Even the inflation nation that is the UK is now seeing disinflation

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.

Comment

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.

Number-Crunching

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.

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27 thoughts on “Even the inflation nation that is the UK is now seeing disinflation

  1. IS the slide due to a US/OPEC deal ? OPEC get the US military and kill fracking , the US destroys Russia , Venezuela etc etc , and strengthens the dollar on the commodity slide

    why is the price dropping so much ???/ has demand dropped off a cliff ?

  2. Shaun, after my comment the other day about the lack of a substantial fall in consumer energy prices I decided to e mail British Gas and ask why their prices had not fallen. In their reply they stated that they are keeping a close watch on wholesale prices and would keep customers fully informed of any changes to their tariffs . The also pointed out that the wholesale price of gas is only part of the cost to consumers. Funny how it was the main part when oil prices rose! I have also noticed that pack sizes in everything from smoked salmon to confectionary are shrinking whilst the price remains constant. Are the inflation calculations for a basket of goods done on a cost per gramm or on a typical pack? I do wonder about hidden inflation and should start my own basket of goods that will note pack sizes, quality and price. A winter project?

    • Hi Pavlaki

      I have been watching the price of domestic fuel and gas and have complete sympathy with your point of view. After all it has so far been a relatively mild autumn/winter in the UK.

      As to the inflation indices yes they do allow for changes in size so for examplw the shrinkflation which has affected Mars bars should have altered the calculations.

  3. Hi Shaun

    Great article as always. With the debt addicted government opposed to disinflation, can you see the return of QE? I’ve heard that bond yields have increased recently.

    Also, where does the myth of deferred purchases during a period of disinflation come from? Its always peddled by the media, and yet no-one questions it.

    My petrol tank was recently empty, and prices at the pumps have fallen dramatically, but I won’t be waiting until next year to fill up my tank?

    thanks

    • Hi Anteos and thank you

      For the moment UK Gilt yields are falling again as our ten-year is 1.77% tonight so I fail to see what QE would add. However that will probably not stop the ECB from unveiling its own QE program in spite of the fact that quite a few Euro countries have evn lower yields than that.

      As to the disinflation theory I am not sure but can tell you that when the tablet I am typing this on dropped by £30 in price I bought it. So it did not wrk there.

  4. I reckon that at $105 a barrel and 130p a litre of petrol, as it was in March, that at $65 a barrel the price should be 107p. I am just considering the cost of the oil in that litre. I saw my first litre at 119.9p yesterday.

    Even with the other factors that might apply petrol ought to be a lot cheaper than it is?

    The government delayed a fuel tax rise so the oil companies have stepped in and done it for them?

    How come nobody says anything much? There was a loud clamour over the 3p proposed tax rise. This is a 12p delay.

  5. Hello Shaun ,

    so after 5/6 years of inflation causing my gas & leccy being 33% higher and food 36% I’m supposed to hang out the bunting and go shopping with all my new found wealth ?? pfft!!

    Who are these people kidding ?

    What on earth are they going to say when oil prices soar away into the stratosphere later next year ?

    Thats assuming we get a growth spurt . elections are due and Russia needs punishment , if speculation can put oil t0 147$ then it can crater it to 30$ ! Yes the market can be irrational longer than I can stay solvent .

    But I still think this price drop owes a lot to demand falling the Gerry Mandered GDP figures are pur fantasy with CPI being the Creative Price Index. Remember I said it was made up of everything that drops in price and nothing of those who rise so they could artifically lower the “inflation ” figure ? And is it still so that taxes go up by RPI ? hah !

    Forbin

    • Hi Forbin

      I take your point about there being a long series of fuel and price rises to reverse. However after it seeming almost endless it is nice to see a reversal even if it turns out to be only temporary.

      If the oil price fall turns out to be mostly demand driven then yes we will have a downwards lurch before the benefits kick in. Let us hope not as there is no way that we are ready for that (if we ever will be).

  6. Great news about food and fuel, Shaun.
    Now all we need is an increase in the cost of iPads, and we can give a GIRUY to TPTB!

  7. Oh I forgot to ask – did Lamont move to Russia ?

    that interest rate rise smacks of his work – with about as much effect !

    Forbin

    • Hi Forbin

      I don;t think so as Norman Lamont quickly u-turned (not entirely by choice) whereas the Bank of Russia has actually implemented 17% interet-rates today. I think the Ruble is at 68 to the US Dollar but it has been trading wildly today.

