One of the reasons that inflation measurement matters was highlighted yesterday mostly unwittingly I think, If we look at the subject of real wages in the UK we were told this.
Including bonuses, average weekly earnings for employees in Great Britain were estimated to have increased by 3.4%, before adjusting for inflation, and by 1.5%, after adjusting for inflation, compared with a year earlier.
Whereas Andrew Baldwin kindly crunched the numbers using other inflation measures for us.
Using any other deflator one gets lower real wage growth: 1.3% with the CPI, 1.2% with the RPIJ, 0.6% with the RPI
So we have growth but there is a lot of debate about how much? As it happens CPI and RPIJ have moved more in line with the official CPIH measure but we have seen spells where it has been much wider. This issue does change how you see the credit crunch which I can illustrate with a tweet from former Bank of England policymaker Danny Blanchflower.
and still real wage growth 5% below feb 2008 levels….
That is from the official data series which has been switched to CPIH which makes real wage growth look better than it really is. Intriguingly as I pointed out the way the influence of Imputed Rents the former Bank of England policymaker replied with this.
Ok but doesn’t the harmonized E.U. measure do what you want?
To which I replied.
Nope as the inflation measure you used to target ignores owner occupied housing entirely. They are usually just around the corner from putting it in…..
Perhaps he had forgotten. But it does reveal how this importance of this matter gets overlooked. Also Danny was keen to emphasise the role of hedonics which reminded me of this report from the annual review of US consumer inflation.
From February 2018 to February 2019, the price of lettuce increased 14.5 percent while television prices decreased 16.8 percent. This compared to an increase of 1.5 percent for all consumer items over that period.
Anybody else reminded of this famous phrase.?
I cannot eat an I-Pad
Inflation Trends
If we look back a year the UK trade weighted index for the Pound £ is little changed however that hides a fall followed by a rally. Thus from the low of mid-December at 76 it has risen to 79.5 putting a brake on the economy equivalent to more than a 0.75% Bank Rate rise. Makes you think doesn’t it about all the hand wringing from the Bank of England over any 0.25% rise. However if we switch to the US Dollar whilst we have been rallying over a similar time frame we are nearly 9 cents lower than the US $1.41 of this time last year.
We find also that the oil price is not far from where it was a year ago with the current US $ 66/67 for Brent Crude being a couple of dollars lower than a year ago. However we did see a fall followed by a rise from just over fifty dollars on Christmas Eve so there will be some upwards pressure as this is reflected first in producer and next in consumer prices.
Today’s Data
Let me change my usual pattern and start with something I have been hoping for and doing so for a while.
Average house prices in the UK increased by 1.7% in the year to January 2019, down from 2.2% in December 2018 . This is the lowest annual rate since June 2013 when it was 1.5%. Over the past two and a half years, there has been a slowdown in UK house price growth, driven mainly by a slowdown in the south and east of England.
Maybe it’s because I’m Londoner that I especially welcome this bit.
The lowest annual growth was in London, where prices fell by 1.6% over the year to January 2019, down from a decrease of 0.7% in December 2018. This was followed by the East of England where prices fell 0.2% over the year.
I have some friends trying to buy at the moment and wish then well. It is symbolic of the times that a couple who both have professional jobs can only afford a shared appreciation property ( for readers from abroad they only “own” say 2/3rds). Switching back to the national numbers we see that with wage growth in January at 3.7% then over the past year there has been real wage growth of 2% in this area. This is a welcome move after many years of losses.
Also the more up to date numbers from LSL Acadata hint at more good news to come.
Prices edged up for the third consecutive month in February, rising 0.5% to take the average value of a home in England and Wales to £302,435. A spike in prices early last year, however, means prices are down 0.5% compared to this time last year.
Producer Prices
These numbers are beginning to pick-up the higher oil price.
The growth rate of prices for materials and fuels used in the manufacturing process increased to 3.7% on the year to February 2019, up from 2.6% in January 2019…..Crude oil provided the largest upward contribution to the change in the annual rate of input inflation.
Over the next month or too this will also give the output number a push albeit a smaller one.
The headline rate of output inflation for goods leaving the factory gate was 2.2% on the year to February 2019, up from 2.1% in January 2019.
Consumer Inflation
This was a mixed month for our measures as shown below.
The all items CPI annual rate is 1.9%, up from 1.8% in January…….The all items RPI annual rate is 2.5%, unchanged from last month……The all items CPIH annual rate is 1.8%, unchanged from last month.
The drivers were an upwards pull from apparel and transport offset by rises in recreation and culture mostly computer games and food and drink. Intriguingly one of the falls came from an area which has proved very difficult to measure.
The effect came from a
range of products but most noticeably from footwear, particularly women’s footwear.
Have any readers noticed this?
As to why CPIH continues to be the lowest measure it is because of the impact of Imputed Rents via the use of Rental Equivalence.
The OOH component annual rate is 1.1%, unchanged from last month.
This is very different to the United States where the official inflation measure shows that it is such matters ( they call it OER) which has pulled the inflation numbers higher.
Comment
It is genuinely pleasing to be able to report that real wages are outpacing house prices by a decent amount and even more so that this may increase, if we move from slower house price inflation to actual falls. I have been hoping for a long time that first-time buyers might get some actual help from this route rather than being helped to borrow ever more.
Of course this will not be welcome in Threadneedle Street where at the emergency COBRA meeting Bank of England Governor Mark Carney will be ruing the negative wealth effects and chewing his fingernails. I would not want to be the underling bringing him these numbers. But returning to happier news we may for once be seeing the beginning of an actual positive rebalancing of the UK economy as real wages make house prices ( a little) more affordable.