Today is inflation day in the UK or if we look at the official consumer inflation numbers may be disinflation day as we face the prospect of another negative inflation reading albeit one of only -0.1%. This means that the spell of low and at times negative headline inflation is persisting for longer than we would have expected from a one-off disinflationary burst. A major factor in this as I discussed only last Thursday is the reality that commodity prices have not only remained weak but have been falling again. As I shall discuss below we are continuing to see multi-year lows for a list of major commodities in what looks like a second disinflationary burst.
The product which was long considered as a diagnosis provided for the world economy is seeing its price drop into the doldrums again.
Copper plunged to the lowest intraday price since May 2009………The metal used in power cables and wiring lost as much as 2.1 percent to $4,590 a metric ton on the London Metal Exchange before trading at $4,654 by 4:51 p.m. in Singapore, while futures slumped as much as 4.3% in Shanghai.
If we move to the way that the copper price is reported in the Financial Times then on Thursday I pointed out it had fallen into the US $2.21s and now it is in the US $2.12s. It is now some 30% lower than at this time last year. Also it was far from feeling lonely in its decline.
Zinc fell as much as 2 percent, while lead dropped as much as 1.5 percent and nickel lost 1.7 percent.
They seem to have missed out tin so let me add that to the list for them.
We see a by now familiar beat being hammered out here too.
The front-month contract for U.S. hot-rolled coil steel futures traded on the New York Mercantile Exchange is down nearly 40 percent year-over-year:
We are seeing the consequence here of production rising but facing demand which stalled and in 2015 so far has actually fallen. This of course is related to the slow down seen in China and is one of the biggest signals of it. In the UK we have faced the grim reality of steel operations closing and jobs being lost as we find that we are simply unable to compete at such prices.
All of these price falls are likely to have been compounded by the way that basic metals were collateralised and financialised in the Chinese boom. We must be seeing more than a few margin calls contributing to the decline but we cannot say exactly how many.
Even through a period where you might expect a rise in prices due to the terrorist outrage in Paris we see the price of a barrel of Brent Crude remaining below US $45. Thus it is 43% lower than a year ago and contributing to a lack of inflationary pressure.
Today’s consumer inflation numbers
The headline will no doubt be presented by places such as the Financial Times as deflation although of course it is disinflation.
The Consumer Prices Index (CPI) fell by 0.1% in the year to October 2015, the same fall as in the year to September 2015.
We have had two months in a row of outright disinflation here which the Financial Times is reporting as not happening for 50 years. Perhaps they have redacted 2009 from their memories as the Retail Price Index went negative for eight months in a row back then. Also the CPI only began in 1997 and there are genuine issues with backcasting it decades before it ever started. But if you want some real perspective there is this from Ed Conway which raises a wry smile.
Between 1660 and 1914, when the gold standard was in place, annual UK inflation averaged zero per cent.
The world ended right? There was no advancement surely?
What drove today’s numbers?
Pleasingly for those of us who eat there was some good news.
Food and non-alcoholic beverages, where prices, overall, fell by 0.4% between September and October this year compared with a rise of 0.1% between the same 2 months a year ago.
Sadly the news for chocoholics was not so good as has been highlighted on here. Also there was something which was a result of a past move. Yes, university tuition fees rise from the past but this time to lower inflation.
Education, where prices, overall, rose by 3.6% between September and October this year compared with a larger rise of 7.9% between the same 2 months a year ago. The downward contribution came principally from UK and EU student tuition fees,
Not so good if you wanted to buy some clothing or footwear I am afraid although the statisticians in a refreshing burst of honesty say the pattern has changed there and we may be misreading it.
The gap with the Retail Price Index
The headline gap narrowed slightly but is still very wide if we consider that we used to be told (2010) that the “formula effect” was only 0.1%.
The RPI 12-month rate for October 2015 stood at 0.7%,
However the new version or RPIJ has noticeably narrowed the gap between itself and the headline CPI over the past few months.
In October 2015, the 12-month rate for RPIJ stood at 0.0%, down from 0.1% in the year to September 2015.
The other side of the inflationary coin
Whilst there are downwards forces on inflation it is not correct to say that they are all-encompassing. I am not a fan of switching to core inflation measures ( core CPI is 1.1%) as central bankers love to as that ignores the fact that food and energy are vital and hence core for anybody who eats and wants to keep warm in winter. However we get a hint that the UK remains an inflation nation from the numbers below.
The CPI all services index annual rate is 2.2%,
After when the weightings are next updated the service sector will nudge nearer to and may even reach four fifths of our economy.
The UK establishment went to a lot of effort to keep house prices out of the UK consumer inflation measures. Today we got another reminder of why.
UK house prices increased by 6.1% in the year to September 2015, up from 5.5% in the year to August 2015…..On a seasonally adjusted basis, average house prices increased by 0.8% between August and September 2015.
These days the rises are broader based across the country than they once were and if you think of the fact that real wages have fallen by between 5% and 6% depending on the measure you use then these numbers are chilling.
In September 2015, the UK mix-adjusted house price index increased 0.3% from the previous record level witnessed in August 2015 to reach a new record of 219.8 . The UK index is 18.5% higher than the pre-economic downturn peak of 185.5 in January 2008.
Regionally the leaders are shown below.
The largest annual increase was in the East at 8.4% (down from 8.8% in the year to August 2015) followed by the South East (7.4% increase in the year to September 2015, unchanged from August).
London is sending out a multitude of signals right now but on this measure annual price growth rose from 5.4% to 7.2%.
If we look at UK wage growth and compare it to inflation we see that this disinflationary phase has provided a boost to real wages and hence to the economy via consumption. I first pointed out this theme back on January 29th and a direct link to it is below.
Of course some individual sectors such as oil and gas and latterly steel have caught the chill winds of this move and been affected adversely but overall we have gained. Indeed those who I described as “deflation nutters” have had a bad 2015 as wage growth has risen and inflation in the service-sector has remained above target. Indeed they have had to completely ignore the housing market where prices and rents continue to rise.