Sometimes you get sea changes in an economic perspective and my home country the UK is in one of those phases. What I mean by that is we have returned to what was my first ever theme on here which is that the UK is a nation prone to inflation. In this specific phase we are seeing inflation which is noticeably higher than our peers. As so often we get proof from the way that the Bank of England denies it.
BOE’S RAMSDEN SAYS INFLATION IS ON TARGET WITH CURRENT POLICIES ( @FirstSquawk)
Even a cursory look at the numbers shows that not to be true as the targeted measure CPI inflation is at 3.8% rather than 2%. Indeed another nudge higher looks likely for the immediate future in the course of which we may see 4% or double the target.
Shop Prices
The claim from Deputy Governor Ramsden did kind of survive the day but only just as these numbers were released at a minute past midnight.
Headline shop price inflation rose to 1.4% year-on-year, up from 0.9% in August (the highest since February 2024). Month-on-month, prices increased by 0.2%
That is from Harvir Dillon of the British Retail Consortium or BRC and there was more.
Food inflation held steady at 4.2%, unchanged from August, but still above the 3-month average. Fresh food inflation remained at 4.1%, while ambient food stayed at 4.2%. Dairy and beef prices remain high, but wholesale dairy costs are now falling notably.
There are two nuances here as central bankers have pushed the idea of Core inflation for at least a decade. But are never challenged on the issue of the reality that the inflation we have experienced has had energy and food inflation as the headline acts. For newer readers Core means exactly the opposite of what you would assume it means as pretty much everything vital to life is excluded. Next up is that with the food prices I have experienced I am finding it hard to believe the inflation rate in this area is 4%. Moving forwards I do have a kind of test because as I enjoy a glass of milk I can test if the price of the 4 pint carton I buy mostly from the Co-op on Battersea Bridge Road declines from its present £1.65 in response to the fall in wholesale costs.
The next area is also bad news for Deputy Governor Ramsden.
Non-food deflation narrowed to -0.1% (from -0.8% in August). DIY, gardening, and hardware saw price rises, while electricals, clothing, and home entertainment remained in deflation. Promotions continue to drive down prices in some sub-categories.
The irony here is that this is an area the Bank of England would have loved to emphasise when it has falling prices.They must have missed it. Anyway it looks like the disinflation here is over. Along the way we have the hedonics klaxon as electricals and home entertainment inflation will be affected by this. For those unaware this is how you try to adjust for the improvements that we see in the likes of smartphones and TVs. It is a complex area as I recall the statistician Simon Briscoe pointing out that when he bought a new I-Pad he paid £1000+ but mostly used it for the same things. There might be something new he uses but mostly not. So via Better Statistics we are looking at this area again.
Also the hits keep coming for Deputy Governor Ramsden as Harvir also looks at world trends via the United Nations data.
FAO Food Price Index is up 6.9% year-on-year, with meat, sugar, and vegetable oils leading. Dairy prices fell month-on-month but remain 16% higher than last year. Oil markets remain sensitive to global supply and demand shifts.
Also there is fear that just like last year Chancellor Rachel Reeves may add to inflation via her Budget in November.
However, further tax rises, especially on consumer-facing businesses, could keep inflation stubbornly high, with food inflation potentially staying above 5% well into next year.
Inflation also in the GDP Release
This morning there was another worrying signal from the revisions to GDP.
Nominal GDP is estimated to have increased by 1.0% in Quarter 2 2025 (previously estimated at 0.8%), and is now 5.6% higher compared with the same quarter a year ago.
As real GDP was unchanged as you can see below that means inflation was higher.
UK gross domestic product (GDP) is estimated to have grown by an unrevised 0.3% in Quarter 2 (Apr to June) 2025, following an unrevised increase of 0.7% in Quarter 1 (Jan to Mar).
So a back of the envelope calculation shows a 0.7% inflation rate in the quarter and this is a broader measure than the usual consumer price measure which is 23/24% of it.
The implied GDP deflator is the broadest measure of inflation in the domestic economy, reflecting changes in the price of all goods and services that make up GDP. The GDP deflator covers the whole of the domestic economy, not just consumer spending. It also reflects the change in the relative price of exports to imports.
I used to consider the GDP deflator as a gold standard measure but sadly the changes to health and education measurement meant it exploded in the Covid pandemic. From August 12th 2020.
The implied deflator strengthened in the second quarter, increasing by 6.2%. This primarily reflects movements in the implied price change of government consumption, which increased by 32.7% in Quarter 2 2020.
So I have downgraded my emphasis on it. But even so we are seeing yet another UK inflation measure around double the annual target.
Compared with the same quarter a year ago, the GDP implied deflator grew by 4.1% in Quarter 2 2025.
Oh and is anybody surprised that claimed improvements yet again lead to claims of lower inflation numbers?
Across 2024 and 2025, there have been downward revisions to the GDP implied deflator (Figure 2). These mainly reflect a number of deflator improvements introduced as part of Blue Book 2025, in particular, where we have replaced selected import and export price indices with unit value indices based on HM Revenue and Customs (HMRC) data for basic commodities, including natural gas, crude oil, refined fuels and metals.
Comment
As you can see you can see that the immediate news flow could not have been much worse for the claims of Sir David Ransden and thus for his policy prescription.
Bank of England Deputy Governor Dave Ramsden said there is still scope to cut interest rates further, predicting price pressures from the services sector and wages will continue to ease. ( Bloomberg)
In a way this is a classic of the genre as Dave ( Sir David to his friends) has to cherry pick the numbers to get the answer he wants. You may note the “continue to ease” when in fact inflation has been rising for a while now. You may also note that with the problems at the Labour Force Survey then wages and employment data are the last area you should rely on.
In fact for the output gap theories that his policy prescription is based on there was more bad news in the GDP release.
The level of GDP in Quarter 2 2025 compared with Quarter 4 (Oct to Dec) 2023 is now estimated to be 2.9% higher, revised up from the first estimate of 2.6%.
The UK economy being stronger weakens his output gap style arguments for lower interest-rates. So what is good news is in fact bad news for him. No doubt the Bank of England modelling is being “improved” right now to reflect this.
As an aside today has seen more backing for my argument that the Office for National Statistics has problems with its seasonal adjustments. Here is my tweet from yesterday in reply to Julian Jessop.
To add to Julian’s post it is starting to look as if the UK ONS has a problem with its seasonal adjustment of GDP. Reporting a good first half to the year and indeed first quarter then a poor second half.
Followed this morning by additions of 0.3% to the second half of 2024 and a 0.1% shift from the first to the second quarter. I expect more over time when they think no-one is looking.
