Today has brought into play quite a few themes of my work as we receive new information on the inflation issue in the UK and hence the cost of living crisis. Let us start with the official view.
The Consumer Prices Index (CPI) rose by 6.2% in the 12 months to February 2022, up from 5.5% in January.
On a monthly basis, CPI rose by 0.8% in February 2022, compared with a rise of 0.1% in February 2021. This was the largest monthly CPI increase between January and February since 2009.
So the highest reading this century and in fact for 30 years but we need not get too hung up on that as it will be worse and indeed much worse next month. In terms of my argument from last summer that the Bank of England should have been acting to head off an inflation rise could not have been much more correct as we now have a rate that is treble its target. Indeed under Governor Bailey it looks to be in complete disarray. Remember this?
Speaking to the BBC hours after the central bank imposed back-to-back interest rate hikes, the governor said businesses should assert “restraint” in pay negotiations to help battle 30-year high inflation.
When asked by the BBC whether the Bank was asking workers not to demand big pay rises, Bailey said: “Broadly, yes.”
He said that while it would be “painful” for workers, some “moderation of wage rises” is needed to prevent inflation from becoming entrenched. ( CNBC )
It lead to a lot of people pointing out that wage restraint is a lot easier when you are paid over half a million pounds a year. That will not have got better after the recent accusations that he fell asleep in a meeting when he was head of the FCA.
What is driving this?
The inflation we are seeing is more in goods than in services.
The CPI all goods index annual rate is 8.3%, up from 7.2% last month……..The CPI all services index annual rate is 3.5%, up from 3.2% last month.
In terms of the goods inflation it is being led by furniture and household goods.
Annual rate +9.2%, up from +8.5% last month
We have previously noted rises in this category and put them down to a combination of the supply chain crisis and people buying furniture for the new trend towards working from home.
Clothing and footwear is in hot pursuit.
Annual rate +8.8%, up from +6.3% last month
For both we are seeing this.
Never higher since National Statistics series began in January 2006
Never higher since modelled historical series began in January 1989
Actually I have my doubts about the modeled series as the numbers were collected differently then so let us be polite and say some of it is open to doubt. But for this purpose we are reasonably okay.
Also recreation is not high compared to the others but is for it and also looks to be accelerating hard.
Annual rate +4.7%, up from +2.9% last month.
The RPI
This is in a phase where it is our best measure and let me explain why. Many will think that this is more realistic in the present circumstances.
The all items RPI annual rate is 8.2%, up from 7.8% last month.
Also there is an additional problem for the Bank of England if we remind ourselves of the version used for inflation targeting.
RPIX, the all items RPI excluding mortgage interest payments (MIPs), RPIX, is 8.3%, up from 8.0% last month.
At times the change made by Gordon Brown may not seem a big deal but right now with CPI at 6.2% it is more than 2%. Not only is it a really bad decision in itself there are consequences. Let us now look at why? A big factor is this which CPI ignores.
UK average house prices increased by 9.6% over the year to January 2022, down from 10.0% in December 2021.
The average UK house price was £274,000 in January 2022, which is £24,000 higher than this time last year.
I have made the point many times that the Bank of England ( and HM Treasury) pump up house prices and planned this via their exclusion from the CPI inflation measure. How healthy is it after a slump where we have only recently got back to previous economic output levels that we are still seeing this?
On a seasonally adjusted basis, average house prices in the UK increased by 0.7% between December 2021 and January 2022, following an increase of 0.6% in the previous month.
There is another factor in play which is insurance and it comes from something which seems arcane as to whether you measure gross or net premiums?
LOL, car insurance renewal price up by 30%. Do these guys not know there is a cost of living crisis going on!? ( @ClausVistesen )
The RPI is recording it at 13.1% and CPI at 5.7% and that is before we get to the lower weight in CPI. Oh and housing insurance is always going to be an issue if you ignore owner occupied housing.
The Trend
A familiar sound can be heard.
The only way is up, baby
For you and me now
The only way is up, baby
For you and me now ( Yazz)
Next month will see the 54% rise in domestic energy costs that I would say is a one-off but will be accompanied by another rise in October. Then there are our other leading indicators.
On the month, the rate of output inflation was 0.8% in February 2022, down from 1.2% in January 2022
On the month, the rate of input inflation was 1.4% in February 2022, down from 1.5% in January 2022.
You will not be surprised about the leader of the pack here.
Of the 10 product groups, five displayed upward contributions to the change in the annual rate. Crude oil displayed the largest, at 0.31 percentage points . The monthly rate of 9.0% between January 2022 and February 2022 is higher than the 6.0% between the same months a year ago; this has pulled the annual rate up by 4.2 percentage points from 53.1% in January 2022 to 57.3% in February 2022.
Comment
My campaign in favour of the RPI was always likely to succeed in what are bad economic times. We are about to see double-digit inflation numbers again and a cost of living crisis. It is the inflation measure that is performing best but it does not mean that it is perfect. You may have seen the debates over time I have had with Andrew Baldwin so let me offer a fix. We could exclude clothing and footwear which is 2.9% of the RPI and where much of the debate is ( this month the respective rises were 3.6% for the RPI and 0.8% in the CPI series). So we trim a bit off it but the song remains the same in essence. Oh and to any arguments about excluding clothing well CPI excludes the much larger owner-occupied housing sector.
Now let me switch to the implications of the inflation problem. One has been highlighted by Duncan Weldon.
In a time of high and volatile inflation uprating benefits in April based on the inflation rate the previous September is a serious problem.
As to inflation measurement Andrew Sentance is correct here about the woeful CPIH which this month has housing inflation at 2.5% via the use of Imputed Rents.
Can the @ONS please explain why their Consumer Prices data release continues to focus on CPIH, a measure which nobody uses and is derided and ignored by the economic and financial community. Please focus on CPI and RPI, the most widely used inflation indices in the UK.