Good to see UK wage growth well above house price growth

Today brings the UK inflation picture into focus and for a while now it has been an improved one as the annual rates of consumer, producer and house price inflation have fallen. Some of this has been due to the fact that the UK Pound £ has been rising since early August which means that our consumer inflation reading should head towards that of the Euro area. As ever currency markets can be volatile as yesterdays drop of around 2 cents versus the US Dollar showed but we are around 12 cents higher than the lows of early August. The latter perspective was rather missing from the media reporting of this as “tanks” ( Reuters) and “tanking” ( Robin Wigglesworth of the FT) but for our purposes today the impact of the currency has and will be to push inflation lower.

The Oil Price

This is not as good for inflation prospects as it has been edging higher. Although it has lost a few cents today the price of a barrel of Brent Crude Oil is at just below US $66 has been rising since it was US $58 in early October. Whilst the US $70+ of the post Aramco attack soon subsided we then saw a gradual climb in the oil price. So it is around US $8 higher than this time last year.

If we look wider then other commodity prices have been rising too. For example the Thomson Reuters core commodity index was 167 in August but is 185 now. Switching to something which is getting a lot of media attention which is the impact of the swine fever epidemic in China ( and now elsewhere ) on pork prices it is not as clear cut as you might think. Yes the Thomson Reuters Lean Hogs index is 10% higher than a year ago but at 1.92 it is well below the year’a high of 2.31 seen in early April

Consumer Inflation

It was a case of steady as she goes this month.

The Consumer Prices Index (CPI) 12-month rate was 1.5% in November 2019, unchanged from October 2019.

This does not mean that there were no changes within it which included some bad news for chocoholics.

Food and non-alcoholic beverages, where prices overall rose by 0.8% between October and November 2019 compared with a smaller rise of 0.1% a year ago, especially for sugar, jam, syrups, chocolate and confectionery (which rose by 1.8% this year, compared with a rise of 0.1% last year). Within this group, boxes and cartons of chocolates, and chocolate covered ice cream bars drove the upward movement; and • Recreation and culture, where prices overall rose between October and November 2019 by more than between the same two months a year ago.

On the other side of the coin there was a downwards push from restaurants and hotels as well as from alcoholic beverages and tobacco due to this.

The 3.4% average price rise from October to November 2018 for tobacco products reflected an increase in duty on such products announced in the Budget last year.

Tucked away in the detail was something which confirms the current pattern I think.

The CPI all goods index annual rate is 0.6%, up from 0.5% last month……..The CPI all services index annual rate is 2.5%, down from 2.6% last month.

The higher Pound £ has helped pull good inflation lower but the “inflation nation” problem remains with services.

The pattern for the Retail Prices Index was slightly worse this month.

The all items RPI annual rate is 2.2%, up from 2.1% last month.

The goods/services inflation dichotomy is not as pronounced but is there too.

Housing Inflation ( Owner- Occupiers)

This is a story of many facets so let me open with some good news.

UK average house prices increased by 0.7% over the year to October 2019 to £233,000; this is the lowest growth since September 2012.

This is good because with UK wages rising at over 3% per annum we are finally seeing house prices become more affordable via wages growth. Also you night think that it would be pulling consumer inflation lower but the answer to that is yes for the RPI ( via the arcane method of using depreciation but it is there) but no and no for the measure the Bank of England targets ( CPI) and the one that our statistical office and regulators describes as shown below.

The Consumer Prices Index including owner occupiers’ housing costs (CPIH).

Those are weasel words because they use the concept of Rental Equivalence to claim that homeowners pay themselves rent when they do not. Even worse they have trouble measuring rents in the first place. Let me illustrate that by starting with the official numbers.

Private rental prices paid by tenants in the UK rose by 1.4% in the 12 months to November 2019, up from 1.3% in October 2019.

Those who believe that rents respond to wage growth and mostly real wages will already be wondering about how as wage growth has improved rental inflation has fallen? Well not everyone things that as this from HomeLet this morning suggests.

