Inflation roars in the UK as the cost of living rises by 6%

This morning has brought something to the UK which younger readers will not have experienced. Or rather it has brought more official recognition of an issue that will have been affecting shopping baskets and bills. Millennials and younger will nit have experienced anything like this.

The all items RPI annual rate is 6.0%, up from 4.9% last month. The all items RPI is 312.0, up from 308.6 in September.

So there has been a monthly rise of 1.1% and it has not been this high this century as the previous peaks went above 5% but did not make 6%. Also we can also note that the previous Bank of England target is even higher.

The annual rate for RPIX, the all items RPI excluding mortgage interest payments (MIPs), is 6.1%, up from 5.0% last month.

As you can see even more pressure would be on the Bank of England to act which of course was the main reason why its target was changed to a measure which gives a lower number which is below.

The Consumer Prices Index (CPI) rose by 4.2% in the 12 months to October 2021, up from 3.1% in September.

So the UK deep state will be a lot happier today than you might think and those that are still around will be raising a glass to the success of their cunning plan. A major factor in their plan was to omit owner-occupied housing costs and we can see by looking at that part of the RPI that depreciation ( its version of many of those costs) rose over the past year by 10.2%. So first-time buyers have a measure that allows for the higher house prices they face and a different measure than ignores them.

I think you are beginning to understand the forces behind the campaign against the RPI which curiously get forgotten by those same authorities when it comes to rail fares, student loans and most disgracefully of all Bank of England pensions. The Bank has shamefully pursued an “I’m all right Jack ( and sometimes Jill)” attitude to this via its silence on something which is then good enough for its pensioners.

Actually at a later date they decided that they could find a way to reduce the numbers further. This came from something of a backwater in the national accounts called Imputed Rents which are a balancing item as otherwise switches from owning to renting property or vice versa would distort the income version of GDP. They do not exist and are never paid but they are 19% of the officially approved CPIH measure which means it claims housing costs are doing this.

The OOH component annual rate is 1.9%, up from 1.8% last month.

At a stroke the inflation numbers become much more friendly looking.

The Consumer Prices Index including owner occupiers’ housing costs (CPIH) rose by 3.8% in the 12 months to October 2021, up from 2.9% in the 12 months to September.

With nearly a fifth of the index doing not much the monthly numbers are affected too.

CPIH increased by 0.9% on the month in October 2021, compared with no change in October 2020.

The problem that they have is that in spite of the official pressure this ruse has been seen through and the number remains widely ignored. The present rise in inflation will make that worse as its failings become more pronounced. After all translating the numbers below to a 1.9% rise is very transparent.

UK average house prices increased by 11.8% over the year to September 2021, up from 10.2% in August. The average UK house price was at a record high of £270,000 in September 2021, which is £28,000 higher than this time last year.

Oh and it was most pronounced in Wales.

Average house prices increased over the year in England to £288,000 (11.5%), in Wales to £196,000 (15.4%), in Scotland to £180,000 (12.3%) and in Northern Ireland to £159,000 (10.7%). London continues to be the region with the lowest annual growth (2.8%) for the tenth consecutive month.

What caused the rise?

A major player this time around was the rise in domestic energy costs. Having read my critique about I am sure many of you will have a wry smile at the attempt to bring housing into the move.

The contribution from housing and household services increased from 0.69 percentage points in September 2021 to 1.23 percentage points in October, the largest contribution from this division since November 2011. The main upward pressure came from electricity, gas and other fuels, which contributed 0.59 percentage points to the CPIH 12-month inflation rate.

Anyone with a car will have been expecting the next factor and in fact even those without will have noted the fuel shortage mania which helped dive prices higher.

Within transport, the movements have mainly been caused by changes in the price of motor fuels. Motor fuels made a downward contribution to the 12-month rate between March 2020 and February 2021, before the contribution turned positive in March 2021 and subsequently increased to 0.44 percentage points in October 2021.

A category that is usually quiet has been brought back to life by the microchip and supply shortages.

Used car prices increased by 4.6% on the month to October 2021, leading to a cumulative increase of 27.4% since April 2021. By comparison, in 2020, used car prices grew by 1.4% on the month to October, and by 3.9% between April and October.

Actually new car prices are on the rise as well but by much less  ( 0.5% monthly) and some of the pressure is going onto motorbikes as prices there rose by 1.8%.

Also the hospitality sector saw the chance to pump up prices taking the opportunity to add to the VAT rise from 5% to 12.5%.

