The UK remains an inflation nation albeit one seeing commodity price falls

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.

Commodity Prices

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

Today’s numbers

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.

Comment

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.

https://audioboom.com/boos/3478863-notayesmansecon-joins-morningmoney-to-discuss-uk-inflation-data

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10 thoughts on “The UK remains an inflation nation albeit one seeing commodity price falls

  1. Hi Shaun.
    The Govt. cannot have it both ways, and in trying to do so, may end up getting neither.
    As long as the housing market bubble remains inflated, people are left with little or no disposable income to stimulate the demand required to fire inflation.
    The govt. must, however, support house prices in any way it can, as widespread negative equity will not only see home loans fail to perform, but will destroy the btl brigade who underpin house prices, taking the insolvent banks with them.

    Ergo, interest rates cannot rise before there is wage inflation probably into double digits, and that wage inflation is precluded by the lack of demand. That’s why Cameron, rather pathetically, begged for a payrise for the nation.

    The very thing which keeps the system going in the short term, high housing costs, is at the root of so many other problems.

    The very best that most ordinary people can hope for, is to see their wealth, their saving’s and their pension’s values, indirectly converted into equity in their homes, and that does NOTHING for demand.

    The pronouncements from the BoE on future interest rate rises are wishful thinking; this will not happen unless forced, and then we’re really in trouble.
    The inflation needed to devalue debt cannot, at least at present, happen.

    A downturn and the excrement really hits the air-conditioning

    • Hi therrawbuzzin

      We are back to the issue of whether house price rises are wealth gains or inflation. The powers that be like to press the case that they are wealth gains which is why they are excluded from inflation measures. That of course ignores first time buyers who know what inflation is.

      “In June 2015, prices paid by first-time buyers were 5.1% higher on average than in June 2014.”

      That is roughly double any average earnings increase.

  2. Hi Shaun

    Great article as always.

    I noticed one of the boe members waxing lyrical about the dangers of low interest rates. I assume that when the end game arrives, they can look back and point this out?

    thanks

    • Hi Anteos and thank you.

      I think that we are in the element of a type of game theory here. Bank of England policy makers make all sorts of promises about higher interest-rates but there is always a reason why not now! With one exception it is always just around the corner.

      Should they ease further they can partly quote Carly Rae Jepson ” I really,really,really,really,really” wanted to raise interest-rates but……..

  3. Hi Shaun

    I listened to your radio slot and found it very interesting.

    I agree re your point about CPI and housing costs and that, if we had anything remotely sensible in the way of housing cost input the index would be much higher.

    Now I agree that, in the context of the current policy, that would make the stance on interest rates rather odd – inflation would be higher and interest rates would follow would they not? Your implication is that if we had a more sensible way of measuring things then we would get a different policy stance. But would we? I actually think we have far too much debt around, that the whole economic system is a Ponzi scheme that relies on consistent and ever larger expansion of debt to keep the show on the road and that once this stops the whole thing will collapse; you cannot slowly deflate a Ponzi scheme.

    I think if we had a far higher inflation reading on the basis of a more sensible index we would still get the same IR policy simply because, in the present context, no other stance is feasible apart from owning up to the utter nonsense of the whole structure and you cannot expect TPTB to do that! After all Mervyn King “looked through” the higher inflation in 2011 and I have no doubt that were we to have a more sensible (and higher) CPI index we would get a 2015 version of “looking through”.

    • If we had housing costs included, then that would mean that the only inflation we had came from Government stimulation of that area.
      It would not mean wider demand, and would further undermine the public’s confidence, as we’d return to wage deflation.

      Far better the pretence that there is (practically) no inflation as it justifies expansionary measures which are proclaimed to be for the purpose of stimulating the economy, but are, in fact, means of giving further huge backhanders to banks.

    • Good points, well argued and therrawbuzzin finishes the argument off re the banks which are another evil and anti-social influence on the economy and populace.

  4. It was hugely unfortunate that the RPI CPI User Group Committee, in its response to the questionnaire on UK consumer price indices should recommend the RPI and not the RPIJ, as the preferred measure of inflation. In the same questionnaire the Committee claims that it favours John Astin’s and Jill Leyland’s proposal for a household inflation index to become the standard measure of inflation in the UK, just as I do. But John and Jill both embrace the RPIJ, not the RPI, as the best starting point to get to an HII. How can that Committee at one and the same time say it promotes an HII, and say that it would start with an index that consistently registers 0.6 to 0.7 percentage points more inflation than the RPIJ does?
    The leader of Praviy Sektor has a way better chance of being elected mayor of Donetsk than the RPI CPI User Group Committee does of convincing the ONS to re-establish the RPI as a national statistic. And that’s as it should be. According to the Committee “the ONS has relied on the weight of expert opinion in favour of Jevons rather than engage in a more detailed debate about the suitability of different formulae for particular circumstances”. The implication is that this is an issue much like the treatment of owner-occupied housing in consumer price series, with quite different approaches appropriate for different goals. However, this has never been the position of international manuals on the subject. The 2009 UNECE manual “Practical Guide to Producing Consumer Price Indices” plainly discourages the use of the Carli formula. There is no distinction made for a consumer price series used for upratings as opposed to a deflator of nominal incomes as opposed to an inflation indicator for a central bank. Its use is just flat-out discouraged.
    The Committee references the weight of expert opinion in influencing the decision by the ONS to develop an RPIJ but makes no mention of the weight of international practice. As the ONS study by Bethan Evans showed NOT ONE SINGLE COUNTRY THAT CALCULATES AN HICP USES THE CARLI FORMULA IN ITS NATIONAL CONSUMER PRICE SERIES. In every case, the countries use mainly the Jevons formula (e.g. the United States), the Dutot formula (Germany) or a combination of them (France). This is appropriate as they are both transitive formulas, unlike the Carli formula, which doesn’t even pass the time reversal test. If one extends comparisons to the 13 G-20 countries that don’t calculate HICPs, the story is much the same, but there are three countries that admit to using the Carli formula: India, Indonesia and Saudi Arabia. Not one of them is a country that the UK would normally seek out if it were looking for methodological guidance on producing price indices.

  5. Great column, Shaun, as usual.
    It is quite outrageous that rail fares should continue to be uprated based on rail fares, when it is no longer, and quite properly, considered a national statistic. It is also quite outrageous that gilt-holders would continue to be overprotected against the ravages of inflation. The government really should have introduced legislation when the RPIJ was introduced in March 2013 that would phase out indexation of gilts based on the RPI and substitute indexation based on the RPIJ.
    [Sorry I had cut-and-paste problems. The balance of my comment has already been posted. I very much enjoyed your BBC interview too. I hope it is the first of many.]

    • Hi Andrew and thank you

      The UK system is essentially to use RPI when it is to individuals detriment such as rail fares but to use CPI when it is to individuals gain such as the adjustment of tax thresholds. Although I did hear a broadcast today on BBC Radio 5 Live where the minister concerned (Claire Perry I think) equated inflation with the RPI which is an issue I have raised at the CPIRPIUserGroup before.

      I need to read the User Groups reply in more detail but the arguments for RPI have had something of a rennaisance over here. If only there had been a debate in the first place which was a proper one rather than the forcing of CPI and now CPIH down people’s throats! CPI with proper housing costs and a few other changes might well have got quite a bit of support.

      I too welcome the HII as a potential way out.

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