Today brings UK inflation data in to focus but before we get there we have received almost a message from the past from Nigeria. What I mean by that is that the inflation rate of 15.37% it has just reported for December is a reminder of past problems in the UK. Whilst it is a reduction on November consumers in Nigeria will be focusing on food price inflation of 19.4% no doubt whilst their central bank tells them it is non-core. We even have a hint of a consequence of hyper inflation as I note three different unofficial estimates for its inflation appearing and they are 600%, 3000% and 5067%. Aren’t you glad that’s clear?!
This year has started with inflation concerns as a theme and they have come from two sources. One seems to be something of a rehash of the tired old “output gap” theory. This has perhaps been given a little more credence this year as the world economy has been doing well and finally as unemployment falls in so many places we will then supposedly see some inflation as the Phillips Curve leaps from its grave like Dracula. Or something like that. Putting it another way there are overheating fears based on similar lines. William Dudley of the New York Federal Reserve was expressing such fears last week in remarks and in the Wall Street Journal. The problem for such thinking is that “output gap” style theories have been consistently wrong in the credit crunch era.
What we actually have as I looked at on the of this month is rises in commodity prices. Another example of this was seen overnight as the price of a barrel of Brent Crude Oil nudged over US $70. It has dipped back below that today but the underlying message is of an oil price around US $14 higher than a year ago and US $25 higher than the recent nadir of late June 2017. There are various ways of looking at the impact of this but below is one version.
The New York Fed has a go at measuring inflationary pressure as shown below.
The UIG derived from the “full data set” increased slightly from a currently estimated 2.96% in November to 2.98% in December. The “prices-only” measure decreased slightly from 2.22% in November to 2.18% in December.
This is a better method than the attempt to look at core measures ( which for newer readers mostly means excluding the most important things like food and energy). What it shows us is some upwards pull on inflation right now albeit that some of that is from financial markets and maybe self-fulfilling.
My theme that the UK is particularly prone to inflation gets another tick. From the BBC.
Coca-Cola has announced it will cut the size of a 1.75l bottle to 1.5l and put up the price by 20p in March, because of the introduction of a sugar tax on soft drinks from April this year.
Today’s UK data
Let us open with a welcome piece of news.
The all items CPI annual rate is 3.0%, down from 3.1% in November.
The only person who may be shifting in his seat is Bank of England Governor Mark Carney who has yet to write his explanatory letter to the Chancellor about it being over 3% and now of course it isn’t! Embarrassing.
The reasons for the dip are based on air fares and something parents will have welcomed.
The largest effects came from prices for games and toys, which fell between November and December 2017 by more than they did a year ago.
The air fares move is intriguing as it is a technical move based on them having a lower weighting or the implied view they are relatively less important. So they rose by a similar amount but had less impact, curious.
What happens next?
If we look a producer prices we get a glimpse of what is coming over the hill in inflation terms.
The headline rate of inflation for goods leaving the factory gate (output prices) rose 3.3% on the year to December 2017, up from 3.1% in November 2017.Prices for materials and fuels (input prices) rose 4.9% on the year to December 2017, down from 7.3% in November 2017.
As you can see the immediate impact is a small pull higher but behind that there is less pressure than before. On the latter point we see yet again the impact of the oil price.
The largest upward contribution to the annual rate in December 2017 came from crude oil, which contributed 1.69 percentage points (Figure 2) on the back of annual price growth of 10.6% (Table 3), down from 26.9% last month.
If we look at what has happened since the numbers were collected the oil price is up around US $4/5 but in a welcome development the UK Pound £ is up around 4 cents against the US Dollar. So we can conclude two things. Firstly the impact of the lower Pound £ is quickly washing out of the system and in fact as we look forwards it will be a reducing factor on inflation if it remains at these levels because as I type this it is around 13 cents higher than a year ago. Meanwhile the higher oil price I looked at earlier is moving things in the opposite direction. So if you prefer we are moving from an individual phase to more of a world-wide one.
There is a long section in the report on the trade-weighted £ which has many uses but in this area I am afraid that Men At Work were correct due to so many commodity prices being in US Dollars.
Saying it’s a mistake
It’s a mistake
It’s a mistake
It’s a mistake
A much bigger mistake
The UK inflation establishment has pushed forwards a new inflation measure and when it was mooted back in 2012 it got a wide range of support. For example the committee which recommended and pushed it called CPAC included representatives from the BBC ( Stephanie Flanders) and the Financial Times ( economics editor Chris Giles). But their main change has failed utterly unless you actually believe costs for those who own their own homes have done this over the past year.
The OOH component annual rate is 1.3%, down from 1.5% last month.
Does anyone actually believe that housing costs in the UK are a downwards drag on inflation? Even someone looking at us from as far away as Pluto could spot that one is very wrong. After all this morning also saw this released.
Average house prices in the UK have increased by 5.1% in the year to November 2017 (down from 5.4% in October 2017). The annual growth rate has slowed since mid-2016 but has remained broadly around 5% during 2017.
Not exactly the same month but if we look at the trend we see that what buyers regard as 5% has somehow morphed into 1.3%! They might reasonably become rather angry when they learn it is because something which does not exist and is never paid called Imputed Rent that is used to lower the number. This also leads me to have to point out that this from the Office of National Statistics deserves the banner of Fake News
mainly from owner occupiers’ housing costs (OOH),
with prices increasing by less between November and December 2017 than they did a year
ago. OOH costs have changed little since September 2017,
This implies they have measured the costs when the major influence is imputed instead.
It is a sad thing to report but UK inflation measurement has been heading in the wrong direction since at least 2012 and maybe 2003 since CPI was introduced. Much of the problem comes from our housing market which CPI mostly ignores ( the owner occupied housing sector is given a Star Trek style cloaking device and disappears). It leads to this problem.
The all items CPI annual rate is 3.0%, down from 3.1% in November…….The annual rate for RPIX, the all items RPI excluding mortgage interest payments (MIPs), is
4.2%, up from 4.0% last month.
Over time a gap like this is significant in many respects and has consequences. After all the inflation target was only moved by 0.5% so does the 1.2% gap highlight another possible cause of the credit crunch? Next whilst the gap is 1,1% to the headline RPI that means students pay more and reported GDP is higher. Of course GDP would be higher still if CPIH was used.
The all items CPIH annual rate is 2.7%, down from 2.8% in November
No wonder more and more people are losing faith. Let me end on a positive note which was my subject of the 19th of December which highlighted a better way.