Inflation is back!

Regular readers will be aware that as 2016 progressed and the price of crude oil did not fall like it did in the latter part of 2015 that a rise in consumer inflation was on the cards pretty much across the world. This would of course be exacerbated in countries with a weak currency against the US Dollar and ameliorated by those with a strong currency. This morning has brought an example of this from a country which I gave some praise to only on Monday so let us investigate.

An inflationary surge in Spain

This mornings data release from the statistics institute INE was eye-catching indeed. Via Google Translate

The estimated annual inflation of the CPI in January 2017 is 3.0%, according to the An advance indicator prepared by INE.This indicator provides an advance of the CPI which, if confirmed, would increase of 1.4 points in its annual rate, since in December this variation was of 1.6%.

Okay and the reason why was no great surprise to us on here.

This increase is mainly explained by the rise in the prices of electricity and The fuels (gasoil and gasoline) in front of the drop that they experienced last year.

So as David Bowie put it they have been putting out fire with gasoline. As we investigate further I note that El Pais labels it as an Ultimate Hora and gives us some more detail.

The agency blames the acceleration of inflation to the rise in electricity prices, which this month has exploded, affecting mainly consumers in the regulated market of light, 46.5% of households, Which pay according to the hourly evolution of electricity prices in the wholesale market.

Actually that sounds ominous in the UK as the National Grid was effectively promising no blackouts yesterday but at the cost of more volatile ( which of course means higher) domestic energy prices. The actual numbers for Spanish consumers are eye-watering.

The average price of the megawatt hour (MWh) in the wholesale electricity market was on January 1, 51.9 euros. This Tuesday, the last day of January, the average price stands at 73.27 euros, 43.4% more. On Wednesday 25, the average stood at 91.88 euros (78.9% more than January 1), with maximums of more than 100 euros for the time stretches with more demand. Consumers receiving the regulated tariff (Voluntary Price for the Small Consumer, PVPC) will see those increases already reflected in their next receipt of light and have already been noted in the CPI, which has registered the highest level for more than four Years,

I guess they must be grateful that this has not been a long cold winter as such prices would have appeared earlier and maybe gone higher. The push higher in the inflation measure was exacerbated by the fact that fuel prices fell this time last year.

Thus, in January 2016, electricity fell by 13% compared to the same month in 2015. The gas price fell at a rate of 15%, while other fuels (diesel for heating, butane …) went down To 19.9%. Finally, the fuel and lubricants registered a year-on-year decrease of 7.1%.

It would seem that El Pais has cottoned onto one of my themes.

 The evolution of oil prices largely explained the behavior of the CPI in Spain. In January of 2016, the oil marked minimums in less than 30 dollars. Now, with the price of a barrel of brent upwards (around 55 dollars), fuels are rising and expenses related to housing are rising: gas, of course, a byproduct, and electricity, which is generated Partly by burning gas.

So far we have looked at Spain’s own CPI but the situation was the same for the official Euro area measure called HICP ( which confusingly is called CPI in the UK) as it rose to an annual rate of 3% as well. This poses an issue for the ECB as El Pais points out.

In any case, inflation is already at levels above the ECB’s target of 2%

Also it points out that Spain will see a reduction in real purchasing power as wage growth is now much lower than inflation.

already at levels that imply a loss of purchasing power for pensioners – the government will only update pensions by 0.25 %, The minimum that marks the law, for officials, whose salaries will not rise above 1%, and the vast majority of wage earners, since the average wage increase agreed in the agreements remained at 1, 06%.

There are also other concerns as to how it may affect Spain’s economic recovery.

As Spanish inflation is above European, the Spanish economy may lose competitiveness, not only because it may affect exports, but also because it may lead to a rise in wages.


A little more prosaic and also for December and not January but we saw this from Germany yesterday.

The inflation rate in Germany as measured by the consumer price index is expected to be +1.9% in January 2017. A similarly high rate of inflation was last measured in July 2013 (+1.9%).

German consumers will be particularly disappointed to note that the inflation was in essential items such as energy (5.8%) and food (3.2%). Of course central bankers and their media acolytes will rush to call these non-core as we wonder if they sit in the cold and dark without food themselves?!

This poses another problem for the ECB as Germany is now pretty much on its inflation target ( just below 2%) and this morning has also posted good news on unemployment where the rate has fallen to 5.9%.

Euro area

This morning’s headline is this.

Euro area annual inflation is expected to be 1.8% in January 2017, up from 1.1% in December 2016, according to a flash estimate from Eurostat, the statistical office of the European Union.

So a by now familiar surge as we note that it is now in the zone where the ECB can say it is achieving its inflation target. Of course it will look for excuses.

energy is expected to have the highest annual rate in January (8.1%, compared with 2.6% in December), followed by food, alcohol & tobacco (1.7%, compared with 1.2% in December),

Accordingly if you take out the things people really need ( energy and food) the “core” inflation rate falls to 0.9%. But the heat is on now as Glenn Frey would say.


The Financial Times reported this yesterday.

Giles Turrell, chief executive of Weetabix, said on Monday that the company was absorbing the higher cost of dollar denominated wheat but that Weetabix prices were likely to go up later this year by “mid-single digits”.

