UK Producer Price and Manufacturing output figures show that the Bank of England was wrong not to have raised interest-rates yesterday

Firstly today let me offer my sympathies to those affected by the earthquake and tsunami which hit Northern Japan this morning. The phrase “Ring of Fire” for some of the Pacific seems particularly appropriate recently does it not? From a personal point of view I did wonder about the implications of working on the 22nd floor when I worked in the Ark Mori building in Tokyo!  In terms of implications for her financial markets it is hard to say much about the 179 point fall in the Nikkei 225 equity index to 10,254. The reason for this is that the American Dow Jones Industrial Average had closed down 228  at 11,984 so the Nikkei may well have fallen by this sort of amount pre the influence of the earthquake.

The Implications of the latest figures for Chinese inflation and output growth

In addition to a natural disaster we got some significant economic news from the Far East this morning. From the Chinese statistics bureau we received this.

In January 2011, consumer price index rose by 4.9 percent over the same period of the previous year………The price of foodstuff increased 10.3 percent year-on-year……

In January 2011, Producer Price Index (PPI) for manufactured goods was up by 0.9 percent month-on-month and 6.6 percent year-on-year; purchasing prices for industrial producers rose by 1.2 percent month-on-month and 9.7 percent year-on-year. 

Industrial Production:In the first two months of 2011, the total value added of the industrial enterprises above designated size was up 14.1 percent year-on-year, or 0.6 percentage point higher than that in December 2010.

Is China still overheating?

If you look at the figures quoted above the answer still looks like yes in spite of the measures applied by the People’s Bank of China with its increases in interest-rates and banks reserve requirements. It is important to point out,however that many of these moves were recent and will take time to have an impact. Whilst consumer price inflation was the same in February as January there had been hopes it would fall back which were dashed by these figures. Sticking with the inflation theme it is plain from the producer price inflation figures that there is still considerable inflationary pressure towards the beginning of the price chain. I added the figures for foodstuff inflation to show that in addition to her own inflation problems China is also being affected by wider trends which are evident elsewhere.

If we look at the industrial production figures they almost define overheating do they not? Year on year growth of 14% is fierce enough before we factor in that this comes up top of previous high growth rates. Accordingly here too we see that more inflationary pressure looks likely as we go forwards from this source. This leads to the fundamental question will China over-tighten monetary policy in response? To which comes the answer it looks like so far she may have not done enough.

Further problems in the Euro zone

Whilst the next main meeting of Euro zone ministers is not until the 24th of March Euro zone politicians are meeting today and we may get some more news on their plans (assuming they have some!). The usual course is for all sorts of plans to be promised plenty of hyperbole and then some combination of unrealistic expectations and dissent shooting it down! I notice that the German Chancellor Angela Merkel has said that there could be “moderate reductions” in the interest-rates on the “rescue” for Greece and Ireland. So far so good until you here that in return Ireland will have to give up her lower corporation tax rate and Greece will have to sell off some of its state assets. Seeing as the last suggestion out of a German parliamentarian about selling Greek assets which referred to some of her islands was about as well received as Arsenal manager Arsene Wenger received the sending of Robin Van Persie on Tuesday night the prognosis is not optimistic! I was asked a while ago about the impact of the recent Hamburg elections where Chancellor Merkel’s party did badly and I feel that this is it, she is hemmed in by the need to appeal to her electors. Whatever you think of the policy that results it is at least a function of democracy something the EU often lacks.

More reasons why the Bank of England was wrong not to raise interest-rates yesterday

Regular readers will be aware that I have argued since I started this blog back in November 2009 (which seems like yesterday!) I have consistently argued that the UK economy needed and needs an increase in interest-rates to help ward off the inflationary pressure that looked as if it was on the horizon. That is my first message on this subject, in my opinion when setting monetary policy you find yourself having to look forwards some 18 to 24 months because that is the period over which whatever policies you implement usually take to have a full impact. It is also my first criticism of the Bank of England as its forecasting has been appalling and accordingly policy based on an incorrect forecast is likely to be incorrect too. Just to give one example of this (and there have been many) according to the February 2010 Inflation Report then Consumer Price Inflation should be just below 1% right now. It is in fact 4% which means that rather than being 1% below target it is in fact 2% over.

