Even the UK ONS agree I was right about Rental Inflation, will they also fold on the RPI?

This morning has brought some much better news for the UK on the inflation front so let us get straight to it.

The Consumer Prices Index (CPI) rose by 3.4% in the 12 months to February 2024, down from 4.0% in January.

The inflatiionary episode we have been experiencing is calming down. We can see that from the monthly numbers.

On a monthly basis, CPI fell by 0.6% in January 2024, the same rate as in January 2023……..On a monthly basis, CPI rose by 0.6% in February 2024, compared with a rise of 1.1% in February 2023.

The reason why I have put the last two months is that due to the sale season and then price bounce backs we get a better idea of the trend by looking at both. As you can see the overall position is a lot better than last year by 0.5% if we combine the two. Also it shows no inflation at all which is a bit of a quirk but would not have been possible at all in last year’s surge.

When I said earlier this was better news there will be a couple of people with itchy collars at the Bank of England morning meeting.

 Two members (Jonathan Haskel and Catherine L Mann) preferred to increase Bank Rate by 0.25 percentage points, to 5.5%.

Apparently a fall in inflation is misleading.

Although headline inflation had fallen by more than had been expected, this was not necessarily informative about inflation persistence.

Although collectively they had just been wrong yet again about inflation.

Twelve-month CPI inflation had remained above the 2% target. Inflation had fallen to 4.0% in December, below expectations in the November Report.

But if we return to our dynamic duo they thought back in November 2021 that this was appropriate.

Bank Rate should be maintained at 0.1%;

To deal with this.

 CPI inflation was then expected to rise to 4½% in November and remain around that level through the winter, accounted for by further increases in core goods and food price inflation. Wholesale gas prices had risen sharply since August, although they had fallen back at the very end of October. CPI inflation was now expected to peak at around 5% in April 2022 in the November Report projections, materially higher than had been expected in the August Report.

I think that they should be called to Parliament to explain how a 0.1% Bank Rate was sufficient to deal with inflation expected to be 5% ( actually it was even higher) but we now need 5.5% to deal with inflation expected to be on target at the policy horizon. Other policymakers have a problem too.

Seven members (Andrew Bailey, Ben Broadbent, Jon Cunliffe, Jonathan Haskel, Catherine L Mann, Huw Pill and Silvana Tenreyro) voted in favour of the first proposition. Two members (Dave Ramsden and Michael Saunders) voted against this proposition, preferring to increase Bank Rate by 15 basis points to 0.25%.

Actually they may as well call Chancellor Hunt in as well to explain why he is rewarding failure?

Dr. Catherine L Mann was appointed to the MPC on 1 September 2021 for a three-year term due to end on 31 August 2024. Following her appointment for a second term, Dr. Mann will continue to hold the post until 31 August 2027.

Monthly Changes

One area which is very different to last year is food price inflation as February last year saw a 2.1% rise and this year we have seen 0.2%. This year saw falls in fish, fruit and in the category for Sugar, jam, syrups, chocolate and confectionery. The latter seems unlikely to remain if you look at the price of cocoa so bad news for chocoholics is in the offing.

Surging cocoa prices are being felt most in Europe, the world’s biggest chocolate consuming region, as new sustainability rules threaten to exacerbate a shortage of beans. ( Bloomberg)

But for the wider category we should see further inflation declines as output producer price inflation for food is now 0.1% monthly and 0.6% annually. Both domestic food (-0.8%) and imported food ( -0.5%) saw falls in February as well.

There were bounce backs in furniture and clothing as the sale season ended but both were 0.4% weaker than last year. There was a strong downwards move from communications which provides some food for thought as it is a development of the modern era. The category saw a 1.1% monthly fall and it was driven by this.

Prices overall fell this year but rose a year ago, particularly for mobile phone applications.

As I only use apps which are free I cannot comment but I can point out that my latest internet and TV payment rose by CPI plus 3.7% in March so next month looks rather different. As an aside who on earth let them charge that extra 3.7%.

I was right about rents

Tucked away in the detail is something I have been right about for some years and in particular for the past couple of years. It is tucked away in the housing and utility sector where monthly inflation in February 2023 was 0.2% and this year it was 0.6%. Below is the cause of this.

Average UK private rent increased by 9.0% in the 12 months to February 2024 (provisional estimate). This was up from 8.5% in the 12 months to January 2024 (revised estimate), and represents the highest annual percentage change since this UK data series began in January 2015.

These numbers are much higher than what we were told before and if you try to check on the ONS website you get told this.

Cancelled

This release has been discontinued.

But I am the persistent type and tracked down what we were told last month.

Private rental prices paid by tenants in the UK rose by 6.2% in the 12 months to January 2024, unchanged for the second consecutive month.

So 2.3% higher now as they have folded and agreed with me that rental inflation has been much higher than they have claimed. Back on the 1st of December I pointed out the consequences of this.

This has utterly failed in the post pandemic world where we have seen a cost of living crisis which has seen rents soar.

The cost of renting in the UK is up 12% year-on-year, according to new data by estate agents Hamptons — a price growth which has reached near-decade highs.

This has serious consequences for the official inflation numbers.

That really matters when you have an inflation measure that more than trebles the impact of rents via Imputed Rents or as they call it Rental Equivalence. They have used a flawed number for what is presently some 22% of that index.

All those such as Chris Giles of the Financial Times and Paul Johnson of the Institute of Fiscal Studies should hang their heads in shame for supporting the CPIH inflation number. It has been wrong by 0.5% or so and CPI by a bit more than 0.1%.

Comment

There is good news in today’s inflation report and it is reinforced by the producer price numbers.

On a monthly basis, producer input prices fell by 0.4% and output prices rose by 0.3% in February 2024.

Indeed with the fall in domestic fuel prices in less than a fortnight things will look rather different. Also if you are aware that this month’s numbers were pushed higher by the new rental numbers you see that the underlying position has improved as we have seen falls in spite of that.

But now I wish to look at another area where I have been proven right and it is about the cost of living. I have consistently argued that the RPI measure has performed well here and one of the reasons why is that it has actual housing costs. I think that this message is getting around.

And for some – depending on personal expenditure basket – the experience of UK prices remains very different to the headline rates. Mortgage interest up 36% YoY; household energy costs down 18% YoY. ( @Frencheconomics )

The RPI has come under all sorts of official attack including from the Paul Johnson Inflation Review and yet it has been our best measure of the cost of living whilst the Imputed Rents so beloved of the establishment have been not unlike a fraud.

The all items RPI annual rate is 4.5%, down from 4.9% last month.