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Falling inflation could boost the housing market – but there’s a catch

A consequence of the Bank of England’s decision to raise interest rates in order to bring down inflation was always that they could cause the housing market to stall and potentially tip Britain’s economy into recession.

Today, the Bank’s Monetary Policy Committee (MPC) will feel vindicated in its strategy, with the rate of inflation unexpectedly falling by more than expected to 3.9 per cent. This is its lowest level since September 2021, but still double the Bank’s 2 per cent target.

The MPC will also be glad that while the UK’s economy did shrink in the final quarter of this year, the prospect of a recession (which is where the economy contracts two quarters in a row) remains hypothetical.

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However, the data also show that the MPC’s decision to repeatedly make the cost of borrowing more expensive did indeed stall the housing market.

Both the Bank’s mortgage data and HMRC’s data show that the number of mortgages agreed and the number of homes being sold are lower than they would usually be, indicating that the housing market was grinding to a halt this autumn.

Now, data from the Office for National Statistics (ONS) show that in the year between October 2022 and 2023, UK house prices fell at the fastest pace in more than a decade.

Average house prices declined by 1.2 per cent during that 12-month period. This is the largest drop since October 2011 when the fallout of the 2008 global financial crisis was taking hold.

The greatest falls have been recorded in London (3.6 per cent), which is to be expected because pandemic house price inflation pushed the cost of homes up rapidly in many parts of the capital.

Some estate agents are trying to put a positive spin on this news. National chain Jackson-Stops, for instance, has issued a statement saying that it is a “minimal drop” which shows the market’s “enduring strength”.

That’s not quite the case. Think of interest rate rises as being more like drip filter coffee than espresso – rather than being an economic shot in the arm, they take time to feed through and their effects can be long-lasting, particularly when it comes to the housing market.

This is because there is a time lag between the Bank’s rate decision, banks setting their mortgage rates, people taking on those rates to buy homes, and the homes that they buy being recorded in the official ONS statistics.

Read about the UK Housing Market via our Specialist Residential & Buy to Let Division

So, just as the true impact of 2008 wasn’t felt until the early 2010s, it won’t be possible to say with any certainty how much house prices have fallen for a little while yet.

The ONS data is the most comprehensive measure of UK house prices because it includes cash purchases. It is also the most accurate but, because the ONS base their records on deals that have been finalised and recorded by the Land Registry, they are less timely than those belonging to lenders such as Halifax and Nationwide.

There is a time lag between what’s actually happening in the housing market and what the ONS records show.

The news that the rate of inflation has come down has already resulted in calls – from the likes of the right-wing think-tank the Institute for Economic Affairs – for the Bank to abandon rate increases.

However, as the MPC made clear in the memo they published after deciding to hold the base rate at 5.25 per cent last week, they won’t hesitate to increase it further if there is any indication that inflation is on the up again.

If interest rates come down, it could pump the housing market up once again. Indeed, financial markets are already speculating that the Bank will cut rates next year and this will be priced into the cost of mortgages.

But, if we’ve learned anything over the last four years, it’s that things can turn on a dime.

The rate of inflation may be falling but everything is still more expensive than it was before the pandemic – from food shops to household bills. More than a million people will see their mortgages get more expensive next year.

And, even with mortgage rates at 4 per cent, the cost of having a mortgage will be significantly higher than it was in the ultra-low-rate world we lived in before Covid.

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Bank of England boss signals interest rates may have peaked

The Bank of England governor, Andrew Bailey, has signalled interest rates may have peaked after 10 successive increases in the official cost of borrowing since December 2021.

Speaking in London, Bailey said Threadneedle Street would assess the impact of tighter policy on the economy before sanctioning any fresh moves.

However, the governor also warned that the Bank was alert to the risk of repeating the mistakes of the 1970s and would not hesitate to raise rates further from their current 4% should inflationary pressures become embedded.

Bailey voted for a quarter-point increase in interest rates at the last meeting of the Bank’s nine-strong monetary policy committee in February but made clear on Wednesday that he was now adopting a wait-and-see approach.