So we now find ourselves in a position where inflationary pressure is increasingly looking like it is inbuilt in our economy. Let us now look at the most recent data.

Manufacturing and Industrial Output in the UK

From the Office for National Statistics (ONS)

Year on year, overall (industrial)  production output in January 2011 was 4.4 per cent higher than in January 2010. (This was in spite of the fact that)  Output in the mining and quarrying sector decreased by 4.8 per cent in January 2011.

Total manufacturing output increased by 6.8 per cent in January 2011 compared to the same month a year ago…..Between December and January, manufacturing output increased by 1.0 per cent.

For those interested in the detail the strongest components of the manufacturing growth were electrical and optical equipment industries which increased by 14.6 per cent, the transport equipment industries which increased by 12.0 per cent and the machinery and equipment industries which increased by 12.7 per cent.


These figures are good and should be welcomed with a smile I feel. After the disappointing official figures for economic growth in the last quarter of 2010 these will be a positive influence on the first quarter of 2011 especially if the current trend continues into March which seems likely. For foreign readers it has become a British tradition to beat ourselves up over the apparent decline in our manufacturing sector over time, well for now we can stop as it is doing well! It may only be 13% of our economy these days but it may soon be 13% and rising.

In terms of economic theory I have discussed on here at times my theory that manufacturing/industrial production may respond to exchange rate moves which are “sustained”. This might mean that we are seeing some benefits from the devaluation of 2007/08 perhaps if companies now feel that the devaluation experienced then is now relatively permanent. As so much has changed since then it is virtually impossible to prove but I still feel that conventional economic theory is wrong in this respect and does not distinguish enough between temporary moves and those which become to be perceived to be permanent.

UK Producer Price Inflation

This has been a consistent problem for the UK economy and our numbers for this have consistently predicted the inflationary issues that we have been suffering from. Here is today’s update from the ONS.

Output price ‘factory gate’ annual inflation for all manufactured products rose 5.3 per cent in February 2011.

Input price annual inflation rose 14.6 per cent in February compared to a rise of 14.1 per cent in January.If you let the shock effect of such figures die down there are clear ways of analysing these numbers. As you can see the output measure’s annual growth is ahead of the level recorded by retail price inflation (5.1%)   and above that of our consumer price inflation measure (4%).So it indicates further acceleration in our inflation on the official measure. On an annual basis, all 10 sub categories recorded increases If we now move to the beginning of the price chain we can see that the position here is truly worrying as an annual rate of  14.6% is higher than that of (overheating) China! This may not be the end of it as it sometimes slips the ONS’s mind to point this out but last months figures were originally reported as being 4.8% and 13.4% and have now been revised to 5% and 14.1%. That is quite a revision for the input price figures.

Those of a nervous disposition may wish to look away now as earlier this month I looked at some figures for input price inflation produced by the Confederation of British Industry (CBI). If you look at the past record these have correlated quite well with the official numbers from the ONS and they are now showing input price inflation in excess of 20%. So rather than reducing it would appear that pressures are building up at the beginning of the UK price/inflation chain. and remember we are starting from a very high base.

Further Analysis

In reality the situation is in fact worse than this as the numbers have been “recalculated” by the ONS. I wrote on the 19th of November, the 14th of December, the 14th of January and the 11th of February  about a change in the way that the ONS calculates these figures. My conclusion is illustrated below.

This seems innocent enough but I have looked at the numbers for 2010 and this is its impact on the headline output number for produced price inflation for the months of this year so far. They are -0.3%,-0.4%,-0.5%,-1%,-0.5%,-0.7%,-0.8%,-0.5% and -0.6%.

I will leave you to draw your own conclusions! Official recalculations of inflation figures leading to a fall in reported inflation lead to a reduction in the credibility of the figures. Looking at the previous trends for this my calculations lead me to believe that on the old basis we would be reporting output price inflation of 5.9% this month and input price inflation of 14.9%.


