Imputed Rents do their job of slowing rises in UK inflation

Today we find ourselves reviewing the data on the rise in inflation in the UK in 2017. This has been caused by a couple of factors. The first is something of a world-wide trend where the price of crude oil stopped falling and being a disinflationary influence. The second has been the fall in the value of the UK Pound which accelerated following the vote for the UK to leave the European Union just over a year ago. If we look back a year then the current US $1.269 has replaced the US $1.411 back then. So the inflation which was supposedly dead ( if you recall the Deflation hype and paranoia..) came back on the menu.

The UK establishment responds

If you do not want the public to realise that inflation is rising but do not wish to introduce any policies to stop it then the only option available to you is to change the way the numbers are measured. Last Autumn the UK statistical establishment began quite a rush to increase the use of rents in  a new headline UK inflation measure. There is of course a proper use for rents which is for those who do rent, however the extension was for those who own their house and do not actually rent it out. So yes imputed rents were required to fill the gap. Here is the official explanation.

However, it does not include the costs associated with owning a home, known as owner occupier housing costs. ONS decided that the best way to estimate these costs is a method known as ‘rental equivalence’. This estimates the cost of owning a home by calculating how much it would cost to rent an equivalent property. A new index based on CPI but including owner occupier housing costs – CPIH – was launched in 2013.

How has that gone?

This new index had some problems in 2014,

Also there is this.

We have still not yet addressed all of the necessary requirements for CPIH to become a national statistic.

So why the rush? Well last week’s numbers on rents from Homelet will have raised a wry smile for many.

UK rental price inflation fell for the first time in almost eight years in May, new data from HomeLet reveals. The average rent on a new tenancy commencing in May was £901, 0.3% lower than in the same month of 2016. New tenancies on rents in London were 3% lower than this time last year…..May’s decrease in average rental values marks a significant moment for the rented property sector. This is the first time since December 2009 the HomeLet Rental Index has reported a fall in rents on an annualised basis.

So rents were rushed in as part of the “most comprehensive measure” of UK inflation just in time for them to fall! Those who believe that rental inflation is related to wage growth will no doubt be thinking that wage growth and hence likely rental growth is lower these days. This is all rather different to house prices where lower mortgage rates can set off more price rises and inflation. I have met those responsible for this and pointed out that the word “comprehensive” is misleading as they do not actually measure the owner occupied housing market they simply impute from the rental one.

Today’s data

We see this.

The Consumer Prices Index (CPI) 12-month rate was 2.9% in May 2017, up from 2.7% in April………The Consumer Prices Index including owner occupiers’ housing costs (CPIH, not a National Statistic) 12-month inflation rate was 2.7% in May 2017, up from 2.6% in April.

So not only is the new measure again below the older one we see that the gap has now widened from 0.1% to 0.2%. As the difference must be the imputed rental section let us take a look.

Private rental prices paid by tenants in Great Britain rose by 1.8% in the 12 months to May 2017; this is unchanged from April 2017.

As you can see whilst the official data does not have the falls indicated by Homelet it is a drag on the overall inflation measure. Sir Humphrey Appleby would have a broad smile on his face right now. Oh and the reason why it is not showing falls is that the numbers are what might be called “smoothed”. The actual monthly  numbers are quite erratic ( which of course would lead to doubts if people saw them) so in fact the numbers are over a period of time and then weighted. The ONS has been unwilling to reveal the length of the period used but it used to be around 18 months. This is of course another reason why this methodology is flawed and a bad idea because rents from a year ago should be in last years indices not this months.

I have argued for a long time ( this debate began in 2012) that house prices should be used as they are of course actually paid rather than being imputed. Also they behave very differently to rents as a pattern and are more timely which is important. So what are they doing?

Average house prices in the UK have increased by 5.6% in the year to April 2017 (up from 4.5% in the year to March 2017).

As you can see house price inflation is currently treble that of rental inflation. Can anybody think why the UK establishment wanted rents rather than house prices used in the consumer inflation measure?

Our past measure

The Retail Price Index used to be used in the UK.

The all items RPI annual rate is 3.7%, up from 3.5% last month.

So the pattern of higher inflation measures being retired continues. Although it does at least serve two roles. The first is for indexation of things people pay such as mobile phone bills as my contract rises by it as of course do student loans. The second is for the indexation of Bank of England pensions where it seems strange that the establishment attack on RPI somehow got forgotten

Looking ahead

Fortunately we see that the main push is beginning to fade.

The annual rate of factory gate price inflation (output prices) remained at 3.6% for the third consecutive month and slowed on the month to 0.1%, from 0.4% in March and April……….The annual rate of inflation for materials and fuels (input prices) fell back to 11.6% in May, continuing its decline from 19.9% in January 2017 following the recent strength of sterling.

There is still momentum to push the annual rate of inflation higher which will not be helped if the post General Election dip in the value of the UK Pound persists. But the main push has now been seen. We should be grateful that the price of crude oil is around US $48 per barrel in Brent Crude terms.

Comment

The latest attempt by the UK establishment to “improve” the UK measurement of consumer inflation is being shown up for what it is, an attempt to manipulate the numbers lower. I guess things we receive will no longer be indexed to CPI they will be switched to CPIH! Also will the Bank of England switch its inflation target? If so it will complete a journey which has lowered the measure from 3.9% ( where what is called RPIX now is) to 2.7% or a 1.2% change when the target was only moved by 0.5%. In these times of lower wage rises, interest-rates and yields then 0.7% per annum matters quite a bit over time.

