Wheezing Consumers & Slowing Economy, No Problem: UK Inflation Jumps Most in 5+ Years. Rate Hike Due in November

The Fed leads, other central banks follow.

The UK is not the only one. But it’s furthest ahead. In the US, consumer prices as measured by the Consumer Price Index rose 2.2% in September compared to a year ago. In the Eurozone, prices rose 1.5%. And today the UK’s Office for National Statistics reported that consumer prices in the UK jumped 3.0%, after having already risen 2.9% in August. It was the biggest increase since April 2012.

And inflation is outpacing wage increases, which inched up a meager 2.1%, slamming consumers further, and hampering the UK economy that is already showing signs of strain, with, for example, new vehicles sales plunging over 9% in September from a year ago.

Inflation has now been above the Bank of England’s target of 2.0% for the eighth month in a row:

Note the dreadful “Deflation Monster” that economists and the media spent so much energy scaremongering about, though a little price deflation would be a godsend for consumers – and the consumer-driven aspects of the economy.

A broader measure of the CPI, which includes “owner occupiers’ housing costs” (CPIH), rose 2.8%; it was also the highest since April 2012.

The ONS explains the homeowner’s cost component:

The CPIH is the most comprehensive measure of inflation. It extends the CPI to include a measure of the costs associated with owning, maintaining and living in one’s own home, known as owner occupiers’ housing costs (OOH), along with Council Tax. Both of these are significant expenses for many households and are not included in the CPI.

The report by the ONS also pointed out that the culprit wasn’t just energy or the depreciation of the UK pound:

The inflation rate for a range of goods has, however, picked up since the start of the year and the overall rate in the UK is higher than in most other EU countries, including all of the larger western European nations. Depreciation may have influenced this but increasing global commodity prices could also be a factor.

This chart by the ONS shows how broad the price increases have been. The yellow bars indicate the upward contribution of each category to the overall inflation figure in September 2017:

When inflation hits 3.1%, the Bank of England is required to write a letter to the Chancellor of the Exchequer to publicly explain why CPI is overshooting the central bank’s 2% inflation target.

BOE Governor Mark Carney told lawmakers on Tuesday that he expects inflation to rise further in October, adding that “it’s more likely than not” that he’ll need to write that letter to the chancellor.

This inflation data was the last reading before the BOE’s next meeting in early November. A veritable cacophony has been emanating from the BOE about what to do next. As the debate rages, more and more indication are lining up that the BOE will raise rates in November by a quarter point to 0.5%. It would be the first rate hike in a decade.

Inflation isn’t necessarily caused by growth or strong internal demand or rising wages, none of which is happening in the UK. Average weekly earnings inched up only 2.1% year-over-year during the three months to the end of July. Falling “real” incomes (adjusted for inflation) have been straining consumers.

That consumers are cutting back is showing in numerous ways – many of them all too conveniently blamed on the uncertainties of the not very smooth Brexit negotiations. For example, new vehicle sales (as determined by registrations) plunged 9.3% in September year-over-year, the sixth decline in a row.

So the BOE is facing surging inflation in a slowing economy with sagging consumer spending due to inflation eating into purchasing power. This is not a nice scenario.

But it if doesn’t get inflation under control, the BOE will face even worse economic conditions and consumers will be crushed.

Inflation is also rising elsewhere, and the Fed has been – albeit timidly – on the forefront with its tightening policies. The Fed has hiked its target range for the federal funds rate four times and is now engaged in unwinding QE and shedding assets from its balance sheet. Another rate hike is likely in December.

The Bank of Canada has raised its policy rate twice this year, including a surprise hike in September. It is likely to raise its policy rate again in December.

The ECB is unlikely to raise rates for now, but it has already tapered its QE program by €20 billion a month earlier this year and will likely announce more QE-tapering at its next meeting on October 26. It too follows the Fed’s path, but years behind: first QE tapering, then rate hikes.

