There is much to consider in the world of inflation and inflation trends in the UK but let me first open with something which is eating away at the credibility of official UK statistics. From the UK Statistics Authority on the 22nd of January.
I note that an indication of the substance of Wednesday’s Labour Market Statistics release was shared by the Department for Work and Pensions (DWP) with up to 300 people, through a social media network ahead of the publication of the report by someone who is not approved to have pre-release access to the statistics.
This is a serious matter as nothing is more corrosive to financial markets than a lack of trust and once lost trust is a very difficult thing to regain. The structure of the UK system is that there is a list of people such as the Prime Minister and the Governor of the Bank of England who receive important statistics 24 hours early so they can be prepared. However the numbers have changed and now include Special Advisers or Spads. Somewhere on this road there seem to have been more than a few incidents of some traders being more equal than others or an “early wire”.
I raise this because this morning there have been suspicions of such action from those trading the UK Pound. Now here is the thing this still matters if they are wrong because the situation is that such complaints are believed. Of course it is even worse if they are true.
Official inflation trends
Yesterday we learned what the German Bundesbank thinks of the prospects for inflation in 2016. From Bloomberg.
Consumer-price growth in Europe’s largest economy will now average approximately 0.25 percent in 2016, down from a December prediction of 1.1 percent, the Frankfurt-based central bank said in its monthly bulletin published on Monday. For 2017, the forecast was cut to 1.75 percent from 2 percent.
This matters as whilst the 2016 change is eye-catching it is the 2017 one that really matters as at the policy horizon inflation is below target. So even the Bundesbank is hinting at a policy easing and we can expect the European Central Bank to do the same as a lower oil price and higher Euro will do the same to it. Oh but we do get an implied critique of official forecasts and forward Guidance as the ones which have just been slashed were only compiled in December.
Much of the analysis above applies to the UK as well and we saw a hint of that yesterday as one Bank of England member folded like a deck chair. From Reuters and the emphasis is mine.
Speaking to the Wall Street Journal, McCafferty, who dropped his lone call to hike interest rates earlier this month, said the central bank was not “out of ammunition” if it needed to fight a renewed downturn by cutting interest rates or restarting its bond-buying programme.
Will down be the new up?
This is particularly awkward for Ian McCafferty who has now twice started series of votes for an interest-rate rise before collapsing like a pack of cards. He is living up to his old City nickname of “as expected” which as you will be aware becomes a nickname when it invariably is not true.
Today’s inflation data
This links into the current driver of inflationary trends pretty much directly. From the Office for National Statistics.
The all items CPI annual rate is 0.3%, up from 0.2% in December…… The largest upward contribution to the change in the 12- month rate came from prices for petrol, which dropped by 1.9%, compared with a larger fall of 7.3% between the same 2 months a year ago. A similar, though less pronounced, effect was seen for diesel, with prices falling by 4.0%, compared with a fall of 6.0% a year ago;
Yes it was a follow-on effect of lower oil prices although we see that they in fact fell more slowly than last year rather than rose. So it was the oil price which is in the news again today after its recent strong rally in percentage terms albeit of course on a much lower price. The OPEC news as I type this is summarised by Neil Hume of the Financial Times as follows.
In summary then Russia and Saudi Arabia are willing to freeze production at or near record levels. Fantastic news for glutted market.
We will see how that plays out but there is another way of looking at today’s inflation numbers.
The all items CPI is 99.5, down from 100.3 in December.
If you want something that looks even more disinflationary then there is this sector.
The CPI all goods index is 98.5, down from 99.3 in December…….The CPI all goods index annual rate is -1.5%
The other side of the coin is services inflation which is at 2.3% although even there the underlying index fell from 101.5 to 100.7.
It is rarely explained that one of the reasons that UK inflation has gone to a lower trajectory is that the definition was “improved”. Rather than a complex explanation let me show you the difference between the old official measure of inflation and the new one.
The all items CPI annual rate is 0.3%…..The annual rate for RPIX, the all items RPI excluding mortgage interest payments (MIPs) index, is 1.4%,
As you can see there is a 1.1% difference which if you look at the economic world right now makes an enormous difference. If you want precision well here it is.
The difference between the CPI and RPI unrounded annual rates in January 2016 was -1.02 percentage points,
This is an important issue as it drives at how we account for housing costs and in particular owner-occupied housing costs which are a particularly important issue in the UK. You see the official CPI measure does the equivalent of sticking its head in the sand on the issue. Whilst there are problems with the RPI I would point out that even the new version is moving away from CPI.
The all items RPIJ annual rate is 0.7%, up from 0.5% last month.
At least some of the “deflation” paranoia exhibited in so many places over the past year or so is due to a lazy ignorance about a type of stealthflation style change to how it is measured.
Here is the nub of UK inflation measurement where there is plenty of inflation to be seen which many will think is exactly why official statisticians ignore it.
UK house prices increased by 6.7% in the year to December 2015, down from 7.7% in the year to November 2015.
Not quite as fast as last month but still around treble the rise in real wages we expect. So a factor in affordability continues to decline which is of course why first time buyers need so much “Help”. The Resolution Foundation has looked at this from another direction today.
The new official effort is to use rental costs and then neuter them as much as they can this leads CPIH to be 0.6%. Mind you it has been at best a shambles.
CPIH is currently undergoing re-assessment
I noted this in today’s numbers which highlighted a different pattern.
There was a 0.2% decrease in average house prices in Scotland (down from a 1.2% increase in the year to November 2015).
If we look deeper we see signs of a decoupling from the pattern in the rest of the UK.
the index for Scotland in December 2015 (226.7) is 6.8% below the record level witnessed in March 2015 (243.2) – Scotland prices are now 1.7% below the pre-economic downturn peak of June 2008 (230.6)
Is this the impact of the falling oil price on Aberdeen or something deeper?
The underlying inflation picture continues apace. Good prices have been driven lower and have sucked the official inflation measure down to around zero. On the other side of the coin services inflation ( CPI 2.3% or RPI 2.4%) continues to be over the target. For us to remain here oil and commodity prices need to continue to fall which is possible if you look at OPEC but the large falls are behind us.
So you would think that central banks would be adjusting for higher inflation at the policy horizon. But in fact they are doing the reverse as we see the Bundesbank in effect giving Mario Draghi licence to ease again and Ian McCafferty the supposed hawk at the Bank of England talking of interest-rate cuts. Forward Guidance anyone?
Meanwhile under the radar something is happening to Scottish house prices at a time where it is hard to think of monetary policy being more supportive.