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.
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?