The UK remains mired in an inflationary burst

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by Shaun Richards

This mornings inflation figures have brought a situation for which HM Treasury have been planning for not only years but decades. This is of course their effort to mislead as much as possible about the actual level of price inflation. They want inflation as it helps to deflated debt burdens but they do not want it measured accurately so that they can avoid paying out similar amounts on cost of living adjustments. Let me illustrate by stepping back in time to the previous Bank of England inflation target.

The annual rate for RPIX, the all items RPI excluding mortgage interest payments (MIPs), is 5.0%, up from 4.9% last month.

Many of you will no doubt be thinking that reflects your personal experience. But the Treasury would be facing all sorts of headlines about inflation being on the march as it is rising and has a new big figure of 5. Added to that would be the fact that it was double the inflation target which was 2.5% for this measure.

They would of course point to the overall Retail Prices Index measure but as you can see it is rising too and is only marginally lower.

The all items RPI annual rate is 4.9%, up from 4.8% last month.

That leaves us in a world we saw 9/10 years ago which was a bad period for UK economic policy as the inflation push then hit real wages hard and we never fully regained that ground. I know that recent average earnings figures say they have but sadly they have been distorted as well as being badly designed and are failing us.

One slight curiosity here is that mortgage rates have risen in September which is a trend which if you look at bond yields is set to continue. My measuring stick for this is the five-year bond yield and at 0.84% as I type this it is around 0.4% higher than much of September.

What did they do?

Some bright spark spotted that they could cut recorded inflation by claiming to be more aligned with the European Union. You see their measure which we call CPI ignores owner-occupied housing so at a stroke they could cut recorded inflation. Not actual inflation as of course costs for home owners are unchanged, but this allowed them to ignore them. As it is an area that is usually one of the faster risers this was a masterstroke in avoiding reality.

Look what it does to the situation.

The Consumer Prices Index (CPI) rose by 3.1% in the 12 months to September 2021, down from 3.2% in August.

This is widely misunderstood as this is a different type of inflation measure called a macroeconomic one which is the swerve used to avoid most housing costs. This is a big deal as for example if we look across to the United States their CPI measure has them as around 24% of the index. Whereas the RPI is a cost of living index which thereby includes housing costs as they are a large part of the cost of living. Although some of course prefer to measure inflation ignoring life’s essentials on the grounds that measuring as little as you can about expenditure gives the best guide.

I can help out by putting house prices in and let me update you with the numbers,

UK average house prices increased by 10.6% over the year to August 2021, up from 8.5% in July.

If we put those in then we see that we would have a CPI of the order of 3.8%. Actually if you use the weights of the measure I am about to look at you could say 4.5%.

CPIH

After quite some time ( a decade) it was decided that they could not keep getting away with ignoring many housing costs. But there was the problem that including them would raise the inflation rate. Another bright spark noted something in the national accounts that could be used to mislead. They have something called Imputed Rents which balance the numbers. They do not exist as owners do not pay themselves rent but you can claim to include housing costs when you are not which brings you to this.

The Consumer Prices Index including owner occupiers’ housing costs (CPIH) rose by 2.9% in the 12 months to September 2021, down from 3.0% in the 12 months to August.

It is like an economics equivalent of the science fiction series The Outer Limits when we note this.

Private rental prices paid by tenants in the UK rose by 1.3% in the 12 months to September 2021, unchanged since July 2021…….Private rental prices grew by 1.3% in England, 1.2% in Wales and 1.6% in Scotland in the 12 months to September 2021.

As you can see the surging house prices of the real world have been replaced by minor rent increases from a fantasy one leading them to claim this.

The main contribution to change in this division came from owner occupiers’ housing costs, where the contribution rose from 0.30 percentage points in August to 0.32 percentage points in September.

Yes at a time of price surges they have managed to record virtually nothing!

There is a sub context to this in that the numbers for rents are wrong too. If we look at the real world there are more and more reports of substantial rent rises which the official numbers are not representing. This is because they are “smoothed” and thus represent the turn of the year on average. If they do not have the confidence to produce up to date numbers I think that speaks for itself as to their reliability.

Producer Prices

The inflation chain is still showing substantial price pressure.

The headline rate of output prices showed positive growth of 6.7% on the year to September 2021, up from 6.0% in August 2021………On the month, the rate of output inflation was 0.5% in September 2021, down from 0.7% in August 2021.

So the heat is on as whilst the monthly rate has dipped these numbers are volatile and the overall stream has been firm for some months.

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The pressure on them continues as well.

The headline rate of input prices showed positive growth of 11.4% on the year to September 2021, up from 11.2% in August 2021……On the month, the rate of input inflation was 0.4% in September 2021, down from 0.5% in August 2021.

There is some fading if we look at the monthly increases but the problem with that is we have seen increases across a range of areas in October. Some of these are complex as for example it looks like we have seen a wave of financial speculation and no little ramping in the copper price. I know that the example below is from the US but the same trends are at play here too.

Oct 19 (Reuters) – Procter & Gamble Co (PG.N) said on Tuesday it will raise prices of some of its grooming, oral and skin care products in the U.S. to counter higher commodity and freight costs that are expected to take a bigger bite out of its earnings this year.

Comment

So there you have it the very unfriendly inflation rate of 5% becomes the much more friendly 2.9% after the manipulations. Care is needed here as no inflation measure is perfect as for example I would modernise the RPI and put actual house prices into it rather than sneaking them in via depreciation. We could head to settle the formula effect debate by producing numbers with and without the effects of the changes to clothing which rather distorted the numbers and from which we have never quite recovered. But it used to be argued it was of the order of 0.7% and even if you subtract that you end up with 4.3%.

Next month will see the energy price rises in to further boost the numbers and more seem likely in April 2022. If we stay with that subject then we can expect of more of this as the official denial below highlights.

The business secretary has denied that individuals will bear the cost of changing to greener ways of living.

Kwasi Kwarteng said it was “not true” to say that the move to more environmentally friendly transport and energy production would “cost us”.  ( BBC News )

Meanwhile the increasingly hapless Bank of England will buy another £1.15 billion of UK bonds this afternoon to help raise inflation even further above target.

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