells one nothing about the change in monthly prices from November 2019 to December 2019, only that there was an increase in prices at an unspecified rate between December 2018 and December 2019, as a dummy price relative showing no change from December-to-December used to calculate the November index number was replaced by the actual annual price change for December 2019. The ersatz seasonal weighting approach used to calculate this component and admissions to racetrack admissions has no justification. Replacing it by something more reasonable was defined as a priority in January 2015 in Paul Johnson’s review of UK consumer price statistics, but it was never made a priority by the UKSA.. At the start of this new decade, when we celebrate the centenary of the discovery of what would later be called the Rothwell formula, people really should put pressure on the UKSA to take action. The Rothwell formula would be a far more sensible seasonal weighting formula to use for package holiday trips, and its use should be extended to all highly seasonal items in the consumer price series, whether related to food, clothing, recreation, or flowers and plants (inclusive of Christmas trees).
    The centenary of the publication of Louis H. Bean and Orville Stine’s seminal paper on different formulas for US indices for prices received by farmers will be in 2024. While it may not be possible to get everything done by then, the UKSA could at least make a good start. It should aim for a roaring pace, like a second iteration of the roaring twenties. Roaring or not, everything could get done by the end of the decade, given an honest effort.

    • Hi Andrew and thank you

      Your mention of package holidays reminds me of the changes made by the German statistics office not so long ago. Do you think that Destatis now handles this sort of thing in a superior manner to the UK Office for National Statistics? For those who did not follow this issue the changes impacted on headline German inflation in such a manner it affected Euro area inflation as well,

      I was wondering about the use of horse racetrack admissions so looked it up and according to the Racing Post.

      “A total of 5.77 million people went racing in 2018, a drop of three per cent compared to the 2017 total of 5.95m – which itself was a slight reverse compared to the 5.99m who passed through the gates in 2016 and 6.13m in 2015.

      The figure means the industry is at least on course to retain its position behind football as the number two professional spectator sport in Britain. ”

      As to your campaign you have my support.

      • Thank you very much for your support for moving to the Rothwell formula for seasonal groups in the UK consumer price series, Shaun, and for the data on horse track admissions. I hope that some of the readers of your blog are also sympathetic to this cause.
        With regard to the German change in methodology, you were the person who made me aware of it in the first place. The new methodology incorporates better data, and of course no-one is opposed to that. Until the change, the Germans were using the class-confined seasonal weights formula, a very dumbed down version of the Rothwell formula, for their CPI and their HICP. This was the only seasonal weighting formula they could use for the HICP: Eurostat doesn’t allow the Rothwell formula to be employed anymore, God knows why. The new data included price data for trips in off-season months where there was none before and the class-confined seasonal weights formula assigned zero expenditure weights. There seemed less reason to stick with that method given the new data, since a tour is not treated as seasonal if it has prices in every month. If the Rothwell formula were being used it still would be, and the expenditure weights for the 12 months of the year would be used. Perhaps the new German method is better than the existing UK method. It is certainly easier to understand. It is still inferior to the use of the Rothwell formula in my opinion. Since Eurostat does not allow the Rothwell formula to be used for seasonal goods in the HICP, its use in the CPI would necessarily imply calculating the CPI differently from the HICP, unless Eurostat changed its rules. An attempt to get Eurostat to do so would certainly be worth a try, given how dysfunctional the current rules for handling seasonal goods are.

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