UK Inflation looks set to fall as 2018 progresses

Today brings us face to face with the UK context on what many are telling us has been the cause of the recent troubled patch for world equity markets. This is because a whole raft of inflation data from the consumer producer and housing sector is due. The narrative that inflation has affected equities markets has got an airing in today’s Financial Times.

The inflation threat has simmered for months, but the missing link had been wage growth, which made the rise in the US jobs figures for January so important, fund managers say. Indeed, the yield on the 10-year Treasury is 40 basis points higher this year, driven almost entirely by inflation expectations. Strong global economic data, coupled with sweeping tax cuts and the recent expansionary budget deal in Washington, should stir price pressures.

Actually that argument seems to be one fitted after the events rather than before as the rise in bond yields could simply be seen as a response to the expansionary fiscal policy in the US combined with interest-rate increases and a reduction albeit small in the size of the Federal Reserve balance sheet. Actually as the FT admits inflation is often considered to be good for equities!

While faster inflation would typically be good for stocks, lifting companies’ pricing power and suggesting economic growth is accelerating.


There is also a theme doing the rounds about wage inflation. Yesterday Gertjan Vlieghe of the Bank of England joined this particular party according to Reuters.

 a pick-up in wages ……..signs of a pick-up in wages

The problem for the Bank of England on this front is two-fold. Firstly it has been like the boy ( and in some cases) girl who has cried wolf on this front and the second is that the official data has picked up no such thing so far. Thus we are left essentially with one higher wages print of 2.9% for average hourly earnings in the United States. So the case is still rather weak as we wonder if even the current economic recovery can boost wages in any meaningful sense.


The first trend which should first show in the producer price numbers is the strength of the UK Pound versus the US Dollar over the past year. It was if we look back about 14 cents lower than the current US $1.388. Also the price of crude oil has dipped back from the rally which took it up to US $70 in terms of the Brent benchmark to US $62.47 as I type this. This drop happened quite quickly after this.

Goldman Sachs has held one of the most optimistic views on the rebalancing of the oil market and oil prices in the near term, and the investment bank is now growing even more bullish, predicting that the oil market has likely balanced, and that Brent Crude will reach $82.50 a barrel within six months. (

The Vampire Squid is building up quite a track record of calling the market in the wrong direction as back in the day it called for US $200 a barrel and when prices fell for a US dollar price in the teens. I will let readers decide for themselves whether it is simply incompetent or is taking us all for “muppets”.

Today’s data

The good news was that the trends discussed above are beginning to have an impact.

The headline rate of inflation for goods leaving the factory gate (output prices) rose 2.8% on the year to January 2018, down from 3.3% in December 2017…….Prices for materials and fuels (input prices) rose 4.7% on the year to January 2018, down from 5.4% in December 2017.

Tucked away was the news that the worst seems to be passing us as this is well below the 20.2% peak of this time last year.

The annual rate of inflation for imported materials and fuels was 3.5% in January 2018 (Table 2), down 1.7 percentage points from December 2017 and the lowest it has been since June 2016.

It is a little disappointing to see the Office for National Statistics repeat a mistake made by the Bank of England concentrating on the wrong exchange rate.

The sterling effective exchange rate index (ERI) rose to 79.0 in January 2018. On the year, the ERI was up 2.6% in January 2018 and was the fourth consecutive month where the ERI has shown positive growth.

Commodities are priced in US Dollars in the main.

Consumer Inflation

This showed an example of inflation being sticky.

The all items CPI annual rate is 3.0%, unchanged from last month.

However prices did fall on the month due to the January sales season mostly.

The all items CPI is 104.4, down from 104.9 in December

The inflation rate was unaffected because they fell at the same rate last year.

There was something unusual in what kept annual inflation at 3%.

The main upward contribution came from admission prices for attractions such as zoos and gardens, with prices falling by less than they did last year.

I will put in a complaint when I pass Battersea Park Childrens Zoo later! More hopeful for hard pressed budgets was this turn in food prices.

This effect came from prices for a wide range of types of food and drink, with the largest contribution coming from a fall in meat prices.

My friend who has gone vegan may be guilty of bad timing.

An ongoing disaster

The issue of how to deal with owner-occupied housing remains a scar on the UK inflation numbers. This is the way they are treated in the preferred establishment measure.

The OOH component annual rate is 1.2%, down from 1.3% last month. ( OOH = Owner Occupied Housing).

Not much is it, so how do they get to it? Well this is the major player.

Private rental prices paid by tenants in Great Britain rose by 1.1% in the 12 months to January 2018; this is down from 1.2% in December 2017.

If you are thinking that owner occupiers do not pay rent as they own it you are right. Sadly our official statisticians prefer a fantasy world that could be in an episode of The Outer Limits. They have had a lot of trouble measuring rents which means their fantasies diverge even more from ordinary reality.

If they had used something real then the numbers would look very different.

UK house prices rose 5.2% in the year to December 2017, up from 5.0% in November 2017.

This makes inflation look much lower than it really is and is the true purpose in my opinion. A powerful response to this at one of the public meetings pointed out that due to the popularity of leasing using rents for the car sector would be realistic ( they do not) but using it for owner-occupied housing is unrealistic ( they do).

If you want a lower inflation reading thought it does the trick.

The all items CPIH annual rate is 2.7%, unchanged from last month.


The underlying theme is that UK consumer inflation looks set to trend lower as 2018 progresses which is good news for both consumers and workers. The initial driving force of this was the rally of the UK Pound £ against the US Dollar and as it has faded back a little we have seen lower oil prices. We also get a sign that prices can fall combined with annual inflation.