Newly agreed rents have continued to fall across most of the UK on a monthly basis despite above-inflation annual rises, HomeLet reveals.

Figures from the tenancy referencing firm show that average rents on new tenancies fell 0.6% on a monthly basis between October and November, with just Wales and the north-east of England registering a 1.1% and 0.4% increase respectively.

Both the north-west and east of England registered the biggest monthly falls at 0.8%.

Rents were, however, up 3.2% annually to £947 per month.

This is at more than double the 1.5% inflation rate for November.

As you can see in spite of a weak November they have annual rental inflation at more than double the official rate. This adds to the Zoopla numbers I noted on October 16th which had rental inflation 0.7% higher than the official reading at the time.

So there is doubt about the official numbers and part of it relates to an issue I have raised again with the Economic Affairs Committee of the House of Lords. This is that the rental index is not really November’s.

“The short answer is that the rental index is lagged and that lag may not be stable.I have asked ONS for the detail on the lag some while ago and they have yet to respond.”

Those are the words of the former Government statistician Arthur Barnett. As you can see we may well be getting the inflation data for 2018 rather than 2019.

The Outlook

We get a guide to this from the producer price data.

The headline rate of output inflation for goods leaving the factory gate was 0.5% on the year to November 2019, down from 0.8% in October 2019……..The growth rate of prices for materials and fuels used in the manufacturing process was negative 2.7% on the year to November 2019, up from negative 5.0% in October 2019.

So the outlook for the new few months is good but not as good as it was as we see that input price inflation is less negative now. We also see the driving force behind goods price inflation being so low via the low level of output price inflation.

Comment

In many respects the UK inflation position is pretty good. The fact that consumer inflation is now lower helps real wage growth to be positive. Also the fall in house price inflation means we have improved affordability. These will both be boosting the economy in what are difficult times. The overall trajectory looks lower too if we add in these elements described by the Bank of England.

CPI inflation remained at 1.7% in September and is expected to decline to around 1¼% by the spring, owing to the temporary effect of falls in regulated energy and water prices.

However as I have described above these are bad times for the Office for National Statistics and the UK Statistics Authority. Not only are they using imaginary numbers for 17% of their headline index ( CPIH) the claims that these are based on some sort of reality ( actual rental inflation) is not only dubious it may well be based on last year data.

The Investing Channel

 

Can Portugal continue its economic success story?

Today is the anniversary of the oldest alliance in the world as England signed the Treaty of Windsor with Portugal back in 1386. So let us take the opportunity to peer under the bonnet of the Portuguese economy which has been seeing better times after the struggles created by the Euro area crisis of the early part of this decade. Back then it was illustrated by an unemployment rate and benchmark bond yield in the high teens in percentage terms. The Euro area crisis saw the economy shrink at an annual rate of over 4% for a while which not only saw unemployment soar but also questioned the solvency of the nation which is why bond yields went with it. The latter point was an issue because like Italy Portugal had built up a history of not being able to sustain economic growth beyond 1% per annum but was unfortunately able to participate in any declines.

What about more recently?

A recovery began in 2014 but it was only slow growth and 2015 saw a rise but it was not until the third quarter of 2016 that we saw a real change with annual GDP growth going above 2% to 2.3%. This welcome rally continued and the first half of 2017 saw annual GDP growth at 3.1%. After the rough times of the credit crunch followed quickly by the Euro area crisis Portugal badly needed this.

2017 was the peak year as the second half maintained an annual growth rate of 2.5% so Portugal for once was not only joining in with a period of Euro area growth it was exceeding it. The latter theme continued in 2018 with Portugal slowing but doing considerably better than the average, although the catch is that in the last half of 2018 this happened.

In comparison with the third quarter of 2018, GDP increased 0.4% in real terms (0.3% in the previous quarter)

 

This meant the annual rate slowed to 1.7% and it was accompanied by something familiar.

