Yesterday we looked at the Bank of England and an apparently desperate attempt to stop house prices turning south. But also there was the issue of their failures on inflation which its Chief Economist seems to think can be corrected with some more measly 0.25% interest-rate rises. This morning’s inflation numbers release show he has yet another numbers problem.
The annual rate for RPIX, the all items RPI excluding mortgage interest payments (MIPs), is 11.8%, up from 11.2% last month.
So the annual rate of inflation using the measure the Bank of England used to target is up by 0.6% which makes his quarter point increases look even more like a peashooter. If we look at the full RPI measure the monthly move is around 0.7%.
The all items RPI is 337.1, up from 334.6 in April.
That is before we get to the difference between the annual rate at 11.8% and interest-rates at 1.25%.
Of course back in 2002 a decision was made to switch to an inflation measure which produces numbers less likely to frighten people and so it has proven again.
The Consumer Prices Index (CPI) rose by 9.1% in the 12 months to May 2022, up from 9.0% in April.
So a 2.7% gain from their perspective especially as those most involved managed to keep their Bank pensions linked to the RPI. It is a shame to see so many media sources producing this as “inflation” without any mention that it excludes owner-occupied housing costs.
Prices are continuing to rise at their fastest rate for 40 years as food, energy and fuel costs continue to climb.
UK inflation, the rate at which prices rise, edged up to 9.1% in the 12 months to May, from 9% in April, the Office for National Statistics (ONS) said. ( BBC )
So that is the opening of our story and there is of course another step planned.
The Consumer Prices Index including owner occupiers’ housing costs (CPIH) rose by 7.9% in the 12 months to May 2022, up from 7.8% in April.
Should this succeed they will have reduced the recorded inflation rate by 3.8% or as ELO would tell us.
I get a strange magic
Oh, what a strange magic
Oh, it’s a strange magic
Got a strange magic
Got a strange magic
It is a long-running game where CPIH was pushed by Paul Johnson in his 2015 Inflation Review. That has gone so badly ( I mean let’s face it they way it has “added” housing costs but reduced inflation is so transparent) with it being widely ignored that in desperation they plan to keep the RPI name but turn it into a CPIH clone.
We can take that further and let me show you. Of the three measures above only the RPI includes this ( via a depreciation measure which is presently some 10.3% of it). What is it doing?
UK average house prices increased by 12.4% over the year to April 2022, up from 9.7% in March 2022……On a seasonally adjusted basis, average house prices in the UK increased by 0.4% between March and April 2022, following an increase of 0.7% in the previous month.
This presents an obvious problem for producing a lower inflation number so for those of you who think they make the numbers up well for around 17% of CPIH they do. They assume that home owners pay rent, ignoring the fact that one of the points of owning your own home is that you do not pay rent! How does that go into the inflation numbers?
Private rental prices paid by tenants in the UK rose by 2.8% in the 12 months to May 2022, up from 2.6% in the 12 months to April 2022.
You have just chopped 10% off inflation in this area via a numerical equivalent of gerrymandering. No-one in the real world can take advantage of this because if you buy you are either (lucky enough) that only the house price matters or paying a house price via a deposit and a mortgage over time for the rest.
Inflation Developments
This month has seen a further pick-up in the contribution of rising food prices to inflation. Even the CPIH measure is forced to admit there is something going on here.
Prices for food and non-alcoholic beverages rose by 8.7% in the year to May 2022…… Overall, prices rose by 1.5% between April and May 2022, compared with a fall of 0.3% between the same two months a year ago. The upward movement was broad-based, with upward contributions from 7 of the 11 detailed classes.
The RPI has its food category rising by 1.5% on the month with particular rises for eggs (5.7%), butter ( 4.2%) and coffee (3.8%).
A category that has pretty consistently been part of the move is the household goods category including furniture.
Prices for furniture, household equipment and maintenance rose by 11.0% in the year to May 2022. The resulting contribution of 0.60 percentage points was the highest from this division in the National Statistic series, which began in January 2006. ( CPIH based)
There was a 1.2% monthly move in the RPI series here led by furnishings at 1.5%.
There was another familiar feature which highlights that even without all the official meddling inflation measurement can be problematic.
The movement largely reflects price changes for computer games, particularly computer game downloads. Price movements for computer games can sometimes be large, in part depending on the composition of bestseller charts, so short-term movements need to be interpreted with caution.
There was a small downwards pull from this and the issue of sharp price changes due to fashion has affected clothing too over time. In fact the establishment have used it to attack the RPI rather than fix the problem.
Looking Ahead
At first it looks as though there will be some relief.
Monthly producer input prices rose by 2.1% and output prices by 1.6% in May 2022, down from 2.7% and 2.8%, respectively, in April 2022.