The all items CPI is 104.4, down from 104.9 in December…..The all items RPI is 276.0, down from 278.1 in December…….The all items CPIH is 104.5, down from 105.0 in December.

One issue that continues to dog the numbers is the treatment of housing and for all the criticisms levelled at it a strength of the RPI is that it does have house prices ( via depreciation).

The all items RPI annual rate is 4.0%, down from 4.1% last month.

Meanwhile the Bank of England seems lost in its own land of confusion. It cut interest-rates into an inflation rise and then raised them into an expected fall! This is of course the wrong way round for a supposed inflation targeter. Now they seem to be trying to ramp up the rhetoric for more increases forgetting that they need to look 18 months ahead rather than in front of their nose. Perhaps they should take some time out and listen to Bananarama.

I thought I was smart but I soon found out
I didn’t know what life was all about
But then I learnt I must confess
That life is like a game of chess




The UK establishment dislikes the RPI because it produces a higher inflation number

Yesterday saw a new phase in a battle I have been fighting since 2012 with roots back to 2009. Back then some changes were made to the way the UK measured inflation in clothing and footwear that led to some uncomfortable answers. This triggered a debate about how we should measure inflation and the UK establishment immediately became fans of Steve Winwood.

While you see a chance take it
Find romance fake it
Because its all on you

You see over this period their behaviour can be summed up simply they are against inflation measures which give a HIGHER answer and in favour of ones which give a LOWER answer. Every time.

Governor Carney joins the party

It must have been party time for Chris Giles the economics editor of the Financial Times as he reported this.

Speaking to the House of Lords economic affairs committee, Mr Carney said the UK “wouldn’t want to be in the same position 10 years from now” using an inflation measure with “known errors” to uprate government bonds, student loan contracts and rail fares.

Indeed Governor Carney went further.

Mark Carney, Bank of England governor, on Tuesday called for a “deliberate and carefully timed” withdrawal of the retail prices index from its use in government contracts because “most would acknowledge, [the RPI] has no merit”.

There are some familiar features here of which the first is usually a combination of hyperbole and arrogance. For example to say that the RPI has “no merit” is plainly silly as whilst it has flaws it also has strengths of which more later. Also if it has “no merit” this should have been obvious from the start of Governor Carney’s term in July 2013 so why has he taken getting on for five years to notice it and then point it out? To use the Bank’s own language he has been “vigilant” with all that implies.

The next bit is maybe even more breathtaking.

He is the first senior official, outside of the UK’s statistics office, to call for the retirement of the RPI and to suggest a way to remove it in long term contracts, some of which stretch so far into the future that they mature in the second half of this century.

Is there an implication that existing contracts will be changed by a sort of force majeure? Care is needed here as the current landscape exists into the 2060s. Anyway the rhetoric continues.

The RPI has lost its status as a trusted inflation measure since 2012 when the Office for National Statistics found that an obscure change in the way it collected the price of clothing exaggerated the difference between it and other measures of inflation which show prices rising at a slower pace.

The use of “trusted” again overreaches. What happened it was declared as “not a national statistic” but it was also true that in the debate the RPI found support at places like the Royal Statistical Society from people like me. Actually some who have looked at this think that it was RPI which behaved more accurately over this period. So there has been a debate ever since and this raises a wry smile.

The ONS agreed that the RPI had errors, but the statistical office still refuses to improve its measurement after rejecting an expert committee’s advice to change the index in 2012. “RPI is not a good measure of inflation and we do not recommend its use,” an ONS spokesperson said.

I will leave you to decide whether Chris Giles is in fact an “expert” as he describes himself as he was on that committee ( CPAC) and voted  for imputed rents rather than house prices in CPIH. The problem with the “expert” description is that CPIH was later also declared not to be a national statistic because the rents numbers used in the imputed rents data were found to be wrong. This was something I predicted to Chris some 5 years ago when he spoke at the Royal Statistical Society.

The problems with inflation measurement

Let me give you some illustrations of good and bad features of UK inflation measures.


A good feature is that it covers owner-occupied housing mainly via the use of house prices via the depreciation component and mortgage interest-rates. It also covers the “average” better than most other measures by excluding some extremes. Apparently these have “no merit”.

The argument against centers on the “formula effect”

Mr Carney said the upward bias in the RPI was 0.7 percentage points a year.

Arguments have raged over the issue of a geometric mean versus an average one. This lead to the calculation of a variant called RPIJ  which was RPI without the “formula effect” and regular readers will have seen Andrew Baldwin’s eloquent arguments in favour of it in the comments section. Yet the UK establishment pressed the delete button on it after only a couple of years or so . Would it be rude to point out that it had consistently given higher readings than their preferred measures?


The arguments in favour of this are that it is consistent with national accounts methodology and that it avoids the formula effect. Against is the way that it omits owner-occupied housing and that it covers the better-off rather than the average person. This is because it is expenditure weighted and the fact that the better off spend more means it ends up about 2/3rds of the way up the income spectrum as opposed to the average,


This variant of CPI above, does cover owner occupied housing but as even the FT hints there is an enormous flaw in the way it does so.

includes an estimate of the housing costs of owner occupiers

That is simultaneously true and untrue. What it has via the use of imputed rent is an estimate of something which is never paid as home owners do not pay themselves rent as assumed. Again this fits with national accounts methodology at the expense of reality.



The truth is that there is no perfect inflation measure as every measure tries to measure the “typical” experience and we all vary in some way or another. There is a further nuance in that we can try to measure the cost of living or try to follow a purist economics/statistic measure based on consumption. Personally I think that the former is a better route as the Bank of England regularly finds out when it conducts its expectations survey.

Asked about expectations of inflation in the longer term, say in five years’ time, respondents gave a median answer of 3.5%, compared to 3.4% in August.

