The UK has an inflation problem which it is trying to hide

I thought that I would give you today a different perspective on the UK inflation numbers. I doubt you will see it elsewhere much if at all as you have to read quite a way through the numbers to find it.

The annual rate for CPI excluding indirect taxes, CPIY, is 2.2%, up from 1.9% last month. The annual rate for CPI at constant tax rates, CPI-CT, is 2.2%, up from 2.0% last month.

This gives quite a different perspective to the headline number that the Bank of England looks at. I remember the days when the Bank of England and especially Adam Posen used to quote them quite frequently. What is it about them being higher rather than lower which has meant they have got ignored this time around? Instead they prefer to concentrate on this,

The all items CPI is 109.2, up from 108.9 in November……..
The all items CPI annual rate is 0.6%, up from 0.3% in November

So the picture as they put it is one of low inflation which allows them to do this.

 The MPC voted unanimously to maintain Bank Rate at 0.1%………The Committee voted unanimously for the Bank of England to continue with the programme of £100 billion of UK government bond purchases, financed by the issuance of central bank reserves, and also to commence the previously announced programme of £150 billion of UK government bond purchases, financed by the issuance of central bank reserves, maintaining the target for the stock of these government bond purchases at £875 billion and so the total target stock of asset purchases at £895 billion.

That is quite a wedge isn’t it? There will be another £1.48 billion of bond purchases or QE this afternoon in fact. In theory it is supposed to raise inflation but even the “independent” review published last week can see trouble.

But a decade on from its introduction in the UK, QE has become bigger, broader and more persistent than expected.

So they did not know what they were/are doing? After all we spotted that some years ago. It even admits they do not really know what they are doing and the emphasis below is mine.

 And as the size and persistence of QE has grown, so has the importance of learning about how it works, ensuring its robust implementation and building public understanding of the tool.

These are strong criticisms when you note that the Bank of England has been able to mark its own homework.

The Bank’s researchers made a valuable contribution to the growing literature on the effects of QE – especially in the early stages.

Is an independent evaluation of an independent body independence squared or taking us for fools?

Puppy Inflation

You may have noted reports of the price of puppies soaring during the pandemic. On a personal level I can vouch for the trend to some extent as friends and neighbours ( one more this week alone) have joined the pack. So much higher prices ( doubling and some) combined with much higher volumes. I enquired officially as to how this will be treated?

It is very difficult to collect the price of larger pets, like dogs and cats, as they are not readily available to buy and they are not necessarily available throughout the year (breeders tend to have a limited number of litters per year). For these reasons, to represent the cost of pets, we collect the price of small mammals (e.g. hamster, gerbils, guinea pigs, rabbits, etc.) which can be purchased directly from pet stores.

Curious as my neighbours and friends seem to have little trouble with them being “readily available”! On this road we end up with a doubling being recorded like this.

Prices increased by 2.7% in the year to November 2020.

But they did manage to find price cuts earlier in the year.

However, earlier in the year with impending store closures at the start of lockdown, there was evidence of price reductions, where some pet stores tried to quickly find their pets homes.

This adds to another issue I raised during this pandemic period over the issue of face masks, sanitiser and cleaning products.

Expenditure on products such as face coverings and hand sanitisers has inarguably increased over the last 7 months. However, based on the scanner data we have been receiving we believe that, as a proportion of total expenditure, it remains below the levels that price movements would have any discernible impact on our figures – essentially these products would receive a 0% weight in an index.

One has to be careful about this and it is the difference between a cost of living index and a macroeconomic measure like CPI. Our statisticians may be right in the latter case although I increasingly doubt that as for example the increased enforcement of the use of face masks will lead to more use. But in the former case this is an increase in the cost  of living and should definitely be counted. I doubt the supermarkets are giving over so much space to products which do not have a “discernible impact” on their sales and trust them more than the Office for National Statistics.

House Prices

Here is something else which does not have a discernible impact on the inflation numbers because CPI plays the three wise monkeys on the issue and CPIH makes up its own numbers based on rents which do not exist.

UK average house prices increased by 7.6% over the year to November 2020, up from 5.9% in October 2020, to stand at a record high of £250,000; this is the highest annual growth rate the UK has seen since June 2016.

There have also been some structural changes in the market and guess who lives in a flat?

In our UK HPI data, we have seen the average price of detached properties increase by 8.5% in the year to November, in comparison with flats and maisonettes increasing by 5.4% over the same period.

