Today is one that I have in a sense been hoping for and but also fearing. The latter is because we see how people are being made worse off. But the former is the case I have been making over the past decade for the Retail Prices Index or RPI as a measure of inflation. We can look at it in the arena of what is the hot topic this month which is the rise in the price of domestic fuel due to the 54% rise in the Ofgem price cap. Below are the numbers that I presented at the Better Statistics conference at the Royal Statistical Society last Wednesday.
We can now move on to how this will be reflected in the consumer inflation numbers?
Retail Prices Index ( weight 4.5%) will see a 2.43% rise in inflation because of this and 1.8% in October ceteris paribus.
The CPIH measure ( weight 2.7%) will see a 1.3% rise in inflation this month because of this 1.08% in October ceteris paribus.
I will just let those numbers settle in for a moment and simply remind you that the Bank of England inflation target is 2% per annum.
There are various points of note here but the main one is that it is the “not a national statistic” RPI which is representing the impact of the surge in energy prices more accurately due to the higher weight it has compared to the “lead” inflation indicator called CPIH. As you can see it makes quite a material difference. This will repeat in October when it will also represent the upward move then more realistically. We do bot yet know what the October change will be but due to some more recent lower gas prices ( the UK is benefiting from a combination of its LNG infrastructure and American gas) the most recent estimate I have seen is that the rise will be 32%.
One way of explaining part of this is a subject I have covered many times which is Imputed Rents or Rental Equivalence. Their use in the “lead” inflation measure covers 17.3% of the index. So they only have 82.7% of it for other things which reduces their weights or importance. This 17.3% is rising at an annual rate of 2.9% ( yes in one of the biggest surges in house prices we have experienced) so it acts as a brake on the numbers in two ways.
The IFS
Here are the views of the Institute for Fiscal Studies.
A key driver of inflation is the increased cost of energy; Ofgem’s updated energy tariff cap came into effect in April, raising the cap on average household bills on gas and electricity by 54% from the previous month, meaning a 70% year-on-year increase. In addition to the dramatic rise in the cost of gas and electricity, other factors such as the continuation of the war in Ukraine further increased prices of items such as petrol and food as well.
You will find that that they have been doing some maths.
However, as poorest households spend more of their total budget on gas and electricity, we now see inflation hitting the poorest households harder. In April, the bottom 10% of the population in terms of income faced a rate of inflation rate of 10.9%, which was 3 percentage points higher than the inflation rate of the richest 10%. Most of this difference comes from the fact that the poorest households spend 11% of their total household budget on gas and electricity, compared to 4% for the richest households.
As you can see they have almost managed to invent the already existing RPI inflation measure. Quite a lot of trouble to get a slightly lower answer. You might have thought that excluding the top 4% as it does would help in this regard. But you see they have a problem.
This will over time likely result in parallel collection for, and production of, the RPI and reduce its appropriateness as a measure of inflation even further. The cost of production will rise. The usefulness of the measure will diminish. The logical outcome must be the eventual discontinuation of the RPI.
That was from the 2015 Inflation Review from the Director of the IFS Paul Johnson.
So the RPI was so bad he has needed to reinvent it 7 years later.
Energy Prices
We can take the impact further and argue it is under recorded. What do I mean? Inflation numbers are weighted on what we have spent ( there are surveys such as the UK living costs one for example). The problem is that when you have a very large change they get left behind because the new reality of domestic fuel prices being 50% higher is not in the weights and that will get worse in October.
Let me put that another way. If you look at the weight in CPIH and use that yo look at likely energy expenditure then if you do the maths average annual expenditure is £74,000 and may be £100,000 in October. This is a nonsense and shows the weights are too low but that the RPI is our best effort.
Rather different to all the official propaganda over the years!
Housing Costs
Let me give you our 3 main inflation measures and look at the influence of this area.
The all items RPI annual rate is 11.1%, up from 9.0% last month.
