Welcome news from UK Inflation

This morning has brought some good news for hard pressed UK consumers and workers from the Office for National Statistics.

The Consumer Prices Index (CPI) 12-month rate was 0.2% in August 2020, down from 1.0% in July…….The all items RPI annual rate is 0.5%, down from 1.6% last month.

As you can see there has been quite a fall which will help for example with real wages (which allow for inflation). After yesterday’s figures which showed us we have been seeing wages falls this is helpful. Although it would appear that someone at the BBC is keen to pay more for everything.

Before the latest figures were published, there had been fears that the UK inflation rate might turn negative, giving rise to what is known as deflation.

Economists fear deflation because falling prices lead to lower consumer spending, as shoppers put off big purchases in the expectation that they will get cheaper still.

They would have had REM on repeat if they had lived through the Industrial Revolution.

It’s the end of the world as we know it (time I had some time alone)
It’s the end of the world as we know it (time I had some time alone)

Briefly I thought my work was influencing them as I noted the start of the sentence below but the final bit is pretty woeful.  Mind you if you think that the Industrial Revolution was bad I guess you might also think that inflation is bad for borrowers.

Low inflation is good for consumers and borrowers, but can be bad for savers, as it affects the interest rates set by banks and other financial institutions.

What is happening?

Here is the official explanation.

“The cost of dining out fell significantly in August thanks to the Eat Out to Help Out scheme and VAT cut, leading to one of the largest falls in the annual inflation rate in recent years,” said ONS deputy national statistician Jonathan Athow.

“For the first time since records began, air fares fell in August as fewer people travelled abroad on holiday. Meanwhile. the usual clothing price rises seen at this time of year, as autumn ranges hit the shops, also failed to materialise.”

As you can see we have a market effect in travel and also a result of a government policy. It looks as though the latter was pretty successful.

Last month, discounts for more than 100 million meals were claimed through the Eat Out to Help Out scheme.

In terms of the inflation data it had this impact.

Falling prices in restaurants and cafes, arising from the Eat Out to Help Out Scheme, resulted in the largest downward contribution (0.44 percentage points) to the change in the CPIH 12-month inflation rate between July and August 2020.

As you can see they are desperate to try to push their CPIH measure. We can deduce from that number that the impact on CPI will be a bit over 0.5% via its exclusion of the fantasy imputed rents in CPIH.

If we switch to the RPI we see this.

Catering Annual rate -7.0%, down from +3.4% last month
Never lower since series began in January 1988.

In fact the catering sector reduced the RPI by 0.52%. There was also another significant factor in its fall.

Fares and other travel costs. Annual rate -8.4%, down from +0.9% last month
Never lower since series began in January 1957.

That sector resulted in a 0.33% fall in the index.

Moving onto other detail there are increasing concerns over pork prices after the discovery of a case of swine flu in Germany but so far any price changes have not impacted the UK. Pork prices were in fact 1.3% lower than a year ago with bacon 0.3% higher. I must be buying the wrong sort of tea as I am paying more yet apparently prices are 8.3% lower than a year ago.

Are we sure?

We are still failing to record more than a few prices.

we have collected a weighted total of 86.9% of comparable coverage collected previously (excluding unavailable items).

The next bit is curious as what is still excluded?

As the restrictions caused by the ongoing coronavirus (COVID-19) pandemic have been eased, the number of CPIH items that were unavailable to UK consumers in August has reduced to eight……. these account for 1.1% of the CPIH basket by weight

When I checked it was things I should have thought of like football and theatre admission.

The Trend

There is downwards pressure on the goods sector in the short-term.

The headline rate of output inflation for goods leaving the factory gate was negative 0.9% on the year to August 2020, unchanged from June 2020.

This has been reinforced by the fall in the price of oil.

The price for materials and fuels used in the manufacturing process displayed negative growth of 5.8% on the year to August 2020, down from negative growth of 5.7% in July 2020…..The largest downward contribution to the annual rate of input inflation was from crude oil.

Owner Occupied Housing

It was hard not to laugh as I read this earlier.

The Consumer Prices Index including owner occupiers’ housing costs (CPIH) 12-month inflation rate was 0.5% in August 2020, down from 1.1% in July 2020.

Why? This is because the imputed rents used to keep the number lower have ended up producing a higher number than CPI.This is because they are smoothed are in fact on average from the turn of the year rather than now.

Private rental prices paid by tenants in the UK rose by 1.5% in the 12 months to August 2020, up from 1.4% in the 12 months to July 2020.

Quite a shambles may be building here because Daniel Farey-Jones has been following rent changes in London and here is an example from the last 24 hours.

Bloomsbury 1-bed down 21% to £1,300……….Waterloo 2-bed down 16% to £2,000……..Shoreditch 1-bed down 23% to £1,842.

Here is how this is officially reported.

London private rental prices rose by 1.3% in the 12 months to August 2020.

