What is the trend for inflation?

The issue of inflation is one which regularly makes the headlines in the financial media. However the credit crunch era has seen several clear changes in the inflation environment. The first is the way that wage and price inflation broke past relationships. There used to be something of a cosy relationship where for example in my country the UK it was assumed that if inflation was 2% then wage growth would be around 4%. Actually if you look at the numbers pre credit crunch that relationship had already weakened as real wage growth was more like 1% than 2% but at least there was some. Whereas now we see many situations where real wage growth is at best small and others where there has not been any. For example the “lost decade” in Japan which of course is now more than two of them can in many respects be measured by (negative) real wage growth. Even record unemployment levels have failed to do much about this so far although the media have regularly told us it has.

At first inflation dipped after the credit crunch but was then boosted as many countries raised indirect taxes ( VAT in the UK) to help deal with ballooning fiscal deficits.. There was also the really rather odd commodity price boom that made it look like all the monetary easing was stoking the inflationary fires. I still think the bank trading desks which were much larger back then were able to play us through that phase. But once that was over it became plain that whilst via house prices for example we had asset price inflation we had weaker consumer price inflation which around 2016 became no inflation for the latter and for a time we had disinflation. This was the time when the “Deflation Nutters” became a little like Chicken Licken and told us the economic world would end. Whereas that was in play only in Greece and for the rest of us things changed as easily as an oil price rise. Also recorded consumer inflation would not have been so low if house and asset prices were in the measures as opposed to being ignored?

What about now?

The United States is in some ways a generic guide mostly because it uses the reserve currency the US Dollar. Whilst there have been challenges to its role such as oil price in Yuan it is still the main player in commodities markets. Yesterday we were updated by  on what is on its way.

The Producer Price Index for final demand rose 0.3 percent in June, seasonally adjusted, the U.S. Bureau of Labor Statistics reported today. Final demand prices advanced 0.5 percent in May and 0.1 percent in April.  On an unadjusted basis, the final demand index moved up 3.4
percent for the 12 months ended in June, the largest 12-month increase since climbing 3.7 percent in November 2011.

As we look at the factors at play we see the price of oil yet again as it looks like being an expensive summer for American drivers.

Over 40 percent of the advance in the index for final demand services is attributable
to a 21.8-percent jump in the index for fuels and lubricants retailing.

There was also maybe a surprise considering the state of the motor industry.

A major factor in the June increase in prices for final demand goods was the index
for motor vehicles, which moved up 0.4 percent.

We can look even further down the chain to what is called intermediate demand.

For the 12 months ended in June, the index for
processed goods for intermediate demand increased 6.8 percent, the largest 12-month rise since
jumping 7.2 percent in November 2011.

As you can see this is moving in tandem with the headline but do not be too alarmed by the doubling in the rate as these numbers fade as they go through the system as they get diluted for example by indirect taxes and the like. Peering further we see a hint of a possible dip and as ever the price of oil is a major player.

For the 12 months ended in June, the index for unprocessed goods for
intermediate demand increased 5.8 percent…..Most of the June decline in the index for unprocessed goods for intermediate demand can be traced to a 9.5-percent drop in prices for crude petroleum.

Such numbers which we call input inflation in the UK are heavily influenced by the oil price and in our case around 70% of changes are the Pound £ and the oil price. As the currency is not a factor for the US so much of this is oil price moves. That is of course awkward for central bankers who consider it to be non core.If you ever are unsure of the definition of non-core factors then a safe rule of thumb is that it is made up of things vital to life.

Commodity Prices

We find that if we look at commodity prices the pressure has recently abated. Yesterday;s falls took the CRB Index to 435 which compares to the 452 of a month ago and is pretty much at the level at which it started 2018 ( 434). The factor that has been pulling the index lower has been the decline in metals prices. The index for metals peaked at 985 in late  April as opposed to the 895 of yesterday.

OilPrice.com highlighted this yesterday.

Two weeks ago, Hootan Yazhari, head of frontier markets equity research at Bank of America Merrill Lynch,said Trump’s push to disrupt Iranian oil production could cause oil prices to hit $90 per barrel by the end of the second quarter of next year. Others have forecasted even higher prices, breaching the $100 plus per barrel price point.

Unfortunately for them whilst they may turn out to be right there are presentational issues it informing people of that on a day when events are reported like this by the BBC.

Brent crude dropped 6.9% – the biggest decline in more than two years – to end at $73.40 a barrel for the global benchmark………Wednesday’s sell-off started after the announcement by Libya’s National Oil Corp that it would reopen four export terminals that had been closed since late June, shutting most of the country’s oil output.

Comment

We see that the move towards higher inflation has this month shown signs of peaking and maybe reversing. Of course some of this is based on a one day move in the oil price but there are possible reasons to think that this signified something deeper. From Platts.

