Mark Carney plans to do nothing about rising UK inflation

Today is inflation day in the UK where we receive the full raft of data from producer to consumer inflation topped off with the official house price index. We already know that December saw gains elsewhere in the world such as Chinese producer prices and consumer inflation in the Czech Republic and some German provinces so we advance with a little trepidation. That of course is the theme we were expecting for the UK anyway as the oil price was unlikely to repeat the falls of late 2015 ( in fact it rose) and this has been added to by the fall in the value of the UK Pound £ after the EU leave vote last June.

The Bank of England

Governor Mark Carney updated us in a speech yesterday about how he intends to deal with rising inflation. But first of course we need to cover his Bank Rate cut and £70 billion of extra QE ( Quantitative Easing) including Corporate Bond purchases from August as tucked away in the speech was a confession of yet another Forward Guidance failure.

Over the autumn, demand growth remained more resilient than had been expected, particularly consumer spending.

Yet at the same time we were expected to believe that by being wrong the Bank of England was in fact a combination of Superman and Wonder Woman as look what it achieved.

but an output gap of some 1½%, implying around 1/4 million lost jobs

So Mark why did you not cut Bank Rate by a further 1.5% and do an extra £350 billion of QE because then you would have pretty much eliminated unemployment? If only life were that simple! For a start it is rather poor to see a theory (the output gap) which I pointed out was failing in 2010 and did fail in 2011 having a rave from a well deserved grave. I guess any port is  welcome when you are in a storm of your own mistakes.

As to his intention to deal with inflation I summarised that last night as he spoke at the LSE.

Here is the Mark Carney speech explaining how and why he will miss his inflation target http://www.bankofengland.co.uk/publications/Pages/speeches/2017/954.aspx 

It was nice to get a mention on the BBC putting the other side of the debate.

http://bbc.in/2jsktij

You see with his discussion of algebra and “lambda,lambda,lambda” we are given an impression of intellectual rigour but the real message was here.

the UK’s monetary policy framework is grounded in society’s choice of the desired end.

What is that Mark?

monetary policymaking will at times involve striking short-term trade-offs between stabilising inflation and supporting growth and employment

As you see we are being shuffled away from inflation targeting as we wonder how long the “short-term” can last? As we do we see a familiar friend from my financial lexicon for these times.

inflation may deviate temporarily from the
target on account of shocks

So “temporarily” is back and a change in the remit will allow him to extend his definition of it towards the end of time if necessary.

Since 2013, the remit has explicitly recognised that in these
circumstances, bringing inflation back to target too rapidly could cause volatility in output and employment
that is undesirable.

Of course with his Forward Guidance being wrong on pretty much a permanent basis Governor Carney can claim to be in a state of shock nearly always. A point of note is that this is a policy set by the previous Chancellor George Osborne not the current one.

The fundamental problem is that as inflation rises it will reduce real wages ( although maybe not in the Ivory Tower simulations) and thereby act as a brake on the economy just like in did in 2011/12.

Today’s data

We are not surprised on here although I see many messages online saying they were.

The all items CPI annual rate is 1.6%, up from 1.2% in November.

In terms of detail the rise was driven by these factors.

Within transport, the largest upward effect came from air fares, with prices rising by 49% between November and December 2016, compared with a smaller rise of 46% a year earlier.

So a sign of how air travellers get singed at Christmas and also this.

Food and non-alcoholic beverages, where prices overall, increased by 0.8% between November and December 2016, having fallen by 0.2% last year

So Mark Carney and the central banking ilk will be pleased as if we throw in motor fuel rises the inflation is in food and fuel or what they call “non-core”. Of course the rest of us will note that it is essential items which are driving the inflation rise.

Target alert

I have been pointing out over the past year or so the divergence between our old inflation target and the current one. Well take a look at this.

The annual rate for RPIX, the all items RPI excluding mortgage interest payments (MIPs) index, is 2.7%, up from 2.5% last month.

It is above target and whilst there are dangers in using one month’s data we see that this month implies that our inflation target was loosened in 2002/03 by around 0.6%. Good job nothing went wrong later……Oh hang on.

What happens next?

We get a strong clue from the producer prices numbers which tell us this.

Factory gate prices (output prices) rose 2.7% on the year to December 2016 and 0.1% on the month,

As you see they are pulling inflation higher and if we look further upstream then the heat is on.

Prices for materials and fuels paid by UK manufacturers for processing (input prices) rose 15.8% on the year to December 2016 and 1.8% on the month.

The relationship between these numbers and consumer inflation is of the order of the one in ten sung about by the bank UB40 so our rule of thumb looks at CPI inflation doubling at least.

House Prices

What we see is something to make Mark Carney cheer but first time buyers shiver.

Average house prices in the UK have increased by 6.7% in the year to November 2016 (up from 6.4% in the year to October 2016), continuing the strong growth seen since the end of 2013.

So whilst I expect a slow down in 2017 the surge continues or at least it did in November. Surely this will have been picked up by the UK’s new inflation measure which we are told includes owner-occupied housing costs?