The contribution breaks down into 0.14 percentage points from accommodation services, which increased by 13.3% on the year to October, and 0.29 percentage points from catering services. Prices within the catering services group grew by 4.9% on the year to October 2021.

Measuring this sector has been made complex by the lockdowns and restrictions.

Much of the catering services basket was unavailable for periods of the coronavirus pandemic, because of movement restrictions. However, in October last year, catering services were largely available.

Looking Ahead

There is more on the way from the producer prices series as you can see below.

The annual rate of output inflation increased by 1.0 percentage points from 7.0% in September 2021 to 8.0% in October 2021; this is the highest the annual rate of output inflation has been since September 2011.

So there is pressure in the short-term and in fact behind that as well.

On the month, the rate of input inflation was 1.4% in October 2021, up from 0.8% in September 2021…..The headline rate of input prices showed positive growth of 13.0% on the year to October 2021, up from 11.9% in September 2021.

Oh and the output numbers had some troubling news for carnivores.

The second largest upward contribution came from food products at 0.24 percentage points, with an annual growth rate increasing from 3.0% in September 2021 to 4.0% in October 2021. This was being driven by preserved meat and meat products for the domestic market.

Comment

As you can see the UK is in the middle of an inflationary burst. In fact the inflationary burst I warned about when the Bank of England pumped up the money supply in response to the Covid-19 pandemic. Economics is about choices but in my opinion you also have to face reality and the Bank of England fantasies about the economy are facing a cold reality that actual production as opposed to printing money requires actions which take time. Looking back to yesterday we all want people to be back in work but doing so at such a pace creates the price rises which make us all worse off. This is why I would have eased off the demand pressure earlier this year, for example by ending QE as opposed to the Bank of England which will buy another £1.15 billion of bonds today.

Next is the issue of how you measure inflation which even if you do it honestly is open to doubt. Many of you will have read the views of Andrew Baldwin on the arithmetic averages in the RPI but if we look at a compromise on that and say go for 5.5% it is performing more accurately than the newer measures. It is simply embarrassing to have 19% of a claimed official inflation measure to be a fantasy as CPIH does and also embarrassing to ignore the area of owner occupied housing entirely as CPI does. If we put house prices in the measure then we would get an answer of say 5% depending on the weight applied which would be quite an improvement on what we are being told now.

Those who have pushed for the CPIH inflation measure such as the Financial Times.Office for National Statistics and the (Paul) Johnson Review should be called out for what they have done. They have made things worse rather than better.

 

 

15 thoughts on “Inflation roars in the UK as the cost of living rises by 6%

  1. Hello Shaun,

    re: “it is performing more accurately than the newer measures”

    this is where politics creeps in , CPI is great for benifits as its lower than RPI . RPI is great for HMG pensions but CPI will do for the rest of us. Economics and fiarness be dammed.

    Forbin

  2. Shaun-from your twitter forum:

    Shaun Richards
    @notayesmansecon
    ·
    2h
    “Does anyone know why house price rises in Wales have been so high. For those unaware they rose 15.4% in the year to September.

    It isnt just Wales whichnhave seen high house prices many prices up North in nice areas gone through the roof so to speak.”
    ………………………………………………………………………………………………………………………………….

    My own view is the pandemic made people think more on gettimng better housing and in places were they arent congested and having good scenery on their door step.

    Bear in mind Shorpshire, Wales and up North house prices have been far cheaper London.

    I also think house price inflation will increase in those areas and not to forget Scotland.

    There are many small towns with less than 10,000 people were there are only a handful of places up for sale and even less in arreas where there are less than 1,000 inhabitant.

    • Thank you Peter

      I was thinking along the lines of Wales being relatively cheap ( an average some £74,000 below the UK average. But was wondering if there was something more specific? Maybe you are right and it is the trend towards the countryside.

  3. I don’t see that this episode has anything to do with money ‘printing’ and everything to do with historical under investment and an unavoidable supply side squeeze. Read the news and everything in the UK is dysfunctional, I literally cannot see a single saving grace. I mean one state sector having problems is forgivable but all of them? The private sector is probably in an even worse state as it appears to be a chumocracy and jobs for the boys*. (*Insert gender as appropiate/invented).

    It’s no wonder nobody knows how to fix this mess, where do you start?

    • Hi bill40

      Every time a surge in the money supply is followed by inflation there is a list of claims that it is nothing to do with it. Yet in keeps happening as more money leads to higher prices in many parts of the world. The only place where it does not seem to work is Japan.