The contribution of net external demand to GDP year-on-year rate of change shifted from -0.3 percentage points in the third quarter to -1.6 percentage points, with a decrease in real terms of exports of goods. The positive contribution of domestic demand increased to 3.3 percentage points in the fourth quarter

 

This is familiar on two counts. Firstly Portugal has a long history of going to the IMF due to balance of trade problems. Next comes the fact that problems with exports were a theme of the latter part of 2018 and has me wondering if this is related to the automotive sector in Portugal which is around 4% of the economy? Through the better period that sector has been a success but now times have got much harder illustrated by the fact that for example car sales by the largest Chinese manufacturer SAIC fell 20% on a year ago in April.

Moving to the Euro area strategy of “internal devaluation” which essentially means lower real wages that collided at the end of 2018 with the world trade issues, which of course are in the news right now. Next comes the role of the European Central Bank summarised here by its President Mario Draghi.

 I’ll be briefer than I would like to be, but certainly especially in some parts of this period of time, QE has been the only driver of this recovery……..We view this as – but I don’t think I’m the only one to be the crucial driver of the recovery in the eurozone. At the time, by the way, when also other drivers were not really – especially in the first part, there was no other source of growth in the real economy.

If you take Mario at his word then QE and negative interest-rates were the driver of the recovery in Portugal. Thus the fading of growth should be no surprise as the monthly QE flow was tapered and then ended. Anyway that is Mario’s view and we should also note that he is hardly independent in this regard.

Unemployment

This is perhaps the clearest signal of better times.

In the 1st quarter of 2019, the unemployment rate stood at 6.8%, higher than the previous quarter value by
0.1 percentage points (pp) and lower than the year-on-year rate by 1.1 pp.

If we ignore for the moment the quarterly move we see that in comparison to the move above 17% ( 17.5%( in early 2013 things have got much better in this regard. Another way of putting it is that Portugal Statistics calculates a very broad measure including underemployment and thinks this.

Albeit of the quarterly increase in the 1st quarter of
2019, the unemployed population and the labour
underutilisation have displayed downwards trends since
the 1st quarter of 2013, having decreased in total
61.8% and 49.8%, respectively (corresponding to
573.2 thousand and 731.8 thousand people in each
case).

Looking Ahead

The Bank of Portugal tells us this.

The Portuguese economy is expected to continue to grow by 2021, although at a slightly slower pace than in the past few years. After a 2.1% increase in 2018, gross domestic product (GDP) is expected to grow by 1.7% in 2019 and 2020, and by 1.6% in 2021, drawing closer to potential growth.

Let us start with the good news within this.

Projected growth for economic activity in Portugal outpaces that projected by the European Central Bank for the euro area, which indicates slight progress in the Portuguese economy’s convergence towards average income levels in the euro area.

Mind you with the trade war issue continuing there has to be doubt over this bit.

The Portuguese economy should continue to benefit from a favourable economic and financial environment, including an average growth in external demand of 3.4% and the maintenance of favourable financing conditions for economic agents.

National Debt

This has led to another favourable situation for Portugal which is the change in trend for the Public Finances. The annual deficit was running at an annual rate of 7.2% of GDP as 2015 began but is now running at an annual rate of 0.5%. This means that the national debt has finally begun to fall in relative terms to 121.5% of GDP. So we again see how economic growth can improve matters in this area.

However an “Obrigado Mario” is due as the ECB QE programme has unequivocally helped matters here with Portugal now having a ten-year yield of a mere 1.1%.

Comment

Let me continue with the good news theme with this from the Bank of Portugal this morning.

In 2018 real GDP was 1.2% higher than in 2008……The unemployment rate stood at 7.0%, the lowest figure in Portugal since 2004…… Although slowing down, tourism exports increased by 7.5% in 2018 and, together with car exports, were at the root of market share gains for Portuguese exporters,

Now let me move to the issues as it sees it.

However, labour productivity, measured as gross value added (GVA) per worker, declined by 0.6%……… Portuguese GDP per capita in 2018 stood at 58% of GDP per capita in the euro area.

