Sometimes you spot something that you cannot let pass and that has happened this morning. There is an interesting article in the Financial Times Alphaville section by a couple of portfolio manager’s at Man Group suggesting inflation is coming. So far so good with the only issue being they are a couple of months or so behind us on here. But there is a catch as I have replied.

Thank you for the article. However I do have an issue with this.

“We are unprepared for inflation and few of us alive have ever experienced what it’s like to trade in an inflationary environment”

Anyone who has bought a house in the UK and quite a few other places has learned to do this as prices rose so much.  It is simply that (supported by the FT economics editor)it was decided by the establishment to exclude such things from the inflation data. Then when forced to try to reflect it they use fantasy imputed rents which are never paid.

In the Euro area they continue to ignore this subject in their inflation measure CPI ( HICP) as even some ECB policy makers have noted recently.

So yes there has been inflation it is just that the major inflation indices have been designed to look away now.

This is an issue which I would shout from the rooftops if I could as it explains why so many feel that inflation indices do not reflect their own circumstances. As an example ECB policy maker Phillip Lane pointed out that when asked people thought that housing costs were 33% of their expenditure but that the Euro area consumer inflation measure (HICP) only counted 6% or so ( actual rents). This has different impacts as Italy has seen very little house price growth but the Netherlands had an annual rate of 8% in May compared to this.

In May, HICP-based prices of goods and services in the Netherlands were 1.1 percent up year-on-year, versus 1.0 percent in April.

Even Statistics Netherlands points it out.

Unlike the CPI, the HICP does not take into account the costs related to home ownership.

UK House Prices

After years and indeed decades of house price rises in the UK ( there were some falls in 2008/09 but the last major fall was 1990-92). We now face a situation which will send a chill down the spine of the Bank of England so let me hand you over to The Nationwide from earlier this week.

UK house prices fell by 1.4% in the month of June, after taking account of seasonal effects, following a 1.7% fall in May. On a seasonally adjusted basis, house prices in June were 3.2% lower than in April.

That will cause scenes at the Bank of England and that is before we get to this.