An answer to this would be to put the asset price which the Bank of England loves to inflate, house prices, in the inflation index. Let me leave you today with the price of a few basic goods if they had risen in line with them.

 

As I am off later to buy a chicken for dinner I am grateful it has not risen at such a rate.

UK Inflation continues its ascent in spite of the measurement “improvements”

Today we will find ourselves updated on the latest official data for UK inflation. Sadly we will see it move further above target and there have been two main drivers of this. Firstly it is the fact that the price of oil stopped falling. This will impact on April’s inflation data as the price of a barrel of Brent Crude Oil was around US $10 per barrel higher than in the same month last year. Here is the Office for National Statistics on the subject.

Oil rose further above $55 (44.22 pounds) a barrel, supported by another shutdown at Libya’s largest oilfield and heightened tension over Syria. Libya’s Sharara oilfield was shut after a group blocked a pipeline linking it to an oil terminal, a Libyan oil source said. The field had only just returned to production, after a week-long stoppage ending in early April. Brent crude LCOc1, the global benchmark, rose 48 cents to $55.72, not far from the one-month high of $56.08. U.S. crude CLc1 was up 37 cents at $52.61.

In addition the next factor then arrives which is the lower level of the UK Pound £ which spent much of last April in the mid US $1.40s compared to the mid US $1.20s this year. Actually later this April the UK Pound £ rose to the current level of around US $ 1.29 so the exact annual difference depends a fair bit on which day in the month is used  but the underlying issue is that the cost will have risen. For the price of crude oil there is a double whammy effect as the two changes combine. Also it impacts on domestic fuel costs although the two main rises in April ( SSE and E.ON ) were on the 26th and 28th of the month so are more likely to be in the May data.

The UK Budget will also give prices an upwards nudge.

The measures that will be implemented in the financial year ending 2017 are estimated to increase the CPIH 1-month rate by approximately 0.16 percentage points, the CPI 1-month rate by approximately 0.18 percentage points and the RPI 1-month rate by approximately 0.23 percentage points.

This compares to 0.04% last year for CPIH and 0.06% last year for RPI.

A Space Oddity

Remember the official campaign against the Retail Price Index measure of inflation saying it does not meet international best practice? It looks like someone has let their greed for higher rises to create a bit of amnesia on that subject.

The March 2017 Budget announced that from 1 April 2017 VED rates will increase in line with the RPI for cars, vans and motorcycles registered between 1 March 2001 and 1 April 2017.

A direct impact

The producer price or PPI inflation measure shows us the impact of the factors analysed above as we look at the impact on input prices.

Crude oil provided the largest contribution of 5.82 percentage points to the annual rate and on the month it provided a contribution of 0.32 percentage points.

The overall picture is as shown below.

The monthly rate of inflation for goods leaving the factory gate (output prices) was unchanged at 0.4% in April 2017, while input prices rose 0.1% following 2 months of no growth….The annual rate for factory gate price inflation was positive but unchanged at 3.6%, while the annual growth rate for input prices fell back to 16.6% from a peak of 19.9% in January 2017.

As you can see some of the input price effect is fading but output prices will continue to be affected and therefore will exert an upwards pull on the consumer inflation indices.

The headlines

These raised a wry smile and I will give you just one example which is from the Press Association which was repeated by many other media and news outlets.

#Breaking Rate of Consumer Price Index inflation rises to 2.7% in April, from 2.3% in March, the Office for National Statistics says

The wry smile was caused by the fact that the new official inflation series is now CPIH and as someone who has led a campaign against it then perhaps more people were listening than I realised. For newer readers the CPIH is where H= Housing Costs, and so far so good. But it all goes wrong when a number is calculated for what houses which are owner-occupied would be rented out for based on Imputed Rent methodology. So a theoretical construct or made up number is used as opposed to actual real world numbers such as mortgage rates and house prices. Oh and the RPI index was downgraded for not being a national statistic whereas CPIH was upgraded for being.

CPIH is not currently a National Statistic.

If we look at the numbers we see that there is another reason to raise a wry smile.

The Consumer Prices Index including owner occupiers’ housing costs (CPIH, not a National Statistic) 12-month inflation rate was 2.6% in April 2017, up from 2.3% in March.

Conspiracy theorists will have noted that it has become the headline measure just in time to give a lower inflation reading than its predecessor! I tend to downplay such thoughts although the rush to make it the new headline measure at the end of last year does give some support to them. After all I was pointing out back then that I expected rents to struggle this year as opposed with what I considered hype from the real estate industry. This is now being borne out by the official data.

Private rental prices paid by tenants in Great Britain rose by 1.8% in the 12 months to April 2017; this is down from 2.0% in March 2017.

So the housing market has arrived in the numbers just in time to lower them after all the years of ignoring it as it surged. Some perspective on this has been provided by the Resolution Foundation today.

Staying with rents the official data is catching up on what has been going on in London which as usual is in the van of any changes.

London private rental prices grew by 1.4% in the 12 months to April 2017, 0.4 percentage points below the Great Britain 12-month growth rate.

If we return to my theme which is that house prices give a much better guide to inflation than rents let me point out that they continue to send a different message. Yes the inflationary burst is fading (good) but compare the number with the one for rents.

Average house prices in the UK have increased by 4.1% in the year to March 2017 (down from 5.6% in the year to February 2017).

Comment

The drumbeat in today’s numbers is that UK inflation is on the rise as was expected on here and that it is not good news. Indeed the news is more disappointing if we look at our old inflation measure.

The all items RPI annual rate is 3.5%, up from 3.1% last month.

