Today we are going to go on a journey as we make our way through the UK inflation numbers. Let me warn you that there will be elements of Alice in Wonderland about this and that even Alice would be bemused by some bits. Let me start by opening with the lowest number and in something of a happy fluke for the UK establishment it is the number preferred by the media. Ironically they are being guided elsewhere but I will come to that in a bit.
The Consumer Prices Index (CPI) rose by 0.4% in the 12 months to February 2021, down from 0.7% to January 2021; on a monthly basis, CPI rose by 0.1% in February 2021, compared with a 0.4% rise in February 2020.
So good news for the establishment as they get the lowest number out in the media and get reports of a fall. Rather awkwardly there are few details on the breakdown because they are so desperate to push the CPIH number they restrict other information. This is really rather poor when you consider that this is the measure used for the inflation target of the Bank of England.
Searching through the elements I do not that we are seeing goods disinflation and what inflation that is being recorded is in the services sector.
The CPI all goods index annual rate is -0.5%, down from -0.2% last month………..The CPI all services index annual rate is 1.5%, down from 1.7% last month.
This in a broad sweep has been true for a while which is confirmed by noting the two indices where 2015 = 100
The CPI all goods index is 105.3, up from 105.2 in January….The CPI all services index is 113.4, up from 113.2 in January.
So the inflation recorded in recent years has essentially been in the services sector.
Next comes the bit that the establishment hope you will not read. This is because there is a variant of the CPI measure that removes the indirect tax changes that have happened. For example the changes to VAT and Eat Out To Help Out. Look what happens then.
The annual rate for CPI excluding indirect taxes, CPIY, is 2.0%, down from 2.3% last month.
Suddenly inflation is on target and there was a time when the Bank of England was very keen on this measure and I remember Adam Posen emphasising it when he was a policymaker. Of course it is not convenient so will be ignored.
You can argue that not all the tax cuts will be passed on but even if we put an allowance for that then CPIY is at say 1.5% still giving a different measure.
CPIH
Next comes the measure which was supposed to be lower than CPI but as you can see has had something of a misfire.
The Consumer Prices Index including owner occupiers’ housing costs (CPIH) rose by 0.7% in the 12 months to February 2021, down from 0.9% to January.
To explain this I need to take you into the Alice in Wonderland world that has been constructed. When it came to housing costs they decided to use something which does not exist rather than say house prices ( which have this habit of rising) and mortgage costs who do exist. So they decided to assume they pay rent when they do not. They could then get the numbers from those who actually pay rent.
They ignored the fact that the official rental series is if we are polite a shambles. For example only a few years ago they had to start again it was so obviously wrong. Because of the issues they “smooth” the numbers over around 16 months to avoid the monthly numbers being obviously embarrassing. Now please do not laugh too much when you see this below.
Private rental prices paid by tenants in the UK rose by 1.4% in the 12 months to February 2021, up from 1.3% in the 12 months to January 2021.
Because of the smoothing I described earlier these numbers are yet to pick up any particular impact from the pandemic. Indeed we can drill deeper because it has been London which has seen the largest falls with Zoopla suggesting reached -5% in the autumn, which gets translated into this.
London private rental prices increased by 0.8% in the 12 months to February 2021, unchanged from January 2021.
So there are two problems here. The first is that saying this is the February 2021 inflation number is not true as 18.5% of the index is Imputed Rents which in this release are more reflective of February 2020. Next comes the fact that the measure will be useless at turning points and will end up like it has in London completely missing what has been a sea change.
RPI
This not only produces a higher number but has ignored the apparent downwards trend.
The all items RPI annual rate is 1.4%, unchanged from last month.
Indeed if we switch to the variant that the Bank of England used to target we see quite a gap between it and the one it now does.
The annual rate for RPIX, the all items RPI excluding mortgage interest payments (MIPs), is 1.6%, unchanged from last month.
So a 1.2% gap between it and the new measure!
An example of a major reason why is below.
Other housing components, which increased the RPI 12-month rate relative to the CPIH 12-month rate by 0.09 percentage points between January and February 2021. The effect principally came from house depreciation.
House depreciation is code for the fact it uses house prices for about 8.5% of the index. It is much the best system we have and could be to use the current buzz phrase “world beating” with two changes.
- Stop messing around and put house prices in explicitly
- There is some smoothing here and this should be replaced with up to date numbers.
House Prices
The case for the above comes with elegant simplicity from a later release today.
UK average house prices increased by 7.5% over the year to January 2021, down from 8.0% in December 2020.
As you can see first time buyers and those trading up are facing quite a lot of inflation which due to the swerves described above slips between the fingers of the official “housing costs” measure. At the moment those in the North West are being especially hard done by.
The North West was the English region which saw the highest annual growth in average house prices (12.0%), while the West Midlands saw the lowest (4.7%).
If we put house prices in CPIH with the current weights a back of the envelope calculation gets you to 1.8% rather than 0.7%.
Comment
Sadly this is yet another story of reality being massaged to avoid telling the truth. Or to be more precise describing reality accurately as there is always some doubt in inflation numbers. This was highlighted by former Bank of England policymaker Andrew Sentance earlier.
What is Uk inflation? Measured by CPI it is currently 0.4 percent but this is the lowest of the available inflation measures. Here are the rest – CPIH 0.7pc; PPI (output) 0.9pc; RPI 1.4pc; RPIX 1.6pc; CPIY 2.0pc; PPI (input) 2.6pc; GDP deflator 6.1pc; GVA deflator 8.0pc.
They are obviously hoping we have forgotten that the GDP Deflator is at 6.1% as they tell us another measure of inflation is 0.4%. Actually Andrew is exhibiting why he made a good external member of the Bank of England in that he looked at different views. Unfortunately the current crew are nothing like that.
So yes there is inflation around so be ready for the words “unexpected” and “surprise” to be deployed. If we look at up the inflation chain there are already some signs of it.
The headline rate of output inflation for goods leaving the factory gate showed positive growth of 0.9% on the year to February 2021, up from positive growth of 0.1% in January 2021.
The price for materials and fuels used in the manufacturing process showed positive growth of 2.6% on the year to February 2021, up from positive growth of 1.6% in January 2021.