Today has brought something of an inflation warning for the UK as we note this from earlier.
The Consumer Prices Index (CPI) rose by 2.1% in the 12 months to May 2021, up from 1.5% to April; on a monthly basis, CPI rose by 0.6% in May 2021, compared with little change in May 2020.
The first thing to note is the monthly increase of 0.6% which means that we have now gone 0.3%, and 0.6% twice which is a signal of acceleration in inflation. That is I think more significant than the 2.1% reading although it does have significance for the Bank of England. If you heard a loud sigh of relief from Threadneedle Street this morning it will have been from Governor Andrew Bailey who now looks to be clear of the phase when he had to write an explanatory letter for inflation being more than 1% below target. However it does present a problem because this afternoon the Bank will but another £1.15 billion of UK bonds to boost UK inflation. That is now somewhat awkward when it is boosting inflation which is above target.
Continuing the theme of inflation above target there are these two variants of the inflation measure.
The annual rate for CPI excluding indirect taxes, CPIY, is 3.8%, up from 3.2% last month…….The annual rate for CPI at constant tax rates, CPI-CT, is 3.8%, up from 3.2% last month.
I point this out continuing the Bank of England theme because they have been keen on using such variants in the past when they fit their views. So I will leave it to your imagination whether they will be pointing this out! As a matter of fact UK inflation would be quite a bit above target without the temporary tax cuts. Maybe not the full amount as these things are not always fully passed on but it would be over 3%.
What is driving the move?
The biggest factor was transport.
where prices rose by 0.3% between April and May 2021, compared with a fall of 1.0% between the same two months of 2020. The effect was principally from motor fuels, with the price of petrol rising by 1.7 pence per litre this year, compared with a fall of 2.8 pence per litre a year ago as prices reached a four year low of 106.2 pence per litre in May 2020. Similarly, diesel prices rose by 1.5 pence per litre this year,
Next comes two categories which have proven very difficult to measure over time.
There was also a large upward contribution of 0.15 percentage points from recreation and culture, where prices rose by 1.2% between April and May 2021, compared with a fall of 0.1% between the same two months a year ago.
This is because the main movers here were computer games and music ( downloads and CDs) where this happens.
It is equally likely to be a result of the CDs, DVDs, music downloads and computer game downloads in the relevant bestseller charts. Price movements for these items can often be relatively large depending on the composition of these charts.
That is not well explained. Essentially prices are high when in the charts but are then discounted heavily and that is not easy to capture properly in an inflation measure. That principle applies to the next category where the advent of ever more fashion clothing with newer retailers like Primark reacting fast means prices can go from (relatively) top dollar to being discounted very quickly.
The rise this year has been influenced by a fall in the amount of discounting recorded in the dataset between April and May,
So with that warning we have this.
Clothing and footwear contributed 0.13 percentage points to the change in the CPIH 12-month inflation rate. Prices, overall, rose by 2.3% between April and May this year, compared with a smaller rise of 0.3% between the same two months a year ago
The Trend
The moves in producer prices have been harbingers of the consumer inflation rise and the beat goes on.
The headline rate of output prices showed positive growth of 4.6% on the year to May 2021, up from positive growth of 4.0% in April 2021.
The headline rate of input prices showed positive growth of 10.7% on the year to May 2021, up from positive growth of 10.0% in April 2021; this is the highest the rate has been since September 2011.
Some of the move is the result of the plunge in oil prices last year.
Petroleum products had the highest annual growth rate of any component of output prices in May 2021, at 67.0%
However if we bring things up to date we see that right now the price of crude oil is rising again. Yesterday for example the price of a barrel of Brent Crude Oil went above US $74 yesterday for the first time since April 2019. As we look around we see some things going the other way as Lumber for example has fallen back somewhat after the surges we saw in previous weeks and months. But in terms of the overall picture the 1.1% monthly rise in UK input inflation continues the 2021 trend of it being around 1% every month. So as Hard-Fi put it.
Pressure
Pressure
Pressure, Pressure, Pressure
Feel the pressure
Housing Costs
This area continues to be quite a problem. So let me start with what is officially claimed to be the most comprehensive measure of UK inflation.
The Consumer Prices Index including owner occupiers’ housing costs (CPIH) rose by 2.1% in the 12 months to May 2021, up from 1.6% to April…….On a monthly basis, CPIH rose by 0.5% in May 2021, compared with little change in May 2020.
It’s problem is the bit which is claimed to make it so comprehensive.
