Today brings us yet more evidence on the rise of consumer inflation in the UK. Regular readers will recall that I warned earlier in the year and indeed pre the EU leave vote that a pick-up in inflation was on the cards. Back then much of this view was simply based on the likelihood that the crude oil price would stop falling and the disinflationary effect from it would fade and then end. Then we would see some of the institutionalised inflation of the UK come into play. An example of this has been inflation in services which has rumbled on at about 2% per annum and thus pretty much ignoring the phase of good price disinflation we have just experienced.
This was in the high 30s if we look at the US Dollar price for Brent crude oil at this time last year and was about to fall so that it fell below the US $30 mark in early January. This compares to a price of just below US $56 so even allowing for daily fluctuations we are on a higher trajectory now and seem set to remain so. Even a rush of production from the shale sector seems unlikely to get us back below US $30 anytime soon. So we see that rather than disinflation we are now seeing some inflationary pressure from the oil price.
The UK Pound £
In spite of the recent rally it has been a poor battered UK Pound for most of 2016. It was in fact falling before the EU leave vote but then it fell sharply creating inflationary pressure via higher prices for imports. This is not something which happens in full immediately as it takes time for fixed-price contracts for example to be replaced with new and higher terms but it is in progress.
If we look at the numbers then this time last year the UK Pound was about to dip below US $1.50 whereas it is now just below US $1.27. Thus we see that commodities prices including the oil one above have around a 15% nudge higher from the exchange rate. Ouch! Other prices will have risen too as the UK Pound has fallen albeit mostly less against many other currencies as well. Even the currency against which it feels there has been a strong bounce back the Japanese Yen is only back to 146 Yen.
Bank of England
We do not get reminded often these days of the latter effect of this statement about QE or Quantitative Easing.
This process aims to directly increase private sector spending in the economy and return inflation to target.
So they are pushing inflation higher just as it was about to surge anyway. A clear policy error and yet another Forward Guidance failure.
We saw this.
The all items CPI annual rate is 1.2%, up from 0.9% in October
I pointed out last month that the dip in the numbers was something of a statistical fluke although the media and analysts either forgot or did not notice that by the mentions of an “unexpected” rise. Anyway here is a reminder of the continuing shambles which is the efforts of the Office of National Statistics to measure UK clothing inflation.
This is the largest October to November rise since 2010 and continues the rather volatile movements observed during 2016, especially over the latest 3 months.
This is a fundamental issue which I posted on the Royal Statistical Society website about a month ago highlighting the situation about ladies coats which I am told lack any lining this year and are therefore cold. I have opened a can of worms I think
If we move back to today’s news then we are seeing in the November figures the effect of the weaker UK Pound in essence. Also there is a significant change as it may only be 0.2% but the trend is clear.
The CPI all goods index annual rate is 0.2%, up from -0.4% last month.
Coming over the horizon
The producer prices situation is beginning to have its effect.
Factory gate prices (output prices) for goods produced by UK manufacturers rose 2.3% in the year to November 2016, compared with an increase of 2.1% in the year to October 2016.
We see that in the goods prices I discussed above and further down the line we see more ch-ch-changes.
The overall price of materials and fuels bought by UK manufacturers for processing (total input prices) rose 12.9% in the year to November 2016, compared with a rise of 12.4% in the year to October 2016.
I would like to demonstrate today why the planned change in the main UK inflation measure will leave us with the equivalent of a chocolate teapot. The UK National Statistician put out his thoughts late last week and I replied confining myself to a sentence plus one word.
Thank you for posting the letter from John Pullinger to Tony Cox. There is much I would like to reply on but we learn so much from one sentence which I have copied below.
“Our view is that neither mortgage payments nor house prices are a good measure of housing costs. ”
So the largest payment someone ever makes in regards a house and/or the largest stream of payments are both to be ignored! They are then replaced by a number under the banner of Rental Equivalence which by contrast is neither paid nor received and in fact is imputed.
The banking sector got itself into quite a mess by replacing mark to market accountancy with mark to model or as some called the latter myth. It has still to recover from this “advantage”.
As this news filters through to the public, confidence in official statistics will be reduced rather than enhanced. This will not be helped by the timing of this as inflation moves above the Bank of England’s target next year.
As of March we will use what is called CPIH as our main inflation measure where H supposedly measures housing costs. Except you see for owner-occupiers it does not and instead with its made up number sings along with Earth Wind & Fire.
Take a ride in the sky
On our ship, fantasize
All your dreams will come true right away
My message has got a decent response already and this one from Arthur Barnett hits home.
You have picked up on an interesting sentence from the National Statistician’s letter.
I would add another sentence –
“It is for the above reasoning we believe that the treatment of housing costs in RPIJ is weak.”
The two sentences refer to views and beliefs rather than evidence – indeed the National Statistician’s letter does not appear to include the word evidence.
If we switch to the numbers we see that house prices are rising at an annual rate of 6.9% whilst CPIH does this.
The all items CPIH annual rate is 1.4%, up from 1.2% in October
So we are now on course to hit the UK’s inflation target and maybe quite quickly. One way this may be achieved will be from the price of petrol at the pumps. We have been told today that it is some 10 pence higher than a year ago which adds some 0.3% to consumer inflation all other things being equal. This is not something that I welcome although economists such as my debating partner on Radio 4’s Moneybox Tony Yates presumably does although it is still a long way short of the 4% inflation target he has argued for. Still anyway here is a link from 3 months ago to it when I was pointing out that the Bank of England had made an inflationary policy error.
Also the numbers looked like they were leaked again and I do not necessarily mean the way those in authority get them 24 hours before. Traders in the UK Pound £ seemed to have an Early Wire yet again.
Meanwhile RPI inflation rises at 2.2% or if you exclude mortgage interest payments RPIX is at 2.5%. I remind you of this because our official statisticians have spent the last 3/4 years trying to rubbish it. Yet even the Bank of England has to admit this.
Asked to give the current rate of inflation, respondents gave a median answer of 2.3%, compared to 1.8% in August.
Apparently everyone is wrong again.