If we take those issues in reverse we see that in spite of the recent stronger phase the troubles of the past leave Portugal mulling what happened to the promises of economic convergence made by the Euro area founders. Also last year saw Romania overtake Portugal in terms of total output but not on an individual basis.

However that issue is driven by the first statistic in my opinion. It stands out in two respects, as it is a disappointment compared to the rate of economic growth and compares very unfavourably with what we were looking at for America yesterday. More deeply it is systemic to Portugal which has long struggled with such issues with the stereotype being of old industries and old practices.

Finally the central bank may be happy about this but first time buyers will not be.

In the 4th quarter of 2018, the year-on-year change of median price of dwellings sales in Portugal was +6.9%,
increasing from 932 €/m2
in the 4th quarter of 2017 to 996 €/m2
in the 4th quarter of 2018. Lisboa stood out from the
other cities with more than 100 thousand inhabitants as it scored the highest house price (3 010 €/m2
) and also the
highest growth compared to the same period in the previous year: +23.5%….. Apart from Lisboa, the cities of Porto (+23.3%), Amadora (+20.3%) and Braga (+18.3%)
observed significant variations too.

Plenty of wealth effects for it to claim but how much lower would real GDP growth be if owner-occupied housing costs were not ignored by the inflation measures used?

 

 

 

UK Inflation starts to head lower and help real wage growth

Today brings the latest UK official inflation data into focus. However the last 24 hours have brought another shift in the environment because the crude oil price had another of those days when it took something of a dive. Here is Oilprice.com on the subject.

Crude prices fell 4 percent on Monday and about 7 percent on Tuesday. WTI dropped below $47 per barrel and Brent fell to the $56 handle.

Moving onto the likely causes they tell us this.

Oil prices crashed to new one-year lows on Tuesday, dragged down by a deepening sense of global economic gloom as well as fears of oversupply in the oil market itself.

The reasons for the sudden meltdown were multiple. Rising crude oil inventories and expected increases in shale production weighed on oil prices, but the price crash was accentuated by the broader selloff in financials.

Genscape said that inventories are rising, which has raised fears of tepid demand amid soaring supply growth.

We are back to mulling an increase in shale oil production at a time when demand is weakening. As ever there is an undercut as we wonder if the shale oil producers will be so enthusiastic if the oil price remains at these new lower levels. If we switch to the impact on the inflation outlook then we now have an oil price that is around 10% lower than a year ago if we use the Brent Crude benchmark and more than that using West Texas Intermediate as the gap between the two has approached US $10.

The impact of this should be felt to some extent in the input version of the producer price data for November and maybe via fuel prices at the pump in a much more minor way on the consumer price inflation number. By the time we get the December data there will be a stronger influence and this will be accompanied by other commodity prices falls. For example Dr. Copper is at US $2.68 as I type this or 14% lower than a year ago. The CRB Commodity Index has not fallen as much but is still some 6% lower than a year ago.

Central Banks

The news above will be debated at the US Federal Reserve as it decides US interest-rates and the subject of QT today. Of course central bankers ignore what they call non-core factors such as energy and food in their favourite inflation measures but the ordinary person cannot and the picture has changed. Also as @fwred reminds us central banks are no longer using their balance sheets to raise inflation.

From an economic perspective, we’ll be debating the impact of QE for years looking at the counterfactual and the complementary effects of other policy tools, including negative rates. ECB’s estimate: ~2% boost both to real GDP and inflation, or +40bp per year.

Well apart from the Bank of Japan anyway, but it has failed to do much about inflation at all in spite of the size of its actions which now exceed annual economic output or GDP.

Today’s data

Having emphasised the impact of lower oil prices let us get straight to the impact.

The annual rate of inflation for materials and fuels purchased by manufacturers (input prices) slowed to 5.6% in November 2018, down 4.7 percentage points from October 2018 . The 12-month rate of input inflation has been positive since July 2016. The annual rate was driven predominantly by crude oil prices, which showed growth of 15.5% in November 2018, although this was down from 40.4% in October 2018. The one-month rate for materials and fuels fell 3.1 percentage points to a negative 2.3% in November 2018.