    • $100 & higher oil caused very high investment in new capacity. Supply has outgrown demand. As JW pointed out, even if some frackers go broke because they cannot repay the banks, another company will buy the infrastructure cheap and the oil will keep flowing.

      • OK so speculation is amplifying the reversal maybe, creating a tipping point and perhaps cheap credit and £150 has made oil companies over extend , and now comes the huge pull out operation , which was so damaging to the developing world in the 80’s.

        So many people explain markets as simply supply and demand but it’s difficult for me to believe price signals like this are due to supply and demand unless there was a huge change in one or considerable change in both – practically overnight.

        So are we so distant from a free market that this could be intended as political manoeuvrings , or is this a free market busting out of the ineffectual constraints of crony capitalism ??

        • Markets are imperfect, market participants don’t all act rationally. Markets can react dramatically and/or overreact.

          The oil market has participants like Russia, Saudi, Iran, Nigeria (and many others) where the rule of law is ineffective – so we can assume that anti-competitive practices and insider trading will not be punished. OPEC is a cartel, cartels are supposedly illegal in advanced economies.

          So I’d think that some market manipulation is possible but given the volumes traded – but the laws of supply and demand do cause wild fluctuations such as the falls in price we’re currently seeing

      • “…even if some frackers go broke because they cannot repay the banks, another company will buy the infrastructure cheap and the oil will keep flowing.” If you mean oil will flow continuously I doubt it. Of course the field & infrastructure will be bought cheap but any company will sit on the whole lot (rather like the land Trusts and Developers in UK) awaiting increases in price before commencing production. The first part of your statement is something I’ve believed for a long time i.e. a massive increase in supply vs anaemic demand growth = prices had only one way to go where they will stay until demand catches up.

        • and I meant to say – “or supply is reduced although the Saudi’s seem if not happy then content with the price at the moment as they fight to regain market share”

        • Hard to say, but I’d guess the infrastructure needs maintenance whether used or not. Buy at bargain basement and pump to make a modest profit or sit, whilst losing money and speculate ??

  8. Hi Shaun, as RPI is the only index I give real credence to any more I’m afraid for me disinflation for the UK is still some way off – if it ever materialises……

    • Hi Noo2

      Under my preferred consumer inflation measure which would also include asset prices and particularly house prices we are also a way away. If you put the house price numbers from Eurostat into CPIH then we push it back up to 1.6% and much nearer to RPI.

      Oh and such measures would reduce GDP growth too….

      Meanwile official measures describe a different universe.

  9. Thank you very much for telling us about the ONS publishing its quarterly owner-occupied housing series, Shaun. It seems that it is still a work in progress. The expenditure weights for new acquisitions and renovations are based on single-year weights when it would make more sense to use pooled three-year estimates as for the homeowner repairs series in the RPIJ. There is a zero expenditure weight arbitrarily signed to net acquisitions of existing dwellings. The renovations series would probably show more inflation in recent quarters if it were based on the new data series that ONS plans to introduce.
    The ONS hasn’t published the CPIH(NA) series to go with the OOH(NA) series. I assumed a 6% basket share for the OOH component and calculated a 2011Q1=100 series from 2011Q1 forward. The four-quarter change in the CPIH(NA) series only exceeds the CPI’s in 2014Q2 (1.8% vs. 1.7%) and 2014Q3 (1.6% vs. 1.4%). The official ONS estimates, if they publish them, may show slightly greater differences. I would have thought that the addition of an OOH(NA) component would make more difference than that. Still, it has to be a big improvement, as an inflation indicator, over the official ONS CPIH.

  10. If what I calculated was close to the truth, the four-quarter inflation rates for the CPIH(NA) series for 2013Q4 to 2014Q3 would be 2.1%, 1.7%, 1.8% and 1.6%. The corresponding inflation rates for RPI ex mortgage interest ex council tax are 2.8%, 2.8%, 2.7% and 2.5%. Even if you deduct 0.6 to 0.7 percentage points for the formula effect, you still come out with much higher inflation rates, and except for 2014Q3, none of them are under 2.0%. However, at least for the calculation of the OOH component, one would think this series would show a higher movement, since it includes stamp duty and there is no smoothing of house prices in the new acquisitions index, as there is in the house depreciation RPI. Maybe part of the problem is the much lower timeliness in implementing new expenditure weights for the OOH(NA) series, 9 quarters, as opposed to just 8 months for the RPI series.

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