Whilst Daniel’s figures started as anecdotes he has built up a number of them which suggests there is something going on with rents that is very different to the official data.

Switching to house prices the official series is way behind so here is Acadata on the state of play.

In August, Halifax and Rightmove are showing broadly similar annual rates of price growth of 5.2%
and 4.6% respectively, with Nationwide and e.surv England and Wales reporting lower figures of 3.7%
and 1.5%


The lower inflation news is welcome but a fair bit of it is temporary as the Eat Out To Help Out scheme is already over. There is a feature in the numbers which is something that has popped up fairly regularly in recent times.

The CPI all goods index annual rate is -0.2%, down from 0.0% last month….The CPI all services index annual rate is 0.6%, down from 2.1% last month.

Goods inflation is lower than services inflation and in this instance went into disinflation.

However I think we are in for a period of price shifts as I note this.

The annual rate for CPI excluding indirect taxes, CPIY, is 1.8%, up from 1.0% last month.

So once the tax cuts end we will see a rally in headline inflation. Some places will need to raise prices but it is also true that others are cutting. For example Battersea Park running track and gym has just cut its monthly membership fee.

15 thoughts on “Welcome news from UK Inflation

  1. Hello Shaun,

    It’s all a bit of a dog’s dinner , isnt it ?

    Still by Christmas we’ll have a better picture , I hope


    • erm yes, as we both know all these stats are temporary, for a number of reasons, first the “eat out to help out” which halved meals out and I am surprised it made 0.5% to the RPI figures which is a considerable percentage from my perspective.

      But more important is how high unemployment will go and how that will affect spending, the main reason for this is as spending falls suppliers must get more competitive thus reducing prices and therefore inflation, which I will explain in more detail later.

  2. “Low inflation is good for consumers and borrowers”. I always thought that high inflation was good for borrowers, including governments, as you repay with inflated income.

  3. Hello Shaun,

    How does a recovery work with efforts like this?

    BBC – Rhondda Cynon Taff to go into lockdown

    but you can still go to the pub so long as it shuts at 11pm ?


    • Forbin,

      Low inflation normally leads to low or negative interest rates and an interesting comment from ECB’s Holtzman 10 minutes ago:

      “FRANKFURT (Reuters) – Low or negative interest rates harm the economy in the long term by curbing productivity, fuelling asset-price bubbles and fostering inequality, European Central Bank policymaker Robert Holzmann said on Wednesday.

      “Many of us, I think, believe that in the medium and, in particular, long term, low interest rates and, in particular, negative interest rates are harmful,” Holzmann, an outspoken hawk who heads the Austrian central bank, said in an online forum.”

      We have already had asset price bubbles does he suggest the bubbles going to expand further or burst?

      As to inequality his remarks are a pure guess no one has a clue how a collapse in the world wide economy would in reality affect each group of people, as an example some of the poor in this country cannot get even poorer as we have a state which should protect the poorest and who knows how a world collapse would affect the rich. Some would be ruined but I suspect everything would be done to protect the people at the other end of spectrum.

      Furthermore high inflation is also damaging to an economy as history has taught us. But the caveat is that debt can be whittled away by inflation, but servicing the debt can cause ruin.

      These are not simple answers, I always take the view there are too many variables which disrupt any outcome and if anyone claims to have the perfect solution to the worlds economic problems they will indeed be very rich indeed.

      Having said all the above I am impressed at Shaun’s take on the world economics albeit I may differ on some issues, his blog however has enlightened my simple understanding of economics.

      • Shaun,

        “Low inflation is good for consumers and borrowers, but can be bad for savers, as it affects the interest rates set by banks and other financial institutions.”

        Too simplistic, high inflation can also be bad for savers if money on deposit is say 8% when tax on interest is taken into account and inflation running at well over 8%.

        To put it simply anyone who has invested in property has done far better over the last 50 years than savers in the bank.

        Moving on to your comments on tea, a few weeks ago Morrison along with other supermarkets all decided to cut their prices. First it was Tesco trying to compete with ALDI then MARKS with their every day essentials and then Morrison was the latest to announce over 400 basic item price cuts and PG Tips slashed near half price!


        “The lower inflation news is welcome but a fair bit of it is temporary as the Eat Out To Help Out scheme is already over. There is a feature in the numbers which is something that has popped up fairly regularly in recent times.”

        Yes it is temporary but since the data most of the supermarkets have started a price war and all this hasn’t been taken account of yet.


        “So once the tax cuts end we will see a rally in headline inflation. Some places will need to raise prices but it is also true that others are cutting. For example Battersea Park running track and gym has just cut its monthly membership fee.”

        Its difficult to forecast now imo as more and more people will become unemployed the retailers and services will have to get more competitive and I see further slashing of prices in the months ahead. Furthermore a number of food outlets have carried on their half price meals.

        On balance I would guess al low inflation for months to come. Certainly well below the GOV target of 2% which I think is out of the window.