The Consumer Prices Index (CPI) rose by 9.0% in the 12 months to April 2022, up from 7.0% in March.
The Consumer Prices Index including owner occupiers’ housing costs (CPIH) rose by 7.8% in the 12 months to April 2022, up from 6.2% in March.
The RPI is influenced in this area by a combination of house prices and mortgage costs ( which has an element of house prices and mortgage rates). Why are they doing?
UK average house prices increased by 9.8% over the year to March 2022, down from 11.3% in February 2022.
Mortgage payments have been kept down by the impact of the interest-rate cuts and QE bond buying but they are now in play as they rose by 1.7% month on month in April as they catch up with bond yields.
CPI simply ignores them as too difficult ( code for rises too fast)
CPIH manages to take an area of high inflation and produces a low number. It does this by assuming that if you own your own home you pay rent to yourself. How much do you pay?
Private rental prices paid by tenants in the UK rose by 2.7% in the 12 months to April 2022, up from 2.4% in the 12 months to March 2022.
There you go job done! You take an area of high inflation and at a stroke it is solved! Or as the band America put it.
You can do magic
You can have anything that you desire
Magic, and you know
You’re the one who can put out the fire
Comment
When inflation rises like this we see which inflation measures have been swimming naked to misquote Warren Buffett. When the numbers are small I understand that it is easy to ignore but now they are large we are seeing the reality of the situation as a gap between 11.1% and 7.8% is material. It is not good enough to claim the RPI is wrong as our statistical authorities have done when they have come up with something worse. Also in twenty years they have failed to put full housing costs in the CPI measure which we have to regard as deliberate.
The much maligned RPI is performing better in its measurement of housing costs and now we find it is also doing so in the area of energy costs. I am not sure how much more our supposed authorities could have embarrassed themselves. It leads to rumours that staff at the ONS have asked for their pay rises to be based on the RPI but I cannot categorically confirm that.
No inflation measure is perfect and last month I took a look at an area of dispute about the RPI which is clothing costs. If you say that is correct then you can knock 0.3% off it but it does not materially change the argument.
Let me finish off by pointing out we have a new cost of living measure called the HCI. I have supported it but sadly the Office of National Statistics has proceeded at the pace of a snail which means after years it is not ready today. Oh and it does not have the house price ( capital component in its terms). Sound familiar?
Notayesmanseconomics's Blog 
The real problem you have is that being right is, to the global tyranny, irrelevant & will change nothing.
They know, as well as I do, that you are right, but as it does not fit within their total narrative, it will be, at best, ignored, at worst, you will be isolated, demonised, ridiculed & de-platformed as “dangerous misinformation.”
For example, there are thousands of peer-reviewed science papers now which either contradict or ameliorate anthropogenic climate change, to the extent that, if it does exist at all, it is trivial, & not the threat to humanity, or any other species, it is made out to be.
ok this is politics , as I have pointed out CO2 does have an effect but with two caveats many will have ” issues” with
1, Its a mouse , not an elephant . We do have results in and its on the lower of the bounds. The current effect seems to warm night times not day time tempratures . The rebound from the last mini ice age is also still happening.
2, There is no change whatsoever in the big 5 emitters of CO2 so what ever we dont burn they will and more . Given the effect is measurable but what ever we do is next to nothing as to make no odds why are we beating ourselves up for ?
You can disagree if you like , its a free world ( for now )
Forbin
I would add a third. Radiation Physics demonstrates that the wavebands that CO2 ‘reflects’ are almost full. Increases in CO2 will have rapidly diminishing effects. Not a subject most ( if any) climatologists ( computer modellers) have the remotest knowledge of.
Harold Wilson pound in your pocket speech
https://www.bing.com/videos/search?q=harold+wilson+pound+in+your+pocket+speech&docid=608005118444132687&mid=3DBD5064816AD7C7D2013DBD5064816AD7C7D201&view=detail&FORM=VIRE
Harold Wilson 1974
Threats of rising rates in US is hammering Dow which is down 3% as I write, movey moving out of stoack markets and into cash on deposit.