As you can see there was quite a change in the trajectory in November and as the annual rate remained positive there is more to come. There was also the beginning of an effect on the output number.

The annual rate of inflation for goods leaving the factory gate (output prices) fell by 0.2 percentage points to 3.1% in November 2018 . The 12-month rate of output inflation has remained positive since July 2016. On the month, output inflation also slowed, falling 0.1 percentage points to 0.2%.

Actually there was a larger impact from the lower oil price than this but it got offset by this.

This increase reflects the rise in Tobacco Duty introduced in November 2018 and is the highest the rate has been since March 2014.

So not the best of months for Oasis fans.

But all I need are cigarettes and alcohol!

Consumer Inflation

Here we also saw a marginal nudge lower in the main two measures.

The all items CPI annual rate is 2.3%, down from 2.4% in October…….The all items RPI annual rate is 3.2%, down from 3.3% last month

This was driven by lower rates of inflation for recreation and culture and this.

Petrol prices fell by 2.6 pence per litre between October and November 2018, compared with a rise of 1.8 pence per litre between October and November 2017.

Actually I noted this mention about recreation and culture.

Price movements for both
computer games and live music events can often be relatively large depending on the composition of
bestseller charts and the bands that are touring at the time of price collection.

This was on my mind due to the fact that Ringo Starr and Ronnie Wood joined Paul McCartney on stage at the O2 in London on Sunday night. My point is that you can measure the ticket price but what is your quality measure? From the excitement on social media that changed by Ringo’s presence in the crowd before we get to having the only surviving Beatles playing on stage and to top it off being joined by a Rolling Stone.

How to measure inflation

We can move onto the widely ignored official measure called CPIH.

The all items CPIH annual rate is 2.2%, unchanged from last month.

It is widely ignored because of the way it uses Imputed Rents to get to this.

The OOH component annual rate is 1.1%, unchanged from last month ( OOH = Owner Occupied Housing).

House Prices

A couple of weekends ago when the economics editor of the Financial Times was presumably otherwise engaged I noted this.

The original consumer price index included house prices. But they were removed in 1983 and replaced with “non-market rents” — an estimate of how much owners could charge to let their homes…….
Including house prices in the new index would not guarantee a higher rate of inflation as high house price inflation might be offset by smaller increases, if not a decline, in rents or offset by price changes in other components. But large and persistent acceleration in this new economy-wide index would be a sign of more general inflation.

This was about the US and written by Joseph Carson but it applies to the UK as well. I note it got widespread support in the comments, although we cannot make a comparison to the pro Imputed Rent articles as they seem to have suspended the comments system for those.

The rate of UK house price inflation has slowed and I welcome that but it remains a much better guide to inflation than any rental fantasies.

Average house prices in the UK increased by 2.7% in the year to October 2018, down from 3.0% in September 2018. This is the lowest annual rate since July 2013 when it was 2.3%. Over the past two years, there has been a slowdown in UK house price growth, driven mainly by a slowdown in the south and east of England.

Comment

There is some pre-Christmas cheer in the UK inflation data today as we see the new lower oil price start to have an impact on the numbers. If it is true that the New Year Sales have started early then that too may impact on the December data although of course it will wash out to some extent in January.

But for the moment the trend for consumer and indeed asset inflation is down and we should welcome the way that will benefit real wages and indeed first time buyers in the property market. Also as someone who has spent the last 6 years or so arguing about inflation measurement with official bodies being operated like puppets by HM Treasury I had a wry smile at this tweet which ignores the measure it has pressed for.

Lower house price inflation adds to the headache at the Bank of England

Today is inflation day in the UK where we receive the latest data but before we get to that there were some developments on the issue of how we measure it. This took place at the Economic Affairs Committee of the House of Lords where its ongoing enquiry into the Retail Price Index  or RPI continued and took evidence from the National Statistician John Pullinger. Regular readers will be aware that I have been making the case for the RPI for more than six years now as the UK establishment set a plan to try to get rid of it and more recently attempting to let it wither under a policy of neglect where they do not update it even if the changes required are ones which are easy to do because the data is already collected for other indices. Actually they have not even been consistent in that policy as they did make a change last year to bring in a new house price index as the previous one had been discovered to be incorrect.

For newer readers this matters because put simply it is the indices that give the higher readings for inflation which seem to come under official challenge. The pensioners index went about five years ago and the RPI has been under fire for most of this decade. The measure they would like to replace it with called CPIH has in its relatively short life consistently given the lowest reading. The latest numbers go RPI ( 3.4%) which of course was replaced by the CPI ( 2.4%) and then CPI (2.3%). I am sure you can see the trend for yourself but in case you think this is arcane it mattered a lot yesterday as with total wage growth being 2.5% then we get quite different answers for real wage growth. Another impact is on GDP growth where the statistician Mark Courtney has estimated that the use of CPI rather than RPI has raised recorded growth by something of the order of 0.5%. At times of low growth like now that gets even more significant.

Moving to yesterday John Pullinger said this.

The RPI is not a good measure of inflation ( slight delay) as captured by prices that capture the impact on the consumption of goods and services, it is not a good measure of inflation if you look at the impact of prices on households.

Even this opening salvo represents a change as the previous position was the bit before the slight delay whereas now room for manoeuvre is being created. As the meeting developed there was a shift to this as reported by the Financial Times.

Mr Pullinger had previously refused to consider reforms to the RPI, saying it was a legacy index that could not be changed.But in response to insistent questions by committee members, he said the statistics agency had now changed its mind, but needed to get the Treasury and the Bank of England on board before it would act.

So just like the Financial Times itself where the economics editor Chris Giles argued for some years against the RPI before mellowing recently. Let me cut to the two main issues here which are owner-occupied housing costs and the formula effect. The UK establishment have campaigned in favour of inflation measures which exclude owner occupied housing costs ( CPI) or use fantasy rents which are never paid in reality to do so ( CPIH). In some ways I think the latter is worse as it flies under a false flag as cursory readers may only read the headlines which say it covers housing costs. In reality it has been an embarrassment which I have covered many times.

The “formula effect” is more complex and many of you will have read the eloquent arguments in  favour of what was called RPIJ  by Andrew Baldwin in the comments section here which in essence is RPI without it. The UK establishment took that line for a few years then dropped it as you have to calculate it yourself now ( or wait for Andrew to do it for you). The bone of contention here is that some of it at least is due to changes in the way clothing prices were measured in 2010 which caused as Taylor Swift would put it “trouble,trouble,trouble”. You see until then there were arguments CPI under measured inflation not RPI being over. If I was in charge there would be a major project into investigating and reforming this area as before then the formula effect was smaller. It is a matter for the UK authorities as to why such work began but then stopped. Research was replaced by rhetoric.

Today’s numbers

We dodged a little bit of a bullet I think.

The all items CPI annual rate is 2.4%, unchanged from last month

What I mean by that is that there were upwards pressure as three utilities raised domestic energy costs and the comparison for petrol prices was with 115.3 pence last year. Having written what I have above it was hard not to have a wry smile at what held inflation down.

where prices of clothing fell by 2.3% between May and June this year compared with a fall of 1.1% between the same two months a year ago. Prices usually fall between May and June as the summer sales season begins but the fall in 2018 is the largest since 2012.

Fortunately in some ways this was not the reason why the RPI went the other way.

The all items RPI annual rate is 3.4%, up from 3.3% last month.

Looking Ahead

There continues to be a tug higher from the producer price numbers.

The headline rate of inflation for goods leaving the factory gate (output prices) was 3.1% on the year to June 2018, up from 3.0% in May 2018. Prices for materials and fuels (input prices) rose 10.2% on the year to June 2018, up from 9.6% in May 2018.

These do not impact on a one for one basis by any means as the effect weakens from input prices to output prices and even more so to consumer inflation. The input number is mostly ( ~70%) the impact of the oil price and changes in the value of the UK pound £.