I think that the figures are rather eloquent. We have an inflation problem which appears to be building further and at the beginning of the price chain the problem looks ever more serious. We also have a manufacturing sector which is going very well and an industrial sector which is doing well. The Monetary Policy Committee continues to forecast falling inflation and use phrases such as “temporary” and “one-off” when reality is quite different. We need a change in my view which was particularly highlighted by the appointment of a Goldman Sachs banker and ex-alumni of Harvard Business School to the MPC this week. It remains my opinion that it would be likely to lead to better policy outcomes if the MPC was directly elected. Frankly it would struggle to do much worse…..

UK Pensions Policy

There have been quite a few changes mooted this week and I would like to canvass readers thoughts on them. Not only from the UK as I am intrigued what the international perspective is on moving to a flat rate state pension and restricting public-sector pensions.


23 thoughts on “UK Producer Price and Manufacturing output figures show that the Bank of England was wrong not to have raised interest-rates yesterday

  1. A question, are the output figures calculated in value or volume: and, if as value, then if “manufacturing output increased by 6.8 per cent” and “annual inflation for all manufactured products rose 5.3 per cent” are we talking about volume growth of 1.5%?

  2. You asked for comments on the pensions of public sector in the UK. Speaking as someone in the private sector with an accumulated pot but no defined benefits, I am beginning to realise that the public sector workforce simply does not understand the dire pension position of the private sector.

    All the nonsense about public sector pensions not being gold-plated could be put to the test quite easily. Let’s just say that, from tomorrow, all government workers will have the choice of their past and present contributions paid into a typical private scheme or staying where they are. How many do you think would move?

    • In the medium term I do not think they will have a choice. The pension industry covets the provision of public sector pensions, wanting to do their skimming.

      There is the usual corrupt politics in the background.

  3. Firstly, I think the public sector pension forms are needed. In the private sector these changes have in the main already been made over the last 10 years or so. I just don’t understand how people think things can carry on as they were. It just seems to me that things are not clearly laid out and explained in a way that most people can understand them, and of course there is todays “me me get whatever I can get culture”, little personal responsibility and couldn’t care less to consequences.
    It is perfectly fair that the proposals are to ring-fence that which is already earned, but even that is more than some private pension holders got when their schemes collapsed. However, people will complain and say that things are being taken away. But they are not they havn’t even earned them yet!
    Overall a sensible recommendation, that together with hopefully a flat future old age pension that will reward those that make a provision, rather than those that don’t, will lead to a more sustainable future for the next generations.

  4. Hi Shaun
    Just reading your analysis brought to mind the fact that the norms of economic behaviour you are applying which lead you to your conclusion on raising rates are distorted now by QE. Isnt it necessary for you to accompany your view on short term rates with, also, a view on QE, otherwise isnt there an unanswered question?

    • Hi Shire
      Put like that I guess that there is yes. By default I have given an answer but I have not specified it so let me offer some thoughts on the subject.

      Whilst I am not a fan of QE and really only have much tolerance for the first £50 billion of the £200 billion ( as at that time things were genuinely uncertain so I am willing to offer the benefit of the doubt on the 1st tranche) the fact is that we have £200 billion of it. I would look to endand unwind it as I feel that with the upcoming trends I expect the UK taxpayer could end up holding loss-making investments. However I would announce future planned sales but would look to build them into the overall UK debt management. Also I would look to take advantage to market rallies to do so.

      This would be reliant on markets and favourable opportunities and is to that extent unsatisfactory but unfortunately we are where we are. So I would be hoping for the UK austerity package to succeed and help by reducing our deficit and required annual debt sales. Ironically what is happening in Japan could lead to a short-term bond market rally and if it did a nimble Bank of England would possibly have the chance to reverse some of the QE quite soon. Apart from opportunities like that I see little scope for the next couple of years.

      I have been critical of the Bank of England’s plan to unwind early the Special Liquidity Scheme as I feel this may accelerate falls in the housing market and possibly create something of a rout. I would have preferred to have looked at unwinding QE. However apart from favourable short-term opportunities I feel trhat raising interest-rates would be enough for now.

      The only scheme I have seen suggested by anyone around the Bank of England is when ex-MPC member Mr. Blanchflower siad that they could wait for the bonds to end. So on his scenario QE would be with us until the 22nd of January 2060! This only confirmed me in my view that they do not fully understand the implications of their actions.

