The one thing we can be sure of is that the inflation numbers are wrong

Today’s has brought us inflation data with more and indeed much more than its fair share of issues. But let me start by congratulating the BBC on this.

The UK’s inflation rate fell in April to its lowest since August 2016 as the economic fallout of the first month of the lockdown hit prices.

The Consumer Prices Index (CPI) fell to 0.8% from 1.5% in March, the Office for National Statistics (ONS) said.

Falling petrol and diesel prices, plus lower energy bills, were the main drivers pushing inflation lower.

But prices of games and toys rose, which the ONS said may have come as people occupied their time at home.

They have used the CPI inflation measure rather than the already widely ignored CPIH which the propagandists at HM Treasury are pushing our official statisticians to use. Although in something of an irony CPIH was lower this month! Also it would be better to use the much more widely accepted RPI or Retail Prices Index and the BBC has at least noted it.

Inflation as measured by the Retail Prices Index (RPI) – an older measure of inflation which the ONS says is inaccurate, but is widely used in bond markets and for other commercial contracts – dropped to 1.5% from 2.6%.

Yes it is pretty much only the establishment which makes that case about the RPI now as supporters have thinned out a lot. It also has strengths and just as an example does not require Imputed or fantasy Rents for the housing market as it uses actual prices for houses and mortgages.

So as an opener let us welcome the lower inflation numbers which were driven by this.

Petrol prices fell by 10.4 pence per litre between March and April 2020, to stand at 109.0 pence per litre, and
diesel prices fell by 7.8 pence per litre, to stand at 116.0 pence per litre……..which was the result of a 0.2% rise in
the price of electricity and a 3.5% reduction in the price of gas between March and April 2020, compared with price rises of 10.9% and 9.3% for electricity and gas over the same period last year.

Problems. Problems,Problems

Added to the usual list of these was the fact that not only did the Office for National Statistics have to shift to online price collection for obvious reasons which introduces a downwards bias there was also this.

Hi Shaun, the number of price quotes usually collected in store was about 64% of what was collected in February – so yes just over a third. This is for the local collection only.

Let me say thank you to Chris Jenkins for replying so promptly and confirming my calculations. However the reality is that there is a problem and let me highlight with one example.

prices for unavailable seasonal items such as international travel were imputed for April 2020. This imputation was calculated by applying the all-items annual growth rate to the index from April 2019.

Yes you do read that correctly and more than one-third of the index was imputed. In addition to this rather glaring problem there is the issue of the weighting being wrong and I am sure you are all already thinking about the things you have spent more on and others you have spent less on. Officially according to our Deputy National Statistician Jonathan Athow it does not matter much.

A second was to also account for lower consumption of petrol and diesel, which has been falling in price. Reducing the weight given to petrol and diesel gives a figure similar to the official CPI estimate.

Sadly I have learnt through experience that such research is usually driven by a desire to achieve the answer wanted rather than to illuminate things. If we switch to the ordinary experience I was asked this earlier on social media.

Are face masks and hand sanitiser included in the CPI basket? (@AnotherDevGuy)

I have just checked and they are not on the list. This poses a couple of issues as we note both the surge in demand ( with implications for weighting) and the rise in price seen. A couple of area’s may pick things up as for example household cleaners are on the list and judging by their suddenly popularity albeit in a new role lady’s scarves but they are on the margins and probably underweighted.

The New Governor Has A Headache

If we check the inflation remit we see that the new Governor Andrew Bailey will be getting out his quill pen to write to the new Chancellor Rishi Sunak.

If inflation moves away from the target by more than 1 percentage point in either direction, I
shall expect you to send an open letter to me, covering the same considerations set out above
and referring as necessary to the Bank’s latest Monetary Policy Report and forecasts, alongside
the minutes of the following Monetary Policy Committee meeting.

He will of course say he is pumping it up with record low interest-rates and the like. He is unlikely to be challenged much as this morning has brought news of a welcome gift he has given the Chancellor.

Negative Interest-Rates in the UK Klaxon!

For the first time the UK has issued a Gilt (bond) with a negative yield as the 2023 stock has -0.003%. So yes we are being paid to borrow money.

A marginal amount but it establishes a principle which we have seen grow from an acorn to an oak tree elsewhere.

There is trouble ahead

There are serious issues I have raised with the ONS.

How will price movements for UK houses be imputed when there are too few for any proper index? The explanation is not clear at all and poses issues for the numbers produced.

Also this feeds into another issue.

“It should be noted that the methodologies used in our consumer price statistics for many of these measures tend to give smoothed estimates of price change and will therefore change slowly.”

The suspension of the house price index below after today poses big problems for the RPI which uses them and actually as happens so often opens an even bigger can of worms which is smoothing.

In other words we are being given 2019 data in 2020 and this is quite unsatisfactory. So whilst the ONS may consider this a tactical success it is a strategic failure on the issue of timeliness for official statistics. I think all readers of this would like to know more detail on the smoothing process here as to repeat myself it goes against the issue of producing timely and relevant numbers.

Some of you may recall the disaster smoothing had on the with-profits investment industry and once people understand its use in inflation data there will be plenty of issues with it there too. My full piece for those who want a fuller picture is linked to below.


As the media projects lower inflation ahead sadly the picture is seeing ch-ch-changes,

Oil prices rose for a fourth straight session on Tuesday amid signs that producers are cutting
output as promised just as demand picks up, stoked by more countries easing out of curbs
imposed to counter the coronavirus pandemic. Brent crude, climbed 25 cents or 0.7% to
$35.06 a barrel, after earlier touching its highest since April 9. ( 19 May 2020)

That may not feed into the May data but as we move forwards it will. That also highlights something which may be one of the Fake News events of our time which is the negative oil price issue. Yes it did happen but since then we have seen quite a bounce as we are reminded that some issues are complex or in this instance a rigged game.

How much of other price rises the inflation numbers will pick up is open to serious doubt. Some of this is beyond the control of official statistics as they could hardly be expected to know the changes in the patterns for face masks for example. But the numbers will be under recorded right now due to factors like this from the new HDP measure.

Out of stock products have been removed where these are clearly labelled, however, there may be products out of stock that have still been included for some retailers. If the price of these items do not change, this could cause the index to remain static.

What do you think might have happened to prices if something is out of stock?

Meanwhile there is another signal that inflation may be higher ahead.

BoE Deputy Governor Ben Broadbent said it might go below zero around the end of 2020

The reality is of a complex picture of disinflation in some areas and inflation sometimes marked inflation in others.




20 thoughts on “The one thing we can be sure of is that the inflation numbers are wrong

  1. Quick comments.

    Some analysts seem to think we could go into deflation. Its a close call imo.

    There has been short term change in shopping habits which was expected as more people are working from home so some products in short supply .

    However with more and more people becoming out of work and Rolls Royce the latest to announce redundancies this morning the supply, the shortage of supply issues could be reversed and deflation occur.

    Negative interest rates look like they are coming closer.

    • Hi Peter

      There was another development this afternoon as the Bank of England twice bought UK Gilts at negative yields. The July 2023 Gilt and the September 2025 one were ones it will make a loss on it if holds to maturity, or rather the asset protection fund will ( BEAPF) as the Bank of England charges it Bank Rate ( presently 0.1%) for the funds.

  2. Hello Shaun,

    re : “What do you think might have happened to prices if something is out of stock?”

    obviously with the lock down – nothing ! the otherwise black market ( think thunderbirds tracey island from decades ago) was squashed . no secondary sources – once out – its unobtainable ( infinite price ?? ) .


    • forbin,

      A few weeks ago I decided to get a PURE Evoke H 5 Dab radio which were priced at £169 at PC World (curry’s) but no stock for delivery, and the same applied to many DAB radios. John Lewis had limited stock. I got the feeling as such they were not discounting as they should due to demand on electrical items. The battery was extra from memory another £23

      I did a price spy check and found the same model from Coolshop an online shop for about £30 cheaper excluding battery. They are however the same price now as PC World.

      I think it comes down to supply and demand the more demand prices are held up. But as peoples income falls I think as I said in my earlier post, less money in peoples pocket will mean prices will fall particularly as manufacturers get back to work and competition will mean price falls which in turn could amount to deflation.

      At the moment the furloughing has to some extent provided some relief for workers particularly if they are topped up as John Lewis has done but if JL closes a store the employees will be worse off.

      Deflation isn’t being talked about too much and I cannot understand why?

      I accept some products like food may become a problem if enough people cannot pick in the fields but technology is getting better now and that wont be too much of a problem in due course. Costs are going up in Supermarkets but again they will get round this in due course; the technology is there to scan a basket load of goods and do away with a check-out assistant.

      • I think it’s down to optimism .

        the housing market was down turned before the pandemic
        job market wasn’t much better.
        we have people now with a slight drop in income being paid for by HMG but soon that will be 60% . Then less .

        how many jobs will be viable ?

        oh be Jesus ! how can they inflate the economy again quickly enough ?

        not by cutting rates IMHO. too little too late, should have been done last year ( but then this event would have happened anyway)

        and negative ones on the high street will be a mix bag – fear, uncertainty, doubt.

        Peter I don’t know what they will do but I’m certain it will involve panic!


  3. If we have interest rates at 0% and deflation of -3% it means real interest rates are +3% relative to GDP, so I’m sure the ONS will do everything possible(including adding falling house prices into the equation) to get that figure as negative as possible to justify negative rates, of course no journo will then ask the obvious question why house prices were never included in the inflation calculation when they were soaring 10-20% p.a as that would have then required a rise in interest rates.