House Prices

Finally the official data series is catching up with the other measures that we look at.

Average house prices in the UK have increased by 3.0% in the year to May 2018 (down from 3.5% in April 2018). This is its lowest annual rate since August 2013 when it was also 3.0%.

This means that the other measures seem to be working well as a leading indicator although it is also true that there remain challenges to the new series ( there is still some debate about its treatment of new builds)

Comment

There is good news today in that inflation at least on the official measures did not rise and there is hope for something of an official rethink on how it is measured. Let me give some credit to the Economic Affairs Committee which did challenge the National Statistician yesterday. For purposes of transparency I did contact them last month to point out they should widen their evidence base and to invite them to the Royal Statistical Society meeting on the RPI at which I was one of the speakers. Sadly their Lordships were otherwise engaged but staff members did attend I am told. I note that they were also willing to reflect evidence that the CPI measure has under recorded inflation ( housing costs for a start).

Moving to today’s numbers we see that upwards pressure remains on consumer inflation but that there is plenty for the Bank of England to consider. We saw yesterday that wage growth has dipped albeit only by a small amount and now inflation has remained static. Some may consider that its eyes will be on the fall in house price inflation especially should its mood be of behaving like an unreliable boyfriend.

But even so let me compare house price growth’s 3% with this which is a basis of the CPIH housing costs section.

Private rental prices paid by tenants in Great Britain rose by 1.0% in the 12 months to June 2018; unchanged since April 2018.

It is time to replace consumer inflation measures with inflation faced by us

Let me open today by agreeing with the Bank of England. As many of you are aware I wrote to Governor Carney challenging the testimony he gave to the House of Lords on the 30th of January. Here is part of the response from the Bank.

No measure of consumer prices is perfect.

A good start however sadly they then claim to agree with me whilst putting  a word in my mouth so to speak that I did not say. I have highlighted it below. Also as CPI has been used as their inflation target since 2003 one might wonder where this point of view has been the last 15 years.

We agree that the single biggest shortcoming of the current CPI is that it excludes the consumption price of owner-occupied housing.

If you could sum up what is wrong with the UK establishment view on inflation that single word does it. By putting it like that you go from an owner occupier spending quite a bit of their income over time on their home to someone who spends far less as it is put into another category as it is an asset which doesn’t count and/or an investment which doesn’t count either. Fantastic isn’t it? Chelsea fans like me would have loved to have done that to Barcelona;s goals last Wednesday night but even the murky world of football does not stoop so low.

On the consumption road the owner-occupier does this.

As you will know, measuring this is not straightforward because the consumption cost of owner-occupied housing services is not directly observable. As you note, people do not pay rent to themselves to live in their own home.

Of course it is not directly observable as it is a fantasy number which is imputed as it does not exist. Theory over reality again, what could go wrong?

This is considered an economically sound concept and it is easy to understand, the price a homeowner would have to pay to rent a home similar to their own, but it is clearly an imputed one.

Is “economically sound” an oxymoron? Also it may just be where I live but I have little idea of what they rental value of my flat is and as I live there am not much bothered. As to the idea that it is easy to understand may be so in the Ivory Towers of the Bank of England but I bet if you asked people you would get the reply “but I don’t”. If we go deeper there has been a lot of trouble with measuring this as the Office for National Statistics does not get the source data and is on its second effort in terms of overall series. Those of you willing to look back to 2012 on here will note that I warned about problems with the original series back then but the establishment of course knew better and when it failed it was as usual nobody’s fault. I have seen arguments that its failure to properly stratify between new and old rents means that it is perhaps 1% per annum to low. If we now move to today’s data release you can see the significance of this.

Private rental prices paid by tenants in Great Britain rose by 1.1% in the 12 months to February 2018; unchanged from January 2018.

RPI

If we move to the Retail Prices Index or RPI the Bank of England tells us this.

RPI suffers from this problem.

Which is?

