Remember rebalancing? Is UK manufacturing really picking- up as housing cools?

Today has opened with a reminder of both  a major economic issue of 2017 for the UK and the theme that the UK is an inflation nation. From the BBC.

British Gas will increase electricity prices by 12.5% from 15 September, its owner Centrica has said, in a move that will affect 3.1 million customers.

However, the company’s gas prices will be held at their current level.

The average annual dual-fuel bill for a typical household on a standard tariff will rise by £76 to £1,120, up by 7.3%.

Unless you live in an all electric property it is the last number I guess which is the most relevant. However the reason is not what you might think according to Centrica.

Centrica chief executive Iain Conn told the BBC’s Today programme that wholesale costs had gone down and were not the reason for the price rise.

“We have seen our wholesale costs fall by about £36 on the typical bill since the beginning of 2014 and that is not the driver”

A fascinating viewpoint and he rammed home what were the real causes.

It is transmission and distribution of electricity to the home and government policy costs that are driving our price increase

We are back to the UK being an inflation nation theme as whilst out political class regularly promise energy cost price caps and the like they then sign us all up to policies often but not always green based which will cost us all more money as time passes. The headline feature in this regard was the promise of £92.50 per megawatt hour to EDF for electricity from the proposed Hinkley Point nuclear power station or around double current prices.

Perhaps that is why the Bank of England targets an inflation rate of 2% per annum and claims that is sound money as in fact there is a steady drip feed away from us. These days the impact of even such a rate of inflation is larger due to the weak level of wage rises.

Inflation trends

The good news on this front has been the rally in the UK Pound £ versus the US Dollar which passed US $1.32 yesterday. Of course the US Dollar is weak overall but the price we pay for commodities will be helped by this. Less hopeful has been the rise in the  price of a barrel of Brent Crude Oil has risen above US $52 per barrel. Some other commodity prices have been rising too as the Reserve Bank of Australia reported earlier.

Using spot prices for the bulk commodities, the index increased by 7.4 per cent in July in SDR terms and remains 21.9 per cent higher over the past year.

These things are of course very volatile with The Australian reporting this earlier.

According to Platts’ The Steel Index, benchmark 62 per cent iron ore at Chinese ports rose $US4.10, or 6 per cent, to $US73.10 last night, the highest since early April and up from lows of $US53 hit in mid June.

So there are inflationary pressures around for the rest of this year.

Inflation measurement

This was released yesterday by the UK Office for Statistics Regulation ( OSR ).

On behalf of the Board of the Statistics Authority, I am pleased to confirm the re-designation of CPIH as a National Statistic.

I gave evidence to the OSR suggesting that they should not do so. In my opinion they have not demonstrated that they can estimate imputed rents and prices accurately. The situation below is apparently just fine.

 I acknowledge the efforts by ONS staff to provide reassurance around the quality of the Valuation Office Agency (VOA) private rents microdata, which are currently unavailable to ONS…………. ONS’s lack of assurance over these data in 2014 played a significant role in our decision to remove National Statistics status.

How can you reassure about data you do not know? Anyway the result was no surprise however  the ONS ( Office for National Statistics) will be damaged but what has been a tin eared propaganda campaign in favour of CPIH and I fear the OSR has shown that it looks and sounds good but in reality simply rubber stamps the establishment viewpoint. Even past fans and supporters  of CPIH such as the economics editor of the Financial Time Chris Giles seem to lack any real enthusiasm for it.

House prices

We got an estimate of what has been going on with Nationwide customers today.

The annual pace of house price growth remained broadly stable in July at 2.9%, only a touch lower than the 3.1% recorded in June.

There is an irony here as the effort to exclude house price rises from the inflation data applies just as it is pretty much the same as the official inflation measure. Also the market is looking rather becalmed.

Survey data point to relatively sluggish levels of new buyer enquiries, but at the same time surveyors report that relatively few properties are coming onto the market

UK Manufacturing

The news this morning was good on this front.

The rate of improvement in UK manufacturing operating conditions accelerated for the first time in three months at the start of the third quarter.

A factor in this was very welcome.

foreign demand rose at the second-strongest rate in the series history, beaten only by that recorded in April 2010. Companies reported improved inflows of new work from clients in North America, Europe, the AsiaPacific region and the Middle-East.

Are we finally seeing that bit of economic theory called the J-Curve applying after the fall in the value of the UK Pound? Perhaps we got that as well as a benefit from the recent higher Pound.

Cost pressures eased in July

This would be rare for the UK as movements in the currency invariably seem bad! Just to be clear these are movements over different periods of time where prices respond more quickly than business. Also there was a further improvement in the UK employment situation.

The ongoing upturns in output and new orders encouraged further job creation in July. Staffing levels rose for the twelfth straight month. The pace of expansion was among the best registered over the past three years.