When the US Consumer Price Index jumped 2.2% in September, all fingers pointed at energy costs, particularly gasoline. But there’s something boiling beneath the surface, and it has nothing to do with energy. Read… Yellen Was Right: “Transitory” Factors of “Low” Inflation Are Reversing, with Much More to Come

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  45 comments for “Wheezing Consumers & Slowing Economy, No Problem: UK Inflation Jumps Most in 5+ Years. Rate Hike Due in November

  1. Frederick says:

    Weak pound would cause this Cable hit 1.18 not too long apo down from around 1.50 due to Brexit news Its around 1.32 now so it’s recovered and that should also reduce the inflation alittle

  2. Stevedcfc72 says:

    Well balanced article Wolf and finally somebody not blaming Brexit for something lol.

    For the last year I’ve been waiting for Mark Carney to start the ball rolling on an interest rate increase, its about time.

    Similar to the US he has been slow to get this done.

    The British Banks are sitting on billions of pounds of loans to private customers in the form of base rate interest only mortgages and businesses who borrowed big sums at just 1% above base rate pre the financial crisis.

    As you’ve stated its only in the last six month’s car sales have declined, I worked in the car Industry and from 2010 new car sales in the UK were going up massively so its due a slowdown for a bit.

    • TJ Martin says:

      I find it rather interesting not to mention curious that you and Wolf are claiming automotive sales in the UK were on the upswing until recently when in fact every UK automotive financial and business news outlets have been claiming the exact opposite for the last five years or more … with automotive sales across the board in the UK ( the sole exception being compact premium SUV/CUV’s ) on the wane since what now seems like …. forever .

      As for BREXIT ? Tell me that isn’t having a major effect on your economy and I’ll tell you the one about the Victorian for sale cheap … in SF !

      • Wolf Richter says:

        Sounds like you haven’t looked at a UK piece of information on the new vehicle industry since 2012, which was the first year since the Financial Crisis when new vehicle sales started rising. From the bottom in 2011 to the peak in 2016, sales jumped by nearly 50%!!!

        Here is a chart from the Society of Motor Manufacturers and Traders (SMMT) from 2001 to Sep 2017:


        Its from this page which gives you more data:

      • Stevedcfc72 says:

        Hi TJ Martin,

        Automotive sales Wolf has answered.

        Brexit has had no major effect on our economy. A lot of the companies I work for have had record financial years, manufacturing-service sectors.

        Don’t believe anything you read in the press.

        The only thing I have seen is Companies have probably spent slightly less on new capex.

        Foreign European Companies are still investing in the UK.

        Whether it does have an effect in the short term going forward maybe but remember that will hurt European Companies as well. The only issue similar to the US is that some people have substantial debts which they need to deal with.

        Whilst our politicians do a poor job on dealing with the Brexit issue, the real business people out there are doing exactly what they should be doing, going for new business around the world.

        China,USA for starters I’ve seen it – we should be looking to do more trade with our commonwealth friends India, New Zealand, Australia and Canada.

        The UK has been far too inward looking whilst being in the Euro, now we’re starting to look outwards more.

    • p1nkfish says:

      The car sales have been off the scale in the UK. Given possible car life of 6++ years weakness in that sector may last quite a while.

      Carney cut rates after the 23rd June 2016 EU Referendum in a knee jerk reaction so he is partly responsible for too loose money and the subsequent reaction by the partying consumer.

      Whichever way you look at it the UK consumer will need to address their debt levels and the consumer economy suffer. The money has already been spent, Brexit or no Brexit.

  3. Tom Welsh says:

    This is the only thing that anyone needs to know about the cause of inflation:

    “Whenever we see in a country signs of a continuous fall in the value of the credit unit, we shall, if we look carefully, find that it is due to excessive indebtedness”.

    – Alfred Mitchell-Innes, “The Credit Theory of Money”, The Banking Law Journal, Dec./Jan.1914, pages 151-168. http://www.newmoneyhub.com/www/money/mitchell-innes/the-credit-theory-of-money.html

  4. fajensen says:

    Maybe one should buy stocks?

    So many parameters seems to be inverted / the FED raising rates will perhaps cause some of the OTC derivatives deals to unwind, then the money comes piling into the regulated markets (OTC is about 5x the value of the regulated markets according to ISDA) and into raw materials.

