This morning I noted something which raised a wry smile. It covered what are important economic topics as well as an issue I have campaigned on for more than a decade now. The Financial Times has put it like this.
Britons with mortgages and renters have been hit by inflation more severely than other groups in society, underscoring the uneven impact of the surge in living costs and the challenge facing the government to help struggling households.
The decade long campaign is my argument that inflation and cost of living measures need to include housing costs properly and in the case of owner-occupiers this means some combination of mortgage costs and house prices. The other side of the argument has been made by the former economics editor of the Financial Times Chris Giles who has been a consistent critic of our longest-running inflation measure which includes mortgage rates.He has attacked the measure all this time so is this a bit of a reverse-ferret from the Financial Times here?
This is an issue with real world consequences because over the cost of living crisis there was quite a big difference in the inflation measure Chris supported called CPIH with its Imputed Rents and the RPI. A big factor in this has been the mortgage costs he wanted to exclude in favour of imputed rents.For example the monthly change peaked at 5.9% in January 2023 and the annual one at 60.3% in August 2023 and even now ( as of July) was 27.6%. Thus as many people are paying higher mortgage rates it was our best measure of the cost of living leaving Chris Giles with quite a lot of egg on his face.
Household Costs Index or HCI
This is a relatively new inflation measure I have mentioned before which was developed by John Astin and Jill Leyland and has been supported by the Royal Statistics Society. A strength of it is that it looks at what people actually pay. So in the case of owner-occupied housing costs fantasies such as the Imputed Rents so beloved of the likes of Chris Giles are replaced by mortgage costs and a capital component (house prices in another form). Let is take a look at the latest results and the headline is below.
Overall, UK household costs, as measured by the Household Costs Index (HCI), rose 2.5% in the year to June 2024, slowing from the annual rate of 4.5% in March 2024.
For those of you wondering why this measure is quarterly rather than monthly it is in my view another sign it has strengths. You see the official statistics establishment is gully behind it in the way that was explained by the apocryphal civil servant Sir Humphrey Appleby “It is necessary to get behind someone before you can stab them in the back.”. Thus they have decided to produce it only quarterly so that sadly it will mostly escape attention. You may also note that it is behind the other inflation numbers (June rather than July) again to reduce the impact.
But the important issue for today is this.
By tenure type, mortgagor and other owner-occupier households had the highest annual inflation rate of 3.7% in the year to June 2024, reflecting rising mortgage interest payments; by contrast, the rate for outright owner occupiers was the lowest, at 1.3% in the year to June 2024.
The highest inflation rate it is recording comes from those with a mortgage. Most will recognise that higher mortgage rates have been a big factor in the cost of living crisis. Or as it is put in the official release.
The HCIs also include changes in mortgage interest rates, Stamp Duty and other costs related to the purchase of a dwelling. These are omitted from CPI and estimated using equivalent rental prices in CPIH, reflecting its different use case .
“Different use case” is doing some heavy lifting as those who purchase a dwelling do not pay rent! Many buy precisely to stop paying rent. But as the CPIH measure says “housing costs” many are misled by the claim. It is another example in life of always read the small print. This should not be true of an official statistic (the term these days is accredited) but sadly it is.
We can see how the HCI performed by looking back a year to June 2023 when it recorded an inflation rate of 9.8%. Whereas the official measures told us this.
The Consumer Prices Index including owner occupiers’ housing costs (CPIH) rose by 7.3% in the 12 months to June 2023, down from 7.9% in May………The Consumer Prices Index (CPI) rose by 7.9% in the 12 months to June 2023, down from 8.7% in May.
As you can see that was a pretty awful fail from the CPIH inflation measure. Just as mortgage costs were going through the roof it recorded a LOWER inflation rate than the measure which excludes owner-occupied housing. That is what happens when you prefer fantasy to real numbers. Whereas the HCI measure was picking up real inflation via mortgages at 11.1% and the end of the previous house price surge at 9.8% both of which were much higher numbers than from the officially series.
Actually they had also had a discontinuity in the rents numbers which I shall cover more in the next section. So in fact CPIH was probably more like 8.4%. That is something they are really hoping will not reach a wider audience that their favourite measure was wrong all along.
The Rents Problem
The latest HCI number tells us that rental inflation is above the headline rate.
Private renters’ HCI inflation rate was higher than social and other renters in the year to June 2024, at 3.2% and 1.9%, respectively.
The problem with that argument is that the official rental inflation series is in a mess.
On average, UK annual percentage change reported by the Price Index of Private Rents (PIPR) is 0.7 percentage points higher than the Index of Private Housing Rental Prices (IPHRP) between January 2016 and October 2023.
That sounded not too bad but the error was getting worse and had reached 2.3% in October of last year. That is what persuaded the Office for National Statistics to put the existing measure out of its misery. The problem now was highlighted this summer when at the Better Statistics conference this summer I challenged ONS Chief Economist Grant Fitzner on why we should trust the new series after such a serious failure. His response was to produce something of a word salad where the numbers were the same but different or was it different but the same? In short he inspired no confidence at all.
If we simply look at this neutrally in a situation where there has been a serious discontinuity like this there should be a period where the new numbers are treating warily. In modern language they are in beta. Yet the media and in this instance the Financial Times treat the numbers as facts.
Landlords with mortgages passing higher borrowing costs on to tenants contributed to the higher inflation rate for renters compared with the general population. A lack of properties is also pushing up rents, which are still rising at near-record rates.
Whereas if we switch to a private-sector measure we see this.
Stevenson said: “Data from HomeLet reveals that the annual growth rate stands at 5.2%, just under half the rate observed a year ago. (propertyeye)
That is completely different and you would hope that an economics reporter at the Financial Times would be aware of that.
Comment
The most important thing here is the further reminder that using actual prices for the housing market gives higher inflation and cost of living numbers for the crisis we have just been in. That means that things have been worse than what we have been told. Along the way we pay a lot of money for statisticians and regulators to approve numbers which have turned out to have serious flaws as in being too low. Yet we are supposed to accept the new numbers immediately in spite of the claims that they are rather like this.
Meet the new boss
Same as the old boss ( The Who)
Oh and no-one in authority has been disciplined in any way for this.