“At this stage, I would caution against suggesting either that we are done with increasing Bank rate, or that we will inevitably need to do more,” he said. “Some further increase in Bank rate may turn out to be appropriate but nothing is decided. The incoming data will add to the overall picture of the economy and the outlook for inflation, and that will inform our policy decisions.”

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Financial markets have been pencilling in further increases in interest rates later this year, but analysts said Bailey’s speech pushed back against this idea.

Samuel Tombs from Pantheon Macro said: “It is clear from Mr Bailey’s speech that committee is placing more emphasis on the substantial tightening already delivered and would like to call time on its hiking cycle as soon as it feasibly can. It makes little sense at present, therefore, to price-in a terminal rate at 4.5% or higher.”

Krishna Guha from Evercore said Bailey had “become the first central bank chief to push back against the hawkish global repricing of rates in recent weeks that pushed the market discounted peak UK bank rate close to 5%”.

Bailey said the Bank’s outreach programmes with the public had brought home to him the impact high inflation was having on people’s lives. Although it has fallen back slightly from its peak of 11.1% late last year, the government’s preferred measure of the cost of living still shows inflation running at 10.1%.

“People should not have to worry about inflation in this way,” the governor said.

Bailey added that the UK had been hit by a series of “significant economic shocks” – including Brexit, Covid and the rise in global energy prices linked to Russia’s invasion of Ukraine – and there was “no easy way out”.

People on lower incomes were struggling to make ends meet and the Bank needed to ensure that the situation did not get worse through allowing “homemade inflation” to take hold.

Read about the UK Housing Market via our Specialist Residential & Buy to Let Division.

“I am afraid monetary policy cannot make the shock to our national real income go away. But what monetary policy can – and must – do is to make sure that the inflation that has come to us from abroad does not become lasting inflation generated at home. Homemade inflation will not make us any better off as a country. Those with weak bargaining power will fall further behind.”

Bailey said failing to raise interest rates now may necessitate tougher action later. “The experience of the 1970s taught us that important lesson. But equally … we have to monitor carefully how the tightening we have already done is working its way through the economy to the prices faced by consumers.

“Our outreach events make clear that we need to calibrate monetary policy with great care to return inflation to target sustainably.”

Bailey said the shortage of available workers across much of the UK economy would be a key factor in future decisions by its ratesetters.

“The UK labour market remains very tight. Since the start of the Covid pandemic, we have seen a large increase in the number of people who do not take part in the labour market in this country. The UK labour force has shrunk.”

By Larry Elliott

Source: The Guardian

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2023 could be the year of recovery for the UK

It might be a little too early to talk of spring buds but the green shoots of recovery may not be too far away.

When winter began, talk in the mortgage market was concentrated on the impact Kwasi’s Kwarteng’s disastrous “mini”-Budget was having on the UK’s financial stability.

Fast forward two months and the outlook has improved significantly. Five-year swap rates may have risen slightly over the last day or so, but at the end of January they dropped below 3.5 per cent for the first time since September 2022 – falling as low as 3.285 per cent.

Meanwhile, two-year swaps have fallen to 3.944 per cent, down from 4.357 per cent in December 2022.

These figures are evidence of increasing market stability and offer hope that rates will not reach the highs predicted last autumn.

So what has changed in recent weeks? Firstly, inflationary pressures are beginning to ease slightly.

Wholesale gas prices have fallen to below levels seen before Russian’s invasion of Ukraine.

And this should eventually feed through to lower bills for households. Petrol and diesel prices have also dropped sharply from their summer high.

Meanwhile, the latest figures from British manufacturers, show that factory output prices unexpectedly fell 0.8 per cent in December, the biggest decrease since April 2020.

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Although inflation remains more than five times above the Bank of England’s 2 per cent target, it has fallen for two consecutive months and there are signs that it is heading towards single digits.

