Is UK inflation below target (CPI)? On it (RPIX)? Or pushing higher with house prices?

16th September 2014 by The Harried House Hunter

The recent rend for inflation in the UK has been for it to fall back too and then below its inflation target of an annual rate of 2% for Consumer Price Inflation. A major factor in this improved situation has been the rise of the value of the UK Pound which according to Martin Weale of the Bank of England has been responsible for a 0.5% fall in the inflation rate on its own. Actually they may be understating its impact but we can agree that it has been a major factor in the fall in the officially recorded rate of inflation. Along this road we can continue the theme that so far Bank of England Governor Mark Carney can be considered to be the equivalent of a “lucky” general. The economy turned around for his arrival and started a growth spurt and now inflation has fallen below target. The only real policy impact here is that he has (mostly) stopped the policy of his precessor Mervyn King of trying to talk the UK Pound lower. Of course the apochryphal civil servant Sir Humphrey Appleby would describe policy so far as being one of “masterly inaction”.

Friday morning could be a more difficult day than Mark Carney has had so far should Scotland vote for independence. So far the impact on the value of the UK Pound has been much less than the fact that the US Dollar is strong but an actual independence vote followed by a consideration of the new larger rUK current account deficit could be different. It showed poor judgement that Governor Carney originally intended to be at the G20 conference in Australia at such a potentially crucial time.

The public are not convinced that inflation has fallen

The debate about the gap between official inflation measures and people’s perception of inflation was reignited by the Bank of England’s own survey on inflation expectations earlier this month.

Asked to give the current rate of inflation, respondents gave a median answer of 3.4%, compared with 2.9% in May.

That is quite a considerable margin over the official rate of inflation although of course the RPI (Retail Price Index) is nearer the mark. No wonder they keep wanting to discredit it! Also expectations of inflation are not only above the inflation target but are rising.

Median expectations of the rate of inflation over the coming year were 2.8%, compared with 2.6% in May.
Asked about expected inflation in the twelve months after that, respondents gave a median answer of 2.8%, compared with 2.5% in May.

Perhaps one day it will trouble someone in authority that time after time the public’s estimates of inflation exceed their official measures.

Today’s data

The official inflation rate nudged lower in August.

The all items CPI annual rate is 1.5%, down from 1.6% in July. The all items CPI is 128.3, up from 127.8 in July.

So prices are still rising but more slowly than before. The major driver in the reduction in the inflation rate was this.

Food and non-alcoholic beverages, where prices overall fell by 0.2% between July and August this year but rose by 0.5% between the same two months a year ago.

To be specific it was mostly dairy products.

Another way of looking at things is to look at goods inflation and services inflation.

The CPI all services index annual rate is 2.7%, up from 2.5% last month.

As you can see it is not only above the theoretical target but has accelerated whilst goods inflation at 0.6% has nearly disappeared.

What are the prospects?

The producer price series gives us some strong hints as to what will be coming along the inflation way in the future.

The output price index for goods produced by UK manufacturers (factory gate prices) fell 0.3% in the year to August, compared with a fall of 0.1% in the year to July.

So inflationary pressure from this source has fizzled out and if the input costs below are any guide may head further into negative territory.

The overall price of materials and fuels bought by UK manufacturers for processing (total input prices) fell 7.2% in the year to August, compared with a fall of 7.5% in the year to July.

If we add in that we know that so far in September there have been falls in the price of crude oil and iron ore as discussed on here only yesterday the disinflationary drumbeat goes on. You will be pleased to read that the main drivers here of lower prices are energy (crude oil) and home produced food (led by UK cereals) which will be welcomed by all but central bankers and their acolytes.

Other inflation measures are not so compliant

One way of debasing a system is to make a structural change and then hope that everyone forgets about it. Back in 2002/03 when the UK inflation target was changed this happened. This is illustrated today by the fact that the official measure is 0.5% below its target whilst its predecessor is on it.

The annual rate for RPIX, the all items RPI excluding mortgage interest payments (MIPs) index, is 2.5%, down from 2.6% last month.