Also there are regional differences.

Average house prices increased over the year in England to £267,000 (7.6%), Wales to £180,000 (7.0%), Scotland to £166,000 (8.6%) and Northern Ireland to £143,000 (2.4%).

So even more of a surge in Scotland but by contrast very little in Northern Ireland which has recovered very little from the credit crunch. Speaking of slow recoveries I would imagine that a special Bank of England squad is on its way to the North-East right now.

The North East is the final English region to surpass its pre-economic downturn average house price peak of July 2007, to now stand at £140,000.

Also the theme of people fleeing London that has been pushed by the BBC and the Financial Times seems to be having trouble with reality.

London’s average house price surpassed £500,000 for the first time in November 2020.

Meanwhile the officially approved measure tells us this.

Private rental prices paid by tenants in the UK rose by 1.4% in the 12 months to December 2020, unchanged since October 2020.

Can you see how it got to be officially approved?


There are always issues with inflation measurement as who is the typical household? But you can make a decent fist of it if you try. But sadly back in 2002/03 the UK decided to join the European trend in ignoring owner occupied housing costs. This is a great swerve for civil servants as it means they can claim wealth effects but the reality of higher house prices is inflation especially for first time buyers. There is always a weasel word and the one here is consumption because you see assets are not part of consumption whereas if we switch to the consumer then even the ECB admits up to a third of income is spent on housing.

There are efforts to improve this such as the Household Costs Index but sadly the same trend of it being manipulated is in play. Last week there was an official Zoom seminar on the subject given by Dr.Martin Weale who use to be at the Bank of England. To give you a clue I still remember him trying to explain to me how the UK house price rises should be recorded as negative inflation. That is why the establishment push his views in spite of the mess he made of the average earnings numbers.

If we now move to puppy costs and what we might call consumer PPE I have sympathy with the Office for National Statistics as it is a fast moving situation. But their failures here are symbolic of an organisation which only 2/3 years ago spurned the chance to set up a really good inflation measure. Instead they are throwing away what little credibility they have left.

The Bank of England has an inflation problem

In these times we have seen the technocrats grab economic power in what is something of a challenged to democracy. Often their words are more important than that of elected politicians. Also they like  to travel in a pack and are not keen on venturing outside of it. So we can learn from the latest outpourings from Bank of England Chief Economist Andy Haldane who has given 2 interviews over the past 24 hours. Or rather they have been published in that time frame.

The interview with the Guardian focused on unemployment.

Haldane said unemployment was a scourge that could leave long-lasting scars. “I saw it up close and personal in the 1980s but it is still very much visible now,” he added.

“If we are not careful those unemployment problems can become sticky. What we found from the 1980s experience is that they can become generational. It is passed down the generations and you have whole families without work.”

It is of course important to learn from the past but there is also the danger of being like a first world war general and fighting the previous war rather than the new one. Andy Haldane seems to think that things have gone as well as they can.

“Policy has been tremendously important. A huge amount of insurance has been provided by the government and the Bank of England – supporting people’s jobs, supporting incomes, supporting businesses and supporting borrowing costs. Without that insurance the outcome for jobs, incomes and the economy would have been massively, massively worse.”

He suggests a much worse path if we had not acted as we have.

Haldane said without action the 25% collapse of the economy in the spring would have pushed up the unemployment rate by 10 percentage points. “Instead of 2-3 million unemployed we would be talking about 4-5 million,” he added.

Whereas his opinion on where we are is relatively benign.

Haldane said he estimated that the UK’s unemployment rate had picked up from less than 4% to more than 6% since the arrival of the pandemic but job losses had been less severe than the Bank’s early estimates.

This time around I think we can cut them some slack on the issue of another set of forecasting errors as this year has been quite something. However there is an issue here where the Chief Economist is wither being deliberately misleading or ignorant and it relates to the way that the unemployment rate is concealing a lot of hidden unemployment. He has started the journey by quoting an unemployment rate if 6%+ when it is officially 4.9% but as you can see below it falls quite a distance short of my estimate. From the 15th of this month.

That is the impact of the furlough scheme in the main and if we quantify that we see that around 1.5 million people are in a type of hidden unemployment so putting them back in leaves us with 3.2 million unemployed or a near doubling of the numbers. On that road the unemployment rate looks to be a bit over 9%.