  5. I have to take issue with the assessment of the necessity for public sector pensions reforms and some of the hostility (which usually is reserved for Central Banks in this forum). I am the Fund Manager of a local authority pension fund. Local authority schemes have from inception been funded from a mix of employee and employer contributions. My fund is currently 99% funded despite increased longevity,the dividend tax credit and countless other assaults ,we are internally managed with a in house fee cost of 6 basis points.As in house Fund Manager I receive a thrilling public sector wage rate with no bonuses and no perks (except flexitime).

    We strive through aggressive asset allocation/stock selection and a fiercely independent view (and thank you Shaun for your free help in this regard!) to outperform our benchmarks.We aim by this to keep the employers contribution as low as possible so that local taxpayers pay for services not overheads.

    In return I ask for a fair pension in retirement in line with what I was promised at age 18 and have paid for 27 years.

    • andy
      were you really promised this 27 years ago?
      It may have been assumed that on the basis at the time that was what you would get. What guarantee was there it would always be like that.
      Contract conditions and pay etc are reviewed or should be frequently for the benefit of both employer and employee – else you may never ever get a payrise for example.
      Agreed you should not lose what you have earned to date but there can never be a guarantee for the future. Just like redundancy, ill health, companies closing down or going bankrupt etc.

    • I really wish you well. My own experience in dealing with the UK government and UK pension schemes since 1998 has been one of continual scamming so that I lost a substantial amount of pension money. It means that my wife and I who should have been comfortably off are now stretching to exist.
      I don’t live in the Uk, not even Europe, but had taken a pension fund based on Unit Trusts and therefore got no tax allowances. Nevertheless on my retirement HMG clawed back my non existent tax allowances. Income tax UK told me they couldn’t give me back my money and to try asking my local tax office – they thought it was a joke. So in an attempt to regain some capital I answered an ad in the local press put there by Equitable, no less. Result? I lost even more pension money.
      The moral of this story is don’t expect too much pension wise from anyone in the UK. Personally I think it is regarded as a milk cow by a large number of people associated with it.

    • While I have great sympathy for people who have put money in as described, the contract was in fact based on an expectation that people died soon after retiring, keeping the whole equation in balance.
      The brutal effect of increased longevity is that the contract doesn’t work any more. The private sector has simply transferred the risk to the individual by switching from defined benefit to defined contribution, with very large cuts in pensions as a result. Large parts of the public sector have not had to do this. We therefore have a position where taxes are being paid by private sector employees to fund public sector pensions better than those they can afford themselves. I don’t see that as sustainable.

      The argument is particularly acute in pensions, since there is a huge disparity between the lives of people aged 50+ and the younger generation. I speak as one in his fifties and I would ask those wh think their pension to be unfair to have regard for the next generation which they expect to pay for it. Add in a combination of crazy house prices to student fees to youth unemployment (none of which we had 30 years ago) and I think that you can see that the intergenrational contract has broken down completely. If I were 25, I would resent very much the imposition of taxes to fund pensions which I would have no chance whatsoever of achieving myself.

    • Andy, you’re probably more aware than most that the Local Government Pension Scheme is the exception within public-sector pension schemes, by virtue of it being a fully funded scheme.
      For the vast majority of public sector schemes, which are not fully funded, tax payers are on the hook for the large shortfall between (employer/employee) contributions and the benefits paid out.

      [Most/all Local Authority pension schemes have extremely generous employer contributions, which may be over 3 times the employee’s contributions. The employer contributions obviously ultimately all come from central government and local government coffers: ie. tax payers and council tax payers.]

      Despite the fact that there are many public sector workers who are in lowly, low paying jobs, and who may receive pensions that will certainly not allow them to live luxurious retirements, the bottom line is that compared to equivalent roles in the private sector, their pensions are, almost without exception, exceptionally generous. And extremely generous compared to what they themselves have contributed.

      I think it’s understandable that it rather sticks in the craw of many in the private sector (especially the self-employed) that, while they themselves may face the prospect of poverty in retirement, they’re being asked to pay out ever larger proportions of their own incomes in taxation in order to support these generous public sector schemes.

      I don’t see public sector workers being too keen on the idea of contributing to my self-employed carpenter brother-in-law’s pension pot, so they must understand why he’s not enamoured with the idea of contributing to theirs for the whole of his working life!

