Today gives us another look at the state of play on inflation in the UK as we receive the last data set for 2015 and in essence the conclusion will be that there wasn’t any. Or to be more specific that the Consumer Price Index was 128.2 in December 2014 and 128.5 in December 2015. Of course that is according to the official headline number which conveniently excludes the area where we have seen a fair bit of inflation! However 2016 has opened with more signs of the commodity price disinflationary pressure that has pushed consumer inflation lower. So we know that early 2016 will be more of the same instead of a period where consumer inflation indices bounce and return to what we regard as normal.
Commodity prices
It comes to something when an oil price where Brent Crude Oil is just over US $29 is seen as a bounce back rally! However even such a change leaves them some 40% lower than a year ago as pressure remains in terms of disinflation. If we look to wider commodity markets we see a similar pattern as Bloomberg reports.
The Bloomberg Commodity Index (BCI) fell 4.2 percent last week and touched the lowest level since its inception in 1991. Last year was the fifth straight year the index has fallen, a prolonged price slump that is a reversal of the previous decade, when growth in Asia fueled a surge in prices, dubbed the commodity super cycle.
At 74.16 this morning the BCI is down 28% on a year ago and already down over 5% in 2016 so far. It is these pressures (oil and other commodities which have pushed goods prices so much lower in the UK and elsewhere. This has had this impact on the official data.
The CPI all goods index is 118.4, down from 119.0 in November. The CPI all goods index annual rate is -2.1%, down from -1.9% last month.
The problems of the UK Pound £
The offset to all of this has been a phase of weakness for the currency as the UK Pound has dipped four cents or so in 2016 leaving it around US $1.43 or 5% lower than a year ago. This is not just a reflection of US Dollar strength as we note that 1.36 versus the Euro has been replaced by 1.31. Putting it another way the effective or trade weighted index which rose above 94 on several occasions in 2015 is now 87.8 meaning that we are seeing quite a loosening of monetary policy that on the old rule represents the equivalent of a 1% cut in Bank Rate over the past month.
How might the Bank of England respond?
The newest member Gertjan Vlieghe opened in downbeat form by discussing this.
My particular focus today will be on “3 Ds”: debt, demographics and distribution of income.
Which in case you were unsure of his views lead to this.
I will argue that changes in the 3 Ds are interacting powerfully to create an environment where a given level of growth might be consistent with substantially lower interest rates than in the past. This environment might persist for years, even decades.
Are those “lost decades” Gertjan? Anyway he was keen to ram his message home.
Moreover, the fact that, at very low interest rates, policy cannot respond as effectively to bad news as it can to good news also makes me more patient before raising rates.
Many though will think that nearly seven years of unchanged interest-rates has required quite bit of patience already. Also the section which refers to possible higher interest-rates looks very wishy washy by comparison.
So policy rates, when they rise, may not need to rise by much over the coming years. These medium-term considerations make me relatively more patient before raising rates.
In short should we see a situation where growth shows signs of ” slowing further” we could see two votes for a Bank Rate cut now as Gertjan joins Chief Economist Andy Haldane. We also see a potential cause of the recent weakness of the UK Pound as markets adjust not only to some weaker numbers but also Bank of England Open Mouth Operations.
Today’s numbers
A little nudge higher was seen.
The Consumer Prices Index (CPI) rose by 0.2% in the year to December 2015, compared with a 0.1% rise in the year to November 2015.
The cause was rather interesting as after all shouldn’t airlines be one of the main beneficiaries from lower crude oil prices? I have highlighted the particularly odd bit.
Air fares increased by 46% between November and December 2015 compared with 19% between the same 2 months a year earlier. This is the largest November to December price increase since 2002, although it is important to note that air fare prices are highly variable.
This returns us to my theme of the UK being a nation prone to institutionalised inflation as we also wonder whatever happened to cuts in domestic heating and lighting bills? They seem to go up with a higher oil price but not down with a lower one.
What is coming over the hill?
We see that the producer price numbers continue to push downwards on UK inflation trends.
Factory gate prices (output prices) for goods produced by UK manufacturers fell 1.2% in the year to December 2015, compared with a fall of 1.5% in the year to November 2015.
