Today we are going to go on a journey as we make our way through the UK inflation numbers. Let me warn you that there will be elements of Alice in Wonderland about this and that even Alice would be bemused by some bits. Let me start by opening with the lowest number and in something of a happy fluke for the UK establishment it is the number preferred by the media. Ironically they are being guided elsewhere but I will come to that in a bit.
The Consumer Prices Index (CPI) rose by 0.4% in the 12 months to February 2021, down from 0.7% to January 2021; on a monthly basis, CPI rose by 0.1% in February 2021, compared with a 0.4% rise in February 2020.
So good news for the establishment as they get the lowest number out in the media and get reports of a fall. Rather awkwardly there are few details on the breakdown because they are so desperate to push the CPIH number they restrict other information. This is really rather poor when you consider that this is the measure used for the inflation target of the Bank of England.
Searching through the elements I do not that we are seeing goods disinflation and what inflation that is being recorded is in the services sector.
The CPI all goods index annual rate is -0.5%, down from -0.2% last month………..The CPI all services index annual rate is 1.5%, down from 1.7% last month.
This in a broad sweep has been true for a while which is confirmed by noting the two indices where 2015 = 100
The CPI all goods index is 105.3, up from 105.2 in January….The CPI all services index is 113.4, up from 113.2 in January.
So the inflation recorded in recent years has essentially been in the services sector.
Next comes the bit that the establishment hope you will not read. This is because there is a variant of the CPI measure that removes the indirect tax changes that have happened. For example the changes to VAT and Eat Out To Help Out. Look what happens then.
The annual rate for CPI excluding indirect taxes, CPIY, is 2.0%, down from 2.3% last month.
Suddenly inflation is on target and there was a time when the Bank of England was very keen on this measure and I remember Adam Posen emphasising it when he was a policymaker. Of course it is not convenient so will be ignored.
You can argue that not all the tax cuts will be passed on but even if we put an allowance for that then CPIY is at say 1.5% still giving a different measure.
CPIH
Next comes the measure which was supposed to be lower than CPI but as you can see has had something of a misfire.
The Consumer Prices Index including owner occupiers’ housing costs (CPIH) rose by 0.7% in the 12 months to February 2021, down from 0.9% to January.
To explain this I need to take you into the Alice in Wonderland world that has been constructed. When it came to housing costs they decided to use something which does not exist rather than say house prices ( which have this habit of rising) and mortgage costs who do exist. So they decided to assume they pay rent when they do not. They could then get the numbers from those who actually pay rent.
They ignored the fact that the official rental series is if we are polite a shambles. For example only a few years ago they had to start again it was so obviously wrong. Because of the issues they “smooth” the numbers over around 16 months to avoid the monthly numbers being obviously embarrassing. Now please do not laugh too much when you see this below.
Private rental prices paid by tenants in the UK rose by 1.4% in the 12 months to February 2021, up from 1.3% in the 12 months to January 2021.
Because of the smoothing I described earlier these numbers are yet to pick up any particular impact from the pandemic. Indeed we can drill deeper because it has been London which has seen the largest falls with Zoopla suggesting reached -5% in the autumn, which gets translated into this.
London private rental prices increased by 0.8% in the 12 months to February 2021, unchanged from January 2021.
So there are two problems here. The first is that saying this is the February 2021 inflation number is not true as 18.5% of the index is Imputed Rents which in this release are more reflective of February 2020. Next comes the fact that the measure will be useless at turning points and will end up like it has in London completely missing what has been a sea change.
RPI
This not only produces a higher number but has ignored the apparent downwards trend.
The all items RPI annual rate is 1.4%, unchanged from last month.
Indeed if we switch to the variant that the Bank of England used to target we see quite a gap between it and the one it now does.
The annual rate for RPIX, the all items RPI excluding mortgage interest payments (MIPs), is 1.6%, unchanged from last month.
So a 1.2% gap between it and the new measure!
An example of a major reason why is below.
Other housing components, which increased the RPI 12-month rate relative to the CPIH 12-month rate by 0.09 percentage points between January and February 2021. The effect principally came from house depreciation.
House depreciation is code for the fact it uses house prices for about 8.5% of the index. It is much the best system we have and could be to use the current buzz phrase “world beating” with two changes.
