UK Inflation improves but there is a clear problem with rents

We are in the midst of a two day barrage of data on the UK economy. This morning we were presented with some better data on the inflation front.

The Consumer Prices Index (CPI) rose by 10.1% in the 12 months to January 2023, down from 10.5% in December 2022.

In terms of the annual rate that does still mean that prices are rising in the double-digits.But there was some outright good news in the monthly detail.

On a monthly basis, CPI fell by 0.6% in January 2023, compared with a fall of 0.1% in January 2022.

As you can see there was a strong move lower on a monthly basis which looks hopeful. The main elements are below.

The largest downward contribution to the change in both the CPIH and CPI annual inflation rates between December 2022 and January 2023 came from transport (particularly passenger transport and motor fuels), and restaurants and hotels,

Looking at the transport sector then many will have spotted the falls in prices at the pump for petrol and this time around a slightly larger one for diesel. So the impact of the diesel shortage has been reducing and older readers who were encouraged to buy diesels ( me  included) will no doubt mull another example of establishment failure. Younger readers may find it hard to believe they were supposed to be cleaner as well. But today has good news as we saw a 3.8% fall in fuel costs. This was reinforced by strong January sales for airfares as they fell by 41.7%.

There was some further good news in an area that has been discussed in the comments recently as second-hand or  used car prices fell by 1.2% in January. As an aside on Monday I attended an online ONS seminar about plans for  improvements in this area ( essentially using the Auto-trader data) but they were quietly shelved.

Next up is the hotel sector where the price of accomodation fell by 2.6% in January.

On the other side of the coin were  the “sin” categories.

with rising prices in alcoholic beverages and tobacco making the largest partially offsetting upward contribution to the change.

It was especially bad news for fans of alcohol as prices rose by 4.6% in January.I suppose those who did a Dry January were feeling rather pleased with themselves. The particular risers were Vodka ( Russia sanctions?) and 4 bottle packs of lager.

Bank of England

We can review the numbers from the perspective of our central bank. Some unfortunate research student will have been up all night trying to think of a way that inflation being five times over its 2% target can be presented as a masterstroke by Governor Bailey. A little relief will be provided by the monthly fall which will be presented as a response to his “forceful” moves on interest-rates.”Well played Sir….”

Our research student will be thinking their luck is out in that one area  of progress in inflation will produce fuming from the Governor.

On a seasonally adjusted basis, the average UK house price decreased by 0.2% between November and December 2022…..On a non-seasonally adjusted basis, the average UK house price decreased by 0.4% between November and December 2022,

Housing Costs

These come up in various ways and let me start with an area where I have been proven right over the past decade. I say it with a tinge of sadness as people are  being misled by it.

Private rental prices paid by tenants in the UK rose by 4.4% in the 12 months to January 2023, up from 4.2% in the 12 months to December 2022.

The problem with the official series is that private-sector measures of rents have been in double-digits with the issue being particularly pronounced in London. Homelet for example had a 10.2% rise for the UK with Greater London at 13.%. I am not saying that they are exactly right but in a broad sweep this is what private-sector measures are telling us. Such higher numbers are being backed up by other pieces of news of which the Bloomberg quote below is one of many examples.

Four in 10 renters moving home in London last year chose to leave the city as pricey monthly payments squeezed budgets to the limit.

So the official rental series is wrong and if you want the detail much of it seems to be because it has a 14 month “stock” of rents. So maybe it will catch up at the end of this year or 2024? The problem is that rents may have stopped rising then or even be falling!

Next up is the move that economics editor of the Financial Times Chris Giles was a vehement supporter of.

While the Consumer Prices Index including owner occupiers’ housing costs (CPIH) is our lead and most comprehensive measure of consumer price inflation……

The housing cost element is via Imputed Rents which are based on the rental series which is a dreadful miss measurement of the situation. This is a serious issue because via the route described above rents are 22.3% of CPIH. Thus a back of an envelope calculation suggests it is of the order of 1.25% too low.

If we now switch to how the Retail Price Index measures such housing costs we see that rather than Imputed numbers which do not exist as owners  would not own if they still had to pay rent! We get things they do pay such as house prices via a depreciation measure and mortgage payments. I have summarised the latter part on social media.

Mortgage payments are a big part of many UK budgets. Here are how our inflation measures deal with them

CPI 0%

CPIH ( H is supposed to be Housing) 0%

RPI 45.6%

Mortgage payments were all over the media late last year but they never seem to bring that to the inflation numbers where as you can see the RPI is the only measure in the game. If we switch to house prices there has been a monthly fall but the annual picture is as below.

Average UK house prices increased by 9.8% in the 12 months to December 2022, down from 10.6% in November 2022……The average UK house price was £294,000 in December 2022, which is £26,000 higher than 12 months ago but a slight change from last month’s record high of £296,000.

As you can see using house prices has picked up quite a lot of inflation too. So we have as follows from it

Depreciation 9.3%

Mortgages 45.6%

I think you are beginning to see why it is “not a national statistic”.

By contrast the one that is tells us this about the surge in home owning costs.

(Imputed) Rents 4.4%

Comment

The picture for inflation is beginning to improve and this is being seen further upthe chain as well via producer prices.

Producer input prices rose by 14.1% in the 12 months to January 2023, down from 16.2% in the year to December 2022.

Producer output (factory gate) prices rose by 13.5% in the 12 months to January 2023, down from 14.6% in the year to December 2022.

Input prices fell by 0.1% on the month and whilst output ones rose by 0.5% that was a lot lower than the 1.5% of January 2022.

The outlook would be even brighter if Chancellor Hunt has the sense to do this.

The solution is pretty obvious. The Treasury can – and almost certainly will – delay the increase in EPG for three months to give wholesale prices time to feed through. ( Resolution Foundation )

That is the rise in a typical energy bill from £2500 to £3000 which Chancellor Hunt announced last autumn. That will teach him to rely on the OBR as the first rule of OBR Club that it is always wrong worked yet again! Whilst there is egg on his face it is good news for the public finances and hopefully if he does the right thing, for inflation prospects.

Meanwhile returning to the online  ONS inflation seminar on Monday there was further news on rents where apparently Big Data is going to be applied like rail fares and the plans for second-hand cars. I asked a question about the new mathematical formula called GEKS-Tornqvist which seems to have a potential 25 month lag? The reply emphasised that it is in line with international standards and will be an improvement. But when I asked for a fuller explanation unfortunately none of the ONS “experts” understood it well enough to attempt an answer. Rather embarrassing.