With wage and indeed economic growth around 2% per annum the difference  between our old and newer inflation measures becomes more material. It is of course something the Bank of England should be looking into but apart from putting their own pensions in instruments benefitting from the RPI they are shamefully silent on the matter. What we can see is that each “improvement” in consumer inflation methodology seems to result in a lower number whereas other prices surge. I have already looked at house prices but whilst some of it is growth we have to wonder if inflation is also at play in this asset price as well.

The FTSE 100’s recent record breaking run showed no sign of ending as the UK’s main share index hit another record intra-day high.

In morning trade,the index climbed to 42 points, or 0.5% to 7,495.68 – meaning it is up 5% this year.

Vodafone led the way, with the mobile giant’s shares rising 4.1% as investors ignored news of a hefty annual loss and focused on its upbeat outlook.

UK Inflation is hitting the poorest hardest

As we advance on a raft of UK inflation data there has already been a reminder of one of the themes of this website which is that the UK is an “inflation nation” where the institutional bias is invariably one way. From the BBC.

Drivers saw their car insurance premiums rise by an average of £110 in the last year, a comparison site says.

More expensive repairs and recent government changes to injury payouts pushed up annual insurance costs by 16%, according to Confused.com.

It found drivers paid on average £781 on comparison sites for a comprehensive policy in the year to March 2017.

Average premiums are set to rise to a record high and could pass £1,000 next year, it added.

Up,up and away! I guess those pushing for driverless cars will be happy with this but few others. Some of this is that cars are more complex and thereby more expensive to repair but little or nothing was done about the rise in “whiplash” claims and there has been something of a stealth tax campaign.

IPT went up from 6% to 9.5% in 2015, to 10% in 2016, and will rise to 12% in June 2017. ( IPT = Insurance Premium Tax)

Inflation outlook

We get much of this from commodity prices and in particular the price of crude oil. If we start with crude oil it has returned to where it has mostly been for the last few months which is around US $55/6 for a barrel of Brent Crude Oil where the OPEC production cuts seem to be met by the shale oil producers. However today’s data will be based on March where the oil price was around US $5 lower so this is for next month.

Speaking of the price of oil and noting yesterday’s topic of a rigged price ( Libor) there was this on Twitter.

In 2 years oil price/bbl gyrated from $80->$147->$35->$80 while physical demand for consumption varied by less than 3%……..I recommended to Treasury Select Committee in July 2008 a transatlantic commission of inquiry into the completely manipulated Brent market…..I blew the whistle on LIBOR-type oil futures market manipulation in 2000 & lost everything I had. Treasury/FSA were complicit in a whitewash

I have speculated before about banks manipulating the oil price but how about the oil price rise exacerbating the initial credit crunch effect?

One area of interest to chocoholics in particular is cocoa prices as I pointed out last week. If we look at them in detail we see that London Cocoa has fallen from 2546 last July to 1579 with 2% of that fall coming this morning. How many chocolate producers have raised prices claiming increasing costs over the past few months? Even allowing for a lower UK Pound £ costs have plainly fallen here as we wait to see if Toblerone will give us a triangle back! Or will we discover that the road is rather one-way……

We get little of a signal from Dr. Copper who has been mostly stable but Iron Ore prices have moved downwards. From Bloomberg.

Iron ore dropped into bear-market territory, with Barclays analysts pinning the blame on lower demand from China……Ore with 62 percent content in Qingdao fell 1 percent to $74.71 a dry ton on Monday, according to Metal Bulletin Ltd., following a 6.8 percent drop on Friday.

So as we wait to see what the price of crude oil does next some of the other pressure for higher inflation has abated for now. This was picked up on the forward radar for the official UK data today.

Input prices for producers increased at a slower rate in the 12 months to March compared to the beginning of 2017………PPI input price increased by 17.9% in 12 months to March 2017, down from 19.4% in February, as prices remained fairly flat on the month and prices increased in the previous year.

There was also a slight fading of output price inflation.

Factory gate prices (output prices) rose 3.6% on the year to March 2017, from 3.7% in February 2017, which is the ninth consecutive period of annual price growth.

Our official statisticians point us to higher food prices which has been a broad trend.

In the 12 months to February 2017, vegetable prices in the EU 28 countries increased by 12.4% and in Germany they increased by 22.5%.

However whilst this was true this may well be fading a little as well. We had the issues with broccoli from Spain earlier this year but more recently I note there are cheaper prices for strawberries from er Spain. So whilst there was an impact from the lower Pound £ we wait to see the next move.

CPIH 

This is the new headline measure of inflation for the UK although those who remember the official attacks on the Retail Price Index for being “not a National Statistic” will wonder how a measure which isn’t one either got promoted?! Or why it was done with such a rush?

Some may wonder if this news was a factor? From the London Evening Standard a few days ago.

In London, where rents are by far the most expensive in the country, prospective tenants saw prices fall 4.2 per cent year on year………The average cost of renting a home in the UK remained almost the same as at the start of 2016, rising just 1.8 per cent, compared to the 3.9 per cent annual growth recorded a year ago, thanks to a significant increase in the number of properties available.

It does make you wonder if they thought the buy-to let rush of early 2016 might depress rents? Anyway even the official numbers published today are seeing a fading.

Private rental prices paid by tenants in Great Britain rose by 2.0% in the 12 months to March 2017; this is down from 2.1% in February 2017………London private rental prices grew by 1.6% in the 12 months to March 2017, which is 0.4 percentage points below the Great Britain 12-month growth rate.

