Policy Research in Macroeconomics

Our economy: low consumer inflation, high asset inflation, big wage deflation

The latest UK annual CPI inflation statistics, for August 2014, were published today by the Office for National Statistics.  They show annual inflation down to 1.2%.

The last time the annual rate was below this was in September 2009, in the depth of the recession, when it fell to 1.1%.  Assuming that the present lower CPI inflation trend is continued in coming months, as seems probable, we will be back to levels last seen in the late 1990s and up to 2004.  The lowest levels this century were in May 2000 (0.5%) and June 2002 (0.6%).

But there is a very big difference between then and now.  Today, wages are running at an annual increase rate of around 0.7%, still well below CPI inflation.  In the period 2001 to 2008, when the ONS wages dataset begins, total wages were mainly rising annually at around 3-5% – and till the 2008 crisis, never fell below the inflation rate.

The chart below shows the picture clearly for the period 2001 to 2014.  Till 2008, total pay (which includes bonuses etc.) was always above inflation in annual % terms, usually well above. Since then, it has almost constantly been below inflation.  N.b. we have estimated that total wage increases remain at 0.7% (the last figure published by ONS, for July) for the months of August and September 2014.

ONS today also published their latest house price statistics. UK house prices for the most part maintained their rapid rate of annual increase in August, though in most regions no faster than in July.

For the UK as a whole, the annual “mix-adjusted” rate of house price increase in August 2014 was 11.7%, compared to an average rate of just 3.7% in August 2013.  London continues to be the fastest annually growing region for prices at 19.6% (8.5% a year ago), the South-East next at 12.3% (in 2013, 2.2%), and the East at 11.6% (2.3%).  By contrast, the slowest growing region is the North-East at 3.8% (2.5% in 2013).  5 of the 12  “regions” including Wales and Scotland saw a softer rate of increase in August than July.

Whlst consumer inflation has currently fallen to a low level – and looks likely to fall further – asset price inflation (for housing) has leapt ahead since 2009 (and mainly since 2012), though in a geographically very lumpy way – with London roaring ahead, as we know, but some other regions still behind CPI inflation over the period.

From the lowest point in March, April or May 2009 (according to region), the house price index for the UK as a whole has risen by 31.9%, with London at +70.3%, the South-East +34.1%, the East +31%, whilst the North-East has seen  a modest 11.1% rise in prices, similar to Scotland (11.6%) and Wales (12%).  For first-time buyers, the apparent increase between 2009 and 2013 is over 50%, but the housing mix adjustment changes each year so ONS warn that the figures are not comparable between years.  Nonetheless, the orders of magnitude are apparent and daunting.

By contrast with the above housing asset inflation, the CPI Index has risen overall a total of 16.9% in the 5+ years since March 2009.  So UK housing asset inflation, seen as a whole, is running at about twice the CPI rate, with London a full 4 times the rate, whilst several regions have seen housing asset rises of below the CPI rate over the 5 and a half years since the crisis “trough”.

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