The campaign against the UK Retail Price Index carries on

This week brought some disappointing news for the Bank of England. If we go back to Monday we were told this.

LONDON (Reuters) – British households’ expectations for inflation over the next 12 months rose to 2.8% in July from 2.6% in June, according to a survey from U.S. investment bank Citi and pollsters YouGov.

Longer-term inflation expectations rose to 3.4% from 3.3% in June, the Citi/YouGov survey of 2,011 adults showed.

“Rising inflation expectations should … support hawks at the (Bank of England),” Citi economists Christian Schulz and Ann O’Kelly said.

There are two problems there for the Bank of England. The first is that expectations imply that people think that inflation is above the 2% target and has been so. This is an implied defeat for the enormous effort that it and other parts of the UK establishment have put it getting our official statisticians have put into getting the Imputed Rent driven CPIH as the headline inflation measure.

Even worse the measure of future expectations has risen. This shows two factors at play. One is rhetoric as we are subjected to a media barrage about future falls in the UK Pound £ exchange rate. The other is the reality that the UK Pound £ has been in a weak phase and in inflation terms this is best represented by the rate against the US Dollar because it is the currency in which nearly all commodities are priced. Whilst it is relatively stable this morning at US $1.2060. Whereas if we go back a bit over 3 months to the early part of May we see that it was some 11 cents higher. Over the past year it is some 5.5% lower so we can see that there is some commodity price pressure on the cards so well done to the ordinary person surveyed for inflation expectations.

Producer Price Inflation

We can find out what is coming down the inflation pipeline from these numbers.

The headline rate of output inflation for goods leaving the factory gate was 1.8% on the year to July 2019, up from 1.6% in June 2019…….The growth rate of prices for materials and fuels used in the manufacturing process was 1.3% on the year to July 2019, up from 0.3% in June 2019.

This is a change as the previous overall trend was for both input and output inflation to be falling. The main area is a little awkward so let us look at it.

On the month, crude oil provided the largest positive contribution of 0.30 percentage points with monthly growth of 1.8%. This is a 9.3 percentage points increase following negative growth of 7.5% in June 2019.

This is because the lower UK Pound has been a constant influence but the oil price has been ebbing and flowing to some extent mirroring the tweets of President Trump on the trade war. For example yesterday it rose 3/4% as he announced delays in planned tariffs on China. So the outlook with Brent Crude around US $61 per barrel is for it to have a small disinflationary impact looking ahead but the trend may change with one tweet.

Also do any of you have thoughts on this? The subject is on my mind anyway after last Friday’s power cut in Battersea.

This growth was mainly driven by electricity production and distribution, which increased 20.1% on the year to July 2019, the highest the rate has been since records began in 2009.

Consumer Inflation

Here the situation looks calm on the surface but there are two serious problems below it.

The Consumer Prices Index (CPI) 12-month rate was 2.1% in July 2019, increasing from 2.0% in June 2019.

In a world where US President Trump describes a 0.3% monthly and 1.8% annual increase like this I am not sure where this puts us!

Prices not up, no inflation.

Anyway if we return to the UK we see that a problem I have warned about before is back.

The largest upward contribution (of 0.08 percentage points) to change in the CPIH 12-month rate came from recreation and culture. Within this group, the largest effect came from games, toys and hobbies (in particular from computer games and consoles) where prices overall rose by 8.4% between June and July 2019 compared with a rise of 4.1% between the same two months a year ago.

Here is the confession that we are blundering in the dark here.

Price movements for these items can often be relatively large depending on the composition of bestseller charts and the upward contribution between the latest two months follows a downward contribution, from computer games purchased online and games consoles, between May and June 2019.

This matters because it highlights a systemic problem. A similar problem is in play with fashion clothing. Rather than doing something about it the UK establishment has been using the latter problem as a tool for beating the Retail Price Index with. Rather than research and reflection we get rhetoric.

Retail Price Index

Speaking of the RPI the annual rate fell to 2.8% which is partially good news for rail passengers because the rate at which regulated fares rise will be that. At east it is below the rate of wages increases. But there is a problem here too.

An error has been identified in the Retail Prices Index (RPI) in 2019, caused by an issue with the 2017 to 2018 Living Costs and Food Survey (LCF)dataset, which is used to produce the weights underpinning the RPI.

Indicative estimates show that if the corrected LCF dataset had been used to calculate the 2019 RPI weights, it would have led to an upward revision of 0.1 percentage points to the published RPI annual growth rate in March 2019, from 2.4% as currently published to 2.5% and a downward revision of 0.1 percentage points to the June 2019 rate, from 2.9% as currently published to 2.8%. No other month’s annual growth rates have been affected.

It is a good job that large amounts of financial contracts do not depend on this, Oh wait! But these numbers also matter in themselves.

House Prices

There was some excellent news here.

Average house prices in the UK increased by 0.9% in the year to June 2019, unchanged from May 2019 . Over the past three years, there has been a general slowdown in UK house price growth, driven mainly by a slowdown in the south and east of England.

The lowest annual growth was in London, where prices fell by 2.7% over the year to June 2019, less than the 3.1% fall in May 2019. Average house prices in London have now been falling over the year each month since March 2018.

With wage growth at 3.7% finally houses are on average becoming more affordable. As the London numbers highlight there are regional disparities though. On the other side of the coin house prices in Wales rose by 4.4%.

Comment

I have a couple of serious points to make so let me start with some humour courtesy of The Guardian.

City economists had forecast CPI to fall to 1.9% – instead, it’s now over the Bank’s target of 2%.