Another way of putting this is that our old inflation measure is running at an annual rate 1% higher than the new one. This of course is operating in the opposite direction to the GDP revisions and improvements. Tucked in there is another rise in recorded GDP growth if you substitute CPI for RPI which was done a few years ago. In terms of the GDP inflation measure or deflator some 18% of it was changed or “improved”.

What about house prices and inflation?

The Office for National Statistics sprang something of a surprise with its release today as you can see below.

UK house prices increased by 11.7% in the year to July 2014, up from 10.2% in the year to June 2014.

Quite a surge is it not? The driver of this was a rather familiar one.

Annual house price increases in England were driven by an annual increase in London of 19.1% and to a lesser extent increases in the South East (12.2%) and the East (10.6%).

So as of July house prices were still blasting higher but do not worry as we have an inflation index called CPIH which includes housing costs.

The all items CPIH annual rate is 1.5%, unchanged from last month.

This is because their measure of a proxy for owner occupied housing costs did this.

The OOH component annual rate is 1.0%, up from 0.9% last month.

This is quite an intellectual failure in my opinion and it matters for economic policy because if you put house prices into the numbers then you get a CPIH of more like 3.1%. It would therefore be providing exactly the sort of warning signal that those like me who argued for it hoped and believed it would provide. Instead we have a situation I summarised on twitter as shown below.

UK CPI is 1.5% then you add housing costs with house prices rising at 11.7% and then you get 1.5%! Oh hang on….

Actually the shambles here gets worse as they have discovered that they cannot measure the rents correctly either! This led to this.

The National Statistics status of CPIH has been discontinued pending work by ONS to investigate and improve the method for measuring owner occupiers’ housing costs in this index.

So it has been an utter failure in every respect and it was brought to you by a combination of the UK National Statistician and the Consumer Prices Advisory Committee (now disbanded).

Oh and I am still at a loss as to how the situation below actually helps first-time buyers.

In July 2014, prices paid by first-time buyers were 13.5% higher on average than in July 2013. For owner-occupiers (existing owners), prices increased by 10.9% for the same period.


At the moment the conventional view is that inflation in the UK is rather benign. However if we move to our previous inflation target it becomes 1% per annum higher. Also it was only ten days or so that the Retail Price Index was quoted by Chancellor of the Exchequer George Osborne as the inflation rate. I guess that he will not be doing that today!

Meanwhile house price inflation was roaring ahead at an annual rate of 11.7% in July. How convenient that this increases our wealth (hurrah) but apparently does not boost inflation (hurrah again). So if we simply doubled all our house prices we would wipe out our economic problems at a stroke?

If we move to the inflation expectations survey of the Bank of England it would appear that the general population or some 2016 of it at least are not being fooled by the shenanigans. Meanwhile there are plainly international disinflationary pressures right now as evidenced by the collapse of inflation in the Euro area. But for us it simply means less inflation for now not the end of it as our establishment is as addicted to it as a heroin addict is to their fix.

As a postscript then house price rises for rUK would have been even faster without Scotland. However all things being equal Scotland would have just reached a new house price peak in time for independence should the vote on Thursday be Yes.

 The index for Scotland (232.2) in July 2014 is 0.7% above the peak of June 2008 (230.6).

On that subject has anybody given any thought to possible inflation indices for rUK and Scotland should they be required?





13 thoughts on “Is UK inflation below target (CPI)? On it (RPIX)? Or pushing higher with house prices?”

  1. Anonymous says:

    Perhaps the current situation is that rapidly rising asset prices – especially houses – divert spending from current consumption and depress measures of consumer price inflation; buying or renting houses requires an ever increasing proportion of household incomes leaving less – reducing effective demand – for other things. In other words, rapid asset price inflation is contributing to lower consumer price inflation.

    1. Forbin says:

      lack of wages when faced with massive housing costs means effectively

      we have the end consummerism


      1. Jim M. says:

        Hi Forbin,

        I believe you mean that ‘we have the end of consumerism’, to which I can only say ‘Oh thank God!’