As well as an improved inflationary outlook, the pound’s recovery and the performance of the London Stock Exchange are also signs that investors have more faith in the UK economy and its recovery than some sections of the mainstream media.

Lenders will be keeping a close eye on all these key indicators to get a sense of what is to come.

Clearly we are not out of the woods yet; household finances are still under significant strain with real wages falling and the prospect of higher interest rates.

But the good news is that the expected peak in interest rates may not be as far away as was predicted in the autumn.

Forecasts now put the ceiling for base rate at 4 per cent to 4.5 per cent. This means we may only be one, or possibly two, rate rises away from a levelling off.

My sense is that the outcome is already baked into swap rates, meaning mortgage rates may also have reached their peak in the current cycle.

Read about the UK Housing Market via our Specialist Residential & Buy to Let Division.

We are already seeing lenders start to reduce rates, with the best five-year deals for landlords back under 5 per cent, albeit with higher fees.

Renewed competition among lenders combined with improved swap rates and a less gloomy economic outlook should help to stabilise the market and could even push rates down further.

In turn this will help to improve affordability issues for landlords. Stress tests were tightened significantly as rates began to rise, which restricted buy-to-let borrowing, but they are now beginning to ease.

No one knows exactly what’s around the corner, but there is a sense that with spring on the horizon the most turbulent days are behind us.

Events of the past six months mean conditions are not going to return to ‘normal’, but the market and the UK economy is showing signs of resilience.

Let’s hope 2023 is a year of recovery.

By Phil Riches

Source: FT Adviser

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UK inflation hits 41-year high following surge in energy prices

SOARING energy bills sent UK inflation to its highest level since 1981 in October as the cost-of-living crisis continues to hit households, according to official figures.

The Office for National Statistics (ONS) revealed that inflation jumped to a higher than expected 11.1% in October – the highest rate for 41 years and up from 10.1% in September, as gas and electricity costs rocketed.

That exceeds the 10.7% rise most economists had predicted. Chancellor Jeremy Hunt has claimed getting inflation under control would require “tough but necessary decisions on tax and spending to help balance the books”.

He is set to lay out his autumn Budget on Thursday.

The ONS said gas prices have leaped nearly 130% higher over the past year, while electricity has risen by around 66%.

The SNP have said the figures show households across Scotland “are paying the price for continued Westminster control”.

The party’s Shadow Chancellor Alison Thewliss said: “These latest figures must force the Chancellor to deliver meaningful financial support to households and businesses.

“Tomorrow’s budget must deliver a boost to incomes, energy bill support for low- and middle-income families, a real living wage, and extra investment in the NHS to help people weather this Tory-made cost of living storm.

“However, once again, households and businesses across Scotland are paying the price for continued Westminster control.

“With both the Tories and Labour hell bent on ‘making Brexit work’, there can be no doubt that independence is the only way to escape the long-term damage of Westminster and Brexit.”

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Families were also hit by rising costs across a range of food items, which also pushed up the cost of living to eye-watering levels.

Elsewhere, the Scottish Greens have slammed the “cruel and incompetent” Tory government for runaway inflation.

The party’s economy spokesperson Maggie Chapman said: “These are not just abstract figures; they represent people’s expenses and wellbeing.

“They can be the difference between a household or family being able to eat or not.

“With temperatures falling and bills increasing, millions of people are looking at a long, cold winter and, with even more cuts expected to be announced in tomorrow’s autumn Budget, things are set to get even harder.”

The jump in inflation – the biggest leap since March to April – comes despite the government energy support which had sought to limit Ofgem’s energy price cap at around £2500 a year.

Read about the UK Housing Market via our Specialist Residential & Buy to Let Division

Chapman continued: “It is the cost of a reckless Tory Brexit and a cruel and incompetent government that is well aware of the pain it is inflicting but simply doesn’t care.

“If they cared, they would have spent the last 12 years investing in the infrastructure that would have prevented this situation.

“But they chose, instead, to re-inflate the housing bubble and impose austerity. The Tories are not the answer to this economic crisis.

