Today is a day that is unique in the current structure of UK inflation targeting. Whilst we have had more than a few incidents of inflation soaring to more than 1% above the target of a 2% annual rate of Consumer Price Inflation this is the first incident of it falling more than 1% below it. So Bank of England Governor Mark Carney will have to write an explanatory letter to the Chancellor of the Exchequer George Osborne. The details of this are shown below.
the Governor of the Bank must write an open letter to the Chancellor explaining the reasons why inflation has increased or fallen to such an extent and what the Bank proposes to do to ensure inflation comes back to the target.
The second section is of course not a little problematic right now as I shall come to in a moment. After all policy is extraordinary loose with an “emergency” Base Rate of 0.5% and a stock of £375 billion of Quantitative Easing or QE so putting a foot on the accelerator finds it already depressed. Also it poses an issue for the claimed Bank of England policy of Base Rate rises being on the horizon. Regular readers of this blog will be aware that since the Christmas before last I have been arguing that Base Rate cuts are as likely as rises.
A Change of Situation
It used to be the case that the letter would be published today but last year Chancellor Osborne changed the system.
I shall expect you to send an open letter to me, alongside the minutes of the Monetary Policy Committee meeting that followed the publication of the CPI data and referring as necessary to the Bank’s latest Inflation Report and forecasts, covering the same considerations set out above.
There was also an explanation as to why such a change was being made.
The reason for publishing this letter alongside the minutes is to allow the Committee time to form and communicate its strategy towards returning inflation to the target after consideration of the tradeoffs.
That is an odd reason to my mind as after all the MPC should be aware of what its policy and plans are at all times! It would do if I had the job. It gives the impression that a move away from the inflation target is a “surprise” when in fact it is a fact usually known some time ahead. the other alternative is that the Chancellor has little faith in the skills and abilities of the MPC.
The driving force of all this
If we look back the UK establishment made quite an effort to push UK inflation higher. To the usual pack of administered and institutional inflationary policies such as rail fares was added the Base Rate cuts,talking down of the value of the UK Pound and then other measures such as the QE discussed above by the Bank of England. However as time as passed we remain with a higher price level but lower annual inflation.
Then in the summer of 2014 there was something of a game changer as oil and commodity prices began to fall and in some cases plummet. This has continued this morning with the price of a barrel of Brent Crude Oil falling below US $46 for a 4% drop today so far and a 57% drop on a year ago. This has put considerable downwards pressure on many inflation measures around the world including in the UK. Whilst the weight of the price of oil is only around 4% of our consumer inflation measures directly it then feeds into many other prices starting with domestic fuels.
The all items CPI annual rate is 0.5%, down from 1.0% in November.
The all items CPI is 128.2, unchanged from last month
In essence there were price rises last December but overall there were none in the UK this year so the annual rate of inflation dropped substantially. If you buy something tangible then there is further good news for you in the detail of the data.
The CPI all goods index annual rate is -1.0%, down from -0.2% last month.
The CPI all goods index is 121.0, down from 121.3 in November
If you are looking for examples of institutionalised inflation they seem to have tucked themselves away in the services sector.
The CPI all services index annual rate is 2.3%, down from 2.4% last month.
When Bank of England Governor Mark Carney received this news yesterday they must have put him off the Bank of England tea trolley. By contrast UK consumers and workers will welcome both lower annual inflation and in some places outright lower prices.
And the beat goes on
We can keep that track by the Whispers playing in the background as we look upstream in the UK inflation data.
The output price index for goods produced by UK manufacturers (factory gate prices) fell 0.8% in the year to December, compared with a fall of 0.6% last month.
Even further upstream we see this.
Total input prices fell 2.4% between November and December, compared with a fall of 0.7% between October and November.
The overall price of materials and fuels bought by UK manufacturers for processing (total input prices) fell 10.7% in the year to December, compared with a fall of 8.2% in the year to November.
With numbers like that perhaps we should switch to “The heat is on” by Glenn Frey. The major driver at the input level has been the fall in crude oil prices which has amounted to 35.9% over the year to December. However UK consumers will be pleased to note that the home food category has fallen by 12.3% as well.
Whilst there is a shortage of activity from UK domestic fuel suppliers there has been quite a lot of activity in petrol and diesel prices at the pump. UK petrol prices have fallen 16.5% over the past year to the current 108.9 pence and diesel prices have fallen 16% to the current 130.36 pence. As a fair bit of this has happened recently then there is more downwards pressure on the way for the headline inflation measures of the UK.
There is another way
Today would look very different under the old system.
The annual rate for RPIX, the all items RPI excluding mortgage interest payments (MIPs) index, is 1.7%, down from 2.0% last month.
No open remit letter from Mark Carney would be required and the headlines would not be screaming deflation. Indeed the gap at 1.2% between the old and the new measures is now so wide that supporters of the old system have a case for wheeling out the word debasement. As we are reminded on the London Tube system “Mind the Gap”. I have argued before that gaps of this size between the old and the new system with of course the new system always giving a lower number do pose questions for the credibility of the system.
What about Paul Johnson and his report?
It was nice to see my argument against this embarrassment reach the broadsheets. Today we are told this.
The all items CPIH annual rate is 0.6%
So for once it is above the headline CPI albeit marginally. A driver is this.
The OOH component annual rate is 1.1%, up from 1.0% last month
But this is yet another odd result from this measure as you can see below.
UK house prices increased by 10.0% in the year to November 2014, down from 10.4% in the
year to October 2014.
The UK housing market was slowing in November and other numbers make us think it slowed again in December. But finally our guide is picking a faint hint!
When Paul Johnson is ennobled can he be the Lord of Circuses and Clowns?
Already there is an extraordinary amount of both misinformation and disinformation being produced by the media about these numbers. I have challenged the BBC several times today about them quoting CPI numbers from days before it actually existed. These are official simulations which have been challenged at meetings I have attended at the Royal Statistical Society. So far the worst effort is show below.
UK Inflation falls to lowest since records began
The deflation drumbeat is picking up although you may note that overall prices are unchanged rather than falling, so far anyway. Going forwards there will be further pressure but January last year saw falls too so the picture is complex in the short-term. However if we look for some perspective I note that under our old system inflation (RPIX) would be 1.7% and we would be welcoming it. Have we been mislead and cheated and has there been a Sir Humphrey Appleby style plan all along? If so those who concocted the plan have got it all wrong as it backfires on them. Still as ever it could not possibly be the fault of anybody in authority……..