Whilst there is a slowing here, it is also true that in the broad sweep of things we are not seeing much of a change of beat when numbers of the order of 2% per month are being experienced. The annual numbers do show this I think.
Producer input prices rose by 22.1% in the year to May 2022, up from 20.9% in the year to April 2022; this is the highest the rate has been since records began in January 1985.
Producer output (factory gate) prices rose by 15.7% in the year to May 2022, up from 14.7% in the year to April 2022.
Comment
The story of 2022 is of sharply rising inflation and a cost of living crisis. I have long feared this day and its impact on people which is why I have spent so much time on inflation measurement. I am sure that at times people felt that a difference between say 2.1% and 2.6% was splitting hairs but 11.7% and 7.9% will get a very different response. Also there is another swerve in play which comes from saying you are better off if the rate of inflation falls when in fact it means you are getting worse off more slowly. At least those who have been producing “research” to show how inflation is “transitory” have gone quiet. Well mostly anyway
Notayesmanseconomics's Blog 
Just a quickie.
This year a whole load of retailers said they would have to put up their prices of clothes NEXT, PRIMARK, and I think both both BooHoo and ASOS. Well we aren’t seeing the amount of inflation which they said they would have to pass on, this is what the ONS said:
“Clothing and footwear
There was a further offsetting downward contribution (of 0.08 percentage points) to the change in the rate from clothing and footwear. Prices rose by 1.1% this year but rose by a larger 2.3% a year ago. Last year’s rise was higher than usual for the time of year. It was influenced by a large fall in the amount of discounting recorded in the dataset as the country continued to open following the coronavirus (COVID-19) lockdown in the first quarter of 2021. The effect came from women’s clothing and, to a lesser extent, men’s clothing and footwear.”
This comes back to my argument once consumers whether through choice or are forced to because they cannot afford things stop buying products, then the retailers are forced to reduce prices. Yesterday Kantar told us shoppers were being more savvy and trading down to own brand products. Today ASDA tell us their shoppers are setting £30 limits on tills !
https://www.bbc.co.uk/news/business-61879194
Inflation may rise a bit more yet but I feel we are geting to the stage where inflation is peaking and it falls. TESCO our biggest supermarket is still making billion of profits and I think there is a lot of profiteering going on out there with claimed shortages which I don’t doubt but will ease in future.
Average wages aren’t going up anything like 9.1% never mind core RPI at 11.8%
WEll the rise in furniture isn’t surprising lockdown increases savings and some of this savings went on furniture particularly when they moved house:
“Prices for furniture, household equipment and maintenance rose by 11.0% in the year to May 2022. The resulting contribution of 0.60 percentage points was the highest from this division in the National Statistic series, which began in January 2006. ( CPIH based)”
iF you look at retailers furniture makers/retailers profits you wont see low profits on their balance sheets, which is yet more proof when their is demand the retailers put up their margins.
Even TESCO are seeing a change in shopper behaviour well if they don’t watch it some of their customers will go to ALDI and LIDL and all this price match is a joke you cannot price match some of ALDI’s own products !
Hi Peter
There will be plenty of changes as 2022 progresses because due to the fall in real wages we are seeing and I expect to see. Some will be able to cut prices if demand falls but others are in a vice due to rising costs such as energy ones. It is always a complex picture.
I just wish the MSM would latch onto imputed rents. it really is the most ridiculous idea and should be exposed for what it is.
MSM are part of the problem, not the solution, or they would.
Hi Rzzr
Maybe the door is beginning to creak open. Paul also spoke at the Better Statistics event in May and presents Moneybox on BBC Radio 4 for those unaware,
Remember, watch what they do, don’t bother listening to what they say, if you want to know someone’s real agenda.
Pill does not think, for one second, that a couple of 0.25% rates rises will cure anything, but he doesn’t give a flying monkey’s about the disease.
Inflation doesn’t concern him; remember, he’s protected against it.
If Pill doesn’t think interest rises will make any difference then why raise them and hurt business and borrowers? Bear in mind there are lots of people think the weak £ is down to BREXIT and if that is the case more rises won’t make any difference. I take the view we have a weak £ because our eeconomy is weak we are going to be bottom of the G7 next year.
“If Pill doesn’t think interest rises will make any difference then why raise them?”
why indeed . perhaps no need except to follow the FED? or keep in line with the US.
The way we’re going we’ll be lucky to stay in the G20 let alone the G7/8
Forbin
To be seen to be doing something, especially something that will change nothing.
If govts can invoke special powers in a crisis, politicians will create a crisis.
Pill is ex vampire squid. You hear what he says and know he means the opposite.
Whose Money?
