This morning has again brought home the cost of living crisis that is affecting the UK. We can open the analysis by looking at this from the perspective of the Bank of England. It used to target the inflation measure below.
The annual rate for RPIX, the all items RPI excluding mortgage interest payments (MIPs), is 8.0%, up from 7.7% last month.
The first issue is that we have broken new ground as we have an 8 big figure for a consumer inflation measure. We were expecting it but perhaps not quite this quickly. Now let me show you what the Bank of England now targets.
The all items CPI annual rate is 5.5%, up from 5.4% in December.
As you can see in the exchange they have “gained” some 2.5% or rather we have lost it. For the purposes of the establishment this is quite a win as the perception of inflation is reduced. I say perception because reality is unchanged it is all about how we measure it. As the group Pilot put it back in the day.
It’s magic you know
Never believe it’s not so
It’s magic you know
Never believe it’s not so.
There are other ways they will consider it a win as for example in the present situation RPIX would be more than treble its target and in fact is the present level of the CPI (5.5%) above it. Whereas the CPI is a lower 3.5% above its target. Whilst that is bad enough it is all about such gains for the establishment.
The next planned move was to replace the above with this and again you can see why.
The Consumer Prices Index including owner occupiers’ housing costs (CPIH) rose by 4.9% in the 12 months to January 2022, up from 4.8% in the 12 months to December 2021.
As you can see they managed with this measure to trim a little more off their inflation reading. In this instance by telling what is a lie about housing costs for owner occupiers. If you are to have a reliable inflation measure then you need a decent measure of housing costs and you do not need to take my word for it as here is something from the European Central Bank this morning.
Housing costs account for the single largest share of people’s spending and disposable income, according to two consumer surveys.
Curious how they have managed to “forget” them for a couple of decades in their inflation measure is it not? That is quite some time to have an oversight and it is the measure the UK adopted called CPI.
Changes in January
The energy price issue got slightly worse as Northern Ireland caught up with the rest of us.
Combined with the April 2021 increases, these latest rises resulted in 12-month inflation rates of 18.8% for electricity and 28.1% for gas in October 2021. In January 2022 these rates increased slightly to 19.2% for electricity and 28.3% for gas, although the overall contribution from electricity, gas and other fuels was unchanged at 0.59 percentage points. The increase in the rates for electricity and gas was because of changing energy prices in Northern Ireland.
A sign of the times I guess. Also at a time of supply chain issues we should not be surprised to see that the January Sales were weaker this time around.
The 2.9% fall in prices in January 2022 was smaller than the 4.8% fall a year earlier…..Prices usually fall sharply between December and January due to sales ; prior to the pandemic, between 2016 and 2020, the average monthly fall in January was 3.8%. Therefore, the 2021 monthly fall of 4.8% was slightly higher than usual, and the 2022 monthly fall of 2.9%.
In their desperate rush to promote the CPIH measure they have made a mess of past comparisons but it looks to have been the weakest sales season for over 3 decades. The same happened in the furniture section.
Prices fell by 0.5% on the month, compared with a fall of 1.6% a year ago. The effect was mainly concentrated in glassware, tableware and household utensils (0.03 percentage points), with a further 0.01 percentage points coming from tools and equipment for house and garden.
Also we are seeing the beginnings of the influence of rising rents.
This was split between owner occupiers’ housing costs (0.04 percentage points) and actual rentals (0.02 percentage points), with increases of 0.3% on the month, compared with 0.1% a year earlier.
We need to step back for a moment because the official measure is not a measure of rents right now. It measures them over the last 18 months or so. Thus the reports that we are seeing quite a bit of rental inflation right now will only dribble into it as 2022 progresses. Whereas Zoopla are telling us a very different story.
The rate at which rents are rising reached a 13-year high of 8.3% in the final three months of 2021.
The average annual rent for those agreeing a new let is now £744 higher than pre-pandemic levels.
As you can see this is a bit of a mess and is not really a monthly inflation measure at all. It gets worse when these numbers are claimed to be a guide to owner-occupied housing costs and are used as 19% of the inflation measure ( CPIH). Putting it another way they end up with about a quarter of that inflation measure being rental numbers they have little faith in (otherwise they would put a monthly number in rather than a smoothed version over 18 months).
House Prices
So far there has been no relief from the upwards march in this area.
UK average house prices increased by 10.8% over the year to December 2021, up from 10.7% in November 2021. The average UK house price was £275,000 in December 2021, which is £27,000 higher than this time last year.
It is extraordinary really that we are seeing larger moves than in the boom that led to the credit crunch.
On a seasonally adjusted basis, average house prices in the UK increased by 0.9% between November and December 2021, following an increase of 2.0% in the previous month.
Producer Prices
I am afraid there is no relief to be found here because the fading of growth that was happening at the end of 2021 seems to have gone away.
On the month, the rate of output inflation was 1.2% in January 2022, up from 0.3% in December 2021 (Table 1). The monthly rate has been positive for 16 consecutive months, since October 2020……..On the month, the rate of input inflation was 0.9% in January 2022, up from 0.1% in December 2021 (Table 3). The monthly rate has remained positive for 17 consecutive months since September 2020.
Comment
The situation of rising inflation is one that is creating quite a cost of living crisis now. I am sure you all have your own examples of going to buy something which has shot up in price. The official measures are sadly letting us down as I have warned they would. Much of it is simply through the issue of housing costs which they either ignore or indulge in a fantasy. No measure is perfect – a fact which has been ignored in the official propaganda campaign against the RPI- but even if we accept the criticisms against it and adjust it to say 7% it is still in my opinion the best measure of what is taking place.
It could have been modified as much of the issue concerns fashion clothing but the research into this was abandoned some years ago. Presumably it did not give the answer they wanted. But moving on there is a big deal from what at first may seem arcane issues. This is because if you get a wage rise or pension increase based on CPI then you are being left behind by inflation. and yes you will be worse off. The widely ignored CPIH will make you even worse off.
I am sorry to have to say that more is on its way and sadly attempting to drown your sorrows may only make it worse.
I’m sorry, but Heinekken, the world’s 2nd largest brewer, just warned it will raise prices for its beer by “courageous” amounts to offset rising commodity and freight costs. For Heinekken, aluminum is a big input costs (for its cans). ( @JavierBlas )