Another way of putting this is from a reply to the FT from Lu Xun.

The average 25 year old living independently of parents is spending 50-75 % of post tax income on rent in London.  Official inflation  of 2 % , 3 % , no matter if  RPI  or CPI ,  is entirely meaning less for the average punter.

The sad reality of the UK experience has gone as follows and see it you can spot a trend. We were told RPI ( 4.1%) was bad and was replaced by CPI (3%). For a while we were told RPIJ (~3.4%  ) was a possible way ahead but it got dropped whilst CPIH ( 2.7%) with its fantasy rents for owner-occupiers carries on as the “preferred” measure.

Meanwhile RPI carries on with more believers in it than the claim of it losing “trusted” status would have you believe. Yet it is not being updated ( a rather petulant act in my opinion) so it will over time increasingly have issues which when you consider it will be used into the 2060s is a decision of which those who made it should be thoroughly ashamed. Also let me agree with Chris Giles on one issue its use in areas where the government benefits and we lose but not the reverse is simply indefensible and wrong.

student loan contracts and rail fares.

Some care is needed though as some pensioners will have it in their contracts and of course what on earth will the Bank of England pension fund invest in going forwards ( 90% last time I checked)? A bit of a gap there between its rhetoric and behaviour.

However all is not lost as we do not have to go down the slippery slope from RPI to the CPIH as you see there is a new measure called HCI on its way. It looks like it will be a proper replacement for RPI as it does cover house prices so in a few years time once it begins to have a track record we could perhaps suggest beginning to move from RPI to it. It would have been much better if Governor Carney said that and also argued for the RPI to be properly updated in the meantime.

Those of you interested in finding out more about the proposed HCI will find more at the link below.

Number Crunching

You may be intrigued to know that an estimate of the effect of switching from RPI to CPI was that it raised GDP by around 0.5% a year. How? Well for the same outcome lower inflation means a higher recorded real output.


Is UK inflation rising or falling?

Today brings UK inflation data in to focus but before we get there we have received almost a message from the past from Nigeria. What I mean by that is that the inflation rate of 15.37% it has just reported for December is a reminder of past problems in the UK. Whilst it is a reduction on November consumers in Nigeria will be focusing on food price inflation of 19.4% no doubt whilst their central bank tells them it is non-core. We even have a hint of a consequence of hyper inflation as I note three different unofficial estimates for its inflation appearing and they are 600%, 3000% and 5067%. Aren’t you glad that’s clear?!

The trend

This year has started with inflation concerns as a theme and they have come from two sources. One seems to be something of a rehash of the tired old “output gap” theory. This has perhaps been given a little more credence this year as the world economy has been doing well and finally as unemployment falls in so many places we will then supposedly see some inflation as the Phillips Curve leaps from its grave like Dracula. Or something like that. Putting it another way there are overheating fears based on similar lines. William Dudley of the New York Federal Reserve was expressing such fears last week in remarks and in the Wall Street Journal. The problem for such thinking is that “output gap” style theories have been consistently wrong in the credit crunch era.

What we actually have as I looked at on the of this month is rises in commodity prices. Another example of this was seen overnight as the price of a barrel of Brent Crude Oil nudged over US $70. It has dipped back below that today but the underlying message is of an oil price around US $14 higher than a year ago and US $25 higher than the  recent nadir of late June 2017. There are various ways of looking at the impact of this but below is one version.

The New York Fed has a go at measuring inflationary pressure as shown below.

The UIG derived from the “full data set” increased slightly from a currently estimated 2.96% in November to 2.98% in December. The “prices-only” measure decreased slightly from 2.22% in November to 2.18% in December.

This is a better method than the attempt to look at core measures ( which for newer readers mostly means excluding the most important things like food and energy). What it shows us is some upwards pull on inflation right now albeit that some of that is from financial markets and maybe self-fulfilling.


My theme that the UK is particularly prone to inflation gets another tick. From the BBC.

Coca-Cola has announced it will cut the size of a 1.75l bottle to 1.5l and put up the price by 20p in March, because of the introduction of a sugar tax on soft drinks from April this year.

Today’s UK data

Let us open with a welcome piece of news.

The all items CPI annual rate is 3.0%, down from 3.1% in November.

The only person who may be shifting in his seat is Bank of England Governor Mark Carney who has yet to write his explanatory letter to the Chancellor about it being over 3% and now of course it isn’t! Embarrassing.

The reasons for the dip are based on air fares and something parents will have welcomed.

The largest effects came from prices for games and toys, which fell between November and December 2017 by more than they did a year ago.

The air fares move is intriguing as it is a technical move based on them having a lower weighting or the implied view they are relatively less important. So they rose by a similar amount but had less impact, curious.

What happens next?

If we look a producer prices we get a glimpse of what is coming over the hill in inflation terms.

The headline rate of inflation for goods leaving the factory gate (output prices) rose 3.3% on the year to December 2017, up from 3.1% in November 2017.Prices for materials and fuels (input prices) rose 4.9% on the year to December 2017, down from 7.3% in November 2017.

As you can see the immediate impact is a small pull higher but behind that there is less pressure than before. On the latter point we see yet again the impact of the oil price.

The largest upward contribution to the annual rate in December 2017 came from crude oil, which contributed 1.69 percentage points (Figure 2) on the back of annual price growth of 10.6% (Table 3), down from 26.9% last month.

If we look at what has happened since the numbers were collected the oil price is up around US $4/5 but in a welcome development the UK Pound £ is up around 4 cents against the US Dollar. So we can conclude two things. Firstly the impact of the lower Pound £ is quickly washing out of the system and in fact as we look forwards it will be a reducing factor on inflation if it remains at these levels because as I type this it is around 13 cents higher than a year ago. Meanwhile the higher oil price I looked at earlier is moving things in the opposite direction. So if you prefer we are moving from an individual phase to more of a world-wide one.