    So, we get increasing rates driving both inflation and a stock market boom – at least for a while. Which is maybe not what the central banks expected.

  5. Plumas One says:

    Wolf, does anyone believe that inflation in the UK jumped
    “just” 3 % ?

  6. John M says:

    The final scenes in the movie “Hunt For Red October” has the chasing Russian submarine launching a torpedo to kill its prey. The torpedo goes full circle and blows up the submarine that launched said torpedo.

    Here we have the UK and BoE trying to contain inflation, yet, when we’re all done we’ll probably hyper-inflation across the planet.

    We won’t be able to enjoy schadenfreude as it will be our currency that will be disintegrating.

  7. Bobber says:

    Where is the inflation coming from? I thought people were loaded with debt and had no money. Perhaps the top 10% are spending because they are finally feeling wealthy as a result of stock gains.

    • michael says:

      Seriously? The central banks bought the bad mortage debt from banks and made loans at near 0% rates. That fiat has driven asset home prices, commercial real estate projects, education, antiques, art, and any other stupid dot com activity one can imagine like Uber, Facebook and Google. Unfortunately the rest of us commoners have to fight with the investors to survive.

      How does a legitimate business or working individual survive against companies that do not need to make a profit. Welcome to a world upside down. Now you know why Jesus through the money changers out of the temple.

    • James N says:

      The inflation is the feed through from the 10-12% fall in sterling (vs $ and euro) on 24 June 2016. If this doesn’t feed through to wages (unlikely in any meaningful way) inflation should start dropping early next year. This inflation is way, way different to the inflation which plagued the UK in earlier decades.

      • Wolf Richter says:

        It’s always funny: when some people think they have an explanation for why (right or wrong) inflation surged, inflation no longer matters.

        But regardless of why inflation surged, it is hitting consumer purchasing power and impacting consumption. For people who make a lot more money than they spend, inflation doesn’t really matter, as long as asset prices continue to rise. But for the many workers and consumers who spend everything they make, inflation can be devastating … in particular if the items they spend much of their money on experience much higher inflation rates than overall CPI. They cut back… they have to cut back. And if that’s over half the population that spends everything they make, and they start trimming their expenditures, it’s going to show up.

  8. fozzie says:

    Any chance the Fed will raise by half a point instead of a quarter in December?

      • Rates says:

        To add to Wolf’s point, there’s more chance of the Fed dropping the rate a quarter when compared to raising by half a point :)

    • We have heard that his
      rule would be calling for a 5% Fed Funds, hah, we laugh at such a notion. Where
      would the FED get the $100 billion a year to give to the banks? Then again
      maybe that’s what will be needed to once again in order to save the system. http://www.321gold.com/editorials/sloane/sloane101817.pdf
      [through the magic of RRPO it costs the Fed to raise rates, [[taxpayer money]], raising rates in these circumstances is MORE accommodative. Greenspan did the same thing, using the simple discount window while he was Fed chief. ]
      The Fed could drop the financial repression but who would listen? Where do you think interest rates would be without the RRPO phony rate hike program? Yellen is somewhat a hero for keeping rates POSITIVE when ZIRP was taking over globally but she’s swimming against the tide.

  9. am says:

    This inflation is coming from the central banks and the way they manage economies. Their main problem now is inflation in goods, services, assets, but not nearly as much in wages. The end result is overall poorer, and more indebted populations.

    This is an unstoppable trend, and it’s not a problem that central banks can solve. The very nature of money is that it represents stored value. Somebody has to have created value to earn money. Real economic growth is needed to create real value. Without real economic growth, there is only competition for existing resources.

    If a central bank injects money into an economy without creating value, the money will find its way into things that are already valuable.

    Central banks are now trying to manage decelerating growth, and the result looks like asset inflation and debt. The only solution is to somehow create economic growth.

  10. Jeff says:

    Perhaps we should look at it this way: goods and services are not becoming more expensive; the fiat currencies are losing purchasing power. This, because the central banks have flooded an over- indebted world with liquidity hard pressed consumers don’t want. Investors, on the other hand, take the money which costs them next to nothing and buy stocks and anything else that will result in a positive carry. And now consumers, or debt slaves as some call them, may be sensing that years of flat real earnings may be followed by an actual decline.

