Today we arrive at the latest UK inflation data series and the Bank of England will be facing a situation it has not been in for a while. This is that consumer inflation is now quite near to its official target as the CPI ( Consumer Prices Index) gets near to 2%. This poses yet another question about its policy as we see that the Bank of England is buying another £775 million of UK Gilts today. Even worse these are longs and ultra longs as it will be making offers out into the 2060s. So it will be creating a problem for our children and grandchildren all in the name of boosting an economy which has so far down well and boosting inflation which is now pretty much on target.
Of course the Bank of England thinks that inflation will rise further in 2016 as it explained at its Inflation Report earlier this month.
Beyond that, inflation is expected to increase further, peaking around 2.8% at the start of 2018, before falling gradually back to 2.4% in three years’ time. This overshoot is entirely because of sterling’s fall, which itself is the product of the market’s view of the consequences of Brexit.
The Sterling fall was exacerbated by the policy easing from the Bank of England which drove it lower when the UK economy was already getting a substantial boost. To be specific it was expectations of easing which drove it lower after Governor Carney’s rhetoric promised it and ignored the fact that there are 8 other voting members.
As an aside I await the views of the inflationolholics who want a 4% inflation target such as Professor Tony Yates and Professor Wren-Lewis. No doubt their Ivory Tower models love the inflation rise as their economic models tell them that wages will rise in response although of course the real world is apt to remain so inconvenient and inconsiderate. Of course I suppose Professor Yates has a model which shows he was right when he and I debated monetary policy last September on BBC Radio 4’s Moneybox whereas of course the real world shows exactly the reverse.
Let me first open with an alternative universe.
The annual rate for RPIX, the all items RPI excluding mortgage interest payments (MIPs) index, is 2.9%, up from 2.7% last month.
So this has gone even further above its old target of 2.5% and would now be signalling that it was time for the Bank of England to consider reducing all its monetary stimulus rather than adding to it. No wonder it was scrapped! However we do learn something by looking at the new measure.
The all items CPI annual rate is 1.8%, up from 1.6% in December.
So we immediately learn two things the first is that there is a gap of 1.1% between two measures which are supposed to both measure UK inflation. You will no doubt not be surprised that the lower number has got the official nod or we have seen an “improvement”. But there is the secondary issue of the fact that the target was only changed by 0.5% or less than half. So there was a monetary policy easing that gets little publicity. Some of the difference is that in spite of the fact that mortgage costs are excluded RPIX still has an influence from owner occupied housing costs which the official CPI turns its blind eye to.
What are house prices doing?
Here are the numbers.
Average house prices in the UK have increased by 7.2% in the year to December 2016 (up from 6.1% in the year to November 2016), continuing the strong growth seen since the end of 2013.
Many of you will no doubt be having a wry smile at the way these were moved out of the headline inflation number (2003) just ahead of a boom in house prices. But the UK establishment is about to claim it is including them whilst not actually doing so. I explained in full detail on the 15th of November last year.
There is another issue which the National Statistician has attempted to fudge by writing “the inclusion of an element of owner occupiers’ housing costs”. How very Sir Humphey Appleby! I have noted that many people have reported that house prices are being included but you see they are not. Instead there is a statistical swerve based on the Imputed Rent methodology where they assume house owners receive a rent and then put growth in that in the numbers. The same rental growth measurement that according to their own missives they need to “strengthen”.
Let us look at this month’s number.
The all items CPIH annual rate is 2.0%, up from 1.7% in December.
Lets is start with the good which is that when it becomes the first measure on the statistical bulletin next month it will give a higher number than the one it replaces. The bad is that if you look at house prices it is still way behind them because the number it makes up or “imputes” tells us this about housing costs.
The OOH component annual rate is 2.5%, down from 2.6% last month.
Apologies to any first time buyers who are now choking on their coffee or tea. The ugly is that this made up number is not even a national statistic because of their failures in simply measuring rents. This has led to revisions and an abandonment of the past rental series.
I made these points to the UK National Statistician John Pullinger in late January as I reported on the 31st.
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.
What drove things this month?
If we look at the detailed data then it was clothing and footwear which held inflation back.
Overall, prices fell by 4.2% between December 2016 and January 2017, compared with a smaller fall of 3.1% last year
That tugged it back by 0.1% on the annual rate and offset some of the 0.29% rise from transport costs.
What is coming over the hill?
I am sorry to say that our valiant professors will be pleased by this.
Factory gate prices (output prices) rose 3.5% on the year to January 2017, which is the seventh consecutive period of annual price increases and the highest they have been since December 2011.
So as you can see the heat is on and that is being pushed by prices further up the chain.
Prices for materials and fuels paid by UK manufacturers for processing (input prices) rose 20.5% on the year, which is the fastest rate of annual growth since September 2008.
These only impact on some of the numbers and so get filtered out as well as reaching consumer inflation but they will continue to nudge consumer inflation higher as we move into the spring of this year.
There is much to consider here as we note that under our old regime inflation would be above target rather than just below it. However where we are poses a serious question for the Bank of England as it is pushing inflation higher with its ongoing monetary easing which even the inflationistas must now question. Indeed even the CPIH measure which next month will be first in the statistical bulletin with its imputed rents would if it had a 2% annual target be on it. I do hope that Governor Carney and Chief Economist Andy Haldane will soon be available to explain why a solidly growing economy with inflation heading above target needs a “Sledgehammer” of monetary easing. Actually Andy has been quiet of late has he been put back in the cellar he has spent most of the last 28 years in? How can he build an Ivory Tower from there?
Meanwhile the rest of us face higher inflation and I fear we will see 3% inflation on the CPI measure and 4% on the RPI measure as 2017 develops. I can say that I will be having more contact with the UK statistics establishment on the subject of their planned changes and will express my views to the best of my ability.
Seer of the year
There are many candidates for this but to be so wrong in only 24 house deserves a special mention. So step forwards European Commissioner Pierre Moscovici only yesterday.
And the Greek statistics authority today.
The available seasonally adjusted data1 indicate that in the 4 th quarter of 2016 the Gross Domestic Product (GDP) in volume terms decreased by 0.4% in comparison with the 3 rd quarter of 2016,
To coin a phrase Pierre is a specialist in failure. Still he does have a famous song to sing.
Yesterday all my troubles seemed so far away.
Now it looks as though they’re here to stay.
Oh, I believe in yesterday.