There is a long section in the report on the trade-weighted £ which has many uses but in this area I am afraid that Men At Work were correct due to so many commodity prices being in US Dollars.

Saying it’s a mistake
It’s a mistake
It’s a mistake
It’s a mistake

A  much bigger mistake

The UK inflation establishment has pushed forwards a new inflation measure and when it was mooted back in 2012 it got a wide range of support. For example the committee which recommended and pushed it called CPAC included representatives from the BBC ( Stephanie Flanders although she left before the actual vote) and the Financial Times ( economics editor Chris Giles). But their main change has failed utterly unless you actually believe costs for those who own their own homes have done this over the past year.

The OOH component annual rate is 1.3%, down from 1.5% last month.

Does anyone actually believe that housing costs in the UK are a downwards drag on inflation? Even someone looking at us from as far away as Pluto could spot that one is very wrong. After all this morning also saw this released.

Average house prices in the UK have increased by 5.1% in the year to November 2017 (down from 5.4% in October 2017). The annual growth rate has slowed since mid-2016 but has remained broadly around 5% during 2017.

Not exactly the same month but if we look at the trend we see that what buyers regard as 5% has somehow morphed into 1.3%! They might reasonably become rather angry when they learn it is because something which does not exist and is never paid called Imputed Rent that is used to lower the number. This also leads me to have to point out that this from the Office of National Statistics deserves the banner of Fake News

mainly from owner occupiers’ housing costs (OOH),
with prices increasing by less between November and December 2017 than they did a year
ago. OOH costs have changed little since September 2017,

This implies they have measured the costs when the major influence is imputed instead.


It is a sad thing to report but UK inflation measurement has been heading in the wrong direction since at least 2012 and maybe 2003 since CPI was introduced. Much of the problem comes from our housing market which CPI mostly ignores ( the owner occupied housing sector is given a Star Trek style cloaking device and disappears). It leads to this problem.

The all items CPI annual rate is 3.0%, down from 3.1% in November…….The annual rate for RPIX, the all items RPI excluding mortgage interest payments (MIPs), is
4.2%, up from 4.0% last month.

Over time a gap like this is significant in many respects and has consequences. After all the inflation target was only moved by 0.5% so does the 1.2% gap highlight another possible cause of the credit crunch? Next whilst the gap is 1,1% to the headline RPI that means students pay more and reported GDP is higher. Of course GDP would be higher still if CPIH was used.

The all items CPIH annual rate is 2.7%, down from 2.8% in November

No wonder more and more people are losing faith. Let me end on a positive note which was my subject of the 19th of December which highlighted a better way.



Take your pick as UK Inflation rises via CPI and falls via RPI whilst staying the same via CPIH

The issue of UK inflation being above target is obviously troubling the UK establishment so much so that this morning HM Treasury has decided to tell us this.

Latest data from comes out today. Find out more about how the UK brought inflation under control:

There is a problem here as you see when we introduced inflation targeting in late 1992 the targeted measure called RPIX was below 4% and around 3.7% if the chart they use is any guide. It is currently 4% after 4.2% last month which is of course higher and not lower! So this is not the best time to herald the triumph of inflation targeting to say the least! Even worse if you look at the longer-term inflation charts in the release it is clear that the main fall in inflation happened before inflation targeting began. I will leave readers to mull whether the better phase was in fact the end of an economic mistake which was exchange-rate targeting.

The Forties problem

There will be a burst of inflationary pressure when we get the December inflation data from this issue. From the Financial Times.

The North Sea’s key Forties Pipeline System, which delivers the main crude oil underpinning the Brent benchmark, is likely to be shut for “weeks” to carry out repairs to an onshore section of the line, a spokesman for operator Ineos said on Monday. The move follows the worsening of a hairline crack in the 450,000 barrel-a-day pipe near Red Moss in Aberdeenshire over the weekend……..The FPS transports almost 40 per cent of the UK North Sea’s oil and gas production by connecting 85 fields to the British mainland.

If I was Ineos I would be crawling over the contract to buy the pipeline as they only did so in October and may have been sold something of a pup by BP. But in terms of the impact we have seen Brent Crude Oil move above US $65 per barrel in response to this. Also a cold snap in the UK is not the best time for gas supplies to be reduced as we wait to see how prices will respond. No doubt some of the production will get ashore in other ways but far from all. Also other news is not currently helping as this from @mhewson_CMC points out.


Today’s data

This will have received a particularly frosty reception at the Bank of England this morning.

CPI inflation edged above 3% for the first time in nearly six years, with the price of computer games rising and airfares falling more slowly than this time last year. These upward pressures were partly offset by falling costs of computer equipment.

The annual reading of 3.1% means that Governor Mark Carney will have to write a letter to the Chancellor of Exchequer Phillip Hammond to explain why it is more than 1% over its target. I have sent via social media a suggested template.

Of course the official version could have been written by Shaggy.

I had tried to keep her from what
She was about to see
Why should she believe me
When I told her it wasn’t me?

We will not find out precisely until February as one of the improvements to the UK inflation targeting regime was to delay the publication of such a letter until it was likely to be no longer relevant.

How can we keep the recorded rate of inflation down?

This will have troubled the UK establishment and they came up with the idea of making a number up based on rents which are never paid. They rushed a proposal in last year as they noted that it was likely to be a downwards influence on inflation in 2017. How is that going? I have highlighted the relevant number.