In any event, an important factor in any measure of consumer prices is avoiding the influence of movements in asset price valuations (such as land prices and asset valuations of housing structures)…………. Indeed, by the inclusion of mortgage interest payments, RPI conflates the consumption cost of housing not only with asset valuations, but also with the costs of financing the acquisition of those assets.

Again theory trumps reality as something which is a large part of people’s budgets disappears from the inflation data as reality gets twisted in the clouds inhabited by the Ivory Towers. Indeed when someone is really dismissing you they tell you are important but….

We should stress that none of this is to say that house prices and mortgage interest payments do not matter. Accurate information on these is central to much of the work of the Bank’s Monetary Policy and Financial Policy Committees as well as many other economic and financial policymakers.  They matter a great deal,

They matter so much that they need to be excluded. If we look at other perspectives this matters I note some work by the NIESR suggesting that 62% of households are owner-occupiers and that this has happened.

There is a genuine question of affordability with housing.,,,,,Essentially since 1997, house prices have become twice as expensive relative to incomes.

That is the real reason that house prices are kept out of the inflation data as you see then the rises are increases in wealth and filter their way into economic growth.Maybe some is but a lot of this is inflation as first-time buyers will not noting ruefully.

Let me put this another way by noting this from the Bank of England.

As you suggest, the other main alternative is the net acquisitions approach.

No I said house prices as  my support for the net acquisitions approach has faded and let me explain why with two numbers. The weight of owner occupiers in CPIH is 17.4% but the weight using net acquisitions is 6.8%. Just as a reminder it is the same housing stock. But even with that manipulation there is a clear difference.

Owner occupiers’ housing costs (OOH) in the UK under the rental equivalence approach have grown by 1.5% in Quarter 4 (Oct to Dec) 2017 compared with the corresponding quarter of the previous year.

OOH according to the net acquisitions approach have grown by 2.9% in Quarter 4 2017 compared with the corresponding quarter of the previous year.

This comes from a release which in my opinion was part of a propaganda campaign to convince us that all roads led to the same answer. As you can see that is misfiring and perhaps like the effort with the RPIJ measure will find its way into the recycling bin both friendless and abandoned.

Comment

If we look at today’s data the news is better as we see a fall in consumer inflation with the CPI measure falling to an annual rate of 2.7% and RPI to 3.6%. Those of you mulling the potential for a second Battle of the Thames today as well as those who like to keep up to date on the price of fish might like to know that fish prices rose by 1.3% this February as opposed to 4.7% last year. Looking deeper into the inflation chain we see this.

The headline rate of inflation for goods leaving the factory gate (output prices) was 2.6% on the year to February 2018, down from 2.8% in January 2018. Prices for materials and fuels (input prices) rose 3.4% on the year to February 2018, down from 4.5% in January 2018.

The media report this as the fall in the Pound £ dropping out of the numbers actually especially in the input series it is the stronger £ versus the US Dollar at play as it has a pretty direct line in. It will impact on the other measures as 2018 develops and help to bring down their numbers

Returning to my theme we end up with a pretty clear conclusion as to the establishment’s game as RPI at 3.6% is rubbished and CPI at 2.5% is promoted. I wrote some time back that they always promote things which give the lowest number and if I am ever wrong fell free to let me know. Meanwhile my arguments are hitting home as I notice some of my opponents are getting cold feet.

It has only taken 6 years. If we move onto planning ahead I think we have to move from consumer inflation to the inflation people experience as otherwise we miss this as explained by Edward Harrison.

Using the Minsky model, it’s wholly possible that asset price inflation is through the roof even while consumer price inflation barely budges. For example, say you have a credit crisis that throws people out of work and causes mass unemployment. In that case, it would take many years to get back to full employment. You won’t see inflation rising robustly. Yet, during that period, the central bank could set interest rates at a level that encourages an increase in speculative and then, eventually, Ponzi financing. That’s a recipe for asset price inflation without consumer price inflation.

Whatever your views on the Minsky model that bit is pretty much impossible to argue with. Now should we go forwards with that or backwards with “economically sound concepts” which keep failing?