Also that is true even further up the price chain.
The overall price of materials and fuels bought by UK manufacturers for processing (total input prices) fell 10.8% in the year to December 2015, from a fall of 13.1% in the year to November 2015.
The weakening of the trend was only temporary if we note the falls in commodity and oil prices so far in 2016.
An inconvenient truth
The letter I wrote to the McDonnell Review – The UK Shadow Chancellor – pointed out that CPI and RPI (Retail Price Index) inflation measures are becoming increasingly divergent. The beat goes on in this regard.
The annual rate for RPIX, the all items RPI excluding mortgage interest payments (MIPs) index, is 1.3%, up from 1.1% last month.
Even the newer version continues to run consistently higher than CPI.
The all items RPIJ annual rate is 0.5%, up from 0.3% last month
So there are flickers of inflation to be found on our old measure and in essence right now they are to be found in the UK services sector.
The all services RPI annual rate is 2.9%, up from 2.3% last month
As you can see the there is no inflation mantra must seem rather odd to those in the services industry and troublingly that inflation rate seems to be eroding and maybe eliminating any real wage gains.
House prices
This is of course the game changer for UK inflation measurement which is presumably why the CPI “forgot” to add owner-occupied housing costs. In spite of hopes for some and fears for others than house price growth would slow we can see that “the heat is on”.
On a seasonally adjusted basis, average house prices increased by 0.8% between October and November 2015….UK house prices increased by 7.7% in the year to November 2015, up from 7.0% in the year to October 2015.
That is of course far higher than consumer inflation and not far off treble wage increases as we wonder again about the “housing affordability” the Prime Minister promised on the BBC the sunday before last. Indeed more problems for that mantra as well as the there is no inflation one emerge from the data below.
In November 2015, the UK mix-adjusted house price index increased by 0.6% from the previous record level witnessed in October 2015 to reach a new record of 221.5 (Figure 2). The UK index is 19.4% higher than the pre-economic downturn peak of 185.5 in January 2008.
Oh and the higher house prices are no longer being driven by central London if this from LSL Property Services is any guide.
But property values in Central London fell by 8.7% on average during 2015, dragged down by higher Stamp Duty
Comment
If we look at the official data series we see a binary position where “the heat is on” in the services sector but it is “ice,ice” baby in the goods sector. This seems set to continue in early 2016. However what is missing is an adjustment for the fact that the housing market is seeing asset price inflation. If we put it in we would have CPI at between 1% and 1.4% which would change the picture and indeed monetary policy substantially. The “deflation” media scares would be holed below the waterline and we would see a situation in fact which was favourable. In case you are wondering about the 0.4% gap there are even issues with the weighting which highlights the bad place that UK inflation measurement has found itself.
Sadly last night we discovered that Glenn Frey of the Eagles was Already Gone in what is already a grim year for musicians. Still we are left with some great songs. RIP Glenn.
“Relax, ” said the night man,
“We are programmed to receive.
You can check-out any time you like,
But you can never leave! “
Notayesmanseconomics's Blog 
New build prices up over 14%, supply remaining limited. Help to Buy is delivering exceptionally well for our house building cartel!
Quite Paul.
And all funded by a 5%+ fiscal deficit future generations will apy for.
Ironic really,paying through the nose to price yourself out of a home.
Hi Shaun
It would seem likely that we will
have long term low IR’S with little growth
but will TPTB be able to hold
onto the reins.
It would appear that savings rates
are increasing, I know that the santander 123
account is not new but there are a few offering
around 1.5%. Do you think this will be a trend
and is it because the banks will finally have
to compete for our money irrespective of low
base rates?
Glen Freys death is very sad,but lets celebrate
his wonderful gift first seen at “The Troubador”
Until the sun comes up on the Santa Monica
Boulevard.
JRH
Hi JRH
I agree that we should do our best to concentrate on what we received as in his songs rather than have just lost. As to savings interest-rates I have had people contacting me saying they have been falling and there is some backing from the one-year fixed rates around. Even the Bank of England thinks so.
“the rate for households’ new time deposits decreased by 7bps to 1.48%.”