Let us briefly bask in the glow of a UK manufacturing renaissance especially if we add in the CBI report of a week or two ago. We have even managed to nudge above the economic boom in France as our PMI ( Purchasing Manager’s Index) reading at 55.1 was slightly above its 54.9. Meanwhile house price growth has notably faded. Much more of this and the “rebalancing” of former Bank of England Governor Mervyn King will be on the menu again or if we add a dose of reality for the first time. Also 0.2 on this measure is simply spurious accuracy. Indeed if you note this piece of research from them the margins are much wider.

In fact, periods of sustained downturns, the extent to which takes the annual rate of growth of manufacturing output into negative territory, have only ever been recorded when the PMI surveys output index has fallen below 52.6 for more than one month.

So is 50 the threshold for growth or 52.6? Also there is the issue that on this measure the UK had manufacturing growth in the second quarter as opposed to this.

The latest ONS data meanwhile estimated that manufacturing output fell 0.5% in the second quarter.

So we are either booming or contracting? That makes the “on the one hand….on the other hand” of economists seem accurate! Here is the conclusion of the Markit analysis.

The relationship between the PMI and ONS data therefore suggest that the current weakness in the ONS data is merely another temporary downturn and that a resumption to growth will be seen in the third quarter, providing PMI data remain above 52.6 in August and September.

Let’s be upbeat and hope for that although the real message here is that all the numbers are unreliable. Indeed as is news from my old employer Deutsche Bank. From the Financial Times.


Landsec, the property company, said on Tuesday it had signed an agreement for Deutsche to take at least 469,000 square feet at 21 Moorfields, a site under construction in the City of London.

Only last week it was supposed to be flooding out of London. No doubt some will go to Frankfurt but how many?





18 thoughts on “Remember rebalancing? Is UK manufacturing really picking- up as housing cools?

  1. I heard that interview of Ian Conn from Centrica on the Today programme and also thought that his angle was interesting, i.e. that it isn’t just the wholesale prices that determine costs for customers. However, you must have noticed that he was basically browbeaten by the BBC because he was raising prices while wholesale prices have fallen, because it doesn’t suit the BBC agenda:
    1. To listen to anything said by a businessman;
    2. To listen to anything that might hint at costs brought about by green measures,
    I find it very sad that the mainstream media avoids what you do, ie investigate and point out inconsistencies, hidden truths etc and, instead, peddles a line for its own agenda.
    Keep up the good work.

    • Strange you should mention that James,as I listened as well- very rare-and I have to agree.When Conn mentioned regulatory costs and transmission costs,there was no incisive questions about how and why………which is pretty much why I never watch or listen to the BBC.

      • If you go to the BBC website now, the top article is British Gas to raise prices by 12.5%. The first subheading is “how to change your gas supplier”.
        It’s not really reporting any more, just spinning a line.

    • I was surprised to hear from Ian Conn that transmission costs amount to 29% of our bills…..I think that’s what he said. I’m surprised it’s that much. I must say I listen carefully to the business leaders when they come on and not so much to the BBC spin.

      It was also interesting to hear how “green” measures are adding to our costs. Smart meters are also being spun as good for customers to be able to see how much leccy they’re using but as I see it the main advantage will be for the companies as they won’t have to employ expensive meter reader people and will also be more able to control when we’re using power if people buy internet connected freezers etc. Maybe such efficiencies will be passed on to us as savings on our bills but I somehow doubt it.

  2. “In forming our judgement, we have also carefully considered the approach to estimating OOH costs. Throughout this Assessment process, we have heard arguments for and against the different methods to estimate these costs. THERE IS NO CONSENSUS ON A SINGLE RIGHT WAY TO DO THIS, and this lack of agreement is likely to continue.” (Emphasis added.) This is simply false. Gordon Brown could change the name of the UK HICP to CPI, but it is still an HICP. Eurostat agreed early on that if an owner-occupied housing (OOH) component were added to the HICP it would be based on the net acquisitions approach and that led to an EC regulation requiring all EU countries, as well as Iceland and Norway to produce quarterly OOH(NA) series. There has never really been any serious challenger to the net acquisitions approach within the EU or the EEA. Certainly the rental equivalence approach isn’t one, since it is simply a joke to create a composite of a proxy index like an imputed rent series and an HICP that eschews proxies on principle. There are only a few countries that publish HICPs, like Switzerland and the US, that do not also publish OOH(NA) series and are not committed to doing so. None of them publishes a composite of their national HICP and an imputed rent series, and it would be bizarre if any one of them did so. Switzerland and the US already have imputed rent series in their national CPIs, so would see absolutely no benefit in constructing such a series, which would be an inferior index for upratings purposes to the national CPI. There are also EU candidate countries, Serbia and Turkey, that have published HICPs, but not OOH(NA) series. Serbia’s has been published on the EU website since October 2016. They implicitly accept the existing consensus in favour of the NA approach, whether or not they actively endorse it, as they should do.
    The ONS is simply marching right while the rest of the world is marching left, but Ed Humpherson wants to create the impression that everyone is marching off in all different directions. They aren’t.

