The return of inflation to the UK will pose yet another issue for the Public Finances

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£ has been singing along to Alicia Keys and been “fallin'” since the US $1.59 of the middle of June 2015 which has now been replaced by US $1.43 so we are also facing a lower exchange-rate to buy the oil with.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.

Today’s numbers

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 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?





19 thoughts on “The return of inflation to the UK will pose yet another issue for the Public Finances

  1. And followling on that Rates here have gone up 3.5% ( oh I see they dont count that in CPI – how convenient ) along with water rates ( hey get me another supplier – eh ? you cant? )

    indeed Shaun , institutionalize inflation never went away

    go help us when inflation picks up

    and if RPI is so bad , can we have HMG pensions and tax rises set to CPI , no ? I wonder why …..


    • Hi Forbin

      There seems to be a connection between not being in the CPI basket and prices for it rising quickly doesn’t there? Yet as you say those who impose CPI often seem to apply RPI to themselves…..

  2. Hi Shaun

    Presumably the inflation you mention will not include the recent fall in the £ so, if this is the case, then this will make things worse in the near future (or better if you are a central banker) and compound the effect you mention.

    As regards the public finances more inflation will certainly make them worse but I’m of the view that it is the looming growth slowdown or worse that will really blow a hole in them and expose the fiscal charter to be nothing more than the PR trick that it is.

    Another thing I see you mention is that a seasonal adjustment is applied to some of the house price statistics and this is, to me, another potential source of misreporting. Surely any seasonal adjustment must be based on the past and may be an unrealistic figure which only serves to confuse. Would we not be better to stick to a simple 12 month MA as a guide to trends and leave it at that?

    • Hi Bob J

      The Fiscal Charter will require an acceleration of economic growth for it to work whereas as you say we seem to be slowing. As to seasonal adjustment of house prices I can see the point because there are strong seasonal trends in the pattern. But I agree that both seasonally adjusted and non seasonally adjusted ones should be produced especially as seasonal adjustment in more than a few areas has come under challenge.

  3. Hi Shaun
    Picked a great day to fly back to Europe. I know I shouldn’t think this, but can’t help it, I hope Merkel is ‘happy’ today.
    Actual inflation never went away, it was just removed from the meaningless stats produced. Now even those stats are going to have a job staying low.
    ‘Smart meters’ are being introduced for only one reason, and its nothing to do with effiiciencies of meter reading. What you describe as influencing consumption by price signals has existed for decades with Economy 7 tariffs etc. Spot pricing has been tested previously without any indication that the ‘man in the street’ has any inclination ( or time) to take any notice of the price signals. Smart meters allow the supply to tranches of residential customers to be either reduced or turned off. It used to be conjectured that this could reduce the costs of network reinforcement which could keep tariff prices down. Again this was found to be ‘not proven’ in studies and experiments. I am talking about technology available at least 20 years ago.
    The reason they are now being introduced is part of overall demand management and reduction. When the last coal-fired stations close, and there are not enough gas and nukes to pick up the demand the electricity system will swing quite dramatically almost on a daily basis from excess energy that is uncontrollable from ‘renewable’ sources ( when the wind blows and the sun shines, and on almost every weekend and summer months) ; to catastophic shortages ( when the wind does not blow, especially on cold, cloudy weekdays) . The system requirements for voltage support, load following, impedance etc cannot be met by the remaining mainly uncontrollable power sources.
    The ONLY answer to this will be demand management requiring removal of demand from residential customers on a geographic basis dependant on localised balances. A much misunderstood component of electricity supply is its localised basis. Even at ultra high voltages , ‘energy’ does not travel far. There always needs to fairly local demand/supply balances. As most renewable supply is not located close to large residential demand, those balances are not well served by those supplies even in a well organised system. In the future UK system , with insufficient controllable supply, there will be almost constant inbalance.
    How society will adjust to never being certain that the flick of a switch will produce energy, is unknown. Along with much else apparently, we will look back on the 60 years or so after WW2 as a ‘golden age’ for electricity supply.

    • some of us remember the 1970’s

      even had a local transformer blow near by – the resultant power outage completely ky-boshed my kids ….

      if there are going to be outages – and a I agree with your summary – then the political blow back will be harsh !

      however our current skin deep greens will not learn until it happens = flying cow manure and fans

      and we know how joe public will behave – remember the truckers strike ? people were filling wheely bins with petrol and wondering why they melted….. (sighs)


    • Hi Rowland

      I did a piece earlier for Share Radio on the UK current account deficit and importing a load of generators would only make it worse. We could plant some more corn though so Forbin has a ready supply of the raw material…

      • He won’t have the power to pop it.
        Had the high pressure system we’ve seen over the UK in the past fortnight, happened a month earlier, it would have shown the shortages of capacity in the grid now, with shutdowns in businesses already negotiated, to counter the problem.

  4. Lost on this one Shaun. Given that higher inflation = higher tax revenue why will it present issues for public finances, or are you looking solely at gilt prices and interest in isolation?

    • Hi Noo2

      I was thinking of the other side of the balance sheet or public expenditure. the new forecasts were able to reduce expenditure via lowering inflation forecasts ( some £2 billion was “saved” on public-sector pensions for example). However if inflation picks up again so will expenditure and another ruse will be exposed above the waterline.

  5. Hi Shaun,

    The night rate is far too blunt a mechanism to signal meaningful incentives for smart meters.

    A brave move would be to deregulate pricing – peaks could be flattened this way and consumers given economic incentives to buy grid aware devices. While rates are equal regardless of grid demand there are no consumer incentives to invest in “smart” meters or grid aware appliances.

    • Hi ExpatInBG

      It sounds a great idea especially with new technologies becoming available. However if areas did it what would happen to the National Grid? I also remember JW telling us that it would not work but cannot recall the exact explanation. Maybe I am taking the idea too far…

      • The short answer is that renewable + battery is much more expensive than coal. This has to be paid for …. in higher electric bills. And we’d need a much more energy frugal existence with the current solar/wind technology alone.

        I think Hawaii is investing in Vanadium flow batteries & solar, due to high transport costs for fossil fuels. They have a suitable climate for solar.

        Real energy pricing is a step in the right direction. Let market forces and inventiveness search for better low carbon & energy efficient solutions ….

        • The idea that market forces have anything to do with prices in ex-publicly-owned utilities tickles my naivete bone.

      • I’ll add

        The grid is a one way system from big power stations to consumers. You’d need a system capable of doing reversable flows. I guess you’d need an information system to control reversable flows and power availability – which could also be used to provide the realtime pricing information necessary for demand pricing.
        This would also provide the data for grid aware appliances – a freezer might demand expensive electric above -8, but only chill below -12 with a cheaper rate.

        • Or we could admit that Anthropogenic CO2-based Global Warming is a scam, designed to increase profitability for financial institutions through carbon trading, increase GDP via production/installation/maintenance of overly expensive, failed technology, like nuclear powered generation, solar panels & wind turbines, which would not be countenanced on economic grounds, and which themselves are varying forms of pollution, and provides the Govt with an opportunity for raising revenues.

          Because a scam it certainly is.

        • Buzzin – the US republicans are amongst the biggest climate change deniers, they remind me of King Canute who commanded the tide not to come in …… and sea levels are rising in Washington DC

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