The OOH component annual rate is 1.5%, up from 1.4% last month. ( OOH = Owner-Occupiers Housing )
There are probably amoeba on Jupiter smelling a rat here because the issue of rising house prices has been in the news everywhere. Indeed it has been official policy to pump them up via the Stamp Duty Cut for example. Even the official house price series illustrates that.
UK average house prices increased by 8.9% over the year to April 2021, down from 9.9% in March 2021.
Average house prices increased over the year in England to £268,000 (8.9%), in Wales to £185,000 (15.6%), in Scotland to £161,000 (6.3%) and in Northern Ireland to £149,000 (6.0%).
So if we take a broad sweep we see that house price rises of 10% or so become the much more friendly 1.5% or so via the use of Imputed Rents. They assume owners pay themselves rents in a methodology which is going spectacularly wrong all around the world right now. It is amazing that it has not been questioned more. There is a British spin to this because our official statisticians have so little faith in the reliability of the rental data they collect they “smooth” it. This means that the number above is really last years rents rather than May’s.
Comment
We are receiving something of an inflation warning in the UK as we note that we have nudged above the 2% target and would be above 3% without the indirect tax cuts. Another way of putting this is to replace the fantasy imputed rents in the official measure CPIH with a something which is paid which is house prices. Doing so gives a 3.5% reading if you use current house prices.
The irony is this means that our past measure of inflation the Retail Price Index is giving a better guide to the state of play.
The all items RPI annual rate is 3.3%, up from 2.9% last month……..The annual rate for RPIX, the all items RPI excluding mortgage interest payments (MIPs), is 3.4%, up from 3.2% last month.
If we take an international perspective we can be grateful that for once we are not at the front of the pack. Why is the US at 5%.If we put aside different measures. Looking into it the rise in the price of “Gasoline” is much more marked there due to lower taxes as it is up 56%. Also used car prices have surged (29.7%) and that is different to our experience. Yes we have a marked monthly rise ( 1.2% in May) but it only has a weight of 0.12% so the impact is minor. Also the stronger period for the UK Pound £ has helped this year.
Meanwhile perhaps Scotland has given us a clue about what might happen when the Stamp Duty Cut full expires.
The slowdown in house price growth in Scotland may have been driven by the end of the Land and Buildings Transaction Tax holiday on 31 March 2021.
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There was an inflation warning in 2017/18 when CPI edged above 3% but fell back again and most forecasters feel inflation will continiue to rise but fall back again later on.
With the lockdown easing and Joe Public having saved up billions, then supply problems inflation was expected to spike up.
But what will happen once some of those savings have been spent and furlough ends, then later on tax rises kick in?
Hi Peter
But if we look back to 2017/18 much of the inflation then ( I think I remember calculating 1.4%) was due to the posy Brexit vote fall in the Pound £. This time around it has been a demand thing so it is uncertain how long it will last. We can say the summer and then we wait to see what happens to the economy,
Hello Shaun,
I’m sure the BoE will just move the goal posts – again
Forbin
Depends whaat you mean by move the goal posts !
All the rhetoric about raising interest rates to push the £ up but actually doing nothing as they have done nothing for quite a while now.
As for the oil price rises well in a few years time we wont be relaint on oil the UK is aboloshing gas boilers (if it happens at all) and pushing electric cars, then the oil price will plummet in due course.
But we could end up with a mini boom and bust I dont think anyone really knows at the moment.
So long as inflation and wage rises continue to the Autumn when the data sets next years pensions that is all that matters for us oldies.
Its 16 degrees at the moment I must turn the heat up !
We have no chance whatsoever of
Having the generating capacity to switch to electric cars 10 years.
Finding the funding to convert homes to other forms of heating in similar timescale.
Forget it, it is not going to happen.
Just been watching GM news Michaele Dewsbury interviewing a financial reporter who thinks inflation now getting out of control and the BOE will have to either move on interest rates and or press off the accelerator so far as money printing (my terminology) but I happen to think inflation will slow down next year. The Chancellor to be interviewed some time after 8 pm which will be worth watching. I must say the new news chanell is certainly different and contrversial at that in many ways, the dont seem to care about polictical correctness.
Great blog as usual, Shaun, for the most part.
You write that if one decides to “replace the fantasy imputed rents in the official measure CPIH with a something which is paid which is house prices” then the inflation rate for May goes from 2.1% to 3.5%. Then you write that this means that the RPI inflation rate (3.3%) or RPIX inflation rate (3.4%) is closer to the actual inflation rate than the CPIH inflation rate is. Both statements seem to be based on false beliefs. First, it is not defensible to simply replace an imputed rent series with an imputed rent series expenditure weight in a consumer price measure with a housing price series, even as an approximation. The expenditure weight is wrong, and even with an acquisitions approach to owner-occupied housing there are simply too many other things that influence owner-occupied housing costs. Some of them, like dwelling insurance (1.8%) and repairs (0.6%), did not have high inflation rates in May, even looking at the RPI series. Nor is it necessary to go with such a crude approximation. The CPIH(NA) series is calculated monthly by the ONS, albeit with a long lag. As an alternative, which is available without a lag, I look at the RPI for all items excluding mortgage interest payments and council tax, which usually matches pretty closely the RPIX measure. It showed 3.3% inflation in May, up from 3.1% in April.
