Today is one where consumer inflation is in the news and in particular weak or low consumer inflation. So the current disinflationary phase is persisting and let me illustrate this with some concrete details from this morning. First from Sweden.
The inflation rate was -0.4 percent in September, down from -0.2 percent in August.
Actually some of this is due to the fact that like the UK Retail Price Index interest-rates are used as a measure here and they have been cut. But even if we allow for this (called CPIF) the inflation rate only climbs to 0.3%
Now let us take a look at Spain.
In September, the annual rate of change of the HICP stood at -0.3%, two tenths above the previous month.
Actually the monthly rate was 1% but as you can see the annual rate remained negative and if we look back we see a measure which has fallen from 2.9% in February 2013. Also apologies for the confusing nomenclature as HICP is the official name for the European consumer inflation standard which we call Consumer Price Inflation or CPI in the UK.
Let us now look at the situation in France.
The Harmonized Index of Consumer Prices (HICP) decreased by 0.4% in September and grew by 0.4% year-on-year, after +0.5% in August 2014.
So finally we get a positive reading but it is a weak one and this is reinforced by this below.
In September 2014, core inflation (ISJ) decreased by 0.3%. It reached zero year-on-year, the lowest level of this indicator (computed from 1990).
Also there is Italy which has declared this.
In September 2014, the Italian harmonized index of consumer prices at constant tax rates (HICP-CT) rose by 1.9% compared with August 2014 and declined by 0.5% with respect to September 2013.
I have used that measure for Italy so we can see the extent of the disinflationary pressure without the indirect tax rises that have taken place. One of those (the VAT rise from 21% to 22%) soon falls out of the annual numbers. The headline annual figure is -0.1%.
So having been used to situations where inflation has been following the song “the heat is on” we now find ourselves observing one much more like “ice,ice,baby”.
Why is a central banker talking of overshooting inflation targets?
In a world of disinflationary pressure right now there is a lot of food for thought in this from Charles Evan of the Chicago Fed.
In sum, we should be exceptionally patient in adjusting the stance of U.S. monetary policy — even to the point of allowing a modest overshooting of our inflation target to appropriately balance the risks to our policy objectives.
I know that the US inflation situation is different to that of Europe right now but I found it interesting that at a time when inflation is at most weak that he is worried about it overshooting. I would say that establishes a link between central bankers and reality! But I suspect Charles is signalling his intentions for the future. Anyway it is nice of him to confirm one of the earliest themes of this blog.
I feel that before the Fed raises rates, we should have a great deal of confidence that we won’t be forced to backtrack on our moves and face another painful period at the ZLB. (Zero Lower Bound).
Disinflationary pressure in the UK
We have been seeing signs of this in the producer price numbers in the UK but we are in the middle of a phase of it for our headline official consumer inflation number too now.
The Consumer Prices Index (CPI) grew by 1.2% in the year to September 2014, down from 1.5% in August.
If we allow for the fact that the UK retains a tendency to official or administered inflation there must be considerable downwards pressure elsewhere. Transport costs were a driver of this and those who recall that recreational drugs have been added to the national accounts may have a wry smile at this other component.
prices for a range of recreational goods
Actually if we look at the overall picture goods inflation seems to be fast disappearing in the UK.
The CPI all goods index annual rate is 0.2%, down from 0.6% last month
Increasingly the consumer inflation in the UK is services inflation and even this has fallen from an annual rate of 2.7% to 2.3%.
I have been discussing the falls in the price of oil and other commodities for a while on here and the price of a barrel of Brent Crude Oil has fallen below US $88 today. More domestically we see this.
The output price index for goods produced by UK manufacturers (factory gate prices), fell 0.4% in the year to September, compared with a fall of 0.3% in the year to August.
The overall price of materials and fuels bought by UK manufacturers for processing (total input prices) fell 7.4% in the year to September, compared with a fall of 7.7% in the year to August,
So there is more downwards pressure in the system with the main contrary trend coming from the value of the UK Pound which has fallen below US $1.60 after today’s data was released.
What about the red pill from the Matrix?
Whilst there is plainly disinflationary pressure right now it is not correct to sing along with this from Blur.
There’s No Other Way
If we swallow the red pill then our previous inflation target will move into our range of vision.
The annual rate for RPIX, the all items RPI excluding mortgage interest payments (MIPs) index, is 2.3%, down from 2.5% last month.
As you can see on this measure we have seen disinflationary pressure as it has fallen but we are now only just below target. The simple answer to the question were we misled when the inflation target was changed in 2002/03? Is yes.
What about house price inflation?
Well according to the official numbers this is still motoring even if we exclude London.
UK house prices increased by 11.7% in the year to August 2014, unchanged from the year to July 2014.
Excluding London and the South East, UK house prices increased by 7.8% in the 12 months to August 2014.
So we see that asset price inflation continues to let rip. Many of you will be thinking that there was a plan to exclude house prices from even the housing consumer inflation measure so that policy could push them higher. Whether you believe in that as a Sir Humphrey style conspiracy theory or not that is the way that it turned out.
It is possible to do a few calculations and put them where I feel they should rightfully be. If we do that then we would have a measure of CPI (Housing) running at approximately 2.8%. It would be flashing a warning which is exactly its role in life.
Meanwhile our official measure tells us this.
CPIH (not a National Statistic) grew by 1.2% in the year to September 2014, down from 1.5% in August.
And no that is not a misprint it is in fact a national disgrace. You may note that it has been so embarrassing it lost its status as a national statistic. My issue would be how it ever got it in the first place. Stealers Wheel got it right I think about those responsible for this.
Clowns to the left of me,jokers to the right
Has anybody apologised for this utter failure?
The ordinary worker or consumer will welcome a lower level of consumer inflation especially in these times of weak wage growth. However governments do not because inflation tends to help them and of course this is a time they need help with the debt burdens they have built up. Accordingly they have with the aid of much of the media built up a fear of it associating disinflation with deflation. Odd that in the other direction they call hyper-inflationists “nutters”! Not much symmetry there.
As we stand there is clear disinflationary pressure around the world and if I was to pick one signal it is a new price high and yield (0.856%) low for ten-year German Bunds. Turning Japanese? Well they still have 0.356% to go. However projecting trends forever plainly has its dangers and there are other roads forwards.
As ever there is much to consider and I shall leave you today with a tweet from M&G’s Bond Vigilantes.
The rally in UK index linked gilts is HUGE. Capital return of the longest linker is +22% since July!
From today’s morning meeting: “Long linker yields are so low that we’ve had to recalibrate all our charts”. Linker 68s now yield -0.44%.
Just to be clear it is bonds linked to (higher) inflation which are rising in an environment which is disinflationary.