  4. FT suggest CPI may peak at 5% by next April any thoughts what RPI will be in that time?

    https://www.ft.com/content/1d3d1cfb-e0af-42db-b1d8-1f601854ea8d

    My own thoughts on these figures is they are concerning but could well be transitory I saw a link about the container fleet and prices are already falling from their highs

    • ah more news from the inmates of that mental institution that’s called twitter

      I would not be surprised if he did a tik tok about the BoE later

      Forbin

  5. Hi Shaun

    Great article as always. Well done for holding the cronies to account.

    Just to update on houseprices in my area of s manchester.Last week a stock three bed semi went on the market for 385k and I waxed lyrical that some wag would soon plump for 400k. That happened 2 days later. The 400k house was last sold in 2018 for 285k. Thats how silly it has become.

    I know that some of it is driven by hot money coming in from hong kong. I personally know of 3 houses sold to people moving from hong kong., And I get the impression that the EA’s a putting out inflated prices to see if anyone bites.

    Its an area where everyone want to live for the grammar schools and there is record low supply at the moment. Sadly I cant see the situation changing in the short term.

    • anteos, I have seen the same around Formby, Southport, Burscough, The pennines. Good houses arent on the market long before offers are being placed above the advertised price. In facgt many houses are being sold “offers over£££s)

      Moreover I forecast this is to continue in the North West for some time.

  6. Professor Danny Blanchflower economist & fisherman
    @D_Blanchflower
    ·
    3h
    “we suspect that CPI inflation will fall back a bit further and a bit faster in the second half of next year, perhaps to close to the 2.0% target by December 2022.”

    so the MPC would be out of their tiny minds to raise rates…..?
    theguardian.com
    UK inflation surges to 10-year high of 4.2% as fuel and energy prices soar – business live
    Rolling coverage of the latest economic and financial news
    …………………………………………………………………………………………….

    On the Money on GB news panel all agreed the first thing the BOE need to do if tightening is necessary is to stop more money printing/buying bonds.

    Then in my opinion to look at the situation in a few months time before they raise interest rates. If the BOE raise rates in December they may have to be reversed later on making the first move foolish and then losing crecibility.

  7. Great blog as usual, Shaun. Sorry to be leaving my comment a couple of days late, especially after you kindly left a shout out to me.
    I am not the only person who liked the RPIJ as a household-oriented consumer price measure. Peter Levell wrote an excellent Institute for Fiscal Studies working paper on the subject, “A winning formula: Elementary indices in the Retail Prices Index” championing the RPIJ. It is a pity that he wasn’t more persuasive.
    I have just been using the last formula effect estimate (measuring the difference between the annual RPI and RPIJ inflation rates) to keep an RPIJ series since the ONS stopped publishing it with the January 2020 update. By my calculations this would mean the RPIJ would have showed an inflation rate of 5.4% in October 2021, up from 4.3% in September. If I understood you correctly you were asking if I would accept an inflation rate of 5.5% as a compromise between 5.4% and the RPI inflation rate of 6.0%. Yes, of course, I don’t see 5.4% as opposed to 5.5% as a hill to die on. There has been enough time elapsed since January 2020 that even the formula effect estimate may have changed notably. In that vein, since a 5.5% inflation rate would imply a formula effect of just -0.5%, the estimate for the formula effect was at that level as recently as September 2019. On the other hand, the related series for the formula effect difference between the RPI and the CPI, which was at -0.83% in January 2000, stood at -1.05% in October 2021, and this would imply, if my math is correct, a formula effect for the difference between RPI and RPIJ in October 2021 of -0.8% (actually -0.76%). This would give an RPIJ inflation rate between 5.2% and 5.3%. This does raise the issue of why the ONS has ceased to update the formula effect series, while it persists in producing a lot of special series for CPIH (e.g. the constant tax CPIH series) that have no value at all.
    I noticed that there has been a big upward trend in the so-called annual inflation rate for package holiday trips in the UK CPI, which went up to 8.8% in October 2021, the highest rate since May 2001. Of course, you can’t take such numbers seriously when the ersatz seasonal weighting method is so defective. However Paul Johnson noted correctly in his report on the UK consumer price indices that the package holiday trips series picks up inflationary trends with a lag, so there is good reason to believe that this very high rate of inflation would be even higher if the index were properly calculated using a proper seasonal weighting formula (i.e. the Rothwell formula). Unfortunately, as with leaving housing prices out of the CPI, what we might see as a bug, a lot of Bank of England or former Bank of England types might simply regard as a feature. This perhaps explains why the problem has festered for so long without any resolution.

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