Hi therrawbuzzin and thank you for the link.
Thank you, therawbuzzin. Great video! Regarding the freedom convoy, much more than half of the funding came from people living in Canada. GoFundMe estimated that 88% of funds originated from inside Canada and 86% of donors were from Canada.
So have house prices peaked?
Stock market falling, house prices may be the next, then a recession, if we aren’t in one already raising interest rates will just push things more over the edge.
Then what? We have already started helicopter money this year and the poor cannot get much poorer without civil unrest.
Slowing down the economy should have been done with tax increases to the rich to level things, up some of these company directors on millions in bonuses.
(Reuters) -High-end British homebuilder Berkeley warned on Wednesday that supply of new-build homes will slow down even as it forecast a slight rise to its 2023 profit, as concerns loomed over an impending downturn in the housing sector.
“You are going to see supply fall because schemes will become unviable and marginal schemes will not start. It will be supply side inflation, not a demand side shock,” Berkeley Chief Executive Officer Rob Perrins told Reuters.
Surveys on Britain’s housing market have showed signs of a slowdown in recent months as fast-rising inflation and higher interest rates mean higher prices and borrowing costs, tightening the financial squeeze for many households.
UK house prices have remained firm although the pace of growth has slowed in recent months and some industry analysts expect the market to cool, as the surging cost of essentials from fuel to home appliances puts pressure on household finances.
Shares of the FTSE-100 builder fell as much as about 7% to 3,532 pence in midday trading, as the broader London market fell 1.1%.
Cobham-headquartered Berkeley became the latest major UK housebuilder to acknowledge challenges from macroeconomic events, including the Ukraine crisis and cost pressures, even as trading and demand remain strong.
“Investors are focusing on rising interest rates, falling consumer confidence and fears of a recession, especially as acquisitions, dividends and buybacks are whittling down the FTSE 100 firm’s net cash pile,” said AJ Bell Investment Director Russ Mould in a note.
The company expects pretax earnings of about 600 million pounds ($733.92 million) for the year ending April 30, 2023 after posting a 6.4% rise in profit on Wednesday.
Berkeley, which operates mainly in London, Birmingham and the South of England, said it was targeting building more than 4,000 units in 2023, up from 3,760 houses built in 2022.
Berkeley’s net cash position in the year through April dropped to 269 million pounds, from 1.13 billion pounds a year earlier.
just 4K ?
when they build 40k or better still 400K , but no , this would not do as house prices might fall
Forbin
Well my margarine product which is in my basket of admittedly only five products that i keep an eye on every week has gone from 1.20 12mths ago to 2.10 this week which in itself was a nigh on 25% uplift from its previous shelf price last time i bought it about a month ago. OK this is one product and the company that produces it says the price of sunflower oil has gone up considerably since the Ukraine invasion as well as the cost of the packaging. However, this demonstrates 2nd order effects cascading down the supply chain and onto 3rd order impacts on the price of every foodstuff that utilise margarine albeit it will probably have a small impact in actual products but when almost every input is increasing in costs the aggregate impact of all these second order impacts will add up so i see a long tail on inflation washing through even if things stabilise on the input front. Mind you as the BoE seems to work on a three year horizon they clearly aren’t too bothered. Oh and when they’ve got wrong there will be a new governor and the current one will be living off his RPI linked pension.
Hi Nicholas
I am a user/buyer of Clover spread and in my local Tesco it is now £2.10. As I also visit the Asda at Clapham Junction I bought some ( 500g) there as it was £1.65. Even so that is a rise much higher than any of the headline inflation numbers today.
Great blog as usual, Shaun.
With the continuing rise in the inflation rate in the UK, it is easy to forget about the continuing failure of the ONS to update its experimental owner-occupied housing price indices. This is especially true of the experimental indices for the net acquisitions approach, but the payments approach indices are also of interest as they include a published component for stamp duty. (The net acquisitions series also includes a component for stamp duty but it is not published. This should really change.) The ONS has not published an update for the experimental OOH series since March 24, 2021, when they were updated to December 2021. The Eurostat tables for the OOH series based on the net acquisitions approach were updated to 2021Q4 on April 8. They still include the UK in their tables although there is no data after 2020Q3, which seems rather odd, as 1 January, 2021 was the end of the Brexit transition period, was it not?
