The UK has an inflation problem which it is trying to hide

by Shaun Richards

I thought that I would give you today a different perspective on the UK inflation numbers. I doubt you will see it elsewhere much if at all as you have to read quite a way through the numbers to find it.

The annual rate for CPI excluding indirect taxes, CPIY, is 2.2%, up from 1.9% last month. The annual rate for CPI at constant tax rates, CPI-CT, is 2.2%, up from 2.0% last month.

This gives quite a different perspective to the headline number that the Bank of England looks at. I remember the days when the Bank of England and especially Adam Posen used to quote them quite frequently. What is it about them being higher rather than lower which has meant they have got ignored this time around? Instead they prefer to concentrate on this,

The all items CPI is 109.2, up from 108.9 in November……..
The all items CPI annual rate is 0.6%, up from 0.3% in November

So the picture as they put it is one of low inflation which allows them to do this.

 The MPC voted unanimously to maintain Bank Rate at 0.1%………The Committee voted unanimously for the Bank of England to continue with the programme of £100 billion of UK government bond purchases, financed by the issuance of central bank reserves, and also to commence the previously announced programme of £150 billion of UK government bond purchases, financed by the issuance of central bank reserves, maintaining the target for the stock of these government bond purchases at £875 billion and so the total target stock of asset purchases at £895 billion.

That is quite a wedge isn’t it? There will be another £1.48 billion of bond purchases or QE this afternoon in fact. In theory it is supposed to raise inflation but even the “independent” review published last week can see trouble.

But a decade on from its introduction in the UK, QE has become bigger, broader and more persistent than expected.

So they did not know what they were/are doing? After all we spotted that some years ago. It even admits they do not really know what they are doing and the emphasis below is mine.

 And as the size and persistence of QE has grown, so has the importance of learning about how it works, ensuring its robust implementation and building public understanding of the tool.

These are strong criticisms when you note that the Bank of England has been able to mark its own homework.

The Bank’s researchers made a valuable contribution to the growing literature on the effects of QE – especially in the early stages.

Is an independent evaluation of an independent body independence squared or taking us for fools?

Puppy Inflation

You may have noted reports of the price of puppies soaring during the pandemic. On a personal level I can vouch for the trend to some extent as friends and neighbours ( one more this week alone) have joined the pack. So much higher prices ( doubling and some) combined with much higher volumes. I enquired officially as to how this will be treated?

It is very difficult to collect the price of larger pets, like dogs and cats, as they are not readily available to buy and they are not necessarily available throughout the year (breeders tend to have a limited number of litters per year). For these reasons, to represent the cost of pets, we collect the price of small mammals (e.g. hamster, gerbils, guinea pigs, rabbits, etc.) which can be purchased directly from pet stores.

Curious as my neighbours and friends seem to have little trouble with them being “readily available”! On this road we end up with a doubling being recorded like this.

Prices increased by 2.7% in the year to November 2020.

But they did manage to find price cuts earlier in the year.

However, earlier in the year with impending store closures at the start of lockdown, there was evidence of price reductions, where some pet stores tried to quickly find their pets homes.

This adds to another issue I raised during this pandemic period over the issue of face masks, sanitiser and cleaning products.

Expenditure on products such as face coverings and hand sanitisers has inarguably increased over the last 7 months. However, based on the scanner data we have been receiving we believe that, as a proportion of total expenditure, it remains below the levels that price movements would have any discernible impact on our figures – essentially these products would receive a 0% weight in an index.

One has to be careful about this and it is the difference between a cost of living index and a macroeconomic measure like CPI. Our statisticians may be right in the latter case although I increasingly doubt that as for example the increased enforcement of the use of face masks will lead to more use. But in the former case this is an increase in the cost  of living and should definitely be counted. I doubt the supermarkets are giving over so much space to products which do not have a “discernible impact” on their sales and trust them more than the Office for National Statistics.

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House Prices

Here is something else which does not have a discernible impact on the inflation numbers because CPI plays the three wise monkeys on the issue and CPIH makes up its own numbers based on rents which do not exist.

UK average house prices increased by 7.6% over the year to November 2020, up from 5.9% in October 2020, to stand at a record high of £250,000; this is the highest annual growth rate the UK has seen since June 2016.

There have also been some structural changes in the market and guess who lives in a flat?

In our UK HPI data, we have seen the average price of detached properties increase by 8.5% in the year to November, in comparison with flats and maisonettes increasing by 5.4% over the same period.

Also there are regional differences.

Average house prices increased over the year in England to £267,000 (7.6%), Wales to £180,000 (7.0%), Scotland to £166,000 (8.6%) and Northern Ireland to £143,000 (2.4%).

So even more of a surge in Scotland but by contrast very little in Northern Ireland which has recovered very little from the credit crunch. Speaking of slow recoveries I would imagine that a special Bank of England squad is on its way to the North-East right now.

The North East is the final English region to surpass its pre-economic downturn average house price peak of July 2007, to now stand at £140,000.

Also the theme of people fleeing London that has been pushed by the BBC and the Financial Times seems to be having trouble with reality.

London’s average house price surpassed £500,000 for the first time in November 2020.

Meanwhile the officially approved measure tells us this.

Private rental prices paid by tenants in the UK rose by 1.4% in the 12 months to December 2020, unchanged since October 2020.

Can you see how it got to be officially approved?

Comment

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There are always issues with inflation measurement as who is the typical household? But you can make a decent fist of it if you try. But sadly back in 2002/03 the UK decided to join the European trend in ignoring owner occupied housing costs. This is a great swerve for civil servants as it means they can claim wealth effects but the reality of higher house prices is inflation especially for first time buyers. There is always a weasel word and the one here is consumption because you see assets are not part of consumption whereas if we switch to the consumer then even the ECB admits up to a third of income is spent on housing.

There are efforts to improve this such as the Household Costs Index but sadly the same trend of it being manipulated is in play. Last week there was an official Zoom seminar on the subject given by Dr.Martin Weale who use to be at the Bank of England. To give you a clue I still remember him trying to explain to me how the UK house price rises should be recorded as negative inflation. That is why the establishment push his views in spite of the mess he made of the average earnings numbers.

If we now move to puppy costs and what we might call consumer PPE I have sympathy with the Office for National Statistics as it is a fast moving situation. But their failures here are symbolic of an organisation which only 2/3 years ago spurned the chance to set up a really good inflation measure. Instead they are throwing away what little credibility they have left.

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