Today is in terms of statistics inflation day in the UK as we receive pretty much all of our inflation data in one burst. It did not use to be that way but the powers that be decided that it was better to have all the bad news in one go rather than have several days of high inflation being reported. As ever their sense of timing saw inflation actually go below target! However we will see the seeds of change today as I forecast back on the 2nd of March.
There is also the issue of the UK Pound £ which has been falling in 2016 against the US Dollar which is the currency the majority of commodities are priced in. It is down just over 9% on a year ago……….Also UK services inflation has been more persistent than in the Euro area and currently it matters little which measure you use.
I was expecting these two more domestic factors to add to the end of the impact of lower oil prices.
But whatever happens we are now unlikely to see a continuation of this reported by Eurostat in its consumer prices release….energy (annual rate) -8.0%, compared with -5.4% in January.
It fell to -3% on an annual basis yesterday and rose by 1% on a monthly basis.
Thus I was expecting this.
However from now they need to look a year or two ahead and after a few months of continued oil price disinflationary pressure we see an increasing chance of inflation rising.
What has happened since then has been the further fall in the UK Pound £ post the EU leave vote which will put more pressure on inflation. Regular readers will be aware that I expect a boost to inflation of the order of 1.5% from this impact although we do not know yet where the value of the UK Pound will settle. Many prices will take some time to change so we will not see their impact until 2017 but the area which changes quickly is petrol prices which have had a double whammy. Firstly the oil price has risen to US $52 per barrel and secondly the exchange-rate of the UK Pound has fallen quite a bit against the US Dollar and is now 20% lower than a year ago. So we see this.
The price of ULSP is 3.4p/litre higher, with the price of ULSD 3.6p/litre higher than the equivalent week in 2015.
As you can see from the points made above it was no great surprise when this was reported today.
The all items CPI annual rate is 1.0%, up from 0.6% in August…….The all items CPI is 101.1, up from 100.9 in August.
Actually it could have been more as I note that something I have been flagging all year had a slight dip.
The CPI all services index annual rate is 2.6%, down from 2.8% last month.
Interestingly a lot of the move was in clothing and footwear and I would be interested in readers views on this.
the upward effect came primarily from garments (in particular women’s outerwear), for which prices rose by 6.0% between August and September 2016, compared with a rise of 3.3% a year ago.
The only article which got cheaper for women was coats,everything else got more expensive.
What is in prospect?
We see that the producer price numbers are also suggesting a rise in inflation going forwards.
Factory gate prices (output prices) for goods produced by UK manufacturers rose 1.2% in the year to September 2016, compared with a rise of 0.9% in the year to August 2016.
This is the third month of rises in this indicator which previously registered a couple of years of declines. In turn it will be pushed higher by this.
The overall price of materials and fuels bought by UK manufacturers for processing (total input prices) rose 7.2% in the year to September 2016, compared with a rise of 7.8% in the year to August 2016.
So input prices will put upwards pressure on output prices and the largest riser was the price of imported metals which rose by over 19% on a year before. Also at this stage of the chain the value of the UK Pound is a major factor.
In trade weighted-terms, sterling depreciated by 14.4% in the year to September 2016.
Actually the main driver is of course the US Dollar but in this instance it had a similar decline.
What about the RPI?
Our old inflation measure which is still used for index-linked Gilts amongst other things did this in September.
Annual rate +2.0%, up from +1.8% last month
The version we used for inflation targeting edged quite close to its old target of 2.2%.
Annual rate +2.2%, up from +1.9% last month
This meant that the wide divergence between it and out new official measure of inflation continues.
The difference between the CPI and RPI unrounded annual rates in September 2016 was -1.08 percentage points, narrowing from -1.11 percentage points in August 2016.
In other words changing the inflation target by only 0.5% back in 2003 was a loosening of policy which many places which should know better simply ignore.
What about housing costs and house prices?
The main way the official UK inflation measure is kept low is by its exclusion of owner-occupied housing costs. This means that the numbers reported today are ignored.
Average house prices in the UK have increased by 8.4% in the year to August 2016 (up from 8.0% in the year to July 2016), continuing the strong growth seen since the end of 2013.
There is an official version which includes such costs but as I argued from the beginning it is the equivalent of a chocolate teapot. This is because it uses rents and thereby end up with this.
The OOH component annual rate is 2.4%, unchanged from last month. ( OOH is Owner Occupied Housing )
The plan is for this to be our main measure of inflation although frankly such a recommendation did a lot of damage to the soon to be Sir Paul Johnson of the Institute for Fiscal Studies. Let me highlight yet another problem with the series which begs belief in many ways.
OOH currently accounts for 16.5% of the expenditure weight of CPIH. This compares with a weight of 19.5% in 2005.
There have been a lot of revising of such numbers which applies also to the imputed rent numbers which mean that no-one can even be sure what the past was from one year to the next. The Alice In Wonderland critique applies.
“How puzzling all these changes are! I’m never sure what I’m going to be, from one minute to another.”
We see that as pointed out in the spring UK consumer inflation is heading on an upwards path. There is statistical noise in the exact monthly numbers but the trend was already clear back then although we know now that it will go higher and be more sustained because of the additional impact of the lower UK Pound £. We will head towards 3% on the CPI and 4% on the RPI if things remain as they are.
The Bank of England should of course respond to this for two reasons. It is supposed to target annual CPI inflation of 2% and also because higher inflation will reduce and perhaps eliminate real wage growth and thus have a contractionary impact on the economy. In response to this we have been told this by Governor Carney. From the BBC.
Earlier, Mr Carney said that the Bank of England was willing to see an “overshoot” of its 2% inflation target if it meant supporting economic growth and protecting jobs.
Perhaps our dedicated follower of fashion has been listening to Janet Yellen of the US Federal Reserve. From MarketWatch.
Fed’s Yellen sees benefits in letting inflation exceed central bank’s 2% target
Benefits for who exactly? Certainly not workers or consumers….
Lucy Meakin of Bloomberg has given us a hint of a quality change here.