2017 is seeing the return of the inflation monster

As we nearly reach the third month of 2017 we find ourselves observing a situation where an old friend is back although of course it is more accurate to describe it as an enemy. This is the return of consumer inflation which was dormant for a couple of years as it was pushed lower by falls particularly in the price of crude oil but also by other commodity prices. That windfall for western economies boosted real wages and led to gains in retail sales in the UK, Spain and Ireland in particular. Of course it was a bad period yet again for mainstream economists who listened to the chattering in the  Ivory Towers about “deflation” as they sung along to “the end of the world as we know it” by REM. Thus we found all sorts of downward spirals described for economies which ignored the fact that the oil price would eventually find a bottom and also the fact that it ignored the evidence from Japan which has seen 0% inflation for quite some time.

A quite different song was playing on here as I pointed out that in many places inflation had remained in the service-sector. Not many countries are as inflation prone as my own the UK but it rarely saw service-sector inflation dip below 2% but the Euro area for example had it at 1.2% a year ago in February 2016 when the headline was -0.2%, Looking into the detail there was confirmation of the energy price effect as it pulled the index down by 0.8%. Once the oil price stopped falling the whole picture changed and let us take a moment to mull how negative interest-rates and QE ( Quantitative Easing) bond buying influenced that? They simply did not. Now we were expecting the rise to come but quite what the ordinary person must think after all the deflation paranoia from the “deflation nutters” I do not know.


January saw quite a rise in consumer inflation in Spain if we look at the annual number and according to this morning’s release it carried on this month. Via Google Translate.

The leading indicator of the CPI puts its annual variation at 3.0% In February, the same as in January
The annual rate of the leading indicator of the HICP is 3.0%.

Just for clarity it is the HICP version which is the European standard which is called CPI in the UK. It can be like alphabetti spaghetti at times as the same letters get rearranged. We do not get a lot of detail but we have been told that the impact of the rise in electricity prices faded which means something else took its place in the annual rate. Also we got some hints as to what is coming over the horizon from last week’s producer price data.

The annual rate of the General Industrial Price Index (IPRI) for the month of January is 7.5%, more than four and a half points higher than in December and the highest since July 2011.

It would appear that the rises in energy prices affected businesses as much as they did domestic consumers.

Energy, whose annual variation stands at 26.6%, more than 18 points above that of December and the highest since July 2008. In this evolution, Prices of Production, transportation and distribution of electrical energy and Oil Refining,
Compared to the declines recorded in January 2016.

In fact the rise seen is mostly a result of rising commodity prices as we see below.

Behavior is a consequence of the rise in prices of Product Manufacturing Basic iron and steel and ferroalloys and the production of basic chemicals, Nitrogen compounds, fertilizers, plastics and synthetic rubber in primary forms.

The Euro will have had a small impact too as it is a little over 3% lower versus the US Dollar than it was a year ago.


The land of beer and chocolate has also been seeing something of an inflationary episode.

Belgium’s inflation rate based on the European harmonised index of consumer prices was running at 3.1% in January compared to 2.2% in December.

The drivers were mostly rather familiar.

The sub-indices with the largest upward effect on inflation were domestic heating oil, motor fuels, electricity, telecommunication and tobacco.

These two are the inflation outliers at this stage but the chart below shows a more general trend in the major economies of the Euro area.

The United States

In the middle of this month the US Bureau of Labor Statistics confirmed the trend.

The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.6 percent in January on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics
reported today. Over the last 12 months, the all items index rose 2.5 percent before seasonal adjustment.

This poses some questions of its own in the way that it confirmed that the strong US Dollar had not in fact protected the US economy from inflation all that much. The detail was as you might expect.

The January increase was the largest seasonally adjusted all items increase since February 2013. A sharp rise in the gasoline index accounted for nearly half the increase,


A currency plummet of the sort seen by the Egyptian Pound has led to this being reported by Arab News.

Inflation reached almost 30 percent in January, up 5 percent over the previous month, driven by the floatation of the Egyptian pound and slashing of fuel subsidies enacted by President Abdel-Fattah El-Sisi in November.

Ouch although of course central bankers will say “move along now……nothing to see here” after observing that the major drivers are what they call non-core.

Food and drinks have seen some of the largest increases, costing nearly 40 percent more since the floatation, figures from the statistics agency show. Some meat prices have leaped nearly 50 percent.


There is much to consider here and inflation is indeed back in the style of Arnold Schwarzenegger. However some care is needed as it will be driven at first by the oil price and the annual effect of that will fade as 2017 progresses. What I mean by that is that if we look back to 2016 the price of Brent Crude oil fell below US $30 per barrel in mid-January and then rose so if the oil price remains around here then its inflationary impact will fade.

However even a burst of moderate inflation will pose problems as we look at real wages and real returns for savers. If we look at the Euro area with its -0.4% official ECB deposit rate and wide range of negative bond yields there is an obvious crunch coming. It poses a particular problem for those rushing to buy the German 2 year bond as with a yield of 0.94% then they are facing a real loss of around 5/6% if it is held to maturity. You must be pretty desperate and/or afraid to do that don’t you think?

Meanwhile so far Japan seems immune to this, of course there will eventually be an impact but it is a reminder of how different it really is from us.

UK National Statistician John Pullinger

Thank you to John and to the Royal Statistical Society for his speech on Friday on the planned changes to UK inflation measurement next month. Sadly it looks as if he intends to continue with the use of alternative facts in inflation measurement by the use of rents to measure owner-occupied housing costs. These rents have to be imputed because they do not actually  exist as opposed to house prices and mortgage costs which not only exist in the real world but are also widely understood.