This should really not be condoned. The UK HICP, somewhat confusingly called the UK CPI, is not an acceptable target inflation indicator for the Bank of England. It should be perfectly feasible for the ONS to make a revisable HICP including OOH costs based on the net acquisition approach, published at the same time as the CPI. Until then I believe the RPI excluding mortgage interest and council tax adjusted for the formula effect constitutes the best monthly macroeconomic indicator. It shows an 11.6% increase in May, up from 11.1% in April. This is 2.5 percentage points greater than the CPI increase of 9.1% for May, an all-time record gap. (The formula effect correction draws down the RPI inflation rate by 0.6 percentage points, the last formula effect estimate published by the ONS.) So the underestimate of inflation is actually substantially higher than the Bank of England’s target inflation rate of 2%. This is completely unconscionable.
Of course, any establishment apologist can pick holes in this preferred macroeconomic indicator. It doesn’t include stamp duty. The formula effect imputation may be too high or too low. My response to that would be: who is to blame for that? It was ONS who decided not to continue publishing formula effect estimates, not to include stamp duty in the RPI in spite of the Johnson report indicating that this would be a sensible thing to do, and not to introduce helpful revisions in CPI methodology into the RPI as well. Analysts are forced to work with what we are given. Nevertheless, an estimate of 11.1% for the May inflation rate has to be much closer to the truth than the ONS estimate.
Two other things of interest. Usually there is not a big difference between the RPIX ex formula effect inflation rate and the RPI ex mortgage interest ex council tax inflation rate, but for May it is substantial: the former is 0.4 percentage points higher than the latter. Also, the dwelling insurance and ground rent RPI makes an oversize contribution to the inflation rate for this series. Its inflation rate goes from 24.7% in April to 26.1% in May. A 0.5% increase in May 2022 replaces a 0.6% decrease in May 2021.
Hi Andrew and thank you
The performance of the ONS has been very disappointing in recent years and in addition to your points I cam think of two others.
1. The abandonment of the RPIJ inflation measure
2. The failure to include the capital component ( aka house prices) in the new HCI measure.
Ordinarily I like consistency but not like this. Just like with your interest in CPI( NA) there should also be an RPIJ for people to consider.
The dwelling insurance category is a curious one because due to law changes not only should the process of automatic rises
for ground rent be stopped some firms promised cuts. Thus dwelling insurance looks to be growing faster then the 26.1% headline here.
An interesting story which has just come to light is “Proxy adviser Glass Lewis is recommending Sainsbury’s investors vote against a resolution at its annual meeting calling for Britain’s second-biggest supermarket group to commit to paying the so-called real living wage to all its workers by July 2023.”
https://uk.investing.com/news/stock-market-news/glass-lewis-backs-uks-sainsburys-on-workers-pay-vote-2673917
Good for shareholders and management but not for the lowly paid workers who are having to go to food banks and getting in debt, children going cold and hungry, not to mention mental helath problems as well.
Sorry guys I had two pages open and had problems with web link
https://uk.investing.com/news/stock-market-news/glass-lewis-backs-uks-sainsburys-on-workers-pay-vote-2673917
Hi Peter
I have fixed it for you
Thanks
An attempt to help the cost of living crisis and curb inflation:
LONDON (Reuters) – British broadband companies and mobile operators have committed to allow struggling customers to move to cheaper packages without charge, the government said on Monday, as part of its efforts to ease a growing cost-of-living crisis.
Other commitments taken by companies such as BT (LON:BT), Virgin Media O2, Vodafone (LON:VOD) and Sky included agreeing manageable payment plans, and options to improve existing low-cost offers and increase promotion of existing deals.
“This latest intervention means anyone struggling to pay their broadband or mobile bill as a result of global price rises can expect support from their provider if they ask for it,” the government’s department for Digital, Culture, Media and Sport (DCMS) said on
BOE Pill also warned of knee jerk reactions and big moves in rates could be counter productive:
Investing.com
Pill said the line reflected his own willingness to step up the pace of tightening policy if data supported such moves, adding that his decision in August would depend on the economic news.
But for now, he stuck with his preferred “steady-handed” approach and warned that big moves in the central bank’s benchmark rate could be counterproductive.
“One-off bold moves can … be disturbing in terms of their impact on financial markets,” Pill said, answering audience questions.
The BoE should avoid gaining a reputation for “jerking around Bank Rate” in response to short-term economic news, Pill added, as investors would view this as noise that would disrupt the transmission of monetary policy.
…………………………………………….
Looks to me like Pill will be seeking a 0.25% rise based upon the above comments at the meeting in August, bear in mind anything can happen until then but things will probably worsen on the economy and inflation count, but oil is also falling.
Unbelievable news report 1 in 10 people over 18 have invested in craptocurrencies over the last few years:
https://www.dailymail.co.uk/money/markets/article-10985533/More-5m-Britons-snapped-risky-crypto-currencies.html
I did know someone who had bought crypto coins but would have never dreamed 5 million people been invested in the crap.
I dont get any support because I am one of those who earn to much to get support but not enough to live safely.