UK Inflation is beginning to pick-up again

Today is inflation day in the UK and we are now at the point where it begins to turn. There is something of a contradiction in that and my subject of yesterday which is the way that negative interest-rates are appearing ever more on the establishment’s agenda. But I guess they never did keep up with events. Before we even get to the numbers from the UK we have seen these from Sweden Statistics this morning.

The inflation rate was 0.8 percent in March, up from 0.4 percent in February……..The inflation rate according to CPIF was 1.5 percent in March 2016.

Inflation at 0.8% and rising and at 1.5% if you take out all of the interest-rate cuts which have lowered mortgage rates too does make one question why the official interest-rate is at -0.75% in an economic boom! It does seem to be a Nordic theme however as the Norwegian central bank has joined in the Open Mouth Operations this morning. From Ioan Smith.

NORWAY’S OLSEN REITERATES CAN’T EXCLUDE NEGATIVE RATE

Crude Oil

In essence the change in inflation prospects and trajectory comes here. The fall in the price of oil drove down producer price and then consumer price inflation. But as time progresses it drops out of annual inflation numbers and as it gets lower it becomes harder for it to fall as producing it becomes less profitable and in the case of the shale producers turns into a loss. That latter factor has contributed to the way that the oil price has bottomed out so far in 2016 and then risen.

This morning Brent Crude Oil has risen above US $ 43 per barrel which compares to the circa US $36 it closed 2015 at. Because of the lower price the percentage rise sounds impressive at 20% or so but it is more helpful now to look at it as being US $7 higher. If we look back we see that it is now 25% lower than a year ago which compares to numbers around 50% before. The recent rise will not be in today’s consumer inflation numbers but we see that should the price of oil remain around here then the effect on the inflation numbers will be felt as we move to high summer. The effect will be like a brick on the end of a piece of elastic especially if we factor in the fact that whilst it has rallied this week the UK Pound £ is lower against the US Dollar. Indeed this time last year it began to head towards US $1.60 so the comparisons going forwards will be tough.

Today’s numbers

Let us go straight to the headline.

The Consumer Prices Index (CPI) rose by 0.5% in the year to March 2016, compared with a 0.3% rise in the year to February.

The panic of those I described as “deflation nutters” is presumably subsiding and we see the rise was mostly driven by this.

Rises in air fares and clothing prices were the main contributors to the increase in the rate between February and March 2016.

The air fare rise was probably mostly an Easter effect but clothing much less so. Also I note that the rising oil price had not at that point impacted inflation via  fuel prices at the pump.

These upward effects were partially offset by a downward contribution from motor fuels with petrol prices rising by 0.9 pence per litre this year compared with a larger rise of 3.8 pence per litre a year ago.

There was also a downwards effect from lower domestic gas prices about half of which was recorded in March and half will come in April.

If we move to the area in these numbers which is flashing amber warning here it is.

The CPI all services index annual rate is 2.8%, up from 2.4% last month……..The CPI all services index is 101.7, up from 101.1 in February.

I have been warning about this for some months now although of course we know that should inflation pick-up quickly later this year the official story will be that it is a “surprise”. But there appears to be plenty of inflation in a sector which comprises some 4/5 ths of the UK economy.

Looking Ahead

As you can see producer prices are still falling but the pressure is reducing.

The overall price of materials and fuels bought by UK manufacturers for processing (total input prices) fell 6.5% in the year to March 2016, compared with a fall of 8.2% in the year to February 2016………the total input price index rose 2.0% (on the month), compared with a rise of 0.1% last month.

The annual rate was -14.6% as recently as last August which reinforces the “winds of change” theme.

Retail Price Index

There is a rising disconnect here between our old official inflation measure or RPI and the new one.

The annual rate for RPIX, the all items RPI excluding mortgage interest payments (MIPs) index, is 1.6%, up from 1.4% last month.

This is now 1.1% per annum higher than the official CPI measure and the reasons for the difference are getting ever more uncomfortable for those who asserted in essence “RPI bad CPI good” as those who follow the debate at the Royal Statistical Society will know. The argument is much more nuanced that the UK establishment and its media acolytes would like you to believe. Anyway before I move on let me give you the numbers for something which was badged as an “improvement” and now has been kicked into the long grass. That is assuming Alpha Centauri has long grass….

The all items RPIJ annual rate is 0.8%, up from 0.6% last month.

Has there ever been a shorter-lived improvement than this?

Housing inflation

There seems to be plenty of it around according to the official statistics.

UK house prices increased by 7.6% in the year to February 2016, down from 7.9% in the year to January 2016.

Prices are rising everywhere except in Scotland which I suspect is being affected by the impact of the oil price falls on Aberdeen. Also if we drop out the London effect we continue to see rises.

Excluding London and the South East, UK house prices increased by 5.0% in the 12 months to February 2016.

Those of a more cynical nature or perhaps familiar with the methods of the UK establishment are probably thinking that this is why owner-occupied costs are not included in CPI inflation. Instead the establishment came up with this.

The all items CPIH annual rate is 0.7%, up from 0.6% in February

Yes you have it all that apparent inflation only raises the measure by 0.2% which is because they use rents. Even the UK Statistics Authority cannot bring itself to describe this shabby effort as a National Statistic.

If we put house prices into the CPI data then it would be recording annual inflation at a rate of 1.5% which would put a very different perspective on things wouldn’t it?

Comment

The situation is now changing for the trajectory of UK inflation as we note the fading of oil price disinflation whilst services inflation rises. Some of the move seen in March was due to Easter but we may see something of a misleading picture over the next 3 months or so. That is because the annual rate of inflation may remain low but later in the year it will rise quickly unless something changes. To put it another way the emergency 0.5% Bank Rate of the Bank of England should already be higher if it had any faith in its own Forward Guidance and it genuinely wanted to hit its inflation target.

Meanwhile if we look at house price inflation we see this from the Resolution Foundation.

Prices up 26% in three years since Feb 2013. Average weekly earnings up 5.6% in same period.

Yet officially there is no inflation. How can that be when so many things are so expensive?

 

 

 

 

 

 

 

 

 

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22 thoughts on “UK Inflation is beginning to pick-up again

  1. Shaun,
    BBC business blog quoting BoE expects inflation to stay below 1% this year! Seems to me we are already there so a surprise in store or gerrymandering of the indices next?

    • Hi Chris

      I found this bit which reinforces your point about the BBC business section.

      “Ben Brettell, senior economist at Hargreaves Lansdown, said the larger-than-expected increase in inflation did not mean interest rates would rise sooner than forecast.
      “Although inflation rose by more than expected, the overall trend remains weak, and places little pressure on the Monetary Policy Committee,” he said.”

      The first bit I agree with but the second about inflation trends I do not. There is a danger for late summer if things carry on as they are. But then I did say it would be presented as a “surprise”

      Sadly the BBC economics blog under Kamal Ahmed does not seem to do economics much if at all.

  2. Rises in air fares (Wtf is going on, oil prices rise, we get surcharges, oil prices plummet, we get price RISES? Thieving swine.) is something that those of us on benefits will be most distressed about.

    • Hi rraw,

      Your point about air fare rises at a time when fuel costs have plummeted was the thing that leaped out at me too. A cursory google tells me that fuel costs are iro 30% of an airline’s costs.

      Perhaps someone with some airline experience may be able to soothe our fears that prices and costs have somehow become detached from each other.

      I should perhaps declare a lack of personal interest as the odds on me taking a flight anytime soon are vanishingly small.

      http://www.wsj.com/articles/SB10001424052702303296604577450581396602106

  3. well Shaun ,

    as both GDP and the Creative Price Index are in fact provable false , then any decisions based on them will also be false , or widely inaccurate

    I do not trust any organization that cherry picks its data

    and after all if CPI is such a good measure , why is not used for tax rises ( remember your council tax is excluded from inflation measurements !!) and HMG pensions ?

    the game is rigged , the table crooked and the dice loaded…..

    and here comes Cilla …….

    Forbin

    • Hi Forbin,

      ‘Tis a game akin to that prescribed for the billiard-sharp in The Mikado, condemned to play
      On a cloth untrue
      With a twisted cue
      And elliptical billiard balls.

      Hmm … how, then, do we make the punishment fit the crime?

      http://themargins.net/anth/19thc/gilbert.html

      (Am I the first to make a G & S musical reference? I’ve got to be the first at something, ferchrissakes!)

  4. Hello Shaun ,

    A subject close to your heart

    “Italy’s financial industry has approved a government-backed plan to set up a rescue fund to help weaker banks.”

    well blow me down with a feather ! didnt they all pass some kinda stress test ?

    apparently it was not stressful enough !

    another Banking crisis , who woulda thunk it !

    Forbin

    • Forbin,
      It is all under control, so don’t worry. According to the FT, the Italian rescue fund is 5 billion Euros. This should be compared with the 360 billion Euros of non-performing loans.
      What could go wrong?
      Looks as safe as houses to me.
      James

  5. The Establishments reliance upon inflation data that does not reflect the reality that surrounds them brings to mind people who drive by satnav and end up in a cul- de- sac or worse, in a river. They never saw it coming either! Non so blind as those who will not see. I see considerable inflation in many areas and most definitely in the service sector where I am surprised that it is not higher than indicated.

    • Hi Pavlaki

      Your description reminds me of the TV series Generation Kill where a US marine unit under Captain America gets lost with the Lieutenant telling him they had taken the wrong road. They end up at a cul de sac and Captain America reports to the battalion commander “The Lieutenant got us lost again”!

      Yet as ChrisL has told us above the BBC is reporting that not only is there very little inflation there is no sign of it on the horizon either .

    • almost had me there with that article

      “Just 1.1% of rural and urban land in England and Wales has domestic property on it, according to the 2011 National Ecosystem Assessment. 1.1%! Another 1% has commercial property and 2% is roads. The rest is not built on. You could almost double the housing stock of England and Wales, using little more than 1% of available land. But planning laws prevent that.”

      IF you include Scotland then thats possibly true

      Give me the figures for SE England , or just England

      Forbin

    • Interesting article Thepessimist. The point about a few large corporations monopolising the new build market leading to characterless bland housing is one worth making. The majority of prospective house purchasers would not choose a house built in the last decade. Small rooms/lack of light/garden/parking and lack of any character easily explain why. You pay a whole lot more for a whole lot less in my opinion.

  6. tut tut Shaun

    “Yet officially there is no inflation. How can that be when so many things are so expensive?”

    me thinks you mean

    “Yet officially there is no inflation. How can that be when so many things keep going up in price?”

    indeed , that is the question , why does the “official ” inflation index not capture what everyone else can see with their own eyes ?

    ( no doubt HMG will say -“Who are you going to believe, me or your lying eyes?” * )

    * Groucho Marx

    NOTE: a CPI index is in fact quite flawed from the outset. It precludes that in a “moden consumerist economy” that the costs of the basics in life, food,fuel and shelter, are so cheap as not needed to be metered , or are static in cost/price.

    Patently this is not true . However a complicit MSM and other bodies have collectively pulled the wool over the citizens eyes that this never gets mentioned.

    The real world of course cannot be ignored for long – its called delusion , and eventually reality wins out and events happen.

    Forbin

    • Hi Forbin

      There are genuine difficulties with inflation measurement but we should be harnessing technology to improve our position whereas the establishment keep driving us backwards. The worst UK consumer inflation measure is CPIH and that is of course something which they keep finding “experts” to recommend.

      With the use of expensive I was implying that inflation had to have been high for us to have got there but I take your point….

      I had spotted the Italy bank bailout which believe it or not was going to be 3 billion Euro’s at one point and then rose to the not very giddy heights of 5 billion. So if an Italian bank goes down it will also weaken the others? What could go wrong? It’s an obvious swerve to avoid it being counted in the national debt but it won’t last long.

  7. Shaun, you wrote: “before I move on let me give you the numbers for something which was badged as an “improvement” and now has been kicked into the long grass. That is assuming Alpha Centauri has long grass….” Love, your sense of humour, Shaun! If the UKSA kicked the RPIJ measure to Alpha Centauri, Sir Charles Bean was obviously happy to leave it there. He released his report on UK economic statistics just two days after it was announced that the UKSA would stop publishing the RPIJ and all other series connected with the RPI at the end of this year, but he didn’t even mention the RPIJ in his report.
    On hindsight, the fix seems to have been in in favour of the CPIH and against the RPIJ before either was released. I remember when the Treasury Select Committee asked Mark Carney before he was appointed Governor of the Bank of England what he thought of UK inflation measures. We’re talking about a man who had been in favour of targeting an inflation measure, the Canadian All-items CPI, that was almost identical in its definition to RPIJ his entire public career. However he completely ignored the fact that an RPIJ measure was about to calculated, and saluted the development of a CPIH. It seems that he was just saying what he thought the Treasury Department would want him to say. He had never shown any interest in the rental equivalence approach to owner-occupied housing as Governor of the Bank of Canada. We had an analytical series based on the rental equivalence approach that ran from January 1982 to August 2000, which I had developed, and he had never shown the slightest interest in having it updated.
    Similarly Sir Charles Bean highlights returning the CPIH to National Statistic status as a top priority, but he doesn’t say why. He expresses no interest in having the RPI return to National Statistic status, although it has a much longer history and a much clearer rationale. It seems that he just wants to be a team player, and still sees the Treasury Department/Bank of England as his team.

    • Hi Andrew and thanks

      When I went to the meeting at the Royal Statistical Society for the Bean Review I felt that he was rather unenthusiastic and I don’t mean in response to my questions which he bristled at! He gave the impression of merely going through the motions. He was no doubt selected as being “sound” in Yes Minister terms so support for CPIH and similar was a given.

      However the review may do some good as it has sparked at least some debate on how the service-sector can be measured more accurately. I hope that this well help as well.

      “To support these recommendations the government announced in the 2016 Budget this week that it will invest over £10 million in a new ONS data science hub and a centre for excellence in economic measurement.”

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