“We must choose and then create a better future that does not have us shackled to the disaster that is Westminster.”

Hunt blamed the impact of the pandemic and Vladimir Putin’s war in Ukraine for the spike in prices.

Chief economist at the ONS Grant Fitzner said: “Rising gas and electricity prices drove headline inflation to its highest level for over 40 years, despite the Energy Price Guarantee.”

He added: “Increases across a range of food items also pushed up inflation.

“These were partially offset by motor fuels, where average petrol prices fell on the month, while the price for diesel rose taking the disparity in price between the two fuels to the highest on record.

“There was further evidence that costs facing businesses are rising more slowly, driven by crude oil and petroleum prices.”

By Adam Robertson

Source: The National

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Higher interest rates expected under new chancellor

Advisers should expect higher inflation and interest rates as a result of Rishi Sanuk’s appointment as chancellor.

Mr Sanuk was appointed to the lead role in the Treasury yesterday (February 13) after Sajid Javid threw in the towel in a show of defiance against the prime minister’s demands.

It was reported that Boris Johnson had asked the chancellor to fire his advisers in a bid to achieve a closer alignment with Number 10.

As a result industry participants believe the new chancellor will work more closely with Number 10, leading to more government spending, higher inflation and higher rates.

Mohammed Kazmi, portfolio manager for UBP’s Fixed Income team, said: “The market reaction of gilts selling off, a steeper rates curve and a stronger sterling clearly indicate that expectations are increasing for fiscal stimulus announcements to be made at the March Budget.

“The incentive for such spending comes from the results of the general election itself, which saw the Conservatives win in some traditional Labour Party strongholds, who most likely voted Conservative due to their Brexit pledge, however would probably require fiscal spending to be persuaded to vote for the party again.”

Since the news of the new chancellor became public sterling has risen to its highest level against the euro for three months, having gained 1.1 per cent ,and gained 0.7 per cent gain against the dollar.

Josh Mahony, market strategist at IG Group, said the rise in sterling since the announcement of the appointment of Mr Sanuk was the result of the market expecting a higher level of government spending than under his predecessor, which would lead to higher inflation.

As the Bank of England’s job is to target inflation at or near 2 per cent, if higher government spending leads to higher inflation, it is likely the central bank would have to put rates up.

The higher level of government spending may also lead to a higher rate of economic growth, which would boost demand in the economy, and also contribute to higher inflation.

Meanwhile investors sold off UK government bonds, leading to gilt yields rising from 0.61 per cent to 0.65 per cent on the 10-year bond.

David Zahn, head of European Fixed Income at Franklin Templeton, said government bonds have sold off because the market anticipates that inflation will rise, and this will make the income from bonds less attractive.

But Anthony Rayner, multi-asset fund manager at Premier Miton, said the general lack of inflation and growth in the world economy over the past decade means central banks are now more focused on maintaining economic growth and so won’t rush to put interest rates up, even if inflation does rise.

At the most recent meeting of the Bank of England’s monetary policy committee (MPC), the group that sets interest rates, the decision was made to leave rates at 0.75 per cent, as inflation was 1.3 per cent, considerably below the bank’s 2 per cent target.

The level of economic growth was also viewed as being likely to rise in the coming months, as other countries around the world have already cut interest rates, and this would boost the level of growth in the UK, so a rate cut is not needed.

By David Thorpe

Source: FT Adviser

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UK inflation rate holds steady at 1.9 per cent sending Britons’ real wages higher

The UK’s headline annual inflation rate remained unchanged in March, staying at 1.9 per cent, meaning Britons’ real wages are increasing as pay growth outstrips price rises.

Meanwhile the inflation rate including housing costs and council tax stayed at 1.8 per cent, where it has stood since January, monthly figures from the Office for National Statistics (ONS) have shown.

With wages rising at 3.4 per cent, Britons are seeing sustained real wage growth, although weekly pay is yet to return to its pre-financial crisis levels.

While the headline rate is below the Bank of England’s two per cent target, it remains unlikely to change interest rates while Brexit uncertainty clouds the economy.