Sadly the decline of the FT continues as the “may” is reported in the headline as “Weetabix prices hiked” . The Guardian was much fairer although this bit raised a smile.

Although the company harvests wheat in Northamptonshire, it is sold in US dollars on global markets, meaning the cost in pounds to buy wheat in the UK has gone up.


It is hard not to have a wry smile as it was not that long ago in 2016 that the consensus was that inflation is dead and of course before that the “deflation nutters” were in full cry. Any news from them today? Of course the official mantra will be on the lines of this as reported by DailyFX.

ECB’s Villeroy says concerns about rising inflation are exaggerated.

What was that about never believing anything until it is officially denied? It was only yesterday that another ECB board member was informing us that there would be no change in monetary policy for 6 months when today’s inflation and GDP data suggests it is already behind the curve, as I pointed out on the 19th of this month. Although as ever Italy ( unemployment rising to 12%) is lagging behind. As Livesquawk points out not everyone has got the memo.

Spanish EconMin deGuindos: Inflationary Trend In Europe Could Lead To Tightening Of MonPol, Higher Interest Rates

So we see a problem and whilst some of the move in Spain is particular to one month it is also true that the pattern has changed now and so should the response of the ECB as it looks forwards.

UK National Statistician

Thank you to John Pullinger for meeting a group of inflation specialists including me at the Royal Statistical Society last Wednesday. I was pleased to point out that his letter to the Guardian of a week ago made in my opinion a case for using real numbers for owner-occupied housing such as house prices and mortgage-rates as opposed to the intended use of an imputed number such as Rental Equivalence. This will be more important when the UK makes the changes planned for March. Here is the section of his letter which I quoted.

And there is a real yearning for trustworthy analysis that deals with both the inherent biases in many data sources and also the vested interests of many who try to cloak their own opinions and prejudices as “killer facts”.






23 thoughts on “Inflation is back!

  1. Excellent blog – I am always amazed that you switch topic day by day!
    A comment and a couple of questions:
    1. Inflation varies a lot between member states within the Euro, which must make a single interest rate pretty hard to get right;
    2. It seems that the weaker economies have higher inflation, which would (normally) point to higher interest rates, but these are the very states least able to cope with rising rates;
    3. If Spain has inflation of 3% and Germany 1.9%, isn’t this just going to be yet another fillip to German industry and alter the terms of trade in its favour, given the fixed exchange rate?
    4. It seems that Spanish workers and pensioners are going to take quite a real-terms hit to their incomes.
    I cannot help feeling that this is part of the drip, drip, drip way in which the Euro punishes the weak and strengthens Germany.
    I would love to see a chart of the Euro economies showing the relative growth/shrinkage since they joined the Euro. I suspect that Germany will have very significantly outperformed the other big Euro economies.

      • Thanks for the link Expat. Given that the powerhouse of western advanced economies is growing relatively slowly and appears to have required ever greater sacrifices from workers, what does this say for the rest of the Western advanced economies? I found this paper very disturbing.

        • We’re in the middle of massive technological disruption. If we take the industrial revolution, we got railways and then a standard oil monopoly. This was very good for the robber barons.

          Now add in globalisation. There is truth in poverty reduction for poorer countries. There are losers too, especially the working classes in advanced economies.

          What the people need is strong political leadership and united pragmatic action. Unfortunately we’re getting corrupt snake oil peddling nationalists, protectionists and liars. I read an article in Nikkei detailing how US consumers suffered high steel costs (knocks on to hurt US car industry etc) from protectionism and US steel inefficiency in updating technology due to lack of competition.

          Anyway – the question you ask, I can’t predict the outcome -> politics will determine how first world workers do in future. Though I’d confidently predict that the US working class will be hurt by the Dump. Obamacare ends and the uninsured will be left to die. Unions squashed and minimum wage laws repealed. Benefits stopped altogether.

  2. I too saw the news about Weetabix prices, and I too had a wry – or in this context should that be rye? – smile. It is all very well Mr Turrell raising the RRP and even wholesale price on such mundane items, but it is the discounters who will dictate actual market prices paid by you and I.

    These days there’s almost nothing which cannot be bought cheaper elsewhere. I believe the internet has become the consumer’s friend in searching out bargains. Folk like FT journalists never seem to factor in such new universal facts.

    I would also venture that Mr Turrell is simply profiteering; relatively small increases in the raw material cost aren’t too influential on output cost. If milling wheat is about £150 per tonne but rises by say 5%, and the contents of a 48x box of Weetabix weigh 1kg, then you do the maths…

    • Hi Andy Z

      I wonder that about quite a few goods these days. Exactly how much of the price we pay is for the bit we consume? It would be interesting to know what the Weetabix themselves cost. I am trying to remember which of the breakfast cereals where the packaging costs more than the bit which is eaten!

  3. Dear God, so the NAIRU merchants would have us believe that an unemployment rate of 6% in an economic powerhouse like Germany is acceptable or maybde even needs to increase as inflation takes hold. What madness is this?

    What is the rate going to look like for Italy, France and Spain? God help them the ECB clearly won’t or can’t.