Perhaps you have been lucky although I note that it thinks a typical savings rate is around 1.5% which I am not so sure about.
Hi Shaun
Carney states that interest rates won’t go up until he sees inflationary pressure and doesn’t have to follow the Fed. Well if oil rebounds he will see that pressure a lot sooner than he expects. These people spout such utter c**p.
I think the central London house price movements are for over £1m property and the sale volume has reduced substantially, thus leading to an overall increase in London prices.
Please don’t keep banging on about how a fall in world oil prices should somehow result in a drop in domestic electricity prices. There is Zero electricity produced by oil-fired generators in the UK. And oil indexation of gas contracts is long gone, Of course reduction in world coal prices could have affected retail prices, but that is a different story.
Hi JW
Whilst the discussions on here have highlighted the problems with Forward Guidance in general he has been given the benefit of the doubt. However even the most credulous must be starting to wonder should “sooner rather than later” from June 2014 or “around the turn of the year” from 2015 occur to them. Or of course they may have a friend who followed his advice to remortgage because interest-rates were going higher.
As to oil and gas prices have they completely decoupled do you think? UK natural gas prices fell a fair bit in 2015.
Hi Shaun
I forgot to add that a report out says that defined benefit pension schemes in the FTSE 250 are now £81bn under water. This is mainly because of ( rather silly) accounting policies, if interest rates increased to about 3% these deficits would ‘disappear’ as if by magic. Think of the new investment opportunities available instead of companies being forced to stuff billions into perceived pension holes.
Why oh why is there no joined up thinking?
This was,I believe, why the Fed raised rates primarily.There isn’t much inflation in the USA but there’s a massive pension problem.
Carney apparently is rocking around today saying no rate rise for years.Tell that to pension funds creaking under the weight of their liabilities.
In twitterspeak the reply is simply +1
Every time you post on this issue Shaun,I can’t help but be unable to get around the fact that virtually noone is talking about this issue -away from hushed corners of the web.
The silence from the MSM is deafening,but then if you’re funded by bank/EA advertising,there’s no real incentive to delve too deep.
Same with imputed rents……….
So many academic economists,yet such a narrow debate about inflation targeting being best at 2% or 4% or 3.5%……wood for the trees etc
Hi Dutch
There is a natural human tendency to reject change and this is added to by the fact the UK establishment does not want reality in inflation measurement. So as the main proponent of change in the UK you might think that my views would be aired in the FT or on the BBC? Nope as I have never been asked to discuss the matter by either of them. Perhaps the economics editor of the FT Chris Giles does not want to be reminded of the day where his RPI bashing went down so badly at the Royal Statistical Society. As for the BBC I do not know.
I appreciate opportunites at newer places such as Share Radio and City AM where I have been able to expound on my views to a different and wider audience.
Hi Shaun
I would expect prices to rise as the first effects of last years oil price fall disappear from the index and the continuing service price inflation carries on unabated.
Also, as you say, the fall in sterling will not help (now at just over $1.42) so one would expect inflation to go up this year.
However, I don’t think the BOE will raise rates just because of inflation data; after all they “looked through” the much worse rise in 2011 and did nothing and I think they would do the same again. In fact Carney has just said don’t hold your breath for IR rises.
I think they will only increase rates if they are forced to by a marked fall in sterling and, even then, there will be a reluctance for the simple that we cannot afford it; almost any increase in rates will tip the whole economy over. I think this will happen anyway but the BOE don’t want to be blamed.
They are clearly, and willfully, blind to asset prices but there must be a level at which they are unsustainable; that is due to the inability to service debt. At this point they cannot increase and the Ponzi collapses. Where we are in this I don’t know but there must be such a point where this simply cannot go on.
You’re right Bob in that the only thing that will make them move is a sterling crisis.
They’ve stared down inflation in prices and assets without blinking.
But the bubble they’ve blown has made the whole economy a hostage to the fortunes of the banking sector.Raise rates and thar she’ll blow.
As it is,I’m not sure savers are ready for negative rates so quite where they’re going to go during the next recession I don’t know.
