Ross Clark

Has the era of low inflation really come to an end?

Has the era of low inflation really come to an end?
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How many times have you heard in recent months that the era of low inflation is at an end?  The case for that assertion is beginning to look somewhat shaky. This morning brings news that the rate of inflation last month – at least as measured by the Consumer Prices Index (CPI) – fell slightly in December from 3.1 per cent to 3.0 per cent. While that is hardly a dramatic move it shows that, once again, the surge in inflation predicted by some has failed to materialise. Now that the inflationary effect of a fall in the pound in the second half of 2016 has dropped out of the annual figures there is every reason to suspect that November’s CPI figure of 3.1 per cent will represent the peak of the current inflationary cycle.

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You have to be looking on an extremely short timeframe to believe that the era of low inflation has ended. Look even just 10 years back and you see a strong downwards trend, each trough and each peak lower than the last. That is how it has been, more or less, since 1990. Trends do not, of course, last forever, but it would be a brave soul who bet against the next trough in inflation being even lower than the -0.1 per cent reached in September 2015.

This month’s figures do, however, mark an interesting divergence between CPI and the Retail Prices Index (RPI) which used to be the government’s preferred measure of inflation. RPI actually rose by 0.2 per cent last month to 4.1 per cent – though it is still below its two recent peaks of 4.2 per cent in October 2008 and 5.6 per cent in September 2011. When Gordon Brown dumped RPI in favour of CPI he was criticised for picking an index which excluded any element of housing costs (something which RPI itself hardly covered satisfactorily). It was Brown’s way of trying to disguise the huge inflation in house prices which occurred while he was Chancellor.

Yet the ONS now has another measure of inflation, CPIH, which does include costs faced by owner-occupiers. While this would have ruin ahead of CPI during the years of the housing boom, it is now running a little lower – in December it was 2.7 per cent. In other words, leaving housing out of the official inflation index used to help the government disguise inflation.     With house prices fairly flat and mortgage costs very low, CPIH is helping suppress the overall picture of inflation. That is the era that really does seem to have come to an end, at least for now – huge inflation in property prices.