    This might partially explain the Bannon phenomenon and, who knows? even the global rush into cryptocurrencies…..

    • junior_kai says:

      How many speculators in the cryptos have gotten their money out and spent it in the real world? I dont hear about that too often. If all you can do is look at a balance or maybe buy a fidget spinner from some online variety store its not much use.

  11. and Libor is a full percentage point higher than Fed Fund Rates, raising rates will bring about inflation, just do it.

    • Wolf Richter says:

      I’m not sure you’re looking at the correct Libor rate (there are a lot of them): The overnight Libor rate for the UK pound is 0.22%. Effective federal funds rate is currently 1.16%.

      • There are a total of 35 different LIBOR rates each business day. The most commonly quoted rate is the three-month U.S. dollar rate. BREAKING DOWN ‘LIBOR’ LIBOR (or ICE LIBOR) is the world’s most widely-used benchmark for short-term interest rates.
        London Interbank Offered Rate (LIBOR) – Investopedia

    • Maximus Minimus says:

      The central banking short term funds rate would also be higher if it was decided by the market, based on the need to attract more savings rather than academic models and bogus CPI. Of course, if that was the case, there would be no need for the wisdom of central banking gurus.

  12. Realist says:

    I wonder if the credit card business for the British banks does resemble that of their US competitors, ie growing losses ?

    This X-mas might turn out to be interesting indeed if maxed out consumers start to feel so much pain that they’ll have to cut their holiday spending in the UK (and/or the US).

    Add to this very British brew the universal credit intoduced by the Tories and you’ll end up with an indeed interesting situation.

    • p1nkfish says:

      BoE has been pressurising banks over consumer lending practices and tightening has been occurring across mortgages, Cc etc. Since early this summer.

      As usual, most likely too little too late but it might be enough tightening going forward to help reduce the rate peak in this cycle.

    • Stevedcfc72 says:

      Hi Realist,

      Yes the British Banks are seeing some small increases in credit card losses but similar to the US banks still at very low levels.


  13. Irishcyclist says:

    The amount of room available to increase interest rates for Central Banks is very limited given the levels of debt that individuals and companies and nations have.

    Levels of indebtedness, personal debt/corporate debt/sovereign debt, mean that any fluctuation upward in interest rates will put already underpressure folk under even more pressure.

    • John M says:


      We went into the GFC with $150 Trillion of world wide debt. Now we’ve $80trillion more 10 years later. The current payment coupon on all US Debt runs at $240billion/annum. If we get a “Mean Reversion” of interest rates back to their mean average of 5% that number balloons to $681billion. http://wealthtrack.com/end-of-an-extraordinary-era-james-grant-declares-the-end-of-the-lowest-interest-rates-in-five-millenia-and-warns-of-the-perils-ahead/ See Jim Grant’s explanation around 3rd minute of that video. At which point do our trading partners effectively devalue our US currency vis a vis theirs? Do we get a run on the USD too?

      This whole shooting match is frankly insolvent. Bernie Madoff might still have been in business had it not been for the GFC. He was able to pull that con off for years. How much longer can the US Government pull their con off for? That question is beyond my pay grade but I do believe that moment in time is coming.

  14. Bobber says:

    This is good. More inflation forces the Fed to tighten. The result of every tightening cycle is lower asset prices. People waiting to buy RE and stocks at reasonable prices may finally get a break.

    • fajensen says:

      In a decade, perhaps. We know that EUR denominated junk bonds have lower yields than treasuries.

      That is some serious distortion right there.

      We learned from Naked Capitalism that in the naughties hedge fund called Magnetar was driving yields down on junkier and junkier loans because it needed them as the feedstock for the CDO’s it was originating and shorting via CDS.

      I speculate that someone is doing something along similar lines, creating an abnormal demand for the junkiest bonds.

      I believe that the first correction will be upwards in all traceable assets because the money tied up in whatever scheme is driving this will move to safer shores as the FED raises.

      I think this correction can go on for an unreasonably long time. Years.