Perhaps our Andy is somewhat trapped by his previous optimism.

Haldane has been the most upbeat of the nine members of the Bank’s monetary policy committee in recent months.

Indeed and if we go back to the 30th of September we were told this.

Now is not the time for the economics of Chicken Licken.

For those unaware there was a description of this.

The fictional fowl who, having been hit on the head by an acorn, declared the sky was falling in.


This morning in something of a pivot our Andy has been interviewed by Bloomberg and the main subject is inflation.

The Bank of England must have a “laser focus” on keeping inflation expectations in check after the pandemic, Chief Economist Andy Haldane said, highlighting the tricky balance the nation faces in managing its massive debt burden.

There is a lot going on in that sentence but let us start with the contradiction between the opening statement and this.

While the BOE is willing to let price growth temporarily overshoot its 2% target as the economy emerges from the current crisis, there can be no question of letting that sentiment become entrenched, he said.

We have been here before when posy the credit crunch the Bank of England let inflation rise above an annual rate of 5% in late 2011 and in fact it took another couple of years or so for it to return to target. This caused damage to real wage growth which is yet to be repaired. Thus the word “temporary” has its own section in my financial lexicon for these times.

It would appear that people are not falling for this line this time around.

Whether policy can stay that loose depends on how businesses and consumers respond when the crisis ends. A gauge by Citigroup Inc. and YouGov last week showed U.K. household inflation expectations for the next 12 months jumping.

Indeed the latest Bank of England survey suggests the same.

Question 2c: Asked about expectations of inflation in the longer term, say in five years’ time, respondents gave a median answer of 2.9%, compared to 2.8% in August.

Indeed if we look at that survey there is quite a critique of inflation measurement in the UK.

Question 1: Asked to give the current rate of inflation, respondents gave a median answer of 2.5%, compared to 2.6% in August.

Yet the so-called lead indicator from the Office for National Statistics tells us this.

The Consumer Prices Index including owner occupiers’ housing costs (CPIH) 12-month inflation rate was 0.6% in November 2020, down from 0.9% in October 2020.

There are a load of issues headed by its inclusion of rents which do not exist ( Imputed Rents) and the fact that they are based on numbers  from last tear rather than November. But a new front has opened on the issue of puppies. Let me hand you over to Belfast Live as I should mention Northern Ireland more.

The cost of all dogs appears to have risen sharply, especially more popular breeds such as cavapoos and cockapoos.

A recent survey by Pets4Homes shows cocker spaniels have seen a price increase of more than 200% this year.

Jack Russell terriers that once sold for £350 are now on the market for £2,000.

A cavapoo which would have cost £1,000 last year, is now expected to cost around £3,000.

I have to confess I do not know what a Cavapoo is but in Battersea mini-daschunds are all the rage which prices now at £3500. Meanwhile the section Purchase of Pets in the inflation series showed an annual inflation rate of 2.7% which is something from another universe.

There is an element of self-selection in these numbers as you have to be able to pay such amounts but of you look at the Jack Russell prices you did not have to in a clear example of inflation letting rip. The issue of it being missed is one I have raised about what you might call pandemic products such as face masks and sanitiser but the official view is that they are too minor to produce any real change.



So our “loose cannon on the decks” has spoken and it seems he is as detached from reality as ever. For example the issues with inflation are two-fold. The first is that the Bank of England has given the economy quite a monetary push with the annual rate of broad money ( M4) growth at 13.1%. So there is an element of a “laser focus” on something it has created. Also there are issues out there.

China’s exchange moved to tighten restrictions on the trading of iron ore futures, which hit a new record high on Monday and more than double from April levels. …….Iron ore futures price has soared in recent months, with the the most traded contract on the Dalian Commodity Exchange surging nearly 10 per cent on Monday to 1,144.5 yuan ($175) ( Yuan Talks)

Dies anybody out there believe the Bank of England will respond to an inflation rise? It was only yesterday we were noting that it has switched UK debt risk into Bank Rate.

Savers have learnt about the word temporary from the Bank of England too as this is from September 2010.

“It’s very much swings and roundabouts. At the current juncture, savers might be suffering as a result of bank rate being at low levels, but there will be times in the future — as there have been times in the past — when they will be doing very well.” ( Sir Charles Bean)

Next there is the issue of how inflation is measured as it seems increasingly to be like th science fiction series The Outer Limits.