If London leads like it usually does…

Oh and Scotland is seeing rent disinflation albeit only marginal.

Scotland saw rental prices decrease (negative 0.1%) in the 12 months to March 2017.

So we see that rents are currently a downwards pull on the annual inflation rate.

The all items CPIH annual rate is 2.3%, unchanged from last month.

Whereas if we look at house prices we see this.

Average house prices in the UK have increased by 5.8% in the year to February 2017 (up from 5.3% in the year to January 2017).

The weasel words here are “owner occupied housing costs” which give the impression that house prices will be used without actually saying it. For newer readers this inflation measure assumes the home is rented out when it isn’t and then estimates the rent and uses that.

Comment

Whilst the headline number is unchanged there is a lot going on under the surface. For example the apparent fading of rents means that the new promoted measure called CPIH seems likely to drop below its predecessor or CPI in 2017. However under the surface there are different effects in different groups. Take a look at this from Asda.

The strongest decrease in spending power has been felt by the poorest households, whose weekly discretionary income in February was 18% lower than in the same month before, falling from -£20 to -£23. This implies that the basket of essential products and services is even less affordable than previous year for the bottom income group.

The clue here is the term essential products and services which of course is pretty much what central bankers look away from as for them essential means non core. You could not make it up! But what we are seeing here is the impact of higher fuel and food prices on the poorest of our society. Those economists who call for higher inflation should be sent to explain to these people how it is benefiting them as we wonder if there will be another of these moments?

I cannot eat an I-Pad!

Meanwhile the UK establishment continues its project to obfuscate over housing costs. The whole area is an utter mess as I note that @resi_analyst ( Neal Hudson) has been pointing out inconsistencies in the official price series for new houses. Back months are being quietly revised sometimes substantially.

A challenge to our statisticians

With the modern GDP methodology we see that the explosion in Airbnb activity has had a consequence.

Colin (not his real name) contacted the BBC when he discovered the flat he rents out on Airbnb had been turned into a pop-up brothel.

You see the ladies concerned were no doubt determined to make sure the UK does not go into recession.

Looking at both their ads, some of the rates were about £1,300 a night. So if they were fully booked for the two nights that’s £2,600 each – £5,200 in total.

But as we mull the issue and wonder how our statisticians measure this? There is a link to today’s topic as the inflation numbers ignore this. Meanwhile if there was evidence of drug use as well would they be regarded as a modern version of Stakhanovite workers by the Bank of England? As Coldplay so aptly put it.

Confusion never stops

 

 

Headline UK Inflation or CPIH is an example of official “Alternative News”

Today is inflation data day in the UK and the National Statistician is about to make a major change. Firstly there is a confession to a current omission in the CPI or Consumer Prices Index ( one which is especially important in the UK economy) and then the detail. The emphasis is mine.

However, it does not include the costs associated with owning a home, known as owner occupier housing costs. ONS decided that the best way to estimate these costs is a method known as ‘rental equivalence’. This estimates the cost of owning a home by calculating how much it would cost to rent an equivalent property.

The new headline measure called CPIH is claimed to include owner occupied housing costs but in fact uses the same methodology as used for Imputed Rents. As the renting does not actually happen they have to estimate which as I will come to later has gone badly. The alternative is to measure real costs and prices such as mortgage costs and house prices which not only exist but are understood by most people. So as a critique we start with the simple issue of why use a made up or Imputed concept when you have real prices available?

Sadly the UK Office for National Statistics has become an organisation which does not want debate and instead publishes propaganda or “fake news”. Here is an example.

(CPIH is…) the most comprehensive measure of inflation

As I have explained earlier it omits house prices and mortgage costs which are for many people substantial expenses and whilst I welcome Council Tax being introduced other housing costs are still missed out.

At the Public Meeting to discuss this the statistician John Wood made a powerful case against the change which was to point out why housing was being singled out to be imputed? Here are his words from the Royal Statistical Society online forum.

The CPI is based on acquisition costs, which is not the same as consumption costs for products (such as cars, furniture, electrical goods, jewellery) that are consumed over many years. I asked John Pullinger at the meeting whether ONS was going to apply the rental equivalence principle to such products and the answer was no. He accepted that they should be so treated in principle but ONS was not going to do so for “practical convenience”. So the only product in CPIH that will conform to the consumption principle will be owner occupied housing.

The problem of measurement

I argued when this saga began back in 2012 that the rental series being used was unreliable but was told our official statisticians knew better. What happened next?

ONS needs to take more time to strengthen its quality assurance of its private rents data sources, in order to provide reassurance to users about the quality of the CPIH.

There was an announcement that CPIH had been some 0.2% too low but the principle that the football chant “You don’t know what you are doing” applies as that series was abandoned and a new one introduced. Let me switch to the regulator’s view from last month.

This matter was considered at the UK Statistics Authority’s Regulation Committee at its meeting on 16 February 2017.

At that meeting, the Regulation Committee decided not to confer the National Statistics status of CPIH at this point in time. This is because although considerable progress has been made, ONS has not yet fully addressed some of the Requirements in the Assessment Report, particularly related to comparisons with other sources, explanations of the methods of quality assurance and description of the weights used in the calculation of CPIH.

I was contacted and gave evidence arguing for such a decision and just to give you a flavour I pointed out that there had just been announced a £9 billion revision to the Imputed Rental numbers which added to so many others that the series is now in my opinion a complete mess.

Also how is CPIH now the headline inflation measure when it is “not a national statistic”? Demotion was grounds for removing the RPI so why does this not apply to CPIH?