Both the headline rate and the inflation rate including house prices were 0.1 percentage point below economists’ expectations.

The largest downward contributions to inflation came from falls in recreation and culture, and food and non-alcoholic beverages.

However, there were upward contributions from a variety of categories including transport, principally increases in both petrol and diesel prices, miscellaneous goods and services, and from clothing and footwear.

Mike Hardie, head of inflation at the ONS, said: “Inflation is stable, with motor fuel prices rising between February and March this year, offset by falls in food prices as well as the cost of computer games growing more slowly than it did at this time last year.”

Tom Stevenson, investment director for personal investing at Fidelity International, said: “The Bank of England will view today’s inflation data as the least problematic of the week’s three economic announcements.”

“Prices are rising pretty much in line with the Old Lady’s two per cent target, giving the central bank cover to continue sitting on its hands,” he said. “As such the CPI data sits between yesterday’s employment data – which pointed towards higher interest rates in due course – and tomorrow’s retail sales numbers – which probably won’t.”

Chief economic adviser to the EY Item Club, Howard Archer, said: “Any help to consumer purchasing power is particularly welcome as the economy is likely to be hampered by prolonged Brexit uncertainties following the flexible extension of the UK’s exit from the EU to 31 October.”

“Consumers have generally been the most resilient part of the economy and they have been helped by real earnings growth climbing to 1.6 per cent in the three months to February, which was the best level since mid-2016,” he said.

By Harry Robertson

Source: City AM

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Bank of England survey of attitudes to inflation and interest rates

This news release describes the results of the Bank of England’s latest quarterly survey of public attitudes to inflation, undertaken between 8 and 9 February 2019.

Q: When asked about the future path of interest rates, 22% said rates might stay about the same over the next twelve months, compared with 19% in November. 47% of respondents expected rates to rise over the next 12 months, down from 53% in November.

Q: Asked what would be ‘best for the economy’ – higher interest rates, lower rates or no change – 17% thought rates should ‘go up’, down from 19% in November. 17% of respondents thought that interest rates should ‘go down’, down from 19% in November. 37% thought interest rates should ‘stay where they are’, up from 34% in November.

Q: When asked what would be ‘best for you personally’, 22% of respondents said interest rates should ‘go up’, up from 21% in November. 28% of respondents said it would be better for them if interest rates were to ‘go down’, down from 31% in November.

Q: Median expectations of the rate of inflation over the coming year were 3.2%, remaining the same as in November.

Q: Asked about expected inflation in the twelve months after that, respondents gave a median answer of 2.9%, up from 2.8% in November.

Q: Asked about expectations of inflation in the longer term, say in five years’ time, respondents gave a median answer of 3.4%, down from 3.5% in November.

Q: By a margin of 56% to 6%, survey respondents believed that the economy would end up weaker rather than stronger if prices started to rise faster, compared with 53% to 9% in November.

Q: 49% of respondents thought the inflation target was ‘about right’, remaining the same as in November, while the proportions saying the target was ‘too high’ or ‘too low’ were 22% and 13% respectively.

Click here for the full report and statistics.

Source: Property118

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Inflation pulled down by falling energy prices

Inflation fell to a two-year low in January according to the Office of National Statistics (ONS).

The 12-month CPI (Consumer Price Index) inflation rate was 1.8% in January 2019, down from 2.0% in December 2018. This drop is largely a result of falling energy and fuel prices.

Between December 2018 and January 2019 consumer prices for gas fell by 8.5%, the biggest fall in three decades. This coincided with energy regulator Ofgem’s implementation of their energy price cap which, after coming into effect in January, helped drive down inflation according to ONS.

Mike Hardie, ONS head of inflation, said: “The fall in inflation is due mainly to cheaper gas, electricity and petrol, partly offset by rising ferry ticket prices and air fares falling more slowly than this time last year.”