We haven’t seen anything like this in the UK for decades and I am not so sure the GOV or bank can do much about this without causing pain.
Raise rates and you will punish investments and could hit the economy by pushing it in recession.
The media is saying the poor are being hit the hardest but if stock markets plunge the rich will see their investments fall as well, and the possibility is house prices will fall leaving many people in negative equity.
Hi Peter
That is a blast from the past. I watched a BBC 4 documentary on his previous administration. His government was told on its first day by HM Treasury that its policies were unviable but carried on anyway which led to the 1967 devaluation of the UK pound £. It was later discovered that the 1967 devaluation was unnecessary.
Oh what a tangled web and all that….
Meanwhil back at the ranch it looks as if GB is going to have 2- 2.5% interest rates whilst having 11% RPI ( REAL price index ) . Even the CRAPPY price index (CPI) will look bad .
hmm, interesting times ahead for all.
Forbin
forbin,
I am actually not so sure you will see interest rates above 2%. Most of the inflation out of the BOE hands if you ignore fall in £ as it fell in any event when the bank raised rates. The vast amount of inflation is due to fuel and energy price rises.
Looking at factory gate prices inflation will rise further but again it is out of the BOE control which is partly due to rise in food prices, sunflower oil and wheat in particular.
The danger of increasing interest rates in this scenario is the UK heading for a deep recession and inflation will fall later on but maybe later on this year and into 2023.
With RPI at 11% something is going to give the UK consumer is just going to stop spending and only buy as much food as they need and cut down their heating.
Big ticket items and clothes sales will fall, retail sales will fall off a cliff.
With the £ falling on inflation figures I tend to think the BOE will have to think very carefully how many increases in interest rates they should be going for.
We saw what happened last week, when the BoE raised IR by 1/4% less than the Fed; NOT raising can be inflationary through currency loss of value.
But the £ isn’t just governed by interest rates it is also governed by how strong the economy is. The £ is weakening as we are forecast to grow by the least in the G7 next year imo.
You are correct, not only did the B of E only raise IR at half the rate of the Fed, but the Fed is expected to raise IR again, when it is doubtful that the B of E will.
As the £ has fallen 10-15% against the $ in the last year an IR rise here could well affect the exchange rate and thus the price of fossil fuels. We could go all out to produce fossil fuels ourselves, which improve our economy and help with the $ exchange rate.
The other major effect on a rise of IR would be to stop increases in house prices.
So two major gains in the battle against inflation.
The other point to consider is at what point would the B of E decide that it had to raise IR substantially, when the RPI is at 15, or 20%? Would the 15 – 20% be far enough ahead of it’s 2% target, or has it forgotten about it’s mandate?
“. . . but the Fed is expected to raise IR again, . . . ”
‘Forget the Put. The Fed Will Risk Recession to Tame Inflation . . .
Listen to what the Fed is saying. Cleveland Fed President Loretta Mester recently stated
“We may get another quarter or two of negative growth but that has to happen in order to get inflation down.”
Mester is saying — out loud and on tape — that she’s comfortable with “another quarter or two of negative growth”. That’s how much they want to tame inflation. ‘
https://www.bloomberg.com/news/newsletters/2022-05-17/forget-the-put-the-fed-will-risk-recession-to-tame-inflation?cmpid=BBD051722_everythingrisk&utm_medium=email&utm_source=newsletter&utm_term=220517&utm_campaign=everythingrisk
how does that work if you dont have a SMART phone like me and many others?
You can still buy bread, but…
Hi therrawbuzzin
I think that sometimes the real world is more frightening…
https://twitter.com/thejcoop/status/1526289490377158657
She hasn’t a clue, the US cabal of the global tyranny knows that Congress won’t approve rises in the debt ceiling to fund its war against Putin, so taxes will have to do it.
This is the figleaf justification.