Smoothing

There is a further problem which is that the UK monthly rental series is erratic and would send out very different messages from month to month. Accordingly each month we do not get that month’s data but a stream from the past to “improve” the data. The first issue is that it is not that month’s data as claimed but this has another problem which is that it takes a long time for changes in the economy to show up ( around 3 years). This is two-fold and the opening effort is that rents take time to respond to economic changes in a way that house prices do not. Next the data is smoothed so it takes even longer to pick it up. What could go wrong here?

Today’s numbers

If we look at the numbers released this morning we would expect our “comprehensive” measure of inflation which now has housing costs or CPIH to push above CPI.

Average house prices in the UK have increased by 6.2% in the year to January 2017 (up from 5.7% in the year to December 2016), continuing the strong growth seen since the end of 2013.

So CPI was?

The Consumer Prices Index (CPI) 12-month rate was  2.3% in February 2017, compared with 1.8% in January.

Should we be nervous before looking at CPIH? Er no…

The Consumer Prices Index including owner occupiers’ housing costs (CPIH, not a National Statistic) 12-month inflation rate was 2.3% in February 2017, up from 1.9% in January.

So owner occupied housing costs make no difference at all? Not only is that embarrassing it comes under the banner of Fake News in my opinion. Actually Torsten Bell of the Resolution Foundation made a good point earlier.

https://twitter.com/TorstenBell/status/843760157494595584

So what is the point of the switch other than to claim you are representing something which you are not?! If we think of the period since the early 1990s the argument that there has been little or no inflation from the housing sector is a very bad joke.

Retail Price Index

This has been dropped from the Statistical Bulletin which is very poor from the UK’s statistical bodies as after all being “not a national statistic” has been no barrier to the advancement of CPIH. Here are the numbers.

The all items RPI annual rate is 3.2%, up from 2.6% last month. • The annual rate for RPIX, the all items RPI excluding mortgage interest payments (MIPs) index, is 3.5%, up from 2.9% last month.

For all the barrage of abuse it has received if you look at UK house prices it continues in my opinion to provide a better snapshot of the UK situation than CPI or CPIH.

Let me also mention the “improved” version or RPIJ which was pushed for a couple of years by our statisticians as it is now RIP for it. More than a few were led up a garden path which now is on its way to be redacted from history.

Comment

Regular readers will be aware that I have been predicting a rise in UK inflation for some time even during the phase when the “deflation nutters” were in full panic mode. Once the oil price stopped falling we were always coming back to this sort of situation and of course there has been the fall in the value of the UK Pound which in my opinion will lead to higher inflation of the order of 1.5%. If we look at today’s producer price numbers with output price rising at an annual rate of 3.7% more of that is on its way, sadly as we now face the fact that real wage growth has ended and will soon be negative even on the official inflation numbers.

Meanwhile as I have given a lot of detail today on the inflation changes let me end with something very prescient from Yes Minister.

Sir Humphrey Appleby: “If local authorities don’t send us the statistics that we ask for, than government figures will be a nonsense.”
James Hacker: “Why?”
Sir Humphrey Appleby: “They will be incomplete.”
James Hacker: “But government figures are a nonsense anyway.”
Bernard Woolley: “I think Sir Humphrey wants to ensure they are a complete nonsense.”

Update 2:45 pm

Someone has a suggestion about why there was such an official rush to include Rental Equivalence in the UK inflation numbers.

The UK National Statistician has made a mistake which will affect us all

Today sees the release of the latest UK inflation data for consumer,producer price and house prices. However I wish to draw you attention to something very important which is this statement issued last week by the UK National Statistician John Pullinger.

I have therefore concluded that we will make CPIH our preferred measure of consumer price inflation as I indicated earlier this year. I believe that CPIH has a number of desirable properties, most notably the inclusion of an element of owner occupiers’ housing costs. It also addresses several flaws and limitations present in alternative measures. We intend to make CPIH the preferred measure from March 2017, by which time all the planned improvements will have been implemented.

Tucked neatly into the post Trump election furore you could call it “a good time to bury bad news” to coin a phrase. But first let me point out a problem which even the official statement acknowledges

It also gives an update on the work to improve the Consumer Price Index including owner occupiers’ housing costs (CPIH) with a view to it being considered for redesignation as a National Statistic.

I will come to my critique in a moment but I would like this to sink in as you see even those pushing this cannot escape the fact that they had to de-designate it and have been unable to fix that! Or as the latest statement on this subject puts it.

In August 2014, the National Statistics status of the CPIH was discontinued after issues emerged relating to the processing of some of the administrative data sources used to estimate Owner Occupiers’ Housing costs.

My Critique

I stood pretty much alone when CPIH was suggested and found myself arguing for example with the economics editor of the Financial Times Chris Giles. Let me take you back to the 24th of September 2012.

In some ways even worse some of the Rental Equivalence data had to be estimated as the series planned to be introduced only began in 2007 in England,2009 in Wales and 2010 in Scotland. So we have no actual evidence of the long-term reliability of these numbers.

I predicted it would not work and the official assessment now tells us what?

ONS needs to take more time to strengthen its quality assurance of its private rents data sources, in order to provide reassurance to users about the quality of the CPIH.

There is another issue which the National Statistician has attempted to fudge by writing “the inclusion of an element of owner occupiers’ housing costs”. How very Sir Humphey Appleby! I have noted that many people have reported that house prices are being included but you see they are not. Instead there is a statistical swerve based on the Imputed Rent methodology where they assume house owners receive a rent and then put growth in that in the numbers. The same rental growth measurement that according to their own missives  they need to “strengthen”. Back in August 2014 they had to announce an embarrassing change.