Russia and Saudi Arabia raised their oil production by a combined 500,000 b/d, and OPEC crude output hit a four-month high of 31.87 million b/d in June, reflecting agreement on easing output cuts, the IEA said Thursday.

Another factor is the Donald as President Trump is in play in so many areas here via the impact of his trade policies which have clearly impacted metals prices for example.Also his threats to Iran pushed the oil price the other way.

For those of us who do not use the US Dollar as a currency there is another effect driven by the fact that it has been strong recently which will tend to raise inflation. This will be received in different ways as for example there may have been a celebratory glass of sake at the Bank of Japan as the Yen weakened through 112 versus the US Dollar but others will (rightly) by much less keen. This is because returning to the theme of my opening paragraph wage growth has plainly shifted lower worldwide which means that those who panicked about deflation actually saw reflation as real wages did better.

As a final point it is hard not to have a wry smile at yesterday’s topic which was asset price inflation on the march in Ireland. So much of this is a matter of perspective.

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13 thoughts on “What is the trend for inflation?

  1. Agenda 21 requires less wealth in the “West” and more in the developing World, a surprisingly different prescription than we have in the West, where we are told that the best option is to allow the nauseatingly rich to become nauseatingly richer “but the poor are still better off.”
    Obviously, having grabbed all they can for the past 40 years, the elites have absolutely no intention of giving up any of their wealth, and it must come from ordinary folk.
    Thus assets are inflated, wages, pensions and savings are squeezed, and the only wealth many have is the illusory “value” of their home.
    So the only way to make ordinary folk poorer is to reduce the share of the World’s resources that they can afford to consume. You know, food, fuel, clothing and shelter.
    The easiest way to do this is by having inflation higher than the ordinary person’s wage growth.
    However, to openly have wages for the bottom 50% at approx. 1/6th of THEIR inflation, might quickly lead to industrial militancy.
    Hence we need deliberately misleading inflation indices, masking real-life inflation, shrinkflation (averaging ~ 10% on many food items), and the fraudulent “imputed” rents, and any other chicanery tptb can get away with.
    If that’s what you intended, what would you have as a measure of inflation? The CPI, of course!
    So going forward, I see more and more weasel ideas will be found to raise inflation without it showing in the index.

    My answer to the question posed by your header today is, “Inflation is rising exponentially at this time, and will continue to do so until civil insurrection.”.

    • As therrawbuzzin says, the effect of inflation on different groups varies considerably. I would add a couple of points:
      1. Upper-end and directors’ salaries have risen above inflation for many years on almost any measure, which is another reason why those at the top don’t feel the pinch as much;
      2. Inflation on food, water etc is pretty marginal for those at the top, as it is such a tiny proportion of expenditure.
      It is clear that, both here in the UK and in the US, large numbers of people are no better off or are worse off than ten years ago and that this seems sure to get even worse, because:
      1. Lots of things like council tax, electricity, water, gas, petrol, trains etc are just unavoidable costs and all seem to go up more than inflation, however measured. The things that go down, such as electronics, are hardly going to feed your family;
      2. As defined benefit pensions evaporate, there is a ghastly chasm between income during work and the reality of pensions in future for most people. Of course, poor people could save more for their retirement, as recommended by government (and where exactly is the money going to come from?). In the real world, those at the bottom are simply going to get poorer gradually during working life and suddenly when they retire;
      3. In the US, of course, you can add healthcare costs to the essential things that always rise faster than inflation.

      Overall, I would guess that someone on median wage in the UK needs to have a salary rise of 4-5% a year to feel equivalently rich to earlier years. No chance of that!

      • James,
        ” Lots of things like council tax, electricity, water, gas, petrol, trains etc are just unavoidable costs and all seem to go up more than inflation, ”

        In those examples I would suspect that those increases reflect more accurately the REAL rate of inflation, as I’ve said before just keep an eye on the price of a Big Mac, it goes up about 7-10% p.a. McDonalds have no interest in fiddling the price of their flagship product and it doesn’t suffer from shrinkflation either.

  2. This is an exteremely complicated subject, considering the number of factors that affect it and the impossibility of getting any real inflation(or deflation data) from the UK government, but if you look to history to provide a guide, the UK government has a long record going back to the events following WWI: in any times of extreme economic difficulties or crisis, sterling will magically devalue to “save” the UK economy.”Because a weaker currency boosts our exporters and everyone will benefit”, neatly forgettting the imported raw material costs of said exporter has just gone by the very amount of the debvaluation or more, and if a perpetually weakening currency were required for our continued “success”, how come Germany can be such an exporting powerhouse with a perpetually strong currency(previously the deutschmark, and now since January 1999 the euro, which at todays prices is up 33% on its launch valuation against sterling)?Imagine what the euro exchange would be if Portugal, Italy, Greece and Spain were not in the currency union, that gives an indication of the relative deterioration of sterling against what would have been the Deutschmark

    Of course, the structural problems of the UK economy problems never go away, they are merely kicked down the road to the next devaluation, the period inbetween gives the population the fuzzy feelgood feeling that the crisis has gone away as the economy recovers and the most important indicator to them is that their house price has gone up(albeit in devalued and ever worthless pounds).