    Agree that there is going to be high inflation in many things and deflation in others, but as to the many things that are out of stock atmo, you can be sure that when they are restocked it will be at much higher prices.

    • funnily enough my wife likes a rice that Ben makes . Been out of stock for a while now. We found some in stock at the local ASDA . Previous price was 3.99, it was on for 3.90

      we took both packets ……. the price is now an imaginary number?

      I think there was an HMG warning at the start of the lock down about ” imaginative ” pricing of super market goods. This I suggest has suppressed prices, along with the difficulties in the black market ( as mentioned before)

      I expect some inflation going forwards 3-6 months as oil price discovery takes place.

      As for housing it was going down before the pandemic ….. I think it will be September before we find out for sure its direction . betting? downwards I’d say

      Interesting times!


      • Forbin, if you look at the May 6 article on “Coronavirus and the effects on UK prices” it gives an idea of how the ONS would treat the situation you described. Rice is a priced item, and it is not on the list of their unavailable items during the pandemic, like cinema popcorn. So if pricing was supposed to be in your outlet, your outlet would be omitted from the sample and the price movement would be based on the outlets that could provide matched samples. If rice was out-of-stock everywhere (highly unlikely), the imputation would be based on matched samples for bread & cereals, the group to which rice belongs.

  4. Hi Shaun

    Great article as always. The boe must be getting worried now. Their misson statement to impoverish the public is coming under threat. Houseprices and inflation are now heading down. I’m sure the press will be trotting out the same misinformation that a little inflation is good.

    As wages come under pressure from job losses and furlough, the public would appreciate some deflation. But probably not from the gment, as I can imagine VAT and council tax rises are on the horizon.

    I’m also expecting more support for the housing market, as it looks like price discovery is starting to occur. We can’t have housing falling can we 😉


  5. We certainly can.
    Amongst others, supermarket Bavarian ham, reduced from 10 slices to 8, a 25% price rise.
    Food inflation is approx. 5x that stated I estimate.

    • Hi therrawbuzzin and thanks for the reminder about pork inflation.

      I like to check it to see if the Chinese Swine Flu epidemic has impacted. For perhaps the first time we are seeing something as pork prices rose by 2.8% in April making them 7% higher than last year.

    • Hi Forbin

      We will have to see if they answer my enquiry. Others have asked and their requests have fallen on stony ground. Maybe it is a bit like Anteos describes with the Halifax house price series where the numbers are regularly revised/massaged.

  6. Great blog as usual, Shaun.
    The RPIJ inflation rate assuming a continuation of the last formula effect published for January 2020, went from 2.0% in March to 0.9% in April. Like the CPIH, it would have been influenced by the steep drop in the annual increase for the council tax, which only changes in April, from 4.7% in March to 3.9% in April. The RPI ex mortgage interest ex council tax adjusted for the formula effect seldom differs in movement from the RPIX adjusted for the formula effect, but the former series was at 0.9% in April, while the latter was at 1.0%, while both were at 2.1% in March. The movement for the depreciation component really can’t be trusted because of the problems with the housing price index, but the drop in the RPIJ inflation rate was also driven by dwelling insurance, whose annual rate of inflation fell from 4.7% to 3.9%, with a monthly decrease for April 2020 of 0.3%, and an April 2019 increase of 1.4% falling out of the index.
    I noticed that because of COVID-19 the consultation on what to do with the RPI has been extended. The only logical thing to do is completely abandon their plans to replace the existing methodology for owner-occupied housing with imputed rents. If they want to change the OOH methodology of the RPI they can remove the smoothing from the depreciation component and add a stamp duty component.
    This August will be the 80th anniversary of the death of Leon Trotsky. I don’t know if an underrated Canadian comedy, “The Trotsky”, ever made it to the UK, but it did produce this lovely song by Mary Milne, which won the Genie Award for Best Achievement in Music – Original Song in 2011:

    • Hi Andrew and thank you

      It is not only council tax which makes its move in April as the price of postage rose by 5.3% on both a monthly and an annual basis. As for RPIJ the behaviour of the ONS has been really poor. They are like a spoilt child taking their football home because they did not win the game.

      As to your suggestion I agree 100%.

      ” If they want to change the OOH methodology of the RPI they can remove the smoothing from the depreciation component and add a stamp duty component.”

  7. Wife to Greengrocer: $3.50 for a kilo of potatoes!… Down the road they’re only $2.50.
    Greengrocer to Wife: Well why don’t you buy them down the road?
    Wife to Greengrocer: They haven’t got any.
    Greengrocer to Wife: When we haven’t got any ours are $2.00 a kilo.

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