The CPI rate is higher than the CPIH equivalent principally because the CPI excludes owner occupiers’ housing costs. These rose by 1.5% in the year to November 2017, less than the CPI rate of 3.1% and, as a result, they pulled the CPI rate down slightly, to CPIH.

That number which is a fiction as the Imputed Rents are never actually paid has a strong influence on CPIH.

Given that OOH accounts for around 17% of CPIH, it is the main driver for differences between the CPIH and CPI inflation rates.

This is like something straight out of Yes Prime Minister where a number which is never paid is used to reduce the answer. Just for clarity rents should be in the data for those who pay them but not for those who own their home and do not. Those who own their homes will be wondering why actual real numbers like the ones below are not used.

Average house prices in the UK have increased by 4.5% in the year to October 2017 (down from 4.8% in September 2017). The annual growth rate has slowed since mid-2016 but has remained broadly around 5% during 2017.

What do you think it is about a real number that would INCREASE the recorded inflation rate that led it to be rejected for a fake news one which DECREASES the recorded inflation rate?

House Prices

Tucked away in the release was this which may be a sign of a turn.

The average UK house price was £224,000 in October 2017. This is £10,000 higher than in October 2016 and £1,000 lower than last month.

A 0.5% monthly fall. As the series is erratic we will have to wait for further updates.

What is coming over the hill?

We are being affected by the higher oil price.

The one-month rate for materials and fuels rose 1.8% in November 2017 (Table 3), which is a 0.8 percentage points increase from 1.0% in October 2017, driven by inputs of crude oil, which was up 7.6% on the month.

This meant that producer price inflation rose on the month.

The headline rate of inflation for goods leaving the factory gate (output prices) rose 3.0% on the year to November 2017, up from 2.8% in October 2017. Prices for materials and fuels (input prices) rose 7.3% on the year to November 2017, up from 4.8% in October 2017.

This is more than a UK issue as this from Sweden Statistics earlier indicates.

The rise in the CPI from October to November 2017 was mainly due to a price increase of vehicle fuels and lubricants (4.5 percent),


There is a lot to consider here as headlines will be generated by the fact that Bank of England Governor Mark Carney will have to write an explanatory letter about the way CPI inflation has risen to more than 1% above its annual target. He might briefly wish that the old target of RPIX was still in use.

The annual rate for RPIX, the all items RPI excluding mortgage interest payments (MIPs), is 4.0%, down from 4.2% last month.

Although actually he would soon realise that he would have had to have written a formal letter a while ago for it. For the thoughtful there is interest in one measure rising as another falls and here are the main reasons.

Other differences including weights, which decreased the RPI 12-month rate relative to the CPI 12-month rate by 0.15 percentage points between October and November 2017.

Ironically putting house prices into the inflation measure would have reduced it last month.

Other housing components excluded from the CPI, which decreased the RPI 12-month rate relative to the CPI 12-month rate by 0.06 percentage points between October and
November 2017. The effect came mainly from house depreciation.

Will the UK establishment do another u-turn and suddenly decide that house prices are fit for use ( now they may be falling) in the same way they abandoned aligning us with Europe by not using them or the way they dropped RPIJ?

The trend now sees two forces at play. The trend towards higher inflation from the lower UK Pound £ is not far off over. However we are seeing a higher oil price offset that for the time being and I am including the likely data for December in this. So we will have to wait for 2018 for clearer signs of a turn although the Retail Price Index may already be signalling it.

Meanwhile the “most comprehensive measure of inflation” and the Office for National Statistics favourite CPIH continues to be pretty much ignored. The punch may need fortifying for this years Christmas party.

Meanwhile I guess it could be (much) worse.

The Financial Times said Avondale Pharmaceuticals bought the rights to Niacor from Upsher Smith, a division of Japan’s Sawai Pharmaceutical, earlier this year. The company also bought the rights to a drug used to treat respiratory ailments, known as SSKI, and increased the price by 2,469 per cent, raising the cost of a 30ml bottle from $11.48 to $295.



Has UK inflation peaked?

Yesterday we heard from Bank of England Chief Economist Andy Haldane.

On 3 November, I visited Greater Manchester on the latest of my Townhall tours.

He makes himself sound like a rock band doesn’t he? It is good to see him get out and about after years and indeed decades of being stuck in a bunker in the depths of the Bank of England. Although sadly for him the hopes of becoming Governor via a “man of the people” approach seem to be just hopes. I do hope that he takes the message below back to his colleagues as not only would some humility be welcome but the reality encapsulated in it would be too.

For most of the people I spoke with, small adjustments in the cost of borrowing were unlikely to have a significant impact on their daily lives.  The borrowing costs they faced for access to consumer credit were largely unaffected by changes in Bank Rate

The latter point was one of my earliest themes when I started this website which had its 7th anniversary over the weekend so you can see that our Andy is not the quickest to pick things up.

Moving to today’s theme of inflation Andy did have some thoughts for us.

It is well-known that increases in the cost of living hit hardest those on lowest incomes.  Rising inflation worsens the well-known “poverty premium” the poorest in society already face in the higher costs they pay for the everyday goods and services they buy.

I hope that Andy thought hard about the role his “Sledgehammer QE” and “muscular” monetary easing in August 2016 had in making the lot of these people worse by contributing to the fall of the UK Pound and raising UK inflation prospects. Speaking of inflation prospects what does he think now?

 Price rises across the whole economy are currently running well above the 2% inflation target and are expected to remain above-target for the next few years.

That is not cheerful stuff from Andy but there are several problems with it. Firstly you cannot forecast inflation ahead like that in the credit crunch era as for example you would have been left with egg on your face when oil prices dropped a couple of years ago. In addition Andy’s own record on forecasting or if you like Forward Guidance is poor as in his role of Chief Economist he forecasts an increase in wage inflation every year and has yet to be correct. Of course when you take out a lottery ticket like that you will eventually be correct but that ignores the years of failure.