In essence officialdom was admitting that the numbers were wrong and the estimate was of the order of 0.2% per annum. I will let readers guess which way?!

It is not fit for purpose

There is another big issue which is that we went through a housing boom which contributed to the credit crunch so there is logic in looking to adapt to that reality. But as I poiinted out as long ago as 2012 CPIH fails here as well.

Jill Leyland of the Royal Statistical Society has analysed the data comprehensively and it was quite plain that the use of house prices would have given at least some sort of signal whereas to quote her directly if we look at the period from 1988.

There is little difference between CPI and the rental equivalence version of CPIH

So we have a made up number which we struggle to measure and even if we could measure it then it is not far off useless as an economic signal! Oh did I say not far off? Actually it is worse than that because if you look at expansions in the housing market there is a long lag of around 2 years, so by the time you might learn something it is likely to be already too late.

Inconsistency

The rationale for us using CPI in the first place was to align us with Europe. We are now diverging from that as they have house prices in their version of CPIH. When you ask those in authority about their inconsistency you get what might be called the sound of silence.

Oh and after the long list of problems issues and flaws from CPIH you might reasonably think that if we put it politiely there is plenty of cheek here.

It also addresses several flaws and limitations present in alternative measures.

Today’s numbers

Let me thank all women, ladies and girls reading this. You see in addition to boosting GDP with your clothing and footwear purchases you have managed to reduce CPI inflation.

Clothing and footwear, where the downward effect came mainly from garments (in particular women’s outerwear), for which prices rose by 0.2% between September and October 2016, compared with a larger rise of 2.3% a year earlier.

You seem to have completely out manoeuvered us men and I suppose you are adding the word again to that. Actually the issue of how we measure clothing inflation has been troubled since around 2010 and if we look for another troubled series we see the university tuition fees one.

The downward contribution came principally from UK and EU student tuition fees, where the impact from the rise in the cap for tuition fees (first introduced for new students in England in 2012) was smaller this year than in 2015.

Accordingly we saw this.

The all items CPI annual rate is 0.9%, down from 1.0% in September

How did CPIH do?

The subject du jour told us this.

The all items CPIH annual rate is 1.2%, unchanged from last month

So to be fair it has added something. What about house prices though?

Average house prices in the UK have increased by 7.7% in the year to September 2016 (unchanged from 7.7% in the year to August 2016), continuing the strong growth seen since the end of 2013.

I will leave the UK establishment to explain how 1.2% is the new 7.7%.

How is our old measure doing? You know the one which according to our establishment is not up to international standards.

The annual rate for RPIX, the all items RPI excluding mortgage interest payments (MIPs) index, is 2.2%, unchanged from last month

Oh it is reflecting things more strongly…..What about the improved version called RPIJ?

After giving this further consideration I can however confirm that ONS will cease publication of RPIJ from March 2017.

So after pushing it and effectively misleading people they are now treating it like someone wearing a come on your spurs T-shirt at an Arsenal football club AGM.

Comment

We have learnt much today and there is an irony in the fact that clothing prices have wrong-footed expectations for the numbers today. Problems with that series kicked off a new phase of the debate over UK inflation measurement from around 2010. Back then the official estimate of the “formula gap” gap between CPI and RPI was 0.1%. That estimate has not been served well by the passage of time as it is now 1.1%. Our “experts” are only currently out by a factor of eleven or so.

Underlying this we see that UK consumer inflation is on an upwards path as we see that this month’s measurement has met some old “friends”. Producer prices rose by 2.1% (output) and 12.1% (input) and will feed into the system over time. Just as we see that inflation will be on the march we will change our measure. Simply breathtaking!

Me in the Guardian

I expressed my views to the Guardian newspaper who have included them here.

https://www.theguardian.com/uk-news/economics-blog/2016/nov/15/new-uk-inflation-measure-office-for-national-statistics-cpih

 

 

 

 

How the UK establishment blocks and neuters new inflation measurement ideas

Yesterday lunchtime I went to the Royal Statistical Society to attend a meeting on a new proposed inflation measure. This is to be their response to a paper jointly written by Jill Leyland of the RSS and John Astin who was involved in the construction of CPI at Eurostat. This proposed a new Household Inflation Index which I consider to be an improvement  What Jill and John were aiming at was a new inflation measure which would better reflect the circumstances of the ordinary household than present measures. Before I present more on the proposal let me give a simple reason why. The current official inflation measure in the UK called CPI ( Consumer Prices Index) measures the situation of someone around 66% on the expenditure distribution scale and not 50% so it is quite a difference from either the average or median. If you think that it is potentially misleading then so do I.

The Index of Household Payments

You may be wondering at the name change well Nick Vaughan who used to be at HM Treasury but now is apparently an independent at UK Statistics told us that they had spent as much time discussing this as the principles. I found that rather stunning. However I will draw from the proposal what I think are the meat of the new suggestions.

utilisation of a payments approach to measuring owner-occupier housing costs, and the inclusion of some measurement of the capital cost of housing

Those who follow my work will know that I believe the UK establishment has gone to enormous efforts to avoid this so that it can pump up the housing market and claim that as growth and ignore the fact that much of it is inflation. I made the point in the discussion that this area is the one debated time and time again so let me complete the detail.

These elements include but are not limited to: mortgage interest payments, mortgage protection premiums, minor repairs and maintenance, Stamp Duty land tax, transaction fees, building insurance and ground rent…….. the index should include down payments, mortgage capital repayments and major renovations or extensions.

