Latest UK inflation data – February 2016

UPDATE: Here is Pete talking about the latest figures on ShareRadio:

The UK inflation figures published today showed little difference to those last month with CPI remaining at 0.3% and RPI 1.3%. Underlying inflation was still 1.2%.

They reflect the continued effect of the declining oil price which reduced petrol/diesel prices by 7.3% over the year and that of food price by -2.3%. Farmers have been particularly badly hit with dairy and meat prices down significantly versus 12 months ago. Competition in supermarkets remains a factor with sugar being the latest target – average price per kilo now only 61p (vs 80p a year ago and £1 a year before that).

Having said that, there is some evidence of food prices stabilising. Moreover should the Brent Crude price manage to break through the downtrend back towards $50, then petrol prices might rise sharply stoking inflation rates towards 1% CPI again. However should the recent rise fail and we return towards $20-$30 a barrel, then inflation may well head back towards zero again in the coming months.

Effects of QE and Helicopter Money

There has been a lot of discussion about further QE and even some form of ‘helicopter money’ being deployed – for example here in WSJ. The belief is that this would stoke inflation rates – which is after all probably the primary purpose of those advocating it (so as to reduce the real value of the world’s debts). However, our analysis of monetary expansion over the recent decades (here), shows that most of it has been creating asset price inflation but not consumer inflation. The same may well happen with helicopter money and its effects on the inflation rate may well be limited. It is fighting against a bigger trend of excessive supply over demand caused by demographic changes – see here.

A new UK inflation measure: HII

Finally, I would advise all readers to look at the latest ONS discussions about the UK inflation measures – see here and here. They are proposing the following:

  1. Discontinuation of RPIJ – the measure that attempted to replicate RPI but using the potentially flawed Jevons/geometric mean method. (See here for the problems with Jevons.)
  2. Improvement of the CPIH method and potential adoption of it as the main UK inflation measure.
  3. Potential creation of a new index called the Household Inflation Index (HII).

The HII is particularly interesting. At last the ONS is recognising that there are indeed two functions for inflation statistics and that they probably need separate measures. Ones such as CPI are probably useful for the Bank of England to use for monetary policy and for international comparisons but they just don’t reflect inflation as experienced by the average household in the UK.
ONS has promised to follow up by this summer investigating creating a HII inflation index along the lines of that proposed by the Royal Statistical Society last year – see paper here. The key benefits of HII over CPI would be:

  1. It would be household weighted and not expenditure weighted i.e. not biased heavily to the consumption of the rich. It would also allow for easier analysis by different household types.
  2. It would include interest payment costs which, although a major (and variable) part of many people’s expenditure, are ignored by CPI. This would include not just mortgages but also loans for other purposes such as cars, student loans and even Wonga.
  3. It would include some measure of house price inflation – again left out of CPI.
  4. It would correctly weight insurance costs – which currently are significantly under-represented due to cost of claims being deducted from premiums when determining the weight. This is key as insurance premiums are currently roaring ahead at 8% pa and this is not being correctly reflected in CPI.
  5. Finally the objective of HII would be at least to create an inflation that has credibility again in a way that RPI used to have.

Inflation Matters supports the development of HII, as it has the potential to rectify many of the issues with CPI. However we fear that it will adopt geometric means (Jevons method) as the underlying method of calculation thereby still underestimating inflation in many consumers’ minds. Furthermore, it should probably also have at its heart web scraping of prices as there is some evidence that this data can be more accurate – see latest experiments by Adobe and their Digital Price Index.

The full ONS stats can be found here.

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