      Remember, especially the ECB, backstopped the unregulated markets, effectively turning all those shadow profits into “real money”. Now they materialize in the actual markets, driving prices.

  15. Gershon says:

    The Keynesian fraudsters at the central banks are going to have a harder and harder time punting on interest rate hikes as even the fake official inflation data can no longer mask the surging cost of living due to the central bankers’ debasement of the currency and asset price inflation.

  16. NoRush says:

    Largest inflationary items in IL are taxes of all kinds. That simple.

  17. Some Guy says:

    With respect to inflation, wages are all that matters. Price movements aside from wages are like a water-skiier behind a boat. Might move around here and there, but not going anywhere far away from their tether.

    If the U.K. is seeing prices rise while wages don’t, that doesn’t mean they have a problem with inflation, it means they have a problem that they are getting poorer. Rising commodity prices, brexit, falling Pound – obvious. Not sure what raising rates will accomplish other than make things worse.

  18. michael Engel says:

    The largest inflation component is oil.
    The second largest is the Euro zone. Since Oct 2016 the $EURGBP
    is trending up. The euro became expensive.
    The US is doing a balancing act. Since Oct 2016 the $USDGBP is
    trending down.
    So, in the game of inflation, first half results are 2:1 in favor of inflation.
    But the game is not over. In the second half, oil prices will go down.
    Since May 2015(H), $WTIC is in triangle. The next move is down.
    That will put the 1/2 a Trillions US energy sector junk bonds in distress,.
    Russian, Chinese and middle east countries assets in deflation and
    the UK inflation will suffer a loss, after few quick counter attacks,

  19. ML says:

    Two reasons for the drop in UK new car sales is that the manufactures have announced electric vehicle plans. Why buy a new car, which in any event goes down in value the moment it leaves the showroom, when a few years down the line its second hand value is likely to be less than it would be were it not for the ev surge. That is if anyone wants to buy a second hand vehicle.

    The other reason is that the UK government has declared war on diesel fuel cars. Which amongst city and town motorists has probably steered them towards the used car market.

  20. raxadian says:

    Anyone who didn’t saw this coming as a effect of Brexit is not very bright.. Of course inflation was gone rise because the UK is leaving the Euro zone.

  21. Thunderstruck says:

    Well, as an American, only one thing in the above chart really catches my eye – notice how their health care expenditures are flat?

    Is that due to single payor (or is it payer)? Or, do they have price controls?

  22. Stevedcfc72 says:

    Hi Thunderstruck,

    The single payer is our National Health Service (NHS), yes it will have price controls (to a point).

    Effectively 65 million people use it so presumably the drug companies whilst making smaller margins due to lower pricing, make money due to the volumes used.

    Massive shame there isn’t something similar in the US. Takes out the element of profiteering. You guys get completely ripped off.

    It has its faults and always looking for extra monies but personally some of my family wouldn’t have been here without it.


    • Cashboy says:

      Unfortunately the NHS:
      (1) is abused by foreigners
      (2) since it is in trusts, 30% of its costs is administration

      It won’t be long before the western governments will be promoting euthanasia on the basis that it is sociably unacceptable to be a burden on society and will be offering assisted suicide. A lot of people will be looking forward to that when they see the west become such a pit.

  23. Gershon says:

    10-year bond yields are starting to surge. The central banks’ serial punting on interest rate hikes is going to become increasingly untenable as investors demand a suitable risk premium on debt that is going to be printed away in any event.


    • Bobber says:

      Given the currency debasing, why hasn’t gold risen? This tells me the market is captive to Fiat, and central bankers can do what they want. As long as there is no alternative, the Fiat printers have a license to steal. I hope bit coin goes to 10,000 next month. This world badly needs an alternative to Fiat.

  24. Cashboy says:

    I live in the UK and for your middle and lower class people inflation is more like 10%. It all depends what is in the government for inflation. for example a new LED TV has fallen in price, you get more hours of talk and data for the same money on your mobile phone contract. However the essentials they need have gone up significantly such as rent, utilities, food and transport costs (trains, buses and fuel for the car) to go to work.
    I run a small accountancy practice and I see my clients getting into more debt and debt seems easy to obtain.

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