Dutch
I cannot see NIRP as a practical proposition. The Swiss banks have been very reluctant to implement it at the retail level and I think so would UK banks. I think if it were tried the peasants would indeed revolt and it would take us to the Alice in Wonderland position where speculation on assets was an official policy. Quite absurd.
so mark carney has denied rate rise ……..
so its an official denial then ……
Forbin
as for the conclusions , shaun , seems the UK is still heading down that hill of cheaper I-Pads and TVs but you cant afford a house or the fuel to heat it
gonna be great when they do revalue the rates , wont it ?
” ah squire , you single bed starter flat is worth a million quid now…. yes,yes, cant afford the rate rise , eh, squire? better move to a cheaper location ……… Somalia is looking good right now ! ! ”
Forbin
Ps: will the country be better off when only millionaires can afford to live here?
Hi Forbin
Being a Kate Bush fan I prefer to run up hills and athletics involves a lot more running up hills than down them too. More seriously as to the official denial I think it is instead a confession of what the real policy has been all along. Those who have remortgaged are sadly in danger of being treated like “Muppets” if we use the language of Goldman Sachs sales staff. Where did Carney work before again?
Officially yes but of course we wont be here to challenge that.
Great column, Shaun, as usual.
Since today is Pentecost for Orthodox Christians (unfortunately my family had to get rid of our Christmas tree yesterday, as our garbage pickup is on Monday) it is worth asking whether the inclusion of Christmas trees in the CPI would have raised or lowered the inflation rate. Christmas trees seem to be excluded now, although the item listing for garden plants and flowers is vague enough there is an outside chance they are included. They are definitely part of the US CPI, where rigorous probability-proportional-to-size sampling virtually guarantees that they will be priced.
The CPI for garden plants and flowers showed an annual decrease of 1.4% in December 2015, i.e. it dragged the UK inflation rate down. I would be interested in whether your readers thought that prices for real Christmas trees were higher or lower this year. I couldn’t find any price information that was comparable between December 2014 and December 2015. However, Deborah Stone of the Express noted that British growers would almost certainly face much stronger competition from German and Danish imports this year, so my guess would be that prices for real trees were down. Therefore, the inclusion of Christmas trees in the CPI would have created an even more severe decline in the measured inflation rate for garden plants and flowers, rather than pushing it up.
http://www.express.co.uk/life-style/garden/623456/Why-your-Christmas-tree-should-be-British-grown
Hi Andrew and thank you
If only I had known in advance about your question as a company sets up shop in Battersea Park pre Christmas and sells them. My mum did buy a new tree but it was more of the plastic fantastic variety. I will tweet the question and see if I get a response.
Thank you very much, Shaun. I would be interested in anything you can find. As Keith Seabridge thought, Christmas trees are part of the output agricultural price index for the UK, and Mr. Graham Burns of the UK Department for Environment, Food and Rural Affairs has provided me much useful information about the plants and flowers series of which it is a component. This is a producer price index for UK farmers, not a consumer price index, of course, but might serve as a proxy for UK consumer price movements. Unfortunately, the price for the holiday 2014 season had to be carried over from the holiday 2013 season, so even the annual movement of farm prices for UK Christmas trees in December 2015 will always be a matter for debate.
Hi Shaun
Driving through Auckland the other day I noticed a billboard that asked –
” Why are you rushing home? It isn’t going anywhere – except up in value.”
I guess Auckland real estate agents haven’t heard about falling dairy prices; or maybe they only listen to Yazz.
Hi Eric
Well at least Auckland billboards open in a type of existential style.Most up here are far less classy. Was Yazz a hit down in NZ?
There was some news up here about lower dairy prices and as I have just tried to track it back down the main entries are from a friendly island in the South Pacific! The supermarkets up here promised to pay better prices to farmers for milk and I wonder how that is going? The price of 4 pints has been £1 for quite some time an example of price competition which stuck like glue.
Found it,from the BBC
“The milk price paid to farmers is to be reduced by dairy company Müller by 1p per litre.
The cut to 21.35p reflected a further weakening in the market caused by “very high levels of supply from farms coupled with poor demand for dairy commodities,” the firm said.”
Hi Shaun, try this:
https://www.globaldairytrade.info