Also the issue I raised earlier about CPI being unrepresentative on the expenditure scale is addressed below.

application of equal weight to the expenditure of all UK households (household weighted)

Some call this democratic weighting although I am not sure that always helps. But we are switching from those with more expenditure having more influence on the measure. another change is this and if you are wondering where it might be relevant then university tuition fees are a clear example.

measurement of price changes, in principle, at the time that goods and services are paid for, rather than when they are acquired.

There are other changes such as more comprehensive coverage of interest costs such as student loans. I do not think this is perfect as I would look for a net rather than a gross measure ( i.e deduct savings interest ) but overall there is much to support this proposal which is why I do.

How the proposal was nobbled before it even began

Easy they plan to produce it only annually rather than monthly. There were audible gasps at this and a lot of criticism. A very good point was made by Simon Briscoe when it was argued that as it was based on the national accounts CPI should on such grounds only be produced quarterly to match the GDP (Gross Domestic Product) data!

I pointed out that I had been expecting a Sir Humphrey Appleby style nobbling of the scheme and that this was it. I asked why they had wasted taxpayers money and people’s time on a proposal which now was now pretty much pointless? Yet again the UK establishment had operated against a plan to measure housing costs. I told Nick Vaughan that the establishment he represented had brought forward an utter turkey in this area which is CPIH (where H is for housing costs) and if you use Twitter as a measure of acceptance then it was registering 0 mentions on days it was released apart from me. I stated that for something which he was proposing as the new single national measure that was another failure. I have just checked over an hour after its release and the number of mentions is again 0.

There were two other bizarre establishment claims. Incredibly it was claimed that the plan was for one inflation measure so they did not want to produce others. An excellent reply said that in the latest Bank of England Quarterly Report there were 30 different measures in the first 4 pages! Thus mentions of a single measure were pure fantasy.

Next was this claim “people do not know what they spend their money on”. The general consensus was that this was both condescending and wrong.

Today’s data

Let me highlight the principles above from today’s data. Here is our official measure.

The all items CPI annual rate is 0.6%, unchanged from last month.

Now let me show you house prices.

Average house prices in the UK have increased by 8.3% in the year to July 2016 (down from 9.7% in the year to June 2016), continuing the strong growth seen since the end of 2013.

Now look at what the experts picked by the UK establishment have done with this.

The all items CPIH annual rate is 0.9%, unchanged from last month.

This is because they use rents as a measure. I pointed out to the meeting yesterday that when CPIH was proposed I had raised at the RSS the issue that we had no reliable measure of them. This was proven correct when the initial system was abandoned. Also that it was a known fact that they take 3 years to respond to economic changes meaning that if the Bank of England used it and made a policy change then it was much more likely to be wrong than right,especially when we allow for the time policy changes take to work (18/24 months to work fully).

Also look at the gap between our current inflation measure and the previous one.

The annual rate for RPIX, the all items RPI excluding mortgage interest payments (MIPs) index, is 1.9%, unchanged from last month

That is not only the fault of the RPI and a difference of 1.3% compares to a change in the inflation target of 0.5%.

What will happen next?

Whilst annual inflation was unchanged there are signs in the system of what the Scorpions called the winds of change.

The overall price of materials and fuels bought by UK manufacturers for processing (total input prices) rose 7.6% in the year to August 2016, compared with a rise of 4.1% in the year to July 2016.

That is apparently mostly being driven by the oil price rather than the lower UK Pound although of course the two do combine. So far it is only edging into the next stage.

Factory gate prices (output prices) for goods produced by UK manufacturers rose 0.8% in the year to August 2016, compared with a rise of 0.3% in the year to July 2016.

So as 2016 develops we will see input costs affect output costs and then CPI. Just as a reminder I was expecting a pick-up in the annual rate before we had the lower UK Pound so now we will get the beginnings of a joint effect. Last year the price of crude oil fell overall towards the year-end as we wait to see what it does this year.This will have an economic effect via lower real wages for example.

Comment

If we look at today’s numbers we see that the headline annual rate was unchanged although as I have discussed above there are upwards pressures in the pipeline. The gap between house prices and the inflation rate is glaring and as the Bank of England will give more details on the house price friendly Term Funding Scheme later this week seems a deliberate policy. That is why first time buyers need so much “Help”.

Meanwhile we see a potential advance in UK inflation measurement completely undermined. As was pointed out by John Astin we need more information and not less. Also I noted that quite a few of my points were made by others so it was nice to see the messages getting home. By contrast the official response was poor and included saying yes when they meant no and also waffling away rather than answering questions.

 

 

 

 

 

UK inflation is simultaneously near-zero, mild and high!

Today sees the announcement of the official inflation data for the UK and they will confirm that we remain in something of a sweet spot. What I mean by that is that particularly by its own standards the UK is seeing a consistent period of low near zero inflation on the official Consumer Prices Index that makes a welcome change. Domestic energy consumers will particularly have welcomed the price falls that will have impacted the data.

EDF Energy has announced a 5% cut to its standard gas price effective from 24 March 2016…. npower has announced an average 5.2% or £32 average annual reduction to its standard domestic gas tariff…. SSE will reduce domestic gas prices on its standard tariff by an average of 5.3%, effective from 29 March 2016.

Well the ordinary worker and consumer will welcome the lower prices although central bankers and their media acolytes will tell you it is a bad thing. Has there ever been any evidence of them backing up their rhetoric with words and insisting on paying more? This period of lower inflation has provided quite an economic boost to the UK via the way that it has led to a much improved series of real wage numbers followed by strong retail sales in particular.

