Today we receive the last UK consumer inflation report in 2015 albeit that it takes us only up to the end of November. What we now know is that this has been an extremely docile and indeed in my view welcome year for UK consumer inflation which has been pretty much zero on the official measure. The Consumer Price Index was 128.2 in both November and December last year and was 128.3 in November this. The downwards push provided by oil and commodity prices gained a second wind towards the end of the year and so we have seen a disinflationary burst which will affect all of 2015 and seems set to influence the spring of 2016 too.
What about oil and commodity prices?
The last fortnight or so has seen yet another plummet in oil prices such that a barrel of Brent Crude Oil costs US $38 now. The post OPEC meeting disarray means that apart from the dip in January then such a price will see us experience annual oil price falls again especially in late spring and early summer when this year we saw Brent Crude push above US $60 per barrel. So rather than being in Taylor Swift terms “like,over” in fact we will see a reduction in oil price based disinflationary pressure as we stand. If you want some perspective you can see that in terms of diesel prices at the pump we have had disinflationary pressure for some time. End November 2012: 141 pence, 2013: 138 pence, 2014: 128 pence, 2015: 110 pence.
A similar pattern can be seen from commodity prices which have also seen something of a second wind on the downside. The CRB (Commodity Research Bureau) Index is at 380 now as opposed to the 438 at which it started 2015, and that does not give the full picture as it bounced to 430 in May. So since then we have been slip-sliding away. The overall fall has been since the peak of 505 in May 2014 to give an idea of scale. In the headlines we see this as reports of new lows in prices for basic commodities like Iron Ore and Copper.
This morning’s data release has confirmed the trends described above.
Factory gate prices (output prices) for goods produced by UK manufacturers fell 1.5% in the year to November 2015, compared with a fall of 1.4% in the year to October 2015.
So we see that the immediate prospect is for more good price disinflation and what do we see further up the chain coming our way?
The overall price of materials and fuels bought by UK manufacturers for processing (total input prices) fell 13.1% in the year to November 2015, from a fall of 12.3% in the year to October 2015.
As you can see the heat remains on and returning to the trends for oil and commodity prices seems set to remain with us into early 2016.
Those who look at the data will note that we now have core PPI numbers. This is you think about it are perhaps the silliest effort on this front we have seen. Let us try to measure trends for manufacturers costs whilst excluding the main costs…. what could go wrong?
Official Consumer Inflation
This nudged its way out of outright disinflation in November.
The all items CPI annual rate is 0.1%, up from -0.1% in October.
The main factors in this were that petrol and diesel prices fell more slowly than last year, prices of spirits and wines rose and the Insurance Premium Tax rose from 6% to 9.5%.
We also see that we have a dichotomy in our inflation position or for football fans a story of two halves. The first half is in line with the updates above.
The CPI all goods index annual rate is -1.9%, up from -2.1% last month.
Whereas the second half begins to return us to my theme that the UK is basically an inflation nation, or if you prefer has a strong tendency towards institutionalised inflation.
The CPI all services index annual rate is 2.4%, up from 2.2% last month.
Clothing and Footwear
This has been a problematic area for the UK Office for National Statistics for some time and the issues were used as an excuse for the establishment attack on the RPI. However just like with the rentals series the pack of cards tends to behave like well a pack of cards.
This is the first fall in prices between October and November since official records began in 1996 and follows the largest September to October price increase on record. It continues the trend seen since the summer of atypical monthly price movements……..
The average person is not convinced
Only last Friday we were told this by the Bank of England’s own inflation expectations survey.
Asked to give the current rate of inflation, respondents gave a median answer of 2.0%, compared to 2.1% in August.
So lower but hardly overall disinflation and if we look ahead?
Asked about expectations of inflation in the longer term, say in five years’ time, respondents gave a median answer of 2.9%, compared with 2.8% in August.
So we see that they are not convinced by the official consumer inflation numbers and we see a reason why the Retail Price Index continues to retain support.
The annual rate for RPIX, the all items RPI excluding mortgage interest payments (MIPs) index, is 1.1%, up from 0.8% last month
The modernised version remains above CPI too.
The all items RPIJ annual rate is 0.3%, up from 0.0% last month.
The RPI is now 1% above the CPI (0.91% to 2 decimal places) which poses its own questions not only for the inflation target which was only moved by 0.5% when the latter replaced the former. That as I have pointed out often in the past was a type of loosening of monetary policy.
These are the two words which must not be mentioned along the lines of the rules of Fight Club in UK inflation measurement. We get to see why just by observing the numbers they provide.
On a seasonally adjusted basis, average house prices increased by 0.8% between September and October 2015……UK house prices increased by 7.0% in the year to October 2015, up from 6.1% in the year to September 2015.
Plenty of inflation here if we bothered to officially look! If we look at the change in the credit crunch era then the official line that it is pure wealth is simply laughable.
In October 2015, the UK mix-adjusted house price index increased by 0.1% from the previous record level witnessed in September 2015 to reach a new record of 220.1 (Figure 2). The UK index is 18.7% higher than the pre-economic downturn peak of 185.5 in January 2008.
The UK inflation experience has been extremely favourable over the past couple of years or so. First we had the ongoing appreciation of the UK Pound £ -often hidden by the rise of the US Dollar- which began in March 2013 and more latterly we have had the fall in oil and commodity prices. However if we bother to look there are signs of inflation in the services sector and the housing market which are very familiar from UK economic history. Thus if the Bank of England applies the 18 month lag rule for monetary policy it has some thinking to do.
Yesterday Deputy Governor Minouche Shafik gave a speech which was not a lot of help.
So when the time does come to raise Bank Rate, it will be important to retain the flexibility to change course if needs be, either by tightening policy more quickly than originally envisaged or by being prepared to loosen again.
That more or less covers everything! Oh and did she mean the credit crunch here?
The flexibility the MPC has had to pursue its target independently since 1997 has brought great benefits.
As we wait to see if Janet Yellen and the US Federal Reserve back up their hints and promises I note that for the Bank of England there is a choice to be made too. Are they targeting inflation two years ahead or not?
Regular Readers will recall that earlier this year Paul Johnson of the IFS recommended that the UK use CPIH (where H= a watered down version of housing costs using rents) as its main inflation measure. How is that going? On Twitter not too well as the only non-official mention is pointing out it is a bad measure.
Hold that knighthood…….