Today sees the publication of the latest set of UK inflation figures which after the drop seen in December are likely to be the subject of much media attention and speculation. This was added to last week by Bank of England Governor Mark Carney at the Inflation Report.
Inflation is at its lowest level since the introduction of Inflation Targeting two decades ago. It will likely fall further, potentially turn negative in the spring, and be close to zero for the remainder of the year.
Mark Carney for the first time publicly added these measures to his toolkit.
expand the Asset Purchase Facility, or cut Bank Rate further towards zero.
A bit different to his past promises of Bank Rate rises which of course have not materialised is it not? Regular readers will be well aware that in the current environment (think what Sweden has just done) my view is that a Bank Rate cut is much more likely. Indeed in response to a question about deflation Mark Carney went even further.
but if we ever were in a situation where we needed to provide additional stimulus, we have many options – we have many options to provide that stimulus,
by which I mean we’re going to have a period where headline inflation is low – very low – for most of this year
This of course led to speculation in the media about deflation and its consequences. Also it did not fit well at all with another of the claims of Governor Carney on that day.
Helps support real incomes – we expect the strongest real income growth in over a decade actually.
What again? Was my first thought as we have been promised this sort of thing before as Mark Carney runs the risk of being like the boy who cried wolf. Actually later he said that he expected wage growth to be weak in the early part of 2015 but we have become used to such contradictions now. Indeed these days even the mainstream media seems to have cottoned onto the forecasting failures of the Bank of England.
One thing that recent history has told us is that the Bank’s
forecasts are unlikely to pan out exactly the way you expect them to.
If you consider that deflation is as much a product of the mind ( a bit like Monsters of the Id from the film The Forbidden Planet) then Mark Carney has just scored an own goal as he has just exacerbated the issue. As we go forwards this has implications for monetary policy as I do not believe the statement below.
Our inflation target is symmetric. We care as much about inflation below target as above.
I have written many times before about asymmetry of policy and I do not believe the above statement. Ironically the should the recent bounce back in oil prices continue (Brent Crude is at US $62 per barrel) then Mark Carney has raised fears about the future unnecessarily.
The Strong Pound £
This may surprise as a paragraph heading but the recent rally in the Pound against the US Dollar which has pushed it towards US $1.54 has reinforced the strength seen against the Euro which has seen it rise at times above 1.35. The effect on inflation is mostly through the US Dollar as most commodities are priced in it but there is the old Bank of England rule.
Bank of England Rule
This involved a rule of thumb between the effective exchange rate and the level of Bank Rate. Over the past year the rise in the exchange rate is equivalent to a 1% rise in the level of Bank Rate according to that rule.
There is much to consider and the misinformation has begun at the UK Office for National Statistics which has confused the concepts of “grew” and “fall”.
The all items CPI annual rate is 0.3%, down from 0.5% in December.
It might be best if they get a job which does not involve taking care with numbers. Oh hang on! Also if we stick with number-crunching then this is being badly reported.
This is the lowest 12-month rate on record.
The headlines are screaming “record low” missing out the bit that such an index is fairly new in economic history terms and the back calculations of past numbers have been challenged at the Royal Statistical Society. Oh and that the headline Retail Price Index went negative as the credit crunch hit (falling to -1.6% in June 2009) and is currently running at an annual rate of 1.1%.
The main movers will be very welcome to shoppers and consumers.
The average petrol price fell by 8.5p per litre between December 2014 and January 2015 to 108.3p. The average diesel price fell by 7.3p over the same period to 115.6p. Petrol is now at its lowest price since November 2009 and diesel since February 2010.
Food & non-alcoholic beverages: prices, overall, fell by 0.7% between December 2014 and January 2015, compared with a rise of 0.2% between the same two months a year earlier.
The former should be no surprise at all. Also this is for the ordinary person and not the central bankers and their acolytes as of course movements in such prices are to be “looked through” as opposed to important prices such as those for I-Pads.
We had outright disinflation in January in terms of the underlying indices.
The all items CPI is 127.1, down from 128.2 in December…..The all items RPI is 255.4, down from 257.5 in December.
However do not get pulled in too much by the media hype as the UK’s propensity for institutionalised inflation is still ticking along.
The CPI all services index annual rate is 2.4%, up from 2.3% last month.
What happens next?
If we look up the inflation chain we see evidence of further disinflationary pressure on the way.
The output price index for goods produced by UK manufacturers (factory gate prices) fell 1.8% in the year to January 2015. This is a record fall for the index (data begins 1997) and is down from a fall of 1.1% last month.
The overall price of materials and fuels bought by UK manufacturers for processing (total input prices) fell 14.2% in the year to January 2015, compared with a fall of 11.6% in the year to December 2014.
Accordingly the musical theme is much more “Ice Ice Baby” than “The Heat Is On”.
What about house prices?
The UK establishment has gone to great effort to keep these out of the inflation numbers. This includes abandoning its past objective of aligning ourselves with Europe as we are now ignoring its procedures.
UK house prices increased by 9.8% in the year to December 2014, down from 9.9% in the year to November 2014.
Indeed as the London boom/bubble fades the rest of the UK seems to be in hot pursuit of its rises.
Excluding London and the South East, UK house prices increased by 7.4% in the 12 months to December 2014.
These numbers are behind the times as we wonder what the impact will be of the mortgage rates falls which have generated what appear to be genuine record low mentions will be.
Perhaps also they want to keep this sort of thing under wraps. From the Council of Mortgage Lenders and the emphasis is mine.
Buy-to-let loans totalled 17,300 in December, unchanged from November but up 18% compared to December 2013. The total value of these loans (£2.5bn) was up 4% month-on-month and up 32% compared to December 2013.
Perhaps the rumours that the new supposedly business based version of the Bank of England Funding for Lending Scheme was funding a more corporate buy-to-let are true.
I have covered a lot of ground today so let me say that I am someone who welcomes the fall in inflation. I covered the theoretical issues in the post below which is edging is way around as I note that Edward Hugh has linked to it from A FistFul of Euros today.
However whilst the falls in food and fuel are extremely welcome for the ordinary person I counsel caution in the way that “record lows” are being bandied about as they are not far off being of the record low since yesterday variety.
Meanwhile the UK establishment via the (arise Sir) Paul Johnson report suggests that we use CPIH (where H=Housing) as our inflation measure. So as house prices surge it will no doubt be signalling that? Er no.
The all items CPIH annual rate is 0.4%, down from 0.6% in December.
Actually that is perhaps its best ever effort as it moves from complete disaster to disaster. Whilst there are points of debate spiritually I agree with the letter written to the National Statistician by the President Royal Statistical Society about this.
we feel the recommendations fall short in a number of areas and some are simply wrong.