Bank of England

The Chief Economist Andy Haldane did not offer a lot of insight here.

Humans are sentient, water-filled whoopee cushions moulded over millions of years of evolutionary experience.

So let us switch to the inflation report.

As inflation remains more than 1 percentage point away from the MPC’s 2% target, the Governor has written a sixth consecutive open letter to the Chancellor as required by the MPC’s remit.

It is hard not to have a wry smile at the fact that the Bank of England has been about as successful changing low inflation as it was with high! After all as I explained earlier we are much better off this way around.

the vast majority of the current weakness in inflation relative to the target is accounted for by past falls in energy and food prices

Yes please! I am reminded of this bit from the Dickens novel Oliver Twist at this point.

Please,Sir, I want some more

To which the Bank of England responds.

The master was a fat, healthy man; but he turned very pale. He gazed in stupefied astonishment on the small rebel for some seconds; and then clung for support to the copper.

As ever they predict that a couple of years ahead inflation will be on target.

rising domestic cost growth returns inflation to the 2% target by the middle of 2018.

Life is seldom that convenient especially with their appalling forecasting record. Indeed wherever inflation is we get told this.

The MPC judges that inflation expectations remain well anchored,

Nothing to see here move along is the message as they skip away avoiding the fact that the low inflation they do not want has boosted the UK economy. Oh and if there is Brexit then the world will end partly via the inflation they want! I will leave them with that particular contradiction.

Today’s Numbers

We saw a dip in inflation mostly due to the Easter effect on airfares.

By far the largest downward effect came from air transport, with prices falling by 14.2% compared with a rise of 4.5% between the same 2 months last year. This is influenced by the timing of Easter.

Clothing prices fell and also an impact from social housing rent where increases have been capped. Thus we got this.

The all items CPI annual rate is 0.3%, down from 0.5% in March.

Actually it might have dipped some more. As regular readers will be aware I look carefully into the UK inflation infrastructure and have spotted this.

The CPI basket captures only variable-price tariffs, so if variable-price tariffs continue to fall by less than fixed-price tariffs, measured CPI inflation may not reflect the overall fall in retail gas prices.

That I am afraid is a basic fail and should see ch-ch-changes.

CPIH

This is the inflation index that the UK establishment wishes to enforce on us. So far it is not going well as 30 minutes after the data release there has not been one tweet on it. Oh well! Let me help out.

The all items CPIH annual rate is 0.6%, down from 0.7% in March.

Even the establishment have not been able to avoid this embarrassment “not a National Statistic”. Mostly that comes from their inability so far to measure the rents reliably. Even worse is the fact that the idea of using rents to measure owner occupied inflation in the UK teaches you nothing useful as for example the changes are slow (circa 3 years) meaning they tell you something too late on the rare occurrence that they tell you anything at all.

Back in the day when CPIH was mooted this was known if you bothered to investigate and I pointed it out. But it was like an episode of “Carry On Regardless” which the National Statistician and Paul Johnson of the IFS have recently added new chapters.

The Retail Prices Index

The RPI used to be our inflation target after mortgage costs have been deducted in a version called RPIX. You will see why I raise this if you look at the numbers.

The annual rate for RPIX, the all items RPI excluding mortgage interest payments (MIPs) index, is 1.4%, down from 1.6% last month.

That is quite a difference as we see that there is a 1.1% per annum divergence between the old and the new. This poses a lot of questions which are not answered by the flood of official rhetoric on the subject and cries of “formula effect”. Back in 2010 the formula effect was officially estimated to be 0.1% so the situation is in my view more complex.

Also the “improved” version is apparently on its way to being scrapped which adds another section to my financial lexicon for these times.

The all items RPIJ annual rate is 0.7%, down from 0.8% last month.

It too is not doing well on the tweet count having the same round number of 0 as CPIH.

House Prices

A problem for the UK establishment comes here via the machinations and misrepresentations and contortions they undergo to keep the biggest purchase of all for most which is buying a house out of the inflation data. How is that going?

UK house prices increased by 9.0% in the year to March 2016, up from 7.6% in the year to February 2016.

So it is going dreadfully and it is even worse for first time buyers.

In March 2016, prices paid by first-time buyers were 9.7% higher on average than in March 2015.

We are due the monthly update on wage growth but we know that it is around 2% or about a fifth of the extra first time buyers have had to pay in the past year. This only adds to the existing problem.

In March 2016, the UK mix-adjusted house price index increased by 2.9% on February 2016 to reach a record high of 228.6 (Figure 2). The UK index is 23.2% higher than the pre-economic downturn peak of 185.5 in January 2008.

This is the major reason why for so many Gwen Guthrie is on their I-Pods and MP3 players.

Aint nothin goin on but the rent

Comment

It is a sad state of affairs when the UK inflation statistics generate as much heat as light. Officially we have if you take a broad sweep no inflation whereas if you take the trouble to look at our previous measure it switches to mild inflation. This may seem no big deal but if we switch to the main economic indicator of these times which is real wages it impacts a lot. The RPI tells us we have very little real wage growth right now which fits with the apparent slowing of our economy whereas using CPI misses that reality.

There is also the situation for those who are looking to buy a house to whom the inflation numbers must look a joke as they see ever more rises! If my suggestion of putting them into CPI had been used then right now CPI and RPI would be giving very similar answers between 1% and 1.5%. This would control a lot of the “deflation nutter” paranoia and help us going forwards. For once the word “improved” would indeed be appropriate.