This latest reduction marks the end of a long run of CPI inflation sitting above the Bank of England’s 2% target. The Brexit referendum caused the value of the pound to fall, which pushed inflation higher. Increasing costs of imported goods meant that Brits’ household disposable income shrank. Inflation peaked at a five-year high of 3.1% in November 2017, when households faced much greater price increases than the EU average.

Stephen Clarke, senior economist at the Resolution Foundation, reported that this drop in inflation should lead to a  “welcome boost to people’s spending power” and “that next month we’re likely to see real wage growth of around 1.5%, the fastest since mid-2016”.

He added “This cannot come too soon for households, with average earnings yet to be restored to their pre-crisis levels.”

Tej Parikh, senior economist at the Institute of Directors, said the lower inflation was a “boon” for the economy as it attempts to weather the effects of Brexit fueled uncertainty: “For the past two years, households have been squeezed between high prices and weak wage growth. With inflation now at a two-year low and growing upward momentum in pay packets, consumers are likely to feel less of a pinch on their wallets.”

Mr Parikh continued, “This easing in the cost of living should provide some uplift for the High Street just as consumer confidence appears to be waning”.

Ian Stewart, chief economist at Deloitte, suggested that the changes should also provide relief for high street retailers. He said falling inflation alongside rising earnings was “delivering a powerful uplift to spending power” and added “Brexit dominates at the moment but were Brexit risks to ease, consumers would be well placed to hit the High Street”.

Due to falling crude oil prices, petrol prices have also fallen by 2.1% per litre between December 2018 and January 2019, which should also come as a pleasant surprise for motorists.

The question now is, will inflation continue to decrease in the future?

Ofgem’s cap is a ceiling that can move up and down twice a year depending on the costs facing energy firms. That cap will be raised this April and this is likely to feed into future CPI figures.

On Wednesday 13th February, npower became the third of Britain’s six major energy providers to say it would raise prices from April following E.ON and EDF which raised their prices on Monday and Tuesday.

Howard Archer, chief economic advisor to the EY Item Club, has said that inflation is largely going to depend on the course of Brexit negotiations in upcoming months.

“Domestic inflationary pressures are expected to pick-up only modestly over the coming months amid likely limited UK growth,” said Mr Archer.

With a Brexit deal, he said inflation could stay below 2% this year – and even dip to 1.6%.

Without a deal, Mr Archer said the Bank of England could cut interest rates as “economic activity would likely take a significant hit”, suggesting a totally different outcome.

Source: Money Expert

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UK households gloomy for 2019, lower inflation eases near-term worries

UK households’ hopes for their finances over the year ahead remain near a five-year low, due to growing concern about job security ahead of Brexit, though easing inflation pressures have offered some short-term cheer.

IHS Markit said its monthly Household Finances Index picked up to a three-month high in January, on the back of households’ perception that their living costs were rising at the slowest rate since October 2016.

The official measure of consumer price inflation dropped to its lowest in nearly two years in December at 2.1 percent.

But households’ expectations for their finances over the year to come, when Britain is due to leave the European Union, remained close to their lowest level since early 2014.

“Political deadlock over Brexit merely adds extra uncertainty to an already unfavourable financial environment for UK households,” IHS Markit economist Joe Hayes said.

Prime Minister Theresa May suffered a historic parliamentary defeat over her Brexit plans last week, raising the prospect that Britain could leave the European Union on March 29 with no transition agreement to ensure trade continues smoothly.

Businesses have put investment on hold because of Brexit, and activity slowed towards the end of 2018.

“Job security perceptions deteriorated to a near one-year low, while there was no bounce-back from the stark drop in house price expectations seen in December,” Hayes said.

Figures from property website Rightmove earlier on Monday showed the weakest start to the year since 2012 for property asking prices.

However, most of the 1,500 adults surveyed by polling company Ipsos MORI for IHS Markit still expect the Bank of England to raise interest rates in the first half of 2019, while 73 percent expect an increase before the end of the year.

Economists polled previously by Reuters on average expect the BoE to raise rates once or twice in 2019, assuming Brexit proceeds smoothly.