    So to the future prospects, as if there weren’t enough uncertainty and problems for the UK with interest rates still at the financial crisis levels of ten years ago and the looming prospect of an insane Labour Marxist chancellor getting the keys to No.11 Downing St, we now also have BREXIT to deal with.

    If BREXIT brings down the Tory government(as it likely will with the current soft T.May version that is remaining in name only) or they simply lose the next election – due to the perceived betrayal of BREXITEERS, this will result in a “punish the Tories” protest vote – Labour will likely win by a landslide leading to a collapse in sterling, if hard BREXIT happens, sterling will crash anyway, so every permutation of the BREXIT/Tory leadership crisis/general election version of the Rubic cube brings up the same result – more downwards pressure on sterling, enter Mark Carney stage left, who is psycopathically determined never to raise rates and you have recipe for disaster ahead.

    Sticking my neck out here now, but I very much doubt the Uk will be able to hang on to sterling throughout the onslaughts outlined above, adoption of the Euro will be given as a fait accompli somewhere along the line, I’d give sterling five years maximum, if Labour do what I expect them to, it will be a lot sooner.

    • You are not optimistic, then!!
      One thing which seems to be ignored in the Brexit debate is what the EU will demand if we have second thoughts about leaving and vote (either parliament or a second referendum) not to leave. I think that the list will:
      1. Start with membership of the Euro;
      2. Include scrapping Article 50, perhaps just for us, shutting the exit door completely;
      3. Demand control over our budget and end the rebate;
      4. Include a joint defence force aka a European army.
      Etcetera etcetera.
      In other words, we are now caught between:
      1. A hard Brexit;
      2. A soft Brexit with the political ramifications that you describe above; or
      3. What I call a hard re-entry, ie the EU simply listing the terms under which it agrees to scrap out notice under Article 50 once a reversal of Brexit has been voted on.
      The one thing that I do not believe is on the table is a return to the status quo ante within the EU.

    • Brexiteers know that the best way to no-deal is to let Treason May stumble on for another few months, then bring her down over this deal when it’s too late to negotiate a new one.

  3. The question was however where is the trend?

    The highest I saw high inflation in the UK was in the 70’s, I had a property which trebled in a short space of time interest rates went up very high as well. What followed was a number of property price falls.

    Its a different set of circumstances now, property prices still too high but we have low interest rates and current inflation nothing like the 70’s!

    Unfortunately when a bubble gets too big its got to burst and something has to give!

    What I think we may see in future is low deflation a collapse in asset prices and negative interest rates.

    Sounds terrible but history cannot be relied upon precisely to predict what could happen next but one thing is for sure and that is the pain has to come at some stage, the efforts by the banks and government policies can only do so much, whatever goes up beyond reason must come back down again.

    Some one has to take the pain!

    • Hi Peter

      The peak for UK inflation ( RPI) was 26.9% in the summer of 1975 when we were in crisis.The next peak was in May 1980 when it reached 21.9% so it was in decline and the next peak only just made double figures as it was 10.9% in the autumn of 1990. Since that phase it has not got anywhere near double figures again.

      The “independent” central bankers claim it as a success but the truth is that the trend was strong before they started. The question is can it carry on? Japan has survived that sort of thing so it is not the end of the world. However we in the UK are more prone to inflation.

  4. I suspect the conditions of any “free trade” deal with the US will force a hard border between the UK and EU whatever gets agreed in the meantime.
    Looking at the government’s new (new new) plan, is it me or does it include something of a hint to anyone in the City who hasn’t already done so to move their own money abroad ? Maybe its a cunning plan to drive down London property prices so the next set of foreign investors can buy it up cheap ?

    • Hi arrbee

      If you had wanted to move your money out of UK Pound £ there have been plenty of opportunities. For me the troubling bit of the new plan was the way it seems to skip over the services sector.

      • Indeed, thats what I was referring to as the “something of a hint”.
        I see Pres Trump agrees with the me that the UK will have to decide between the EU and the US – maybe he sees us as a new Puerto Rico.

        • Better than being the new Greece.
          (I mean no disrespect to any Greeks. One of the deciding factors in my Brexit vote was sympathy for their plight.)

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