International Trends

This mornings data set seems to indicate a clear trend although there is a lack of detail as to why Swedish inflation fell so much.

The inflation rate according to the Harmonised Index of Consumer Prices (HICP) was 1.7 percent in October 2017, down from 2.2 percent in September.

Germany saw a smaller decline but a decline nonetheless.

Consumer prices in Germany were 1.6% higher in October 2017 than in October 2016. The unflation rate, as measured by the consumer price index, was +1.8% in both September and August 2017.

Today’s data

This will be received in mixed fashion at the Bank of England.

The all items CPI annual rate is 3.0%, unchanged from last month.

The Governor Mark Carney will be pleased that his quill pen and foolscap paper will not be required for an explanatory letter to the Chancellor of the Exchequer whereas Andy Haldane will mull that his Forward Guidance has not started well as a rise was forecast this month.

The MPC still expects inflation to peak above 3.0% in October, as the past depreciation of sterling and recent increases in energy prices continue to pass through to consumer prices.

The factors keeping inflation up were as shown below/

In October 2017, the food category, which grew by 4.2% since October 2016, contributed 0.3 percentage points to the overall 12-month growth rate……Recreation and culture, with prices rising by 0.5% between September and October 2017, compared with a smaller rise of 0.2% a year earlier.

There was also a rise in electricity prices. On the other side of the coin we saw transport and furniture and household services pulling in a downwards fashion on the annual inflation rate.


The additional factor in CPIH which is the addition of rents which are never paid to the owner occupied housing sector did its planed job one more time in October.

Housing and household services, where owner occupiers’ housing costs had the largest downward effect, with prices remaining unchanged between September 2017 and October 2017, having seen a particularly large increase of 0.4% in the same period a year ago.

This is essentially driven by this.

Private rental prices paid by tenants in Great Britain rose by 1.5% in the 12 months to October 2017; this is down from 1.6% in September 2017.

I would be interested to know if those who rent are seeing lower inflation but also you can see how this pulls down the annual inflation rate. Fair enough ( if accurate as our statisticians have had problems here) for those who rent but the  impact is magnified by the use of Imputed Rent for those who own their property so the measure of inflation is pulled down even more.

The OOH component annual rate is 1.6%, down from 1.9% last month.

This means that what our official statisticians call our “most comprehensive” measure tells us this.

The all items CPIH annual rate is 2.8%, unchanged from last month.

Now let me take you to a place “far,far away” where instead of fictitious prices you use real ones like those below. What do you think the effect would be?

Average house prices in the UK have increased by 5.4% in the year to September 2017 (up from 4.8% in August 2017). The annual growth rate has slowed since mid-2016 but has remained broadly around 5% during 2017.

Thus the inflation measure would be higher with the only caveat being the numbers are a month behind the others. As owner occupied housing costs are 17.4% of the measure you can see that it would have a big effect. Up is the new down that sort of thing.

The whole episode here has reflected badly on the UK statistics establishment as this new measure is mostly being ignored and CPI is used instead as this from the BBC demonstrates.

The UK’s key inflation rate remained steady at a five-and-a-half-year high of 3% in October, according to official figures.

The use of the word “key” is a dagger to the heart of the plans of the Office for National Statistics.

The trend

This mornings producer price dataset suggested that the inflation peak has passed.

The input Producer Prices Index (input PPI) grew by 4.6% in the 12 months to October 2017, down from 8.1% in the 12 months to September 2017. The output Producer Prices Index (output PPI) grew by 2.8% in the 12 months to October 2017, down from 3.3% in the 12 months to September 2017.

So there is good news there for us although awkward again for Andy Haldane. On the other side of the coin there has been around an US $5 rise in the price of Brent Crude Oil since October so that will impact the November data if it stays there. Also more political crises could weaken the Pound like they did only on Monday.


We find ourselves in the peak zone for UK inflation as we may get a nudge higher but the bulk effect of the fall in the UK Pound £ has pretty much completed now. Back in late summer 2016 I suggested that its impact would be over 1% and if we look at the numbers for Germany and Sweden today that looks to be confirmed. Last year saw monthly CPI rise by 0.2% in November and 0.5% in December as inflation rose so the threshold is higher.

However we remain in a mess as to how we calculate inflation as the Retail Price Index measure has it at 4% as opposed to 3% and of course the newer effort CPIH is at 2.8%. So a few more goes and they may record it at 0% and we could have an “unflation rate”!

I have argued against CPIH for five years now for the reasons explained today and warned the National Statistician John Pullinger of the dangers of using it earlier this year. Meanwhile former supporters such as the economics editor of the Financial Times Chris Giles ( who was on the committee which proposed CPIH) now longer seem to be keeping the faith as this indicates.

CPIH is (probably) better since it has a big proxy for housing services of owner occupiers, but with hindsight I worry occasionally that it doesn’t proxy security of tenure well. And security of tenure is a big service you acquire when buying not renting.






Imputed Rent is doing its job of reducing UK consumer inflation

Today is inflation day in the UK where we receive numbers for consumer, producer and house price inflation. As there were quite a few new readers yesterday let me open today in that spirit and explain the rotten heart of the UK inflation infrastructure. It comes via the issue of the housing sector and in particular people who own their own house or flat. What this involves is paying a large sum if you are lucky enough to be able to do so or taking a mortgage and paying it off in monthly instalments over years and indeed decades or some combination of the two. This presents us with two actual numbers which can be used in the inflation process which is house prices and mortgage payments.