- Stop messing around and put house prices in explicitly
- There is some smoothing here and this should be replaced with up to date numbers.
House Prices
The case for the above comes with elegant simplicity from a later release today.
UK average house prices increased by 7.5% over the year to January 2021, down from 8.0% in December 2020.
As you can see first time buyers and those trading up are facing quite a lot of inflation which due to the swerves described above slips between the fingers of the official “housing costs” measure. At the moment those in the North West are being especially hard done by.
The North West was the English region which saw the highest annual growth in average house prices (12.0%), while the West Midlands saw the lowest (4.7%).
If we put house prices in CPIH with the current weights a back of the envelope calculation gets you to 1.8% rather than 0.7%.
Comment
Sadly this is yet another story of reality being massaged to avoid telling the truth. Or to be more precise describing reality accurately as there is always some doubt in inflation numbers. This was highlighted by former Bank of England policymaker Andrew Sentance earlier.
What is Uk inflation? Measured by CPI it is currently 0.4 percent but this is the lowest of the available inflation measures. Here are the rest – CPIH 0.7pc; PPI (output) 0.9pc; RPI 1.4pc; RPIX 1.6pc; CPIY 2.0pc; PPI (input) 2.6pc; GDP deflator 6.1pc; GVA deflator 8.0pc.
They are obviously hoping we have forgotten that the GDP Deflator is at 6.1% as they tell us another measure of inflation is 0.4%. Actually Andrew is exhibiting why he made a good external member of the Bank of England in that he looked at different views. Unfortunately the current crew are nothing like that.
So yes there is inflation around so be ready for the words “unexpected” and “surprise” to be deployed. If we look at up the inflation chain there are already some signs of it.
The headline rate of output inflation for goods leaving the factory gate showed positive growth of 0.9% on the year to February 2021, up from positive growth of 0.1% in January 2021.
The price for materials and fuels used in the manufacturing process showed positive growth of 2.6% on the year to February 2021, up from positive growth of 1.6% in January 2021.
Notayesmanseconomics's Blog 
And it’s really over 10% if you are on below average income.
I’d posit that even the median income is being stuffed like a christmas turkey…..
forbin
Yes and more will be subject to lower pay or even benefits as John Lewis announces a further 8 store closures, this is after 8 store closures late last year”
https://www.retailgazette.co.uk/blog/2021/03/confirmed-john-lewis-shuts-down-8-more-stores-1465-staff-affected/
The latest closures will place over 1,400 jobs at risk and the “partners” will find it almost impossible to seek further jobs in retail.
Todays news will leave some partners devatated at todays news as they will have to come off furlough go on the dole and see a fall in their income.
With more people losing their jobs this should help to curb inflation due to retailers having to be more competitive in their pricing.
Hi Peter
The clothing numbers are interesting because it has been one of the areas of dispute between CPI and RPI. Here are the CPIH numbers from today.
“The largest downward contribution (of 0.13 percentage points) to the change in the CPIH 12-month inflation rate came from clothing and footwear. Prices, overall, fell by 1.5% between January and February 2021, compared with a rise of 0.9% between the same two months a year ago.”
We only get a hint that this was different to the RPI but with the gap between the 2 widening we can assume it was. I raise this because when there were big changes in clothing prices early last decade due to imports from China there are more than a few statisticians who feel that the RPI was more accurate.
Just a few quickies
“The North West was the English region which saw the highest annual growth in average house prices (12.0%), while the West Midlands saw the lowest (4.7%).”
I live in the North West and have been saying for some time that the house market is extremely strong, in fact most houses are getting sold quite quicly once they are put up for sale in the £150k to £300k bracket. Also the estate agents are stating “offers over” the stated price at the lower to medium band prices.
To be honest I have suspected in the short term CPI infation would be subdued the lockdown has had an impact on clothes in particular.
The lower the inflation the better and some comments from the BOE suggest interest rates are going nowhere short term and may even be cut to zero later on in the year:
“An accommodative monetary policy is likely to see the BOE’s policy rate kept at current level with further quantitative easing (QE) announced later this year. We do not expect interest rates to begin normalising before the end of 2022, whilst any downside could see the policy rate cut to zero alongside further increases to the scale of the ongoing QE programme.”
https://www.fxstreet.com/news/boe-interest-rate-seen-normalizing-by-end-2022-uob-202103220958
Hi Peter
The Bank of England have no intention of raising interest-rates. Even the Bank of Canada which announced the end of some of its emergency measures yesterday added this bit.
