UK Inflation starts to head lower and help real wage growth

Today brings the latest UK official inflation data into focus. However the last 24 hours have brought another shift in the environment because the crude oil price had another of those days when it took something of a dive. Here is Oilprice.com on the subject.

Crude prices fell 4 percent on Monday and about 7 percent on Tuesday. WTI dropped below $47 per barrel and Brent fell to the $56 handle.

Moving onto the likely causes they tell us this.

Oil prices crashed to new one-year lows on Tuesday, dragged down by a deepening sense of global economic gloom as well as fears of oversupply in the oil market itself.

The reasons for the sudden meltdown were multiple. Rising crude oil inventories and expected increases in shale production weighed on oil prices, but the price crash was accentuated by the broader selloff in financials.

Genscape said that inventories are rising, which has raised fears of tepid demand amid soaring supply growth.

We are back to mulling an increase in shale oil production at a time when demand is weakening. As ever there is an undercut as we wonder if the shale oil producers will be so enthusiastic if the oil price remains at these new lower levels. If we switch to the impact on the inflation outlook then we now have an oil price that is around 10% lower than a year ago if we use the Brent Crude benchmark and more than that using West Texas Intermediate as the gap between the two has approached US $10.

The impact of this should be felt to some extent in the input version of the producer price data for November and maybe via fuel prices at the pump in a much more minor way on the consumer price inflation number. By the time we get the December data there will be a stronger influence and this will be accompanied by other commodity prices falls. For example Dr. Copper is at US $2.68 as I type this or 14% lower than a year ago. The CRB Commodity Index has not fallen as much but is still some 6% lower than a year ago.

Central Banks

The news above will be debated at the US Federal Reserve as it decides US interest-rates and the subject of QT today. Of course central bankers ignore what they call non-core factors such as energy and food in their favourite inflation measures but the ordinary person cannot and the picture has changed. Also as @fwred reminds us central banks are no longer using their balance sheets to raise inflation.

From an economic perspective, we’ll be debating the impact of QE for years looking at the counterfactual and the complementary effects of other policy tools, including negative rates. ECB’s estimate: ~2% boost both to real GDP and inflation, or +40bp per year.

Well apart from the Bank of Japan anyway, but it has failed to do much about inflation at all in spite of the size of its actions which now exceed annual economic output or GDP.

Today’s data

Having emphasised the impact of lower oil prices let us get straight to the impact.

The annual rate of inflation for materials and fuels purchased by manufacturers (input prices) slowed to 5.6% in November 2018, down 4.7 percentage points from October 2018 . The 12-month rate of input inflation has been positive since July 2016. The annual rate was driven predominantly by crude oil prices, which showed growth of 15.5% in November 2018, although this was down from 40.4% in October 2018. The one-month rate for materials and fuels fell 3.1 percentage points to a negative 2.3% in November 2018.

As you can see there was quite a change in the trajectory in November and as the annual rate remained positive there is more to come. There was also the beginning of an effect on the output number.

The annual rate of inflation for goods leaving the factory gate (output prices) fell by 0.2 percentage points to 3.1% in November 2018 . The 12-month rate of output inflation has remained positive since July 2016. On the month, output inflation also slowed, falling 0.1 percentage points to 0.2%.

Actually there was a larger impact from the lower oil price than this but it got offset by this.

This increase reflects the rise in Tobacco Duty introduced in November 2018 and is the highest the rate has been since March 2014.

So not the best of months for Oasis fans.

But all I need are cigarettes and alcohol!

Consumer Inflation

Here we also saw a marginal nudge lower in the main two measures.

The all items CPI annual rate is 2.3%, down from 2.4% in October…….The all items RPI annual rate is 3.2%, down from 3.3% last month

This was driven by lower rates of inflation for recreation and culture and this.

Petrol prices fell by 2.6 pence per litre between October and November 2018, compared with a rise of 1.8 pence per litre between October and November 2017.

Actually I noted this mention about recreation and culture.

Price movements for both
computer games and live music events can often be relatively large depending on the composition of
bestseller charts and the bands that are touring at the time of price collection.

