A major theme of 2014 has been the declining rates of consumer and indeed all types of inflation. Although not quite everywhere as the Four Season’s song “Oh What a Night!” got an airing as the plummet of the Rouble saw the Bank of Russia raise interest-rates to 17% earlier. However the Rouble has reached all-time lows again today, after a rally with virtually no half-life, and is at 66 to the US Dollar as I type this meaning that inflation will cruise into double-digits in annual terms. However the majority of places are being influenced by oil and commodity prices which have fallen in some cases substantially.Even an inflation prone nation like the UK has seen consistent falls in its official rate of consumer inflation which was 2% in December 2013 but now is on its way to below 1%.
Oil and Commodity Prices
We have had a move this morning which will delight the headline writers as they can now say that the price of a barrel of Brent Crude Oil has fallen below US $60 per barrel. Indeed buyers seem to be facing a continuing “catch a falling piano” situation as it has fallen another 3% already today to US $59.27. That is now a fall of 46% since a year ago and the annual rate has been considerably higher as the fall began in June. Of course for headline writers this is a double whammy as the price of WTI (West Texas Intermediate) Crude Oil fell below the US $60 level last week.
Added to this commodity prices in general have fallen with the Commodity Research Bureau index dropping from over 504 in early May to 448 yesterday. An 11% decline seems quite minor when compared to the oil price fall but some individual constituents of the index such as Iron Ore prices have fallen heavily too. Not every constituent has of course fallen but I gather there is a seasonal gain in that the cost of a traditional Christmas dinner will this year be lower than last year. It makes a change!
Oh and according to JKempEnergy we have some intriguing prices now.
Brent crude now selling for ~40% less than bottled mineral water in Britain’s supermarkets (20% less excluding VAT):
UK Inflation Shocker
Well perhaps not for regular readers of this blog or for followers of my Twitter feed but today’s data release will put le chat avec les oiseaux in the media at least.
The Consumer Prices Index (CPI) grew by 1.0% in the year to November 2014, down from 1.3% in October.
Downwards moves like this are invariably presented as a “shock” even though the reasons were well-known.
In the year to November 2014, food prices fell by 1.7% and prices of motor fuels fell by 5.9%………. The food and motor fuels product groups in total reduced the CPI 12-month rate by approximately 0.4 percentage points……..Historically, these prices have been among the main causes of inflation,
This will be very welcome to UK consumers and some groups in particular of which more later. For now I have another example of genuine outright disinflation in the UK.
The CPI all goods index annual rate is -0.2%, down from 0.3% last month.
Indeed in an example of for once where up is indeed the new down we see that price levels in the UK have fallen.
The all items CPI is 128.2, down from 128.5 in October
The CPI all goods index is 121.3, down from 121.7 in October
The CPI all services index is 136.9, down from 137.2 in October.
It is the fall in the services price level which particularly catches the eye as it is the one place where inflation in overall terms currently exists in the UK economy.
What is coming down the UK inflation chain?
Well it would appear that the band can strike up “More,More,More” by Andrea True Connection.
The price of goods bought and sold by UK manufacturers, as estimated by the Producer Price Index, continued to fall in November 2014. This was due to falling prices for crude oil, petroleum and food products.
Indeed the heavy hitter in this area is shown below.
The overall price of materials and fuels bought by UK manufacturers for processing (total input prices) fell 8.8% in the year to November, compared with a fall of 8.4% in the year to October.
So there remains downwards pressure on future UK consumer inflation and of course we can add to that the further falls in the oil price which have happened since these numbers were compiled. The oil price in essence fell towards US $70 (Brent Crude) in November. Please do not misunderstand me I do not expect negative inflation of 8.8%! Merely that this sector of our economy has and indeed still is putting a firm brake on any inflation momentum.
What is the impact of this?
If if I may channel some more lyrics from the song I quoted then my answer is that yes I do.
How do you like it?
How do you like it?
How do you like it?
This has been reinforced by the new research by the Office for National Statistics on the impact of inflation on different income groups. Take a look at this bit.
On our preferred measure, among the lowest-spending households experienced average annual inflation of 3.3% between 2003 and 2013, compared with 2.3% for among the highest spending households.
These differences compound over this period, and consequently the prices of products purchased by the former group have risen by 45.5%, compared with just 31.2% for the latter.
So not only do we see that income equality is on the march in these times we see that this is exacerbated by inflation inequality. For once we are seeing trends which will help with the inflation inequality as the price of essentials like food and energy declines. This is not something which brings central bankers any credit as they of course prefer to ignore such matters by concentrating on core measures of inflation which exclude this.
What about house prices?
Even the official numbers are now showing signs that a top is in place.
UK house prices increased by 10.4% in the year to October 2014, down from 12.1% in the year to September 2014.
This can be added to by the fact that they do not seem to have yet realised that prices in London have topped and are now falling.
House prices continue to increase strongly across the UK, with prices in London again showing the highest growth.
Sadly first-time buyers are still being heavily punished.
In October 2014, prices paid by first-time buyers were 12.0% higher on average than in October 2013.
How does this appear in the inflation numbers?
It does not in the headline number and even the version it was supposed to be in called CPIH was nobbled by the UK establishment before it began.
The OOH component annual rate is 1.0%, unchanged from last month.
I see that this national disgrace seems to have regained its national statistics status which is another in a long sequence of embarrassments. However the Eurostat cavalry has finally arrived and it uses house prices. When I rang up to ask about it I had been the only caller! It had UK housing costs rising at an annual rate of 4.07% in the third quarter of this year with the dwellings section rising by 5.02%. Much better! I imagine that is why it has been released to what might be called the sound of silence.
On a lighter note I decided to offer the Bank of England some help earlier today on Twitter.
Dear Bank of England If Mark Carney does not have a fountain pen I have one that he can borrow!
He only just escaped having to write a letter explaining why official inflation had fallen to below 1% today. As last year December saw price rises of 0.4% on a monthly basis we can see that the heat is on and as we look forwards a ready supply of ink should be kept available. Oh and a space in the diary each month to write the letter. Maybe January will provide a break as prices fell considerably last year.
I have avoided the deflation word as the UK economy continues to expand and it was nice to see Mark Carney confirm the impact of the oil price in his press conference earlier. From the Guardian Business Live.
Oil is still a net positive development, Carney replies.
The 40% plus drop in the oil price will flow quite quickly to consumers, it will boost disposable income.
So deflation will have to wait if it comes at all.
The rate of inflation depends on how you measure it. I would just like to remind everyone that our perception of it would be different if we had remained with the Retail Price Index.
The annual rate for RPIX, the all items RPI excluding mortgage interest payments (MIPs) index, is 2.0%, down from 2.4% last month.