Today sees the latest inflation numbers for the UK and I would like to open by presenting something you rarely read these days which is to give an example of how low inflation is good for the majority of us. It can be found in the development of real wages in the UK which after a circa 10% drop finally nudged in positive territory in September compared to the official inflation measure. It was only a small gain as average earnings were rising at an annual rate of 1.4% compared to the CPI rising at 1.2% but after a long winter for UK real wages it was a hint of some upcoming spring sunshine. Whilst wage growth has nudged a little higher it has been the fall in the rate of consumer inflation that has been the major factor here. Accordingly both workers and consumers have been made better off which apparently if you read the mainstream media is bad for us and them!
Let me now contrast this with the state of play in Japan where the Japanese are being told by the Prime Minister Shinzo Abe and the Bank of Japan that higher inflation is good for them. The CPI rose by 3.2% in September so some 2 and two-thirds faster than the UK -how often has one been able to write that?- which meant that real wages fell by 3% which has been revised higher than the 2.9% as I discussed only yesterday. So the Japanese worker is definitely worse off and the stereotypical consumer Mrs Watanabe will be facing higher prices at the shops. Neither of them will welcome this however much official sources and their media lackeys tell them that higher inflation is good for them. Of course it is good for the state which has been facing a falling nominal GDP for some time making the public-sector debt burden a brick or two higher.
The same message is being repeated right now in Europe and will be repeated in the UK should our inflation rate dip further. However low inflation is something to be welcomed and does not have to turn into the disinflation and deflation which have affected Greece. For us in the UK there is much “excess” inflation to wash out of the system as we had a sustained period of above target inflation when the credit crunch bit pushing real wages lower. This is something that the mainstream media has failed to call the Bank of England to account for. There is a military dictum that the best place to hide something is in plain sight and that seems to have worked for the Bank of England.
UK Inflation numbers
There was a slight uptick in the official UK inflation rate this month.
The all items CPI annual rate is 1.3%, up from 1.2% in September.
So still well below target but a nudge higher. As I looked through the detail there were a couple of perhaps surprising influences. Those who have watched the price of Brent Crude Oil plummet may be confused to see fuel prices as a factor but the nuance is that they fell more slowly in October than they did in October 2013. Also the rise in tuition fees was back nudging inflation higher as whilst the actual increase was smaller the impact of the past increase means its weight in the numbers has risen.
What is in the pipeline?
The numbers for producer price inflation show that disinflation is in play here particularly at the input level.
The output price index for goods produced by UK manufacturers (factory gate prices) fell 0.5% in
the year to October, unchanged from last month.
Total input prices fell 1.5% between September and October, compared with a fall of 0.6% between August and September.
The overall price of materials and fuels bought by UK manufacturers for processing (total input prices) fell 8.4% in the year to October, compared with a fall of 7.4% in the year to September.
A little care is needed as the production sector of our economy is reducing in importance over time but it is clear that there is a strong disinflationary influence at play there.
If we look wider we see that downward pressure on many prices continues to be applied by a weak oil price and a barrel of Brent Crude Oil is around US $79 as I type this.
Against this has been something which has mostly escaped mainstream attention which is the dip in the value of the UK Pound versus the US Dollar. This has fallen by 9% since the peak of US $1.717 on the second of July and is offsetting some of the oil and commodity price falls.
On such a road Mark Carney is silently morphing into Mervyn King who was never happier than when the value of the pound was falling. Also if we factor in the change in the UK trade or effective exchange rate UK monetary policy has been eased by the equivalent of nearly a 0.75% base rate cut since the peak of this summer. As a lot of our fall has been against the US Dollar my contention is that monetary policy has in fact weakened or been loosened by more than that.
Oh house prices!
These are not slowing according to the official data. In fact we are seeing the reverse according to the Office for National Statistics.
UK house prices increased by 12.1% in the year to September 2014, up from 11.7% in the year to August 2014.
Indeed many will be troubled by the fact that if we take out the London effect we get this.
Excluding London and the South East, UK house prices increased by 9.1% in the 12 months to September 2014.
Am I wrong to think that the house price boom is fading? Maybe not if we look deeper.
In September 2014, the UK mix-adjusted House Price Index reached 207.3 (Figure 2). This is 0.2% lower than August 2014, when the index reached a record level of 207.7
Of Rock Concerts and inflation
Back in June 1980 a young man/boy who we shall call Shaun went to see Fleetwood Mac at Wembley Arena and paid some £8 for his ticket. This was back in the days of the Tusk tour and was a great show which I excuse me he thoroughly enjoyed! As they are touring again and the nearest like for like comparison is a ticket at the O2 I took a look at some prices at which the better seats were £138.50 and £89. Whereas if we use the retail price index to adjust the price it should be £30.60 and they tell us there is no money in being a rock star these days!
Also to make the comparison I used the measure in play then which was the Retail Price Index. Is it rude to point out the gap between the version of it used for inflation targeting it and the more recent official inflation measure?
The annual rate for RPIX, the all items RPI excluding mortgage interest payments (MIPs) index, is 2.4%, up from 2.3% last month.
There are two main themes for today. The first is that the UK is seeing a battle between the worldwide disinflationary influences I have regularly discussed on here and its natural tendency to institutionalised inflation. In this instance the institutionalised inflation has been exhibited by the university tuition fee changes. The second is related as one of the forces pushing inflation higher in the UK has been Bank of England policy in the credit crunch era and with the recent falls in the value of the UK Pound £ it is back. This is equivalent to a 0.75% base rate cut and hopefully you will forgive me a wry smile at the thought that this is happening under the noses of those who are discussing and analysing a base rate rise in the UK. As Fleetwood Mac put it.
But don’t ask me what I think of you
I might not give the answer that you want me to
Also as we move into the 6th year of this blog yesterday was the best day for views stand alone Notayesmanseconomics has had. So thank you to all of you who have supported it along the way.
Worrying news for chocoholics
The Washington Post seems to think we are in danger of running out of it. Eeek!