With consumer price index inflation negative but house price rises strong, is CPI failing to capture the cost of living?
Shaun Richards, an independent economist, says Yes
A fundamental problem with the UK official CPI inflation measure is its exclusion of owner-occupied housing costs. Without them, it arrives at an ice-cold annual rate of inflation of -0.1 per cent for October.
However, our official statisticians also report house prices rising at an annual rate of 6.1 per cent (albeit for September) which is 0.8 per cent higher than a month before. So if not red-hot, then simply too hot. Both first-time buyers and those looking to trade up the housing ladder have good reason to rue the wide gap between those two numbers.
This is before we factor in the fact that house prices are growing at around double even the new improved level of wage growth. And that’s ignoring the fact that, in the credit crunch era, house prices across the UK rose by 18.5 per cent, while real wages fell by around 6 per cent, meaning that, for many, CPI has not matched the cost of living.
In recent times, rents have accelerated too, so renters are on their way to joining the same club.
Laith Khalaf, senior analyst at Hargreaves Lansdown, says No
There is no such thing as the perfect measure of inflation, and any attempt to generalise the rise in the cost of living will necessarily gloss over regional differences – not to mention individual buying habits.
The important thing is that the calculation method is consistent so the measure can be compared against itself at different times; that is, after all, what gives us the headline rate of inflation.
As with any economic statistic, whether it’s CPI inflation, GDP growth, or unemployment, it pays to understand the limitations of the measure and not to hang too much on just one number.
All of these figures help to build up a picture of the huge moving beast which is the UK economy, but none has the rich detail of an Attenborough wildlife documentary.
Rather, what we are getting from economic data are more like sonar scans from different vantage points and at different times, so we just need to be a bit cautious about the conclusions we draw.