Inflation roars in the UK as the cost of living rises by 6%

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by Shaun Richards

This morning has brought something to the UK which younger readers will not have experienced. Or rather it has brought more official recognition of an issue that will have been affecting shopping baskets and bills. Millennials and younger will nit have experienced anything like this.

The all items RPI annual rate is 6.0%, up from 4.9% last month. The all items RPI is 312.0, up from 308.6 in September.

So there has been a monthly rise of 1.1% and it has not been this high this century as the previous peaks went above 5% but did not make 6%. Also we can also note that the previous Bank of England target is even higher.

The annual rate for RPIX, the all items RPI excluding mortgage interest payments (MIPs), is 6.1%, up from 5.0% last month.

As you can see even more pressure would be on the Bank of England to act which of course was the main reason why its target was changed to a measure which gives a lower number which is below.

The Consumer Prices Index (CPI) rose by 4.2% in the 12 months to October 2021, up from 3.1% in September.

So the UK deep state will be a lot happier today than you might think and those that are still around will be raising a glass to the success of their cunning plan. A major factor in their plan was to omit owner-occupied housing costs and we can see by looking at that part of the RPI that depreciation ( its version of many of those costs) rose over the past year by 10.2%. So first-time buyers have a measure that allows for the higher house prices they face and a different measure than ignores them.

I think you are beginning to understand the forces behind the campaign against the RPI which curiously get forgotten by those same authorities when it comes to rail fares, student loans and most disgracefully of all Bank of England pensions. The Bank has shamefully pursued an “I’m all right Jack ( and sometimes Jill)” attitude to this via its silence on something which is then good enough for its pensioners.

Actually at a later date they decided that they could find a way to reduce the numbers further. This came from something of a backwater in the national accounts called Imputed Rents which are a balancing item as otherwise switches from owning to renting property or vice versa would distort the income version of GDP. They do not exist and are never paid but they are 19% of the officially approved CPIH measure which means it claims housing costs are doing this.

The OOH component annual rate is 1.9%, up from 1.8% last month.

At a stroke the inflation numbers become much more friendly looking.

The Consumer Prices Index including owner occupiers’ housing costs (CPIH) rose by 3.8% in the 12 months to October 2021, up from 2.9% in the 12 months to September.

With nearly a fifth of the index doing not much the monthly numbers are affected too.

CPIH increased by 0.9% on the month in October 2021, compared with no change in October 2020.

The problem that they have is that in spite of the official pressure this ruse has been seen through and the number remains widely ignored. The present rise in inflation will make that worse as its failings become more pronounced. After all translating the numbers below to a 1.9% rise is very transparent.

UK average house prices increased by 11.8% over the year to September 2021, up from 10.2% in August. The average UK house price was at a record high of £270,000 in September 2021, which is £28,000 higher than this time last year.

Oh and it was most pronounced in Wales.

Average house prices increased over the year in England to £288,000 (11.5%), in Wales to £196,000 (15.4%), in Scotland to £180,000 (12.3%) and in Northern Ireland to £159,000 (10.7%). London continues to be the region with the lowest annual growth (2.8%) for the tenth consecutive month.

What caused the rise?

A major player this time around was the rise in domestic energy costs. Having read my critique about I am sure many of you will have a wry smile at the attempt to bring housing into the move.

The contribution from housing and household services increased from 0.69 percentage points in September 2021 to 1.23 percentage points in October, the largest contribution from this division since November 2011. The main upward pressure came from electricity, gas and other fuels, which contributed 0.59 percentage points to the CPIH 12-month inflation rate.

Anyone with a car will have been expecting the next factor and in fact even those without will have noted the fuel shortage mania which helped dive prices higher.

Within transport, the movements have mainly been caused by changes in the price of motor fuels. Motor fuels made a downward contribution to the 12-month rate between March 2020 and February 2021, before the contribution turned positive in March 2021 and subsequently increased to 0.44 percentage points in October 2021.

A category that is usually quiet has been brought back to life by the microchip and supply shortages.

Used car prices increased by 4.6% on the month to October 2021, leading to a cumulative increase of 27.4% since April 2021. By comparison, in 2020, used car prices grew by 1.4% on the month to October, and by 3.9% between April and October.

Actually new car prices are on the rise as well but by much less  ( 0.5% monthly) and some of the pressure is going onto motorbikes as prices there rose by 1.8%.

Also the hospitality sector saw the chance to pump up prices taking the opportunity to add to the VAT rise from 5% to 12.5%.

The contribution breaks down into 0.14 percentage points from accommodation services, which increased by 13.3% on the year to October, and 0.29 percentage points from catering services. Prices within the catering services group grew by 4.9% on the year to October 2021.

Measuring this sector has been made complex by the lockdowns and restrictions.

Much of the catering services basket was unavailable for periods of the coronavirus pandemic, because of movement restrictions. However, in October last year, catering services were largely available.

Looking Ahead

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There is more on the way from the producer prices series as you can see below.

The annual rate of output inflation increased by 1.0 percentage points from 7.0% in September 2021 to 8.0% in October 2021; this is the highest the annual rate of output inflation has been since September 2011.

So there is pressure in the short-term and in fact behind that as well.

On the month, the rate of input inflation was 1.4% in October 2021, up from 0.8% in September 2021…..The headline rate of input prices showed positive growth of 13.0% on the year to October 2021, up from 11.9% in September 2021.

Oh and the output numbers had some troubling news for carnivores.

The second largest upward contribution came from food products at 0.24 percentage points, with an annual growth rate increasing from 3.0% in September 2021 to 4.0% in October 2021. This was being driven by preserved meat and meat products for the domestic market.

Comment

As you can see the UK is in the middle of an inflationary burst. In fact the inflationary burst I warned about when the Bank of England pumped up the money supply in response to the Covid-19 pandemic. Economics is about choices but in my opinion you also have to face reality and the Bank of England fantasies about the economy are facing a cold reality that actual production as opposed to printing money requires actions which take time. Looking back to yesterday we all want people to be back in work but doing so at such a pace creates the price rises which make us all worse off. This is why I would have eased off the demand pressure earlier this year, for example by ending QE as opposed to the Bank of England which will buy another £1.15 billion of bonds today.

Next is the issue of how you measure inflation which even if you do it honestly is open to doubt. Many of you will have read the views of Andrew Baldwin on the arithmetic averages in the RPI but if we look at a compromise on that and say go for 5.5% it is performing more accurately than the newer measures. It is simply embarrassing to have 19% of a claimed official inflation measure to be a fantasy as CPIH does and also embarrassing to ignore the area of owner occupied housing entirely as CPI does. If we put house prices in the measure then we would get an answer of say 5% depending on the weight applied which would be quite an improvement on what we are being told now.

Those who have pushed for the CPIH inflation measure such as the Financial Times.Office for National Statistics and the (Paul) Johnson Review should be called out for what they have done. They have made things worse rather than better.

 

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