  6. Shaun,
    I believe that, yet again, the question of public pensions will be thrown into the long grass. It’s clear, even from your bloggers, (some regular contributers) that public workers just don’t get it.
     I have many private pensions, some defined, others by funds. Many of these  destroyed by tax changes and one even by Equitable Life – all contain broken promises. 
     The only way forward is for all UK workers to have private funds/pots (similar to Australia and America) which are portable and all receive the same tax perks.
    Why should tax payees on low wages support public workers pensions when they are unable to provide a sufficient pension for themselves.

    • Your sentence could be reworded and make equal sense as:
      Why should anyone on low wages support anyone else when they are unable to provide sufficient support for themselves.

      Where would this leave economic activity?

  7. Nhoi, you, and millions of others, have been very badly let down by private sector pension provision- the whole thing has been a complete scam for 50 years. Why not direct your anger towards the people who have skimmed your pensions for their own commissions, in teturn for investment advice that I could have improved using a pin and a copy of the FT. Why, oh why, do you want to force everyone else into the same sort of misery? I have a better idea- close down the private sector pension “industry” on the grounds that it is a simple scam run for the benefit of everyone involved it (contributors excepted!). Then go to mandatory SERPS for everyone, including the self-employed.. Direct your anger at the right target.

    • I’m not sure you actually appreciate the situation regards private pensions. You appear, like many, to conclude that the fault lies with our pension industry (so called scams) – a capitalist problem.
       My own experiance over the last twenty years, with one employer, typifies the real problems. During this period my company was British, then Italian,then German, then British again and lastly Swedish. During this time the company was generous and I also paid additional AVC. A continually changing fund set up, however,caused many losses and many funds.
       The Equitable problem was caused by the judges who believed that some investers were more important than others. (I took a 50% loss and moved my fund into a further fund) 

  8. If the private sector provides bad deals and scams for private sector employees it does not mean that the public sector should start doing the same. The public sector in general provides lower wages and no bonuses. The advantage has always been the stability and pension. If the model is to change for neoliberal nonsense to the public sector, this should be made clear to the electorate in the first place. And of course, strikes will be the answer of course. Government should feel the anger.

  9. The old yardstick of public sector workers being paid less than private sector ones during their working lives and so having a gold plated pension at the end is consigned to the realms of urban myth these days! How many times have we heard public sector salaries justified by comparisons to compatible private sector ones and I’m not talking about £5.93/hr! Also considering working conditions and employment contracts the differences are immense so it’s with more than a little scepticism I hear of so many lost days due to stress! Try running a SME where you can’t just delegate and sideswipe decisions, all the bucks stop with you!

    Getting back to the pension question and as there are obviously industry professionals on this board can I ask one. Our ‘local’ authority is carrying a pension deficit figure roughly equatable to half their total combined income. Last year they made a contribution to that black hole of the full rates increase for the year plus nearly 50%. So whilst ratepayers had to pay an increase just under the capping percentage we actually got no service provision for it. Is that good value to ratepayers?

  10. “Wah, thats not fair! He got more than I did!”

    …and the arguments of Public vs Private vs Public go on and on. How the political elite must be smirking. We forget their profligacy and instead fight amongst one another for the scraps.

    What a shame.

    • Yes your point is well made. 
      However, this weekend has seen a terrible disaster In Japan. The Japanese people  will suffer for many years. This happens at a time of middle East wars. UK private pension funds will also suffer losses. These losses will tranfer into peoples pensions. The world economy and private pensions are governed by these events. 
       But not so a local council pension – after all they were made promises years ago.  

  11. When you compare salaries you should compare like with like, i.e. specific professions. In my profession (do not want to reveal it because of anonymity, it is technical though) it is clear that the private sector provides much better salaries (x2 is typical) and I know this from colleagues who have moved the boundaries, both ways.

    It is also quite pathetic the argument that because private sector sacks, lets make the public sector sack. In this way slowly but steadily in order to become ‘competitive’ we will reach the salaries/pensions of sweatshops in China. If this is the case, sooner or later the whole set of neoliberal nonsense casino-type capitalism will go down the drain. Markets are a means to an end, it is not the end. Decent living for people is the end. If it does not serve the people it will be abandoned.

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