” Meanwhile, a decision on the policy rate is linked to the economic outcomes described in our forward guidance—which says that we will leave the policy rate at 0.25 percent until economic slack is absorbed so that the 2 percent inflation target is sustainably achieved. In the forecast that we published in January, we projected this wouldn’t happen until into 2023.” ( Deputy Governor Gravelle )
Hello Shaun,
I wont repeat myself over petrol from my earlier posts .
But this
“UK average house prices increased by 7.5% over the year to January 2021, down from 8.0% in December 2020.”
Who are they asking – Zoopla? har har
I can see that the North is getting a good dose of ” wealth effect” now .
My road 3 bed semi , 2018 one went for £440K . I could not sell my for £400K in 2019 , 2020 nobody moved , this year one went for £ 380K ………………….
thats appros 4.5% drop each year, yes I know this year aint over , prices are for March though.
All areas differ I know, London will be interesting .
Perhaps the North is getting buyers because you can WFH and get a decent house compared to sunny Surrey..
GDP deflator – thats madness why so high ? anyone?
Forbin
They just make it up.
Indeed, like all the Covid restrictions, they think we are all stupid.
Hello Shaun,
Its the BoE job to talk down inflation unless it wages , what ever they may mouth , wages is the actual target .
Bit of an issue this pandemic……. apparently everybody’s wages grew …….. frankly I know of no one at all who had a wage increase , most are on tender hooks for when the majick money tree goes away , ie furlough ends.
If its allowed to, of course.
Forbin
Hi forbin
On wages Danny Blanchflower and Shaun agreed in their recent tweets the data was up the shoot, DB refered to an article in the Guardian he wrote a number of months ago which is worth reading, which you may have already done so
https://www.theguardian.com/business/2020/dec/23/the-puzzle-of-rising-uk-wages-reveals-an-unprecedented-and-tragic-truth
Rising wages looks good when you are seeing low inflation but lower paid workers are dropping out of the index !
Imports have not yet been hit by TransEnd, but they will be. Then the lid on inflation will come off.
Hi JimW
Well the problems with the Suez Canal will not help but never fear as help is at hand.
Maybe check that the hold isn’t full of those Union flags we’re to fly over all our public buildings!
That aside, maybe the reduction in demand of sundry goods might allow the BoE to explain away any minor increases in inflation in coming month or two? Well, this is a truly unexpected event in fairness 😉 Over to Sir Humphrey.
Iain
Are Sanky and Sunky going as well? Its a long way from the RAF Luton lake.
I don’t think Lewis Carroll came anywhere close to describing this. Far too crazy for him.
Great blog as usual, Shaun.
Sorry for the late comment. It is interesting that Adam Posen was a strong advocate of the CPIY inflation measure. It would seem to me that the more interesting inflation measure is CPI-CT, which does not remove indirect taxes from the index basket, but simply assumes constant tax rates for the index. This is identical with the Eurostat constant-tax HICP (HICP-CT) prescribed for all EEA countries, just as the UK CPI is, to this point, identical with the UK HICP. For some goods, like tobacco and alcohol, excluding indirect taxes altogether really reduces their basket shares. So the CPIY basket represents a fairly different basket from the CPI basket. The same thing cannot be said for the CPI-CT. Of course, the two indices usually move closely together. In the last three months of 2020 these were the annual inflation rates for CPIY, with the comparable rates for CPI-CT in brackets: October 2.3% (2.4%), November 1.9% (2.0%), December 2.2% (2.2%). There are no monthly CPI-CT values after December 2020. A footnote in the monthly publication says: “Following the end of the transition period, the ONS will cease to provide a monthly submission of consumer price inflation data to Eurostat. However, we are planning to continue the publication of the Consumer Price Index at constant taxes (CPI-CT) series on a quarterly basis.” Of course, all data provided to Eurostat to meet EU requirements must be re-examined now by the ONS, to decide if it is still useful. However, this is a dysfunctional change. It would have been better to keep calculating the monthly CPI-CT series, and only produce the CPIY series quarterly, or discontinue the CPIY series altogether.