The unexpected rise could pile pressure on Threadneedle Street to raise interest rates, even as economic growth falters…

Meanwhile the problems with how we measure inflation in the UK pile up as computer game are added to the problems with fashion clothing. Yet the UK Statistics Authority and the ONS have instead spent their time joining the establishment campaign against the RPI. Please do not misunderstand me as I have a lot of sympathy with the ordinary statisticians who in my experience are doing their best, but it was hard not to have a wry smile this morning at us getting the numbers wrong and creating their worst nightmare a “discontinuity”.

If we look wider we see that there are problems elsewhere as the changes to package holiday prices showed in Germany and in the wider Euro area inflation data. That will impact the GDP numbers via the deflator. Ironically with an RPI style inflation measure or perhaps based on the new HII/HCI the UK could be in good shape here.

Let me give another perspective by quoting Paul Johnson of the IFS in Prospect Magazine from February.

A version of it, CPIH, takes account of owner occupiers’ housing costs and is the one that the statisticians would like us to use. But it is of relatively recent vintage and hasn’t really caught on yet.

He seems to have forgotten that it was the Johnson Review ( yes him) that recommended this in 2016.

ONS should move towards making CPIH its main measure of inflation. In the meantime, the CPI should continue to be the main measure of inflation.

 

 

16 thoughts on “The campaign against the UK Retail Price Index carries on

  1. Great article as always Shaun.

    With reference to computer games. I frequently buy PC games and have noticed they’ve become a lot more expensive. I always wait until they’re discounted, but the discounts are not as large. This coupled with the higher RRP, means prices have crept up.

    I always wait until at least 50% discount, maybe I’m an outlier.

    Also why is the boe concerned about the publics perception of inflation? The boe have been shown not to care (looking through inflation) and the embattled worker daren’t ask for an inflationary payrise?

    thanks

    • They are concerned that Joe Public isn’t believing the lies fed to him by the mainstream media about there being no inflation, and as they are supposed to be keeping inflation below 2% the sheep might then reasonably ask why they weren’t raising interest rates to bring it under control(don’t worry – no journalist would ever dare ask that question to Carney).
      In the unlikely event of an MP on the Parliamentary Select Committee asking it, Carney would no doubt say it was temporary and/or they were prepared to “look through it”.

      “This growth was mainly driven by electricity production and distribution, which increased 20.1% on the year to July 2019, the highest the rate has been since records began in 2009.”
      20.1% increase -a typo???

      The power cuts on Friday are a sign of things to come IMHO. The continuing policy of shutting down coal and nuclear plants will make the entire grid less stable as it relies more and more on renewables, you have to have a STEADY baseload supplied by fossil fuels to ensure a stable supply with renewables topping up demand, the government is gambling on replacing this stable system with renewables that can go off line at the drop of a hat, the replacement of these stations is going to make events like Friday more and more frequent I’m afraid.

      The article below shows how frequent these blackouts are becoming.I bet the truth about what led to Fridays cuts never comes out.

      https://www.theguardian.com/business/2019/aug/12/three-blackout-near-misses-in-three-months-says-national-grid

      • Kevin,

        “They are concerned that Joe Public isn’t believing the lies fed to him by the mainstream media about there being no inflation, and as they are supposed to be keeping inflation below 2% the sheep might then reasonably ask why they weren’t raising interest rates to bring it under control(don’t worry – no journalist would ever dare ask that question to Carney).
        In the unlikely event of an MP on the Parliamentary Select Committee asking it, Carney would no doubt say it was temporary and/or they were prepared to “look through it”.

        Joe Public doesn’t believe the official data in any event, due to the average Joe Public’s own inflation figures not in kilter with the official data.

        little wonder CPI is up the £ has fallen and with Hamond continuing to bleat on about the UK in dire straits on a no deal the weak £ could cause a problem for imported goods.

        However that may not even happen as inflation falling now in other economies and bad figures are coming out of China. There are more and more red flags waving around the world now about a global recession and in a recession prices often fall and should mean lower inflation in most the economies.

        https://uk.investing.com/news/economy/recession-warnings-pile-up-for-the-battered-global-economy-1941750

        What I did notice was RPI was 0 in July against a slight rise expected of 0.1% and a previous reading of 0.1%.

        As for Europe Industrial production in July -1.6% doesn’t look good.

        Hong Kong riots are causing more turmoil there and Singapore figures lately point to a bleak global economy.

        Might be a good idea to start selling tin hats because from my standpoint there will be a further cutting of interest rates and QE in many an economy things are set to get worse not better.

        Sorry for all the gloom on doom don’t shoot me I am just the messenger.

      • We seem to have gone all in on electricity generation from renewables and clearly during peak demand in the winter that means wind. We’re also pushing for increased demand for electricity as a result of the push for vehicle electrification. All for environmental and other reasons I understand.

        What’s never been made clear, at least to me, is how we maintain grid frequently and what we do when there’s a cold snap affecting much of northern Europe for several days in winter and no wind.

        Do we have to have two parallel power systems one for when it’s windy and one for when it’s not.

        Paying for two systems would seem to be quite expensive if what we have spent on the intermittent wind based system is anything to go by.

        • yes we do pay for two systems

          nat gas back up to wind – it’s been policy for a while now . but CCGT also need time to ramp up. so we need hydro or tidal pool . all new hydro and tidal have been delayed or shelved due to environmental lobby groups .

          chickens are due to roost ……. but not roast as there will be no power 😉

          just checking for BBU for my micro wave for popcorn ….. eheheheh

          Forbin

        • You will have regular blackouts and possibly voltage/frequency reductions as well, that is why they need to get everyone on smart meters so they can jack up the price during peak demand (the alