Today brings us a raft of UK data on inflation as we get the consumer, producer and house price numbers. After dipping my toe a little into the energy issue yesterday it is clear that plenty of inflation is on its way from that sector over time. I have a particular fear for still days in winter should the establishment succeed in persuading everyone to have a Smart Meter. Let us face it – and in a refreshing change even the official adverts now do – the only real benefit they offer is for power companies who wish to charge more at certain times. The “something wonderful” from the film 2001 would be an ability to store energy on a large scale or a green consistent source of it. The confirmation that it will be more expensive came here. From the BBC quoting Scottish Power.
We are leaving carbon generation behind for a renewable future powered by cheaper green energy.
We will likely find that it is only cheaper if you use Hinkley B as your benchmark.
We find that of our two indicators one has gone rather quiet and the other has been active. The quiet one has been the level of the UK Pound £ against the US Dollar as this influences the price we pay for oil and commodities. It has changed by a mere 0.5% (lower) over the past year after spells where we have seen much larger moves. This has been followed by another development which is that UK inflation has largely converged with inflation trends elsewhere. For example Euro area inflation is expected to be announced at 2.1% later and using a slightly different measure the US declared this around a week ago.
The all items index rose 2.3 percent for the 12 months ending September, a smaller increase than the 2.7-percent increase for the 12 months ending August.
There has been a familiar consequence of this as the Congressional Budget Office explains.
To account for inflation, the Treasury Department
adjusts the principal of its inflation-protected securities each month by using the change in the consumer price index for all urban consumers that was recorded two months earlier. That adjustment was $33 billion in fiscal year 2017 but $60 billion in the current fiscal
The UK was hit by this last year and if there is much more of this worldwide perhaps we can expect central banks to indulge in QE for inflation linked bonds. Also in terms of inflation measurement whilst I still have reservations about the use of imputed rents the US handles it better than the UK.
The shelter index continued to rise and accounted for over half of the seasonally adjusted monthly increase in the all items index.
As you can see it does to some extent work by sometimes adding to inflation whereas in the UK it is a pretty consistent brake on it, even in housing booms.
The pattern here is rather different as the price of a barrel of Brent Crude Oil has risen by 41% over the past year meaning it has been a major factor in pushing inflation higher. Some this is recent as a push higher started in the middle of August which as we stand added about ten dollars. Although in a startling development OPEC will now be avoiding mentioning it. From Reuters.
OPEC has urged its members not to mention oil prices when discussing policy in a break from the past, as the oil producing group seeks to avoid the risk of U.S. legal action for manipulating the market, sources close to OPEC said.
Seeing as the whole purpose of OPEC is to manipulate the oil price I wonder what they will discuss?
After the copy and pasting of the establishment line yesterday on the subject of wages let us open with the official preferred measure.
The Consumer Prices Index including owner occupiers’ housing costs (CPIH) 12-month inflation rate was 2.2% in September 2018, down from 2.4% in August 2018.
For newer readers the reason why it is the preferred measure can be expressed in a short version or a ore complete one. The short version is that it gives a lower number the longer version is because it includes Imputed Rents where homeowners are assumed to pay rent to themselves which of course they do not.
The OOH component annual rate is 1.0%, unchanged from last month.
As you can see these fantasy rents which comprise around 17% of the index pull it lower and we can see the impact by looking at our previous preferred measure.
The Consumer Prices Index (CPI) 12-month rate was 2.4% in September 2018, down from 2.7% in August 2018.
This trend seems likely to continue as Generation Rent explains.
The experience of the past 14 years suggests rents are most closely linked to wages – i.e. what renters can afford to pay.
With wage growth weak in historical terms then rent growth is likely to be so also and thus from an establishment point of view this is perfect for an inflation measure. This certainly proved to be the case after the credit crunch hit as Generation Rent explains.
As the credit crunch hit in 2008, mortgage lenders tightened lending criteria and the number of first-time buyers halved, boosting demand for private renting – the sector grew by an extra 135,000 per year between 2007 and 2010 compared with 2005-07. According to the property industry’s logic, the sharp increase in demand should have caused rents to rise – yet inflation-adjusted (real) rent fell by 6.7% in the three years to January 2011.
Meanwhile if we switch to house prices which just as a reminder are actually paid by home owners we see this.
UK average house prices increased by 3.2% in the year to August 2018, with strong growth in the East Midlands and West Midlands.
As you can see 3.2% which is actually paid finds itself replaced with 1% which is not paid by home owners and the recorded inflation rate drops. This is one of the reasons why such a campaign has been launched against the RPI which includes house prices via the use of depreciation.
The all items RPI annual rate is 3.3%, down from 3.5% last month.
There you have it as we go 3.3% as a measure which was replaced by a measure showing 2.4% which was replaced by one showing 2.2%. Thus at the current rate of “improvements” the inflation rate right now will be recorded as 0% somewhere around 2050.
This is pretty much a reflection of the oil price we looked at above as its bounce has led to this.
The headline rate of output inflation for goods leaving the factory gate was 3.1% on the year to September 2018, up from 2.9% in August 2018….The growth rate of prices for materials and fuels used in the manufacturing process rose to 10.3% on the year to September 2018, up from 9.4% in August 2018.
So we have an upwards shift in the trend but it is back to energy and oil again.
The largest contribution to both the annual and monthly rate for output inflation came from petroleum products.
It is indeed welcome to see an inflation dip across all of our measures. It was driven by these factors.
The largest downward contribution came from food and non-alcoholic beverages where prices fell between August and September 2018 but rose between the same two months a year ago…..Other large downward contributions came from transport, recreation and culture, and clothing.
Although on the other side of the coin came a familiar factor.
Partially offsetting upward contributions came from increases to electricity and gas prices.
Are those the cheaper prices promised? I also note that the numbers are swinging around a bit ( bad last month, better this) which has as at least a partial driver, transport costs.
Returning to the issue of inflation measurement I am sorry to see places like the Resolution Foundation using the government’s preferred measures on inflation and wages as it otherwise does some good work. At the moment it is the difference between claiming real wages are rising and the much more likely reality that they are at best flatlining and perhaps still falling. Mind you even officialdom may not be keeping the faith as I note this announcement from the government just now.
Yes that is the same HM Treasury which via exerting its influence on the Office for National Statistics have driven the use of imputed rents in CPIH has apparently got cold feet and is tweeting CPI.