Hey guys, it's Sasha UK Inflation unexpectedly increased to 4% in December UK Inflation Unexpectedly Rises As cost of tobacco and alcohol increases, surprise uptick to 4.0% Complicates Forecasts: The Bank of England will cut interest rates, so everyone in the media, all the bank analysts seem to be massively surprised that inflation in the UK is in fact a serious problem and the Bank of England is not immediately going to cut interest rates. All the news reports talk about CPI though, which is the Consumer Price inflation index which has gone up from 3.9 to 4% instead of reducing. But the more important metric is Cpih, which is the same thing when you include the cost of housing because the cost of housing is the biggest cost in most people's monthly budgets. I Will frankly never understand why the UK CPI figure doesn't include the most expensive bit.

The thing that people spend most of their money on anyway, Cpih is flat. It was 4.2% last month and it's still 4.2% And this is the chart that Rishy Sunak likes to show off because it shows inflation overall falling. But the more interesting line on this chart is the black one which is owner occupier costs and I'll be honest. I am very confused by this data at least I was when I was looking at it this morning.

Confused is the polite version of it. doesn't add up. It doesn't make sense because the owner occupi cost has been flat for the last 3 months. You can see that it was 5.4% in October, then 5.3 % in November and 5.3% in December and I Have done some digging and boy are you going to like it if you are a geek like me who likes numbers.

So first up, why does owner occupier cost not make any sense? Well, the owner occupier cost, according to the Office of National Statistics are the cost of housing Services associated with owning, maintaining, and living in one's own home. So for most people, the biggest cost of living in your own home is your monthly mortgage payment. The rent payments are a separate category in the UK. Roughly onethird of people rent and onethird have a mortgage.

And here's the issue: I Did some analysis before using interest rate data and mortgage data to find out when people's mortgages are going to increase when people would start suddenly paying a lot more for the same mortgage because they're coming off their fixed rate, and I did a graph of the relative payment shock that people would be experiencing. You can see that Q4 20123 is pretty much at the peak of this graph, and the latest inflation data is for December 2023, which is in Q4. So what gives? Most people's mortgages are increasing by something like 40 to 50% after they come off their 2 to 5e term. Some people a bit more than that, some people a bit less than that, Some people Almost 100% And almost everyone.

you don't believe it either, do you? You just do not believe these numbers. Almost everyone in the UK who has a mortgage has one of these fixed rate mortgages. So this is affecting everybody. So if it's affecting everybody, how is it that the owner occupier cost measure is at 5.3% and it's not increasing? well? I Went and tried to find a precise definition of the owner occupier cost and it's funny because it is a lot harder than you think to find out what it is.

The last available government publication on this was meant to be published in July 2021, but it was cancelled to allow extra time to Quality assured Data before publication we're now in 2024 and I guess 2 and 1 half years is not enough time to make sure the dat is good before publication because that report still hasn't been published. But I actually laughed pretty hard when I Read this bit at the top: Owner occupies housing costs o are the costs of Housing Services associated with owning, maintaining, and living in one's own home. There is not a single defined measure of O because they can be calculated differently depending on what the target is. So there you have it, ladies and gentlemen, you can calculate owner occupier cost in different ways depending on what you want the answer to be I can't But seriously, in 2020, the UK government published this paper that says in the Consumer Prices Index including owner Occupies housing costs which is Cpih, the O component is measured using the rental equivalence approach called O Re.

However, there are other approaches to measuring o and at the bottom of this long document, it says the O rental equivalent approach uses the rent paid for an equivalent house as an estimate of the cost of housing services that are consumed. That is, we value Housing Services by looking at the cost of the next best alternative to home ownership, namely renting a property. So you can see right that this is complete horseshit in the inflation data. There are two lines for property ownership.

There is actual rentals for housing, and there is owner occupies housing costs. But the second thing that is apparently different to the first thing, the owner occupiers cost, which are not the same thing as rental prices are apparently derived by calculating what the equivalent rent price maybe would be on a similar house. So the reason that owner occupier costs in the UK inflation data are at just 5.3% instead of where they would be if they were actually measuring real data while mortgage payments are going through the roof is because the Office of National Statistics does not actually track what people pay for their mortgages. They don't track it in any way whatsoever.

They make a false equivalence to rent payments using some kind of weird estimate formula. They literally make it up by creating this estimate of what the rent price for the house would be, and there is no data provided as to exactly how this equivalence estimation is actually done in numbers. But what we do know is it has absolute Ely nothing to do with actual mortgage payments when actual mortgage payments are increasing 40 or 50% Apparently, the equivalent rent on that house is only going up 5% now depending on which data you use. The average mortgage payer in the UK spends 30 to 40% of their take-home pay on their mortgage, and this is by far the biggest part of the monthly budget.

Of those people, it's the biggest single expenditure, and the Office of National Statistics has made up a special category to measure how much people pay in mortgages. So you would expect given that they've made up the special category for them to actually measure, but instead of actually measuring how much people pay for mortgages, they make it up so that they can massage the numbers when it suits them. Now, it's not hard. the bank of England the FCA the P already get a data feed from UK Banks and from UK building societies.

If they want more data, they could request more data. It really would not be hard at all to take actual more mortgage payments that people make or use surveys, do whatever, and use those in the inflation data. But no, for some reason that has nothing to do at all with faking the numbers. They chose not to do that and instead they make up a number based on an estimate of how much rent maybe will be paid through rent prices.

That are an entirely different thing to mortgage payments. So the truth is, even if people are paying 50% more for their mortgages, which they are every month, this is happening to people, people. you won't see it in the inflation data because it's not represented in the inflation data. In fact, it is.

But the number behind it is fake and inflation data will say that everything is great. Inflation is down to 4% even though you are choosing whether to heat your house or put food on the table because your mortgage payment just exploded. This fact makes Rishy Sunak Celebration of Haring Inflation even more disgusting because this inflation data is not what people are actually experiencing. So the inflation data that we see every month is massively flawed.

But let's look at the data in a bit more detail. Anyway, on this chart, you can see the contribution to Cpih from the various different components related to housing, and you can see that electricity, gas, and other fuels is pushing overall inflation down by almost 1% This is because the energy price cap changed in October But again, this data is a lie because last winter, everyone in the UK got A400 credit to their energy bill in six monthly in storment that credit is not included in this data. So this winter, the actual monthly payments that people are making for electricity and gas are higher than last winter. But according to the inflation data, you're actually paying a lot less.

And here is another thing that is really really concerning I've been pointing this out for many months, but Services inflation is proving really resilient. Incredibly sticky. It was 6.0% last month, and it's still 6.0% this month. And the big reason for this is Wages The UK is in the middle of a wage price spiral, but new data came out a few days ago and UK pay growth slows as inflation pressure weakens.

celebrate wage growth in UK is apparently slowing down. We should pop the champagne. except the only reason that it looks like it's slowing down is because it's spiked artificially in the summer. When the NHS and some other public sector workers got a huge pay bump and a one-off bonus payment.

you can see it on this chart. The light blue line is the public sector total which includes the oneof payments, the bonuses, and it's really high last summer because that summer a lot of NHS staff got those one-off bonus payments. and right now Junior doctors in the UK are holding the biggest strike ever demanding a 40% pay increase. Also from January, the national insurance rate has fallen from 12 to 10% This is on top of the wage data.

That means that people ultimately have more money going into their bank accounts after tax. and that is an inflationary pressure. And remember that the minimum wage is increasing from April by 99.8% so everyone earning the minimum wage will see their wages go up by 99.8% and many of those who earn just above the minimum wage will also get caught up in that increase. If you earn, say 2% or 5% more, then your wage will have to go up as well.

and many people who earn above the minimum wage will demand that they continue being paid above the minimum wage. So those people earning whatever it is just above the minimum wage will also be going up by 10% or in some cases more Depending on how those negotiations work. this is going to be a real problem and we should probably be seeing it in the data. and when that comes through in the data, I Am sure everyone's going to be very surprised now.

Unfortunately, the problem with the wage price spiral is that it is not going anywhere this year. We can see it already from the data that we know and as a result, neither is inflation. Whether the UK government reports the real inflation data that actually includes how much people pay for mortgages or not, It ultimately does not matter what the statistic says, because if people are struggling to make ends meet, it does not matter what Rishi Sunak or Jeremy Hunt or the Office of National Statistics print data pretending that that isn't the case. It doesn't matter if all those idiots lie, look at the inflation data.

Food is still going up at 8% a year. Now That's a lot lower than the 20% or whatever it was at the peak, but 8% a year is still insane in any normal environment. Alcohol and tobacco is up 12.8% Clothes is up 6.4% Communication up 8.6% It's actually increasing from 8.1% In fact, if you look at this data, you suddenly realize that while inflation overall is apparently at 4.2% almost all of these other numbers in the table are a lot bigger. So how come? How is the overall inflation so low? Well, there's only two reasons: Housing and household services are at 1.9% and transport is at minus 1 1.3% Well, transport is down because petrol prices are 10.8% cheaper than a year ago, and airplane tickets are relatively cheaper because airplane tickets are massively reliant on the price of oil.

So the reason is that oil is back down to $70 pretty much the cheapest that has been since Russia Invaded Ukraine And the price of natural gas is also back to 2021 levels. Wait, what? You're paying way more for your gas than you did in 2021. No way, you mean the Energy company is you. While the price of natural gas is completely collapsed, that's impossible.

I Mean come on. SO Transport is down because of the oil, price and energy is down because the price cap came down slightly and because the on is ignoring that 400 discount of energy bills last winter. But I just went and did the math. All of the owner occupier cost data including energy in the inflation report adds up to 30.3% of the total.

The sum of the transport section is 11.1% of the total. So if if you do the numbers, if you ignore the fact that energy prices have dropped because that's not really any kind of sign of what's actually happening with long-term inflation, that's just a random fluctuation if you ignore the fake owner occupier cost data. All the other categories put together like everything except for energy and that owner occupier cost bid average at 6.4% inflation and 6.4% is very different to the 4.2% which is what the Cpih average is. and the UK has a very real inflation problem.

It is right there in the data. and while the UK government is pretending that everything is fine, everything is very much not fine. Numbers do not lie Well, except when those numbers come from the UK government.