Unfortunately, the RPI measure suffers from an upward bias caused by the formula effect. The ONS published a formula effect adjustment up to and including their January 2020 update, and with quibbling caveats I accept what they did as valid. I used their series to adjust for the formula effect and since then have used their January 2020 formula effect value of 0.6 percentage points as a proxy. Therefore, the best guess for now is that the inflation rate was 2.7% in May, up from 2.5% in April. (By the way, I prefer this RPI measure to RPIX, but they are always close. RPIX inflation adjusted for the formula effect shows 2.8% inflation, up from 2.6% in April.) This is pretty alarming stuff in itself. There is no need for a full Hammer House of Horrors treatment to make it worse than it is.
The CPIH(NA) measure is complicated by the reduction in stamp duty rates, which it is sensitive to. The RPI excludes stamp duty. This is not such a thorny problem if you start with the premise that the measure should ideally include stamp duty and be sensitive to changes in house prices reflected in them but that the central bank should look past changes in stamp duty rates. But I digress.
Very sorry if I haven’t convinced you that the CPIH(NA) or a formula-effect adjusted RPI for All items excluding mortgage interest payments and council tax is the best current macroeconomic measure of consumer price inflation for the UK after all this time. I’m obviously not very persuasive. Since we can’t together for a virtual beer I would suggest you get together for one with John Astin and Don Sellwood to discuss the net acquisitions approach to OOH. And why not have a beer with Peter Levell to discuss the formula effect. Everyone has their own opinions, and their views would differ from mine, but I think theirs would be much closer to mine than to yours.
Hi Andrew and thank you
I did have a beer with John Astin and some others a fortnight ago to discuss the problems of inflation measurement. It is a shame due to distance you could not join us as you would observe that the debate is multi-faceted, More speak up for Carli than they did.
You are right that the 18,5% weight for owner occupied housing would be reduced if house prices were used say down to 10.5%. But as I argued at their seminar in 2018 there is a clear problem with that when nothing has changed. I would say not expenditure but of course it has because under my system there is some whereas under CPIH there is no expenditure on Imputed Rents,
CPI (NA) should be published with these numbers so people can see and compare it with the other measures. As should RPIJ which was supposedly the next big thing until it got unceremoniously dropped when it did not give the establishment what they wanted. There are 58 sets of tables I have just downloaded for today’s report so it would not be a lot of effort to produce 2 more.
Next on the list is the failure to produce the HCIs and the inevitable foot dragging over the capital component of housing.
As I have said before I am sure we could fairly quickly settle things. After all your RPIJ system is producing 2.6%/2.8% and would presently be higher if actual house prices rather than the smoother series is used. There is then plenty of work on the fashion clothing and best sellers issue which seems to be an ever growing problem. Dealing with that would reduce the formula effect as a side issue I think….
Good news for pensioners is Rishi Dishi intimates the Triple Lock is GOV policy and he appears to be suggestign if wage rises are the highest numbers we pensioners may get a bumper pension next year subject to the GOV reveiw in the Autumn.
Seems to me like the GOV will have to keep interest rates at the same levels or even go negative to ensure they can keeo up with their interest payments on the GOV eye watering debt.
Any thoughts?
Mew potatoes up from £5/kg last year, to £6/kg this. That’s 20%
I don’t mean the crappy Jersey Royals, which are not a patch on their former selves since they ditched the vraik for irrigation, which blows them to twice their former size.
buz
Jersey Royals used to be something to wait for but arent as tasty as they were a decade or so ago, dont know why maybe like you say its modern farming methods.
http://news.bbc.co.uk/local/jersey/hi/people_and_places/nature/newsid_8478000/8478833.stm
Hi Shaun,
Replying to yesterday’s post regarding the rise in construction sector wages, there is a lot of demand on those that are working currently as a proportion of the non GB workers are either here sat at home not working due to not wanting to go over their taxable amount having collected their furlough payments or at home abroad due to the same (and possibly not coming back).
I hope you are managing to keep your head in a good place during these strange times.
Have enjoyed your posts and commenters for a number of years.
Thank you 😊