The all items CPIH annual rate is 1.7%, up from 1.4% in November……The OOH component annual rate is 2.6%, unchanged from last month.

So no as we see a flightless bird try to fly and just simply crash. That is what happens when you use Imputed Rent methodology which after all is there to convince us we have economic growth and therefore needs a low inflation reading.

As an aside we got an idea of the boom and then bust in Northern Ireland as the average house price rose to £225,000 pre credit crunch but is now only £124,000. Is that a factor in its current crisis?

Comment

Last night saw a real toadying introduction to the speech by Mark Carney at the LSE.

He is someone who thinks very deeply about the big responsibilities he has, and he has that very rare talent of being able to think and act at the same time

The introducer must exist in different circles to me as I know lot’s of people like that and of course the last time Governor Carney acted the thinking was wrong. I did have a wry smile as this definition of the distributional problems that the extra QE has and will create.

He has been thinking very hard about distributional issues

What we actually got was a restatement of Bank of England policy which involves talking about the inflation target as if they mean it and then shifting like sand to in fact giving the reasons why they will in fact look the other way. Last time they did this the growth trajectory of the UK economy fell ( with real wages) rather than rose as claimed. The only ch-ch-changes in the meantime are that the current inflation remit will make it even easier to do.

 

 

 

 

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28 thoughts on “Mark Carney plans to do nothing about rising UK inflation

  1. they have not done much about consumer inflation for decades and I posit they never will

    the discredited Creative Price Index and leaves out “core” things like food and fuel , should be scrapped but it won’t because it covers up the real inflation the people – re citizens- have been experiencing for decades now .

    If an when wages increase – then you’ll see the IR rise , if the USA lets us .

    in the meantime Comical Carney can get away with such outrageous performance because MSM are complicit on the lie – their jobs are threatened

    please keep up the spotlight on them , Shaun

    Forbin

    • Hi Forbin

      I intend to as their next move is to try to claim they are bringing in house price inflation when CPIH becomes the main UK inflation measure in March. Instead of course it will be the index driven by their imputed rents.

  2. I never understand why the UK favors a dropping exchange rate when we are essentially an importing nation – unless inflation is the objective and the only way to deal with debt. A sharp reduction in the value of Sterling never appears to provide the export boost that economic theory says should happen. If the B of E ‘looks through’ inflation again then they loose any credibility they may have left (if indeed they have any). If they continue to be the dog that doesnt bark then consumer debt will explode and prove to be an unmanageable problem in years to come. Definitely time to take away the punch bowl.
    On a different subject but one with significant economic implications, I think that the government have adopted an interesting and possibly quite clever negotiating tactic for Brexit. The EU has been threatening a hard Brexit if we don’t grovel and toe the line but by opting for that, it takes away their major threat in negotiations. The reality will be a compromise on both sides as money will trump politics. The one contact I have at a senior level in a German company has already indicated that they are bending the ear of the German government to avoid a mess. Its going to be an interesting show – pass the popcorn!

    • hello pav,

      I suspect the real reason IR are low is because not just everyone elses is but in fact that if the IR rises then the current Banks will fail .

      no laws have been changed at all , no segregation of high street from casino banking .

      even with the current tinkered capital rules apparently Banks are failing them – Italy anyone?

      And we’ve already seen consumer debt bubble increase this xmas……

      interesting times ahead

      Forbin

    • The EU haven’t been threatening anything as they refuse to negotiate until formal notification is served.

      I think you have become confused with UK commentary that correctly asserts that as freedom of mobility is essential to being a member of the single market and Iceland, Norway et al signed up to this in their Schengen agreement, the consensus is that the non EU schengen signatories are still a bit worse off than if they joined the EU.

      Therefore, it logically follows that any country refusing to allow people freedom of movement, i.e. a Brexited UK, will likely experience a much harsher agreement (hard Brexit) than the Schengen agreement as it applies to the non EU signatories.

  3. Hi Shaun,

    Careful with Carney you know how thin skinned he is… He’ll be threatening to bugger off back to Canada in a huff (again).

    The final toadying quote is actually more literal than the speaker probably realised. It’s all an act and Carney could be up for an Oscar if it were a film rather than 60-odd million peoples lives and one mans vanity (and pension). He kept to script for the Brexit vote, and then when the unpopulists were booted off the stage gave us his new turn with how he saved the UK economy from ourselves and now it turns out a quarter of a million jobs as well.

    His latest performance also gave us a quote not quite as good as a Shakespeare sonnet but a classic none the less. I paraphrase, “the next movement in base rates could be up or it could be down”. I would never have realised that. All this for eight hundred grand a year. George Clooney would be much more expensive and probably no better a bank governor.

    Dave

    • He’ll be threatening to bugger off back to Canada in a huff (again). ..

      I’d say dont linger Careny , in case the door hits yer bum!

      Forbin

  4. Let’s be honest. Carney
    1. Doesn’t have a clue where the economy is going
    2. Is taking credit without any justification for saving us from post- Brexit apocalypse
    He has frankly played a blinder. By chucking more QE and lowering interest rates post Brexit, he can both claim that he was right about Brexit and that he saved the day against all odds. The fact that both measures were unnecessary and damaging is neither here nor there in the context of protecting his reputation.

