A central theme of 2015 has been the emergence of disinflationary pressure created by the fall in commodity prices and in particular the falling price of crude oil. However if we look back at the UK experience in the credit crunch era we have received a reminder this morning that this is a recent development and that before then we were afflicted by persistent above target consumer inflation. From the TUC (Trades Union Congress).
The analysis shows that between 2010 and 2015 fares increased by 25 per cent in real terms, while average pay went up by just 9 per cent.
There is a little bit of hype in the use of “in real terms” as they rose by 25% would do! However this reminds us of a long-running theme of mine that the way that the Bank of England let consumer inflation overshoot in 2010 had a deflationary impact on the UK economy. In the UK rail fares are fixed relative to RPI inflation and its surge to over 5% in late 2010 helped push rail fares up by 7.1% in 2011 and 4.8% in 2012 compared to a wage rise totalling 4%.
Thus commuters saw quite a sharp fall in the buying power or real value of their wages in this area and of course it is quite a substantial portion of budgets for some. Such developments put a squeeze on spending elsewhere which is why an inflationary issue had a deflationary impact. Also you may not that the often criticised RPI is apparently good enough for use on areas where we pay the bill! Otherwise in official terms is a discredited “not to meet the required standard for designation as National Statistics” although index-linked bonds based on it are good enough for the Bank of England pension scheme too as they make up 91.4% of it.
In essence the force driving commodity prices lower has been the drop and in some cases plummet in the price of commodities and in particular crude oil. As I type this the price of a barrel of Brent Crude Oil is below US $49 per barrel meaning that it is some 52% lower than a year ago.
We can add to this falls in other commodity prices. If we look at the CRB (Commodity Research Bureau) Index it peaked at just under 505 in early May 2014. Whereas it ended Monday at 410.8 meaning that over the past 12 months it has fallen by just over 15%.The UK has seen the media looking at the campaign by farmers to raise the price they get for milk and that is not just a UK issue.
Export prices for whole milk powder have fallen 63 percent since February 2014,
I doubt it will come as a great surprise that the statement comes from the Reserve Bank of New Zealand. Personally I find the idea of milk as a commodity a little strange but that’s the world in which we live. Overall the price of basic foodstuffs (including butter but not milk) has fallen by 15% over the past year.
Contrary to the media scaremongering the vast majority of people will welcome lower prices for food and energy. From Robert Peston of the BBC.
Clue to pace of next year’s interest rate rises in inflation stats today. Prices may be down again, tho heaven forfend we call it deflation.
One thing that the milk price issue does remind me of is that with all the subsidies ( the EU Common Agricultural Policy for a start) the area of farming is a shambles in terms of economics. Also the UK needs to up its output along the lines of the wartime Dig for Victory campaign.
This morning with China’s stock market having fallen by 6% and this being reported by the Financial Times we see that the heat is on.
Copper price bends to a fresh 6-year low
Back on the 14th of July I pointed out that this months inflation numbers would be affected by a drop last July.
Should this continue we may see another zero reading for July but for a negative one we would need a solid push as on a monthly basis UK CPI fell by 0.3% last year meaning there is a largish hurdle to vault.
As it happens we saw this.
The Consumer Prices Index (CPI) grew by 0.1% in the year to July 2015
The main driver here was that clothing prices fell more slowly this year than last. An interesting development as measuring clothing inflation has produced a lot of angst and woe in the UK in recent years. If we move to the other measures we see a continuing gap between them and CPI.
The RPI 12-month rate for July 2015 stood at 1.0%
In July 2015, the 12-month rate for RPIJ stood at 0.4%
One Space Oddity at a time of falling oil price was this.
The upward contribution came from most transport fares – notably air fares.
It seems that lower oil prices can be added to the list of things which drive air fares higher! With the rail fares news above we seem to be taking quite a few hits from the transport sector.
What happens next?
If we look upstream we see continuing downwards pressure from producer prices.
Factory gate prices (output prices) for goods produced by UK manufacturers fell 1.6% in the year to July 2015……..The overall price of materials and fuels bought by UK manufacturers for processing (total input prices) fell 12.4% in the year to July 2015.
The subject which must not be mentioned!
This is of course asset price inflation which in the UK mostly manifests itself via house prices.
UK house prices increased by 5.7% in the year to June 2015, up from 5.6% in the year to May 2015.
The “deflation” scares would soon disappear if they were in the official numbers and regular readers will be aware that I have argued for this for some years now. It would have CPI at around 0.8% in my measure.
As to where house prices are rising it is less of a London (Bubble) thing.
Excluding London and the South East, UK house prices increased by 5.2% in the 12 months to June 2015.
But there ae regional issues as Wales barely rose (0.8%) and Scotland fell (-0.6%)
The Bank of England
Apparently life at the Bank of England is so dull – after all Bank Rate has not been changed for over 6 years – that one member has taken to offering health advice.
While you probably won’t want to move from your comfortable spot in the sun, if you ignore the warning signs, you may have a painful sunburn that evening.
Perhaps it is sunnier in Massachusetts USA where she continues to live than it is in the UK! However Kristin Forbes did get to the economy eventually in her article in the Daily Telegraph.
real spending power has increased at its fastest pace over the last months than has occurred since 2007.
If you look at the rail prices data above you might reasonably think that she has set quite a low bar here but what is she really telling us? We get more Open Mouth Operations on the subject of UK interest-rates.
Therefore, interest rates will need to be increased well before inflation hits our 2pc target. Waiting too long would risk undermining the recovery.
However we get a slightly different emphasis to the “sooner rather than later” mantra of Governor Carney. She lists the current disinflationary issues (China,oil etc..) and tells us this.
All of these factors give us a bit more time before inflationary pressures build in the UK.
However in a case of mixing up your message she also tells us this.
Just as with all holidays, the current break in inflation will pass quickly.
If she actually believes that then she should have voted for a Bank Rate hike at the last meeting.
My headline is justified by the following data which deserves much more of a public airing in the media.
The CPI all services index annual rate is 2.4%, up from 2.2% last month.
Yes what is around 79% of our economy sees inflation chugging along on its not very merry way. We saw rises in transport as discussed above and communication as well as recreation and culture services. The other side of the coin is shown by goods inflation driven by commodity prices.
The CPI all goods index annual rate is -1.8%
In the mixture they roughly offset in the official CPI numbers if we look at the last few months. Unlike central bankers I welcome this as the rises in wage growth mean that we are getting out first real wage rises for some time. Looking forwards August saw a 0.4% month on month rise and with lower fuel prices and particularly a five-year low in diesel prices we can reasonably expect the “deflation” mania to return.At which point the media are likely to sing along with Ray Davies and the Kinks.
It’s a state (state)
Of confusion (whooooh).
We’re in a state (state)
Of confusion (whooooh).
I don’t know whether I’m coming or I’m going.
Before the figures were released I did an interview on Share Radio about them.