    2. baldand says:

      That may well be so. In any case, as Shaun said, there is no question that the inflation rate would be substantially higher if house price changes were included. There is no UK CPI with an owner-occupied housing component based on a net acquisitions approach for the moment. The closest official index available is the RPI ex mortgage interest ex council tax series, whose inflation rate went from 2.7% in July to 2.5% in August. Even if one removes 0.6 percentage points of inflation to convert it into an RPIJ series, the inflation rate is still 1.9%. However, there are other aspects of this series: like the omission of stamp duty and house renovations, and the smoothing of the depreciation index, that almost certainly mean that this series shows lower inflation than a CPI series with a properly calculated OOH component would.

      I suspect that QE in the UK has also pushed up prices of works of art. This won’t show up in the RPI at least, since their purchasers would mostly be concentrated among the high income households excluded from the index.

    3. Anonymous says:

      Hi Derrick

      That is an interesting point. The official/conventional view is that rising house prices lead to positive wealth effects. The mechanism you describe is a negative and may well be one of the reasons why conventional theory has performed so poorly.

      1. Anonymous says:

        Yes, there may be some wealth effect but, for that to affect consumer prices, equity must be withdrawn either as cash or increased debt. Do you know if anyone has done a study recently to see to how and to what extent a wealth effect may be at play?

  2. dutch says:

    ‘UK CPI is 1.5% then you add housing costs with house prices rising at 11.7% and then you get 1.5%! Oh hang on…’

    Congrats Shaun,you’ve nailed it….it’s an absolute f****** disgrace that these so called statisticians are getting away with excluding the real cost of housing in their inflation stats.Price of apples ..yes.Price of a house….err no.

    It’s actually far worse than the scam of imputed rents in GDP calcs and that’s a scandal in itself.

    Normally,it doesn’t matter because noone else talks about it much,which is great for carney but a mouthful of baked dog turds for Joe Public. I can sort of bury my head in the sand most of the time and pretend they’re not as incompetent as I think they are,but something keeps bringing me back to learn more.

    These people have no shame.

    1. Jim M. says:

      Hi dutch and hi Shaun,

      My ignorance in these matters is both profound and well-known, but it occurs to me that the CPI better reflects my personal reality because I can actually afford an apple, whereas a house is but the stuff of dreams!

      You’re absolutely correct, dutch. they have no shame at all.

    2. Noo 2 Economics says:

      Is it that simple? If you include housing costs (purchase price) then surely you must include the cost of the mortgage?

      The effects of Help to Buy, Funding for Lending etc are very likely to reduce that housing cost inflation rate and of course the converse would apply when interest rates go up.

  3. therrawbuzzin says:

    Hi Shaun,
    If we knew what the REAL target was, we might be able to answer.
    They’re keeping it pretty close to their chests, but I suspect the govt. wants as much inflation as it dares, commensurate with a chance of re-election.
    If we can fathom that…

    1. Anonymous says:

      Hi therrawbuzzin

      I think that the game has always been to keep as much inflation as possible out of the official numbers. This was what they did when they used rents rather than house prices for owner occupiers.

      As we have no official numbers what do you think consumer inflation in Scotland actually is?

      1. therrawbuzzin says:

        It’s difficult to say, some supermarkets (Morrison’s for instance) have cut a lot of prices, but for how long?
        House prices, although they have risen a little, are not as bubbleicious as SE England, so they may well be right, but by accident rather than design.
        I note warnings of 11% energy price rises at a time when oil has slipped 12%, yet the regulator continues making empty, “light-touch” threats, like a parent telling a naughty child, “If you don’t stop that before I count to three-quarters-of-a-million…”

  4. Noo 2 Economics says:

    Hallo Shaun,

    Three questions today:

    1. What, if anything, do you feel Carney could have achieved by staying in the UK at the time of the Scottish independence vote?

    2. Is home grown food priced in dollars or pounds – I assume pounds yes?

    3. Are we not in for at least some steady inflation in the next few months given the GBP’s behaviour in relation to the US dollar?

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