    • Hi bill40 and welcome to the comments section

      It is not clear to me that NAIRU exists anymore. For those unaware of it then it represents the rate of unemployment which does not increase consumer inflation. Actually I am not sure it ever really existed, like so many pillars of conventional economics it was found wanting in the credit crunch era.

      As to the ECB then it depends on how much you think all the QE policies have actually helped the various real economies.

  4. I cant find the article but I remember that the price of cornflakes ( ok not wheat but…) being £3.00 that , 30 pence was the cost to make it , the rest profits and marketing

    meaning that a 10% price increase would be 3 pence not 30 pence .,,,,


    • Did you know that corn flakes were first
      made to stop masturbation, err how did
      that go. So it follows that all profiteers
      and referees really are wankers.

  5. Hi Shaun

    Great article as always. I’ve noticed that shrinkflation has reached fruit juice. The box has been reduced to 750ml (from 1ltr), but its the same height. So quite easy to miss.

    So in the uk, we have the unelected boe who wish to raise prices (via inflation) for the majority of the uk. Who will save us from these idiots.

    • Not just fruit juice. I was incensed to be offered a “schooner” of lager the other day in a hotel, as I had asked for a pint. A schooner is apparently two thirds of a pint (but, needless to say, cost the same as a normal pint)…

  6. You are right that inflation is back, and that we are in store for more, but I think your assertion that the “deflation nutters” have been proven wrong is far too premature.

    In the short term you yourself have stated, quite rightly, that wages may not follow price rises so there will be a reduction in real wages. But this in itself will provide a check on inflation as consumers will not have that extra income. Furthermore the debt burdens which many are now carrying, and which have brought future consumption forward, will act as a further constraint on price rises.

    However, and more fundamentally, this increase in inflation is likely to be temporary. The fact is we live in a globalized world which has surplus capacity and this in itself is deflationary. Look at history and you see that deflation is the norm, driven by technology or, in the last forty years, by expanding global trade capitalizing on labour cost arbitrage; inflation is the exception driven by monetary regimes which usually collapse in fairly short order. In the US the only periods subject to inflation are generally war periods; in the vast majority of years mild deflation is the norm not the exception.

    Furthermore, as global growth is softening, any excess capacity will undermine any inflationary surge and reinforce the tendency to deflation.

    As I’m a saver I’d be delighted if this surge in inflation resulted in higher interest rates but I can’t see it being other than temporary and I won’t be holding my breath.

  7. Great blog as usual, Shaun. Thank you so much for speaking with the National Statistician last Wednesday, and I hope that you were persuasive. It does speak well of him, I think, that he was willing to speak with you in person, when he knows that you are a harsh critic.
    You wrote how “the official Euro area measure called HICP…confusingly is called CPI in the UK”. Terminology debates can be boring, but I think the government made a big mistake in December 2003, when it renamed the UK HICP the UK CPI. Since the whole point of replacing the RPIX with the UK HICP as the target inflation indicator of the Bank of England was to be more consistent with the rest of the EU, it would have been much more sensible to rechristen the RPI as the CPI. At that time, it was still the principal index used for upratings, which in almost every other country in the world is called the CPI. It is highly unlikely that Mr. Pullinger would be pushing to make an HICP-H series, a UK HICP with an imputed rent series tacked onto it, the main inflation measure of the UK right now if that had been the terminology change made 13 years ago. It is even less likely that the ONS would be about to stop publishing a CPIJ series, and keeping a CPI series, not designated a National Statistic, on limited life support.

    • Hi Andrew and thanks

      You are right that it was good of John Pullinger to meet a group including me but I think that he must be beginning to understand that there are a lot of logical and intelligent objections to the official plan to make CPIH the new inflation headline measure.

      You are right about the confusing system for naming inflation in the UK. My guess would be that the RPI had such an established name that they did not feel that they could change it.

    • Hi Forbin

      It seems endless with Deutsche Bank doesn’t it as we read of ever more bad behaviour followed by ever more fines? They are the German equivalent of RBS and may in fact be even worse. I am less and less sure that fines are the way to go because they punish the shareholders the vast majority of whom knew nothing about the misdemeanours and do not punish the managers and directors who are responsible.

      My old employer is in a bad place.

  8. Hi Shaun, a couple of quotes today followed by a question:

    “So far we have looked at Spain’s own CPI but the situation was the same for the official Euro area measure called HICP ( which confusingly is called CPI in the UK) as it rose to an annual rate of 3% as well”


    “Euro area annual inflation is expected to be 1.8% in January 2017, up from 1.1% in December 2016, according to a flash estimate from Eurostat, the statistical office of the European Union.”

    I’ve got 1.8% CPI for the EZ too –

    So where has the Euro area inflation of 3% emanated from?

    • Hi Noo2

      This is down to the confusing way that many countries name the various inflation measures. As Andrew B has already pointed out the UK does not help! What I was trying to say was that Spain has its own inflation measure ( CPI) and the annual growth rate is the same as the standard measure for Euro area members but just for Spain itself or what is called HICP.

      Overall it is a bit of an alphabet soup I am afraid……

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