Today gives us another look at the developing inflation situation in the UK and in a linked development the first dose of reality for the fantasies aired in the forecasts in the UK Budget last week. The reason they are linked is that lower inflation estimates were used as a way of improving the numbers last week especially around future pensions costs. This may of course be further confirmation that like the image of the blind old lady turning the wheel of fortune in the play King Lear the inflation wheel is beginning to turn. Also today we get actual public finance numbers rather than official and “independent” OBR forecasts which are lauded and then turn out to be wrong again.
Before I come to the detail I wish to express my sympathy for the people of Belgium and Brussels today after this morning’s events which continue to develop as I type this. good luck to those of you who read this website there.
Inflation is slowly returning
Let me remind you of this from the St.Louis Federal Reserve which I posted on the 2nd of this month.
oil prices would need to fall to $0 per barrel by mid-2019 in order to validate current inflation expectations.
In reality we have seen rather a different pattern as the crude oil price has risen from the lows that we saw. The price of a barrel of Brent Crude Oil is just over US $41 as I type this as opposed to the just under US $29 it fell to in mid-January. So year on year we have a 25% fall replacing the circa 50% falls we previously had. Also the UK Pound £ has been singing along to Alicia Keys and been “fallin'” since the US $1.59 of the middle of June 2015 which has now been replaced by US $1.43 so we are also facing a lower exchange-rate to buy the oil with.
If we look at petrol prices at the pump they do not fully reflect this yet as they have nudged higher from the low of the beginning of February at 100.8p for a litre of diesel. We also still have the impact of the fall in diesel prices to match petrol but the impact is beginning to wear off.
As we look forwards there are factors which we would expect to raise inflation in the future. The first is the introduction of the National Living Wage which in itself at a time of reduced real wages is welcome. The danger is that it sets off inflation which will erode any gain. As of next month it will be 10.8% higher than a year ago and according to the Resolution Foundation will apply to around 2.7 million workers and affect 3 million others via differentials.The Centre for Retail Research thinks it will have this impact.
It will increase inflation by 1.1% per year to 2020,
So a welcome development will have unwelcome side-effects.
The second influence only seems to have bad effects which is the impact of Smart meters on UK fuel bills. I have long struggled to see how they help and the best I could manage was that they might transfer some energy use into the early hours. The problem? Well my mum’s tumble dryer caught fire some years ago and I note that other have done so in recent times so there is a danger risk. Also those living in flats like me hardly want noisy equipment turning on in the night. So how will it help? It is certainly expensive. I sympathise with the thoughts of Paul Lewis who presents BBC’s Money Box on Radio 4.
Smart meters will cost customers £11bn and bring few benefits……….The purpose of smart meters is to get consumers to manage the load rather than the grid through time of use tariffs
It all seems very Dunian (Harkonnen) and with potentially penal overtones doesn’t it?
According to the cheerleaders at today’s conference merely by existing they will save £6 billion by “behaviour changes”. It used to be that things responded to us now we have to respond to them.
Let me look at it from the other side today and what I mean is the clearest evidence of inflationary pressure in the UK.
UK house prices increased by 7.9% in the year to January 2016, up from 6.7% in the year to December 2015……On a seasonally adjusted basis, average house prices increased by 0.9% between December 2015 and January 2016.
This is of course why first-time buyers need so much official “Help” these days. Even with mortgage-rates being forced ever lower by the Bank of England these prices are not affordable for many.
Average mix-adjusted house prices in January 2016 stood at a record high of £306,000 in England, £174,000 in Wales, £195,000 in Scotland and £153,000 in Northern Ireland
Let us see how our official consumer inflation measures pick up on this.
The Consumer Prices Index (CPI) rose by 0.3% in the year to February 2016, unchanged from January 2016.
Oh well never mind we have a measure recommended by the National Statistician John Pullinger and a man treated by the media with awe over the past few days Paul Johnson of the Institute of Fiscal Studies. How is it doing?
In February 2016, the 12-month rate (the rate at which prices increased between February 2015 and February 2016) for CPIH stood at 0.6%, unchanged from January 2016.
Not so good then especially as we note that this is the result of it all.
Owners occupiers’ housing costs increased by 0.1% between January and February 2016,
The house price bubble and hence the credit crunch never existed!
As you can see there never was much of a problem according to our national statistician. Has the credit crunch been a mirage? Houses are in fact rather cheap……
Meanwhile the “discredited” Retail Prices Index continues to reflect reality more accurately.
The RPI 12-month rate for February 2016 stood at 1.3%
The RPIJ is at 0.6% as our official statisticians try to get rid of something they introduced only 3 years ago. The shame of it! If you wish to see the other side of the debate Andrew Baldwin made a case for reforming it in the comments on March 10th.
The Public Finances
On a grim day let us open with some welcome news.
Central government received £53.6 billion in income in February 2016. This was around 5% higher than in the same month last year, largely due to receiving more income tax and taxes on production such as VAT and stamp duty.
However the underlying position is this.
So far this financial year (April 2015 to February 2016), the public sector has borrowed £70.7 billion. This was £14.0 billion lower than at the same point in the previous financial year.
So better but slow progress considering the economic growth we have seen and the traditional scape goat used by the media ( lack of tax growth) is not available as you can see above. Part of the reshuffle is the way that Bank of England income gains from its QE portfolio have influenced the interest and dividends section.
interest & dividends decreased by £1.7 billion, or 9.5%, to £16.1 billion
It was only last week that the hapless OBR forecast borrowing of £72.2 billion for the whole financial year. Maybe with the help of a few more ruses like this we might even get there!
On the back of progress we have made in strengthening the bank’s balance sheet in recent years, I am pleased that we are today able to repay the UK Government £1.193 billion to finally retire the Dividend Access Share.
Progress? RBS? You would think we owned 80% or something…..Prince got it right.
Oh why, oh why?
Sign o’ the times, unh
As I pointed out on the 16th of February the inflationary runes have shifted. Once the oil based disinflationary pressure fades from good prices we will be concentrating on this.
The CPI all services index annual rate is 2.4%, up from 2.3% last month.
Added to this we have the institutional inflationary pressure I have described above. If we feed that into the Public Finances then a lot more RBS style ruses will need to be found. After all the meddling surely we should be running out of one-offs?! Of course as Prince has already reminded us they are perhaps the clearest Sign O’ The Times.
Meanwhile I note that the English language is under attack again. From Gabriel Sterne.
Unconventional central bankers cant help treading on political toes says
@jmackin2 Surely time for less independence
Less than none? I was intrigued to find out that Mark Carney was “appointed by non-political process” as I thought that the Chancellor George Osborne courted and then appointed him. The UK Treasury Select Committee seems to agree with me.
The Chancellor himself interviewed the six candidates “deemed appointable” by the panel. He then made his recommendation to the Prime Minister, who made the same recommendation to the Queen, who approved the appointment.
Oh and whilst house prices are rising overall there are issues in Scotland (last month) and now Wales where this was recorded -0.3%. Thoughts?