    • Hi James

      Was it you who made that point on here before the Bank of England move in August? Anyway some did as it would allow the Bank of England to take credit either way. In the worst case scenario ( unlikely as it involved Forward Guidance being correct) it simply would have acted again in November. This way around it tries to take the credit for being wrong!

      Of course more work is required later this year in trying to shift the blame for higher inflation.

  5. Pope – Catholic etc. Speaking of religious people, Carney and May are really both Steve Priest (of The Sweet) in a wig and i claim my £5.

    Devaluation; separation from Europe; sucking up to some redneck in the USA – it hasn’t worked since 1968, so why should it work now?

    • I’d vote to join the US of A !

      yay! whats not to love ? The Queen a US citizen

      think of the look on their faces 🙂

      Forbin

      • The constitution right to sell AR15s to insane or drug addicts might raise the UK murder rate. And most British would rue the demise of the NHS…

  6. My view on the BOE, Carney, ZIRP, QE et al is no different from yours. But, given where we are, is their stance so wrong?

    If inflation goes up due to the exchange rate and is not followed by wages (vital qualification), which will probably be the case at least in part if not in the whole, then the inflation will disappear from the index in a year – unless sterling keeps falling. Now we will all be worse off as a result but what would putting up interest rates achieve? It would simply compound the difficulties and achieve very little because the rise in inflation would be temporary.

    Furthermore, and as you suggest, real wages will decline and this, in itself,would be a damper on economic activity without any movements on interest rates; in this respect it provides a correction in itself.

    Where I think they can be criticized, and roundly, is in the area of FLS and now TLS which add insult to the injury of ZIRP and simply ratchet up the Ponzi a couple of more notches and simply provides a mechanism by which their own predations can be facilitated.

    The problem they will be left with is that if wages do not respond to inflation then the debt burden will not be eroded and we will be yet nearer the time when outright default has to be faced – but not before 2019 when Carney leaves!

  7. Hi Shaun,

    I’m positive, absolutely positive that Mr Carney is worth every penny of his bloated salary/pension/accomodation allowance, if only for the comic potential offered by gems like this nugget of wisdom made at your alma mater.

    “The best I can say is that the value of the pound will go up and down,” Carney said, after being asked a question about the outlook for the currency after delivering a speech at the London School of Economics.

    http://uk.reuters.com/article/uk-britain-boe-carney-sterling-idUKKBN1502C6?il=0

    As for thinking and acting at the same time, think how much more we’d have to pay him if we required him to simultaneously walk and chew gum!

    Mind you, that salary will at least allow him to afford a better class of popcorn … even some artisanal, hand-crafted, gourmet Yorkshire popcorn should he so desire.

    http://www.amosandtoms.co.uk/

    Actually, come to think of it, popcorn most likely gets added to expenses anyway.

    A veritable Road to Nowhere indeed.

    • Hi Jim

      There is I thinking that the so-called “Poshcorn” was the peak of that market and now I learn this thanks to your link.

      “Amos & Tom’s are proud to be the first artisan food producer handcrafting gourmet popcorn in Yorkshire. Based on the Yorkshire Wolds we are popping only the finest mushroom popcorn and coating them in our own specially created sweet and savoury glazes”

      It almost sounds good enough for Davos doesn’t it?

      As to the currency forecast well the up bit was right today….

  8. Hi Shaun
    I am intrigued by the Carney Grand old Duke of
    York stance “Neither up nor down.” Heads he wins and tails
    we lose, how can such BS be allowed?
    As I have said before, debasement of currency is
    the only game in town, will we soon have helicopters overhead
    dropping popcorn and £50 notes…

    JRH

    • Hi JRH

      I have pointed out both on here and on Twitter that RAF Chinooks fly over Battersea much more regularly these days. Perhaps someone is having a joyride or the day when one will fly over with “Carney’s Cash” painted on the side are nearer.

  9. Think and act at the same time? That c*nt can’t pat his head and rub his stomach simultaneously.

    The fact is, we’ll never know whether or not he’s clever, because he is such a liar.
    His speech should have said, “Inflation suits the govt. and banks, and we don’t care how many we Impoverish supporting them.”

    I’m learning to despise him.

  10. We are drowning in debt inflation is rising RPI is 2.5% the pound is falling,final salary pensions have been destroyed,we sold our gold reserves at a bargain basement price.
    House prices aren’t a downturn we are about to leave a market of 400m people.
    The Scots may leave the U.K there may be a hard border between Ireland and N.Ireland.
    The monetary system is heading for a cliff caused by the debt and unfounded liabilities
    Yet 43% of the population according to the polls think we have a competent Government .

    • “Yet 43% of the population according to the polls think we have a competent Government .”

      Well of course they do, they voted for it!

      If they criticise the Government that is tantamount to admitting their own mistakes in electing the buffoons in the first place!

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