As 2014 moved into 2015 we saw one of the manias of our times develop and by this I mean the way that economists and the mainstream media started to scream and shout “deflation”. This was presented as one of the economic evils of our time in spite of the fact that below target inflation would of course be welcomed by consumers and workers and that an economic boost would be provided by a better trend for real wage growth. Indeed they seemed to have an outbreak of amnesia about the fact that the UK had just gone through a period of above target inflation. Odd that because there is plenty of economic literature arguing that inflation “shortfalls” should be made up which means that for symmetry surely so should overruns. The “deflation nutters” also ignored the fact that the UK economy was growing solidly and that if we looked at sectors of the UK economy unaffected by the oil price fall inflation seemed to be pretty much as before.
What has changed?
The “deflation nutters” have seen their economic bogeyman fade somewhat as 2015 has progressed. The price of a barrel of crude oil has risen by 14% in 2015 if we use the Brent Crude benchmark and it is up around US $20 since it hit its low of US $45 in Mid-January. So whilst in annual terms it still has an effect on inflation numbers due to the large previous fall in month on month terms we are now seeing rises. This is why the UK inflation bulletin has told us this.
motor fuels: prices, overall, rose by 1.6% between March and April 2015 compared with a fall of 0.1% between the same 2 months a year ago.
This poses an immediate problem for the “deflation nutter” theory where falling prices escalate and then we see falling wages and falling economic output in a downwards spiral. It is also a bit awkward that wages seemed to have picked up a little according to the latest data and of course other commodity prices such as Iron Ore have stabilised and rallied a little.
Also the UK has been experiencing this all along from the sector which remember is around 4/5 ths of our economy.
The CPI all services index annual rate is 2.0%, down from 2.4% last month.
Falling yes but as you can see it is on target and chugging along (not very) nicely.
The ordinary citizen will of course have struggled with the concept that buying cheaper fuel and energy was bad for them.
The deflation mania has gathered in force in the media after today’s data release.
The Consumer Prices Index (CPI) fell by 0.1% in the year to April 2015 compared to no change (0.0%) in the year to March 2015.
The UK Office for National Statistics has chosen to ramp up the shock effect of this.
This is the first time the CPI has fallen over the year since official records began in 1996 and the first time since 1960 based on comparable historic estimates….. Based on comparable historic estimates, the last time the UK saw consumer price deflation was in the year to March 1960, when prices fell by an estimated 0.6%.
The media has lapped this up ignoring the “comparable historic estimates” part. Presumably they are unaware of the fact that some of the required data was not collected as back then we used the Retail Price Index such that if it was an airplane it would have no tail fins. What could go wrong?
Oh and the Retail Price Index (RPI) went negative in 2009 for a few months which you might think merits a mention. Actually this was a really big deal as it is my view that the Bank of England panicked over this development as it slashed interest-rates and commenced QE (Quantitative Easing) in response. Back then the Bank of England was a “deflation nutter” which of course turned out to be an inflationary episode. How quickly we forget!
Problems with the deflation mania
Our old inflation measure called RPI gives a completely different answer.
The all items RPI annual rate is 0.9%, unchanged from last month.
So the UK establishment has achieved a success by getting the media to accept an inflation measure that is consistently lower and the scale of the “success” has increased as the gap is currently 1% per annum.
Also there is the issue of UK house prices which do not fit at all well with any deflation theme.
UK house prices increased by 9.6% in the year to March 2015, up from 7.4% in the year to February 2015.
No longer is this just a London driven development.
Excluding London and the South East, UK house prices increased by 8.1% in the 12 months to March 2015.
As you can see there is raging inflation in the UK housing market which is the largest purchase that home owners are ever likely to make. How does that go with inflation which is officially negative? It does not as they exclude house prices from the numbers and have gone to a great deal of effort to do so as we were supposed to be aligning with Europe but are ignoring Eurostat’s advice that the housing version of CPI should include house prices. Presumably on the grounds that it gives too big a number.
Actually inflation is on the rise again
If we look at the numbers we do see signs of a turn higher in the UK inflation rate as shown below.
The all items CPI is 128.0, up from 127.6 in March
The underlying index has in fact been rising since January when it fell to 127.1 and since then it has risen by 0.3 in February,0.2 in March and now 0.2 in April. So if that were to continue it would not be too long before we found ourselves facing inflation back at its target level in yet another “surprise”.
A technical issue called Easter
A downwards push was provided by the timing of Easter this year and the impact it has on airfares.
transport services: prices, overall, rose by 2.4% between March and April 2015, compared with a larger rise of 7.9% a year earlier. The majority of the downward contribution came from air and sea fares. Price changes for these fares between March and April vary notably year on year, with the timing of Easter a likely factor.
So we arrive at what I consider to be peak deflation mania for the UK. If we review the situation strategically we see that the oil and commodity price falls have stopped for now and the UK Pound £ seems unlikely to keep rising at the rate it has been. The currency issue is complex because of the impact of the strength of the US Dollar but the UK Pound £ has been very strong against other currencies. Tactically I note that last May prices fell by 0.1% on the month before so we arrive at a period where the annual rate of inflation will get an upwards nudge unless anybody has spotted price falls this month.
One slightly odd result of the various machinations is that Euro area inflation at 0% is for once higher than that of the UK. So should it be the Bank of England with negative interest-rates and QE? Actually I think that this is a result of the UK Pound £’s strength but of course the Bank of England may not and could spring a Riksbank style surprise.
Meanwhile those who are buying a house or facing the inflation in the services sector will be singing along with the Who.
I said I can’t explain, yeah
You drive me out of my mind
Yeah, I’m the worrying kind, babe
I said I can’t explain
Which will morph into the perfect song for inflation statistics.
Then I’ll get on my knees and pray
We don’t get fooled again
Don’t get fooled again
Apologies for the early version of this which got published by mistake.