Instead the UK authorities have chosen to make up their own number based on what are called imputed rents. They choose to assume that someone who lives in their own property rents it out ( of course they do not) and put that rental number in the inflation figures for the index which is called CPIH. There is an obvious issue in this which is the making up of the number when you have real ones to use! Even worse they have had a lot of trouble with the rental series based on those who do rent and in fact scrapped their first effort as it went so badly. So their number series has proven unreliable but they have ploughed on anyway and if you take the case to the National Statistician I am sorry to have to tell you that the response is much more like propaganda that reasoned argument. Why do they do it? Well I doubt it is a coincidence that it leads to a lower inflation number.

The trends

We know that there was some building producer price pressure last month although September itself saw some amelioration of that as the UK Pound £ had a better month against the US Dollar ( the currency in which most commodities are priced). So it will depend on which day they did the survey. But the price of crude oil was rising and has continued to do so since September ended with Brent crude oil above US $58 per barrel as I type this so that there is some inflationary pressure again from this source.

The producer price data today indicated a sort of steady as she goes position with a hint of a dip.

The headline rate of inflation for goods leaving the factory gate (output prices) rose 3.3% on the year to September 2017, from 3.4% in August 2017…….Prices for materials and fuels (input prices) rose 8.4% on the year to September 2017, which is unchanged from August 2017.


What about the impact of inflation?

This sadly tends to hit the poorest the hardest as this from the BBC indicates.

Benefit freezes combined with the predicted rise in inflation could set some low-income households back £300 next year, a think tank has warned.

September’s inflation data will be released on Tuesday, and some analysts predict the Consumer Price Index (CPI) will be 2.9%……….The Resolution Foundation’s analysis found that a single unemployed person would be £115 worse off, a single parent in work with one child would be £225 worse off, and a single earner couple with two children would be £305 worse off.

You may note that the analysis concentrates on our previous inflation measure and not the new CPIH version in yet another embarrassment for the Office for National Statistics.

Today’s numbers

The headline number will capture the er headlines.

The all items CPI annual rate is 3.0%, up from 2.9% in August.

Actually it was a very marginal shift as if we look into the detail the rate was in fact 2.9593%. Also I did point out above that the CPI was what everyone still concentrates on as this from the Financial Times whose economics editor Chris Giles was one of those who argued strongly for the CPIH inflation measure shows.

How times change! Back in the day he and I were taking opposite sides at the Royal Statistical Society and it is nice to see the implied view that he now agrees with me. This leaves the Office for National Statistics somewhat short of friends for its propaganda on the subject of CPIH.

The Consumer Prices Index including owner occupiers’ housing costs (CPIH) is the most comprehensive measure of inflation.

The CPIH number gets so few mentions our statistics authority sends out its staff to get the numbers up.

You might think that after the problems with the UK trade figures I highlighted yesterday the staff there might be too busy to be on social media plugging the new inflation measure but apparently not. James has contacted me to say he is working in the prices division at the moment which gives a partial answer although if he is tweeting official information he might want to use a more accurate title.

The housing problem

Let me explain with the relevant numbers why this is an issue. Firstly let me bring the house price numbers up to date.

Average house prices in the UK have increased by 5.0% in the year to August 2017 (up from 4.5% in July 2017). The annual growth rate has slowed since mid-2016 but has remained broadly under 5% during 2017.

Now let us look at the data on which the Imputed Rental numbers for owner-occupied housing is based.

Private rental prices paid by tenants in Great Britain rose by 1.6% in the 12 months to September 2017; this is unchanged from August 2017.

Which leads to this.

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

So the machinations of the UK statisticians do the following. Firstly they are using a method which reduces the annual rate of inflation from 3% to 2.8% if we use their favoured CPI series. Even worse a previous change meant that the Retail Price Index was abandoned and it is at 3.9%. Those buying a house may reasonably wonder how annual price inflation which has been circa 5% ends up reducing the inflation rate!

If you wish to follow the timing of this there was a rush late last year from the Office for National Statistics to bring CPIH ignoring some of its own guidelines as it was “not a national statistic” at that point. I did tell the National Statistician John Pullinger that doing this at a time inflation was higher but rental inflation was likely to fall ( based on wages growth) was playing with fire as regards both his personal and the body’s overall credibility in my opinion.


So we have headlines of 3% consumer inflation in the UK in spite of the official machinations to keep it below by changing the measure. The latter may strengthen in influence if London continues its pattern of being a leading indicator in this regard.

London private rental prices grew by 0.9% in the 12 months to August 2017, which is 0.7 percentage points below the Great Britain 12-month growth rate.

Those of you who pointed out that owner occupied housing would only go into UK inflation when it lowered the numbers have been proven correct so well-played.

An impact of all of this is to widen the intergenerational issue as the basic state pension will rise next year by 3% which is higher than the wage growth we have seen. Of course Bank of England pensioners will do even better as theirs are linked to the higher Retail Price Index. If we stay with the Bank of England Governor Mark Carney does not have to get out his fountain pen and headed notepaper as the remit was eased and he only has to write if it exceeds 3% on the CPI measure.

Moving onto the detail we see that there has been a strong impact from the rising price of butter we have previously looked at as the oils and fats section has risen by 14.9% on a year ago. Will we now get Imputed Butter prices?

Meanwhile our old inflation target of RPIX is at 4.1% which poses a question for the “improved” measures.

UK Inflation rises again but more hopefully the UK pound follows it

I was not expecting to publish an article today but my knee operation planned for today was cancelled with an hour’s notice. Let me wish the trauma patients who came into Chelsea and Westminster Hospital overnight well. Returning to the economics there is a link between today’s subject of inflation and that of yesterday because inflation will be over target and of course the Bank of England choose to ease policy into an inflation rise.