    (“Probijam led” means “I’m breaking the ice” in Serbian.)

    • Hi Andrew and thanks

      I thought for a minute it was going to be a Serbian girl band then she sung pretty much on her own.

      As to the inflation measurement I completely agree and made the same point about aligning with Europe that the UK establishment used to establish CPI which they have dropped with CPIH. Whether it was that which led Paul Johnson of the IFS to leave his own Public Meeting early I do not know but the situation is a mess. The ONS ( and by default the OSR) are broadcasting propaganda rather than reasoned arguments. As to the no consensus point actually more and more people have been grouping but in the opposite direction and this includes the Royal Statistical Society.

      • Thank you very much for your reply, and it’s great to hear that people in Britain, and particularly the RSS, are coalescing against the CPIH.
        You were actually very close to the mark when you spoke of a Serbian girl band for the Ivana Selakov video. La Selakov was one of the female background vocalists when Marija Šerifović won the Eurovision Song Contest in 2007 for Serbia with “Molitva”. These background vocalists formed a girl band called “Beauty Queens” (yes, their name is English, not Serbian) while still in Helsinki. The group still exists although Selakov is no longer a part of it.
        Today is my last full day in Serbia. When Kusturica made “Do You Remember Dolly Bell?” in 1981, his teenage hero Dino was in a rock band whose main song was in Italian. Maybe Italian songs still have an audience in Sarajevo, but in Serbia and Montenegro, as far as I can hear, the music of the Anglosphere now enjoys a crushing dominance. Everything I heard that wasn’t in Serbo-Croatian was in English, except for one lovely French song that I didn’t recognize. The US would never have lost its number one spot to China if every industry were like the music industry!

        • I think I maybe forgot a few songs in other languages. “Despocito” was played in both the all-Spanish version and Justin Bieber’s bilingual version. There were one or two Italian songs that got played. Just the same, when a song wasn’t in Serbo-Croatian, it was almost always in English.

  3. Shaun, thanks for your insights. It does seem that there is gerrymandering afoot. Not a PC term I know. But what with indicies where 52.6 is the new inflexion point and CPIH being promoted against a backround of crtitque AND the annual movement in prices being quoted instead of the monthly series. I can see a Dunkirk fog being employed. One to consciously and systematically obscure the truth.

    Its quite inconvenient that in this era of the lowest ever interest rates.
    1) Costs are rising majorly in the case of energy, rail tickets, in fact anywhere the Govt has a hand.
    2) Real incomes are falling
    3) Credit consumption is growing at 10%
    4) House price increase is dramatically attenuating

    Instead we have to focus on the rays of hope, manufacturing and movie making which are probably less than 5% of employment and almost certainly due to sterling weakness rather than GB strength.

    • Hi Paul
      Yes it feels like the wheels are turning. Not all of it is bad as house prices cannot just rise and rise especially with wage growth being weak. As to the numbers 52.6 is spurious accuracy but I was surprised that it indicated a recession of sorts. So much for the threshold being 50 and more reinforcement for the view that the zone 48-52 doesn’t mean much either way.

    • Indices to which you refer are produced by Markit – a private company. I do not accept that they are somehow in cahoots with the Government. They simply don’t know what they’re doing.

      There is nothing wrong with annual price increase/decrease quotes as monthly are erratic. I would never pay attention to any shorter a timescale than quarterly.

  4. People had better get used to their gas and electric prices doubling every ten years or so, a combination of the disastrous decision to close the highly efficient coal stations combined with a dash for gas and now compounded by more economically illiterate decisions like Hinkley, add in the billions to install smart meters that are now obsolete and will be replaced by newer meters at higher cost, the price of gas and electricity has only one way to go.

  5. “There is an irony here as the effort to exclude house price rises from the inflation data applies just as it is pretty much the same as the official inflation measure. Also the market is looking rather becalmed”

    House price rises were not included in CPIH’s predecessor CPI so why are you saying this?.

    • Hi, Jive Bunny. I apologiize; I didn’t mean to rate your comment one way or another but rated it up and found that rating it down didn’t cancell it but changed the rating. I think Shaun’s meaning is clear. The CPIH was introduced because the CPI excluded owner-occupied housing (OOH), which even Carney recognized was a defect when he was being vetted for the job of BOE governor by the UK TSC. Adding an OOH component based on the net acquisitions approach was basically a no-brainer, since Eurostat had recommended this option since at least the start of this century, but this would have made the new index very sensitive to rapidly rising house prices, which would have been embarrassing for both the Bank of England and the Treasury Department. So to avoid this embarrassment, a CPIH that used imputed rents was adopted, which was insensitive to house prices. It’s ironic because the CPIH was only made the headline measure with the February 2017 update, and since then house price inflation hasn’t been much different from CPI inflation.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.