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.
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 This is not just a reflection of US Dollar strength as we note that 1.36 versus the Euro has been replaced by 1.31.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.
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.
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
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! “