The impact of higher prices on the poor

One of the issues faced by the poor is that they pay a different set of prices to the rest of us. The Joseph Rowntree Federation has looked at this and intriguingly opens with something which could have been written by me.

Reducing the cost of essential goods and services is as important as increasing incomes for reducing poverty in the UK.  The less people must spend on meeting their needs, the more cash in their pocket.

The Bank of England will be annoyed on two counts. Firstly it aims for inflation of 2% per annum and secondly the idea that what it calls non core items are important.

The JRF moves onto the problem.

New research by Bristol University has laid bare the scale of the poverty premium for the first time.  They estimate that on average the poverty premium is costing low-income households £490 per year.

We get some more details.

Some premiums seem inconsequential, such as paying an extra £5 per year for a paper copy of an electric bill because you’re not online, or find it easier to keep on top of your budget with a paper copy. Others are eye watering, such as paying £540 over the odds for a doorstep loan because you can’t access mainstream credit or an additional £120 for a payday loan.

There are various factors at play here but we know that those that are poorer tend to pay more for many products. These comes from an inability to shop around both physically and online as well as being unable to use direct debits. Some of these represent a type of exploitation but it is also true that sometimes the problems create higher costs for businesses which need to be passed on.

There have been calls at times for different inflation measures to represent different groups. What we do know is that the establishment’s choice the Consumer Price Index performs badly in this regard. This is because it is weighted and based on total spending where of course the better off are more highly represented and so this means that rather than representing the median person it tends to represent those more like two-thirds of the way up the income scale. The much maligned Retail Price Index excludes the top 4% in terms of income so performs better in this regard although it does exclude some pensioner households.

The UK establishment’s view on measuring inflation

We can see this from simply looking at the progression of UK inflation targets. First the original one.

The annual rate for RPIX, the all items RPI excluding mortgage interest payments (MIPs), is 4.1%, up from 3.9% last month.

As we note an annual inflation measure that has passed 4% we move onto the current measure.

The all items CPI annual rate is 2.9%, up from 2.6% in July.

The clear trend is downwards and let us now look at the UK statistical establishment’s favourite measure.

The all items CPIH annual rate is 2.7%, up from 2.6% in July.

Of course the reality of price rises and inflation does not change but at the current rate the inflation reality of now will perhaps be accompanied by an official inflation measure at 0% in a few decades.

A major factor

Treatment of the housing market and particularly owner-occupied housing costs is at the heart of the matter. If we look at house prices we are told this by the Office for National Statistics.

Average house prices in the UK have increased by 5.1% in the year to July 2017 (unchanged from June 2017). The annual growth rate has slowed since mid-2016 but has remained broadly around 5% during 2017.

Those buying houses in the UK have seen a considerable amount of house price inflation in recent times.

The average UK house price was £226,000 in July 2017. This is £11,000 higher than in July 2016 and £2,000 higher than last month.

This compares to a pre credit crunch peak of just over £190,000 and a nadir of just under £155,000.

We are told by the UK statistics establishment that the best method in their opinion of measuring the impact of inflation on owner-occupiers of property is to use imputed rents which leads to this.

The OOH component annual rate is 1.9%, down from 2.0% last month.  ( OOH is Owner Occupiers Housing Costs).

As you can see there is something familiar at play a much lower number which is driven by the fact that rental inflation is much lower than house price inflation.

Private rental prices paid by tenants in Great Britain rose by 1.6% in the 12 months to August 2017; this is down from 1.8% in July 2017.

So yet again we find that the lower number has been selected! A particular issue here is that it is based on something which does not actually exist. Yes rents are paid by those who rent and they should go into the inflation numbers proportionately. But owner occupiers do not actually receive rent except in the calculations for the national accounts and so a statistical and economic concept replaces what is actually paid which is either the house price or the monthly mortgage repayment.

Oh and if London is a leading indicator ( which it often is) there is this to consider.

The growth rate for London (1.2%) in the 12 months to August 2017 is 0.4 percentage points below that of Great Britain.

Inflation Trends

This month saw a rise in UK inflation across the various measures and was driven by this.

Clothing and footwear, with average prices rising by 2.4% between July and August 2017 compared with a smaller rise of 1.0% between the same two months a year ago. Prices of clothing and footwear usually rise between July and August as autumn ranges start to enter the shops following the summer sales season.

So there was less of a summer sale in clothing this year and we have seen the numbers be erratic before as we move into autumn so we need to tread carefully. Also there was this.

Fuel prices rose by 1.6% between July and August 2017. This contrasts with the same period last year, when fuel prices fell by 1.3%.

Producer Prices

These give us an idea of what is coming down the inflation chain and there was a rise here too reversing recent trends.

Factory gate prices (output prices) rose 3.4% on the year to August 2017, up from 3.2% in July 2017, with the change in the rate being driven mainly by petroleum products. Prices for materials and fuels (input prices) rose 7.6% on the year to August 2017, up from 6.2% in July 2017, with the change in the rate being driven mainly by crude oil.


Today’s reversal on the inflation front follows a month were there was better news. Not only were the annual consumer inflation  numbers higher today but the producer ones were too. Some care is needed however as it was issue with the measurement of clothing prices and inflation back in 2010 which kicked off a lot of the debate around UK inflation methodology. Actually the issues there are still in dispute!

As to the trends there is something which may help out as we go forwards.

As many commodities including crude oil are priced in US Dollars the rise in the UK Pound £ will help us going forwards. Although of course currency movements do not always last and can turn out to be a figment of our Imagination.

Could it be that it’s just an illusion
Putting me back in all this confusion?
Could it be that it’s just an illusion now?
Could it be that it’s just an illusion
Putting me back in all this confusion?
Could it be that it’s just an illusion now?