        • Daily Express:

          Tom Stevenson, investment director for Personal Investing at Fidelity International added consumer demand is likely to stay down this autumn as we see through the coronavirus crisis.

          He said: “Weak demand should ensure that inflationary concerns remain on the back burner for now and price growth will track closer to zero through to the end of the year.


          Slow prices growth “will serve to protect households’ spending power at times when many are feeling under pressure,” said Yael Selfin, chief economist at the consultancy KPMG UK.

          Economists expect the Bank to be on a “wait and see” mode this week.

          However, James Smith, economist at ING, said that with depressed activity, millions of people on furlough, subdued inflation, increased Brexit uncertainty and rising infections, action at the November meeting was “looking ever more likely”.

          Samuel Tombs, chief UK Economist at Pantheon Macroeconomics said that he expected “the headline rate of CPI inflation to average just 0.6 per cent in the last four months of 2020, persuading the MPC to sign off more asset purchases before the end of this year”.

          The Bank of England had expected the prices growth rate to slow in the second half of the year reflecting the effects of the government schemes and low energy prices.


          Tomorrows BOE will be interesting and may give a clue as to where interest rates are going; the city expects the BOE to do nothing on rates tomorrow but the odds are shortening later on in the year imo. The BOE could cut to Zero in November if the UK goes into further lockdown and unemployment rises significantly and next year if there is no real improvement negative rates to come.

    • chris,

      Swings and roundabouts I think, the utilities prices being kept down overall particularly water and so far as the better off paying more its done so so the poor have lower inflation.

      Are there more poor than well off?

      The poor get other benefits on electric and gas through the winter scheme which gives them £150 or more to ease winter payments.

    • Hi Chris

      No I had not and am wondering how arrears have come as like many I pay by direct debit. I also remember the days when my maternal grandparents had a meter hence the phrase ” two-bob for the meter” ( 10 pence for younger readers). I guess they must have had instructions not to disconnect non-payers.

      • The utilities cannot disconnect if there is a baby in the house and I think it applies to an elderly. gone are the days fortunately where the gas or electric are disconnected and could cause such distress to people who cannot pay their bills.

        However what does happen is the utilities got round this by installing pre pay meters in council property,

        So what can happen is the vulnerable can be affected in the end and I am not sure what happens if someone has no money to top up a pre paid card meter.

  4. Great blog as usual, Shaun.

    On a different topic, have you or any of your readers seen Amity Shlaes’s new book “Great Society: A New History”? Contrary to what the title would suggest, it doesn’t look just at the Great Society programs of the LBJ presidency but somewhat arbitrarily covers the period from the Kennedy presidency to March 1972 in the Nixon presidency. On the third set of picture plates following page 340 there is a picture of two men in a car with President Johnson, and one of them is supposed to be Prime Minister Harold Wilson, and I am pretty sure neither of them is. Do you or any of your readers know who they might be? Sorry, I am not strong on UK politics. John Cochrane, the Grumpy Economist, said it was a great book, but I think he was being a little generous. It has its moments, but the economic analysis is a little weak. I thought her earlier book, “The Forgotten Man”, about the Great Depression, was better.

  5. This is a little esoteric but it relates to the myth of deflation.

    In August 1981 a very young TW bought the new issue of Byte magazine – a now defunct computing magazine from the US. Inside was a detailed discussion of Xerox’s latest progamming system. We saw windows, a pointer, and a little gizmo called a “mouse” which was used to navigate the system. I was just a beginner in programming then but I was blown away.

    But in the screenshots I noticed something – the amount of memory needed to run the thing. I was blown away again, but this time by the thought of how astronomical the requirements were and how impossible it would be to afford such a system even for most small companies, let alone a single programmer. It would require hundreds of thousands of pounds in today’s money (maybe more) to buy the full kit needed, including storage and so forth.

    The system and the programming language (Smalltalk) are at the foundation of basically everything you think of when discussing personal and SME computing today, despite Xerox completely mismanaging the whole thing and failing to make any money out of it, it lead to the Apple Mac, Java, C++ and a plethora of modern languages and systems.

    Yesterday I saw a notice online that as part of the 40th anniversary (and the 80th birthday of the creator) celebrations, the Smalltalk system had been released to the public in a platform-independent form that can be run on current hardware.

    That system which I could not imagine being able to afford in 1981 can run today on a Raspberry Pi Zero – price 9 pounds and 80 pence. Basically the cheapest computer available.

    As we all know, of course, the IT industry has struggled terribly since 1981. Constantly undermined by deflation it has proven impossible to get companies to deploy any IT infrastructure. Oh, wait. No it hasn’t.

    Deflation has delivered incredible computing power literally into the hands of almost every person in the world in the form of smartphones. That in turn has changed not only their personal lives but the whole world economy which relies so much on communication and analysis.

    One would have thought that professional economists and economics reporters would understand that.

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