Source: UK Reuters

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It’s hard to believe, but Britain’s economy doesn’t look too bad right now

Wages are rising. Employment is at record levels. Inflation is relatively tame. The cost of borrowing is low. House prices are flat or barely rising. The economy is growing.

Where is this paradise?

Chances are, you live there.

Yesterday, we learned that inflation in the UK was not as high as expected last month.

Inflation is one of the most politically sensitive national statistics out there. Even the most economically uninterested people get quite engaged when you talk about the cost of living.

You can usually tell how important a statistic is by counting the number of ways there are to measure it. And inflation doesn’t disappoint.

There are many ways to measure inflation. And oddly enough, the measures that the government seems to prefer are the ones that show that prices aren’t rising as fast as you might think they are.

There’s the consumer prices index (CPI). This is the official inflation measure – the one that the Bank of England has to maintain within one percentage point either side of 2%.

CPI in September grew at an annual rate of 2.4%, according to the Office for National Statistics (ONS). That was down from 2.7% in August and also below expectations for 2.6%.

There’s the retail prices index (RPI). This was the basis for the Bank’s old inflation target, although the Bank targeted a version known as RPIX, which excluded mortgage costs from the inflation figures (because if you didn’t exclude mortgage costs, then when the Bank raised interest rates to target inflation, it would in fact drive inflation higher). Under RPIX, the target was 2.5%.

These days, RPI has been cast into the outer darkness as it’s considered to be flawed (if you’re interested in arcane statistical arguments then you can read all the arguments on the Office for National Statistics website).

As a result, it takes a bit of effort (not much, but enough to put off your average newbie journalist with no history of reporting on inflation data) to find it. It also – completely coincidentally, I’m sure – almost always shows inflation to be higher than the CPI does.

RPIX rose at an annual rate of 3.3%, down a bit from 3.4% in August.

There’s another measure that the ONS is currently trying to push very hard. If you look at the inflation data, then before you even get to CPI, you get CPIH. That is, CPI including owner occupiers’ housing costs.

Right now, according to CPIH, inflation is even lower – rocking in at a mere 2.2%.

At the end of the day, we can play around with the statistics all we want. And it’s good to look at these things with a somewhat jaundiced eye. The idea that we need inflation to be rising at a specific level is a very recent conviction and one I suspect that future generations will wonder about.

But we are where we are, and the good news for the Bank of England is that an inflation reading like this gives the central bank all the cover it needs to keep interest rates on hold. That of course, is not great news for savers – but savers are used to that by now, aren’t you?

The UK economy has been in worse condition

So what does all of this point to?

Well, taken as a moment in time, this is all actually rather good news for the UK. First, wages are rising at 2.7% a year (including bonuses) or 3.1% a year without them. You can quibble about why this is (one-off rises for the NHS, for example). But the fact remains that wages are rising more rapidly than they have in quite some time.

If you want to use CPI, this means that wages are rising in “real” terms (after inflation). If you want to use RPI, it means they’re still falling, but less steeply than they were.

If wages are going up, and unemployment is going down, then that means as a whole, consumers are going to have more money to spend. That’s good news.

Secondly, the other big bane of our lives – ridiculously high house prices – shows signs of slowly changing. Using the ONS house prices index, prices went up by 3.2% in August, compared to 3.4% in July (this latter was revised up from 3.1% – not all of the figures are available when the first estimate is released).

So on a national basis, prices are rising a little more rapidly than wages, but nowhere near at the rate they were. And both measures are going in the right direction – wages growth is rising and house price growth is slowing.

It doesn’t mean that any of this will last. It doesn’t mean we’ll get the “beautiful deleveraging” (to steal a Ray Dalio phrase) on UK house prices that we hope for.

But I would suggest that if the national conversation wasn’t being dominated by Brexit, then people would probably be feeling relatively upbeat about the UK economy. And that if the Brexit gloom ever lifts, then having at least some exposure to the UK market might turn out to be a good bet in the longer run.

Source: Money Week