This was on my mind due to the fact that Ringo Starr and Ronnie Wood joined Paul McCartney on stage at the O2 in London on Sunday night. My point is that you can measure the ticket price but what is your quality measure? From the excitement on social media that changed by Ringo’s presence in the crowd before we get to having the only surviving Beatles playing on stage and to top it off being joined by a Rolling Stone.

How to measure inflation

We can move onto the widely ignored official measure called CPIH.

The all items CPIH annual rate is 2.2%, unchanged from last month.

It is widely ignored because of the way it uses Imputed Rents to get to this.

The OOH component annual rate is 1.1%, unchanged from last month ( OOH = Owner Occupied Housing).

House Prices

A couple of weekends ago when the economics editor of the Financial Times was presumably otherwise engaged I noted this.

The original consumer price index included house prices. But they were removed in 1983 and replaced with “non-market rents” — an estimate of how much owners could charge to let their homes…….
Including house prices in the new index would not guarantee a higher rate of inflation as high house price inflation might be offset by smaller increases, if not a decline, in rents or offset by price changes in other components. But large and persistent acceleration in this new economy-wide index would be a sign of more general inflation.

This was about the US and written by Joseph Carson but it applies to the UK as well. I note it got widespread support in the comments, although we cannot make a comparison to the pro Imputed Rent articles as they seem to have suspended the comments system for those.

The rate of UK house price inflation has slowed and I welcome that but it remains a much better guide to inflation than any rental fantasies.

Average house prices in the UK increased by 2.7% in the year to October 2018, down from 3.0% in September 2018. This is the lowest annual rate since July 2013 when it was 2.3%. Over the past two years, there has been a slowdown in UK house price growth, driven mainly by a slowdown in the south and east of England.

Comment

There is some pre-Christmas cheer in the UK inflation data today as we see the new lower oil price start to have an impact on the numbers. If it is true that the New Year Sales have started early then that too may impact on the December data although of course it will wash out to some extent in January.

But for the moment the trend for consumer and indeed asset inflation is down and we should welcome the way that will benefit real wages and indeed first time buyers in the property market. Also as someone who has spent the last 6 years or so arguing about inflation measurement with official bodies being operated like puppets by HM Treasury I had a wry smile at this tweet which ignores the measure it has pressed for.

7 thoughts on “UK Inflation starts to head lower and help real wage growth

  1. Hello Shaun,

    Wages will need a lot of help over a protracted time period of at least two years – even if we believe the figures given…………

    Forbin

    • Hi Forbin

      Yes they will as for example they are now about level with the RPI in terms of annual numbers but there is a lot of ground to catch up. After all even the woeful CPIH inflation measure leaves us mulling this.

      “For October 2018, average total pay (including bonuses), before tax and other deductions from pay, for employees in Great Britain was:

      £528 per week in nominal terms, up from £509 per week for a year earlier

      £497 per week in constant 2015 prices, up from £488 per week for a year earlier, but £25 lower than the pre-downturn peak of £522 per week for February 2008”

    • Hi Forbin

      True although it is exacerbated in petrol and diesel terms by the 57,95 pence per litre duty and the VAT. Anyway it seems that the US Federal Reserve share your view.

      “Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee judges that some further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective over the medium term. The Committee judges that risks to the economic outlook are roughly balanced, but will continue to monitor global economic and financial developments and assess their implications for the economic outlook.

      In view of realized and expected labor market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 2-1/4 to 2‑1/2 percent.”

  2. Shaun, I saw substantial Xmas discounting in Sainsburys when I went out to get my meal deal lunch today.

    It seems that the retailers are running scared. There will be a bloodbath on the highstreet in the sales as ppen shop frontage drops from 65% to less than 50%. Yes prices down.

    That used to worry economists in 2014…
    deflation we used to be told needed to avoided at all costs..

    • Hi Paul C

      Yes the number of sale offers into my email inbox has risen ( buying sportswear online has advantages but also disadvantages….) suggesting times are hard. The problem is sifting through them to see if there is anything I want!

      As to the general picture last time around the conventional economists were left red faced as disinflation led to higher retail sales. So perhaps they will be quieter this time around. We will find out more tomorrow when we get the latest official numbers.

    • Deflation used to be the killer for fiat currency and factional reserve banking systems (until they discovered the magic money tree, for the 1% only plus a few scraps for the next 10% down to do their dirty work)

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