22 thoughts on “2017 is seeing the return of the inflation monster

    • Hi Anteos and thanks for the link

      “Now the Ministry of Justice has decided to reduce the discount rate from 2.5% to minus 0.75%.
      That will result in more money for the victim, but a higher cost for the insurer.
      The change was ordered because the formula assumes the victim were to invest his or her money in government bonds.
      By the time inflation is taken into account, real returns on such bonds have become negative.”

      This is curious as real returns on UK Gilts have been negative before mostly in past inflationary phases. Very curious indeed as it had been the same for 16 years!

  1. Hello Shaun,

    If you think that Syria lost about 50% of its population due migration away from the civil ware there .

    Think of the economic impact on Europe if Egypt went the same way – 92.5 Million of them

    there’s nothing like costly food and fuel to anger a mob


    • Hi Forbin

      Yes it would have quite an impact if nothing else we would have seen a fair bit of depopulation of the Arab world. According to the Financial Times things are going rather well in Egypt.

      “After wasting the years since the 2011 Arab Spring mired in political uncertainty and economic stagnation, Egypt is back — and back on investors’ radar. The country has finally eased its acute balance of payments position, stabilised its foreign exchange reserves, enacted fiscal reforms under the auspices of the International Monetary Fund and liberalised its foreign exchange regime.”

  2. Great blog, Shaun, as always.
    With regard to US inflation, the US HICP for the total population, an experimental index published by the US BLS, provides a more comparable inflation measure to the UK CPI or the euro area Monetary Union Index of Consumer Prices. It showed less inflation, but a stronger upswing than the US CPI-U, going from 1.5% in December to 2.1% in January. Of course, the reason for both is that the US HICP excludes almost all homeownership costs and the owner’s equivalent rent index has been rising strongly recently (3.6% in December 2016). Just because it excludes equivalent rent, the US HICP was more sensitive to the big January increase in gasoline prices than the US CPI-U was.
    By the way, inflation is also going up in Canada. The CPI All-items inflation rate went from 1.2% in November to 1.5% in December to 2.1% in January. The old dethroned CPIX measure of core inflation went from 1.5% to 1.6% to 1.7% in the same months. The average inflation rate of the three new core measures that now define the operational guide meanwhile, showed the same 1.6% rate of inflation in all three months. How does that make any sense?
    Although volatile, annualized three-months rates of change of seasonally adjusted indices do provide a more timely measure of where inflation is heading than the annual rates of change. For the All-items CPI this has gone from 2.2% in December to 4.1% in January, and for CPIX from 0.6% to 2.2%. It isn’t possible to calculate these inflation rates for the new core measures, since the Bank of Canada, consistent with its more and more restrictive distribution of information, publishes no index numbers for these measures, adjusted or unadjusted for seasonal variation, only their inflation rates. The old CPIXFET series, which was the operational guide between 1991 and 2001, shows similar annualized rates to the CPIX, going from 1.3% in December to 2.6% in January.

    • Hi Andrew and thank you

      Rental Equivalence works better in the US than in the UK in 2 ways I think. Firstly rents seem to change more quickly in response to economic changes ( perhaps they do not smooth the numbers like the UK does) and it has a much higher weight ( 24.583%) than in the UK. Whilst not everyone is a fan in the US and I understand why it works better there than here.

      As to Canada I am sorry to say that the inflation pattern you describe is getting more and more familiar.

  3. This is a form of helicopter money, as those receiving compensation payouts are likely to spend at least some of it.

    So many of us now drive that compulsory motor insurance is a form of privatised taxation.

    • If motor insurance were not compulsory would you really want to take the risk, not insure and then, in the event of an accident that was your fault pay all costs out of your own pocket, especially if personal injury was involved?

  4. ‘These rents have to be imputed because they do not actually exist as opposed to house prices and mortgage costs which not only exist in the real world but are also widely understood.’

    Thanks for your continuing efforts to highlight the inconsistencies of the way the powers that be misrepresent the costs of living and inflate the GDP they’re floating the national on.

    Keep it up Shaun.

    • CPIH (includes housing costs calculated in accordance with “rental equivalence” methods) is due to overtake CPI later this year thereby deflating GDP compared to the CPI deflator so they are about to shoot themselves in the foot. It depends on where you are in the economic cycle as to which index produces the lowest result. Unless they intend to index swap every so often they cannot maintain artificially high GDP no matter which measure they settle on as they will find out with CPIH later this year.

      • GDP is deflated at the component level, and deflators based on the CPI are mainly used to deflate household final consumption expenditure. Actually the RPI retains a toehold in GDP deflation as it is still used to deflate trade unions’ subscriptions and estate agents’ fees and at least for the latter there can be no switch to a CPI deflator. The GDP estimates have used a rental equivalence approach to measure homeownership costs from the beginning, so it is hard to see how this switch to the CPIH will change anything in GDP deflation.

        • I didn’t know that, I stand corrected. Thanks Andrew, this calls the accuracy of GDP numbers from the beginning into question for me.

    • Hi JRH

      That was quite an anti-triumph wasn’t it and the attack on the Donald that some planned got drowned out. You couldn’t really make it up!

      Mind you Claudio Ranieri is probably thinking of the latter sentence and a lot worse right now as I note the Leicester City score.

  5. I would like to say something as a self confessed Deflation Nutter and make a point about the NAIRU nutters. It was widely predicted that stagflation would replace deflation and so it is proving.
    I wonder how much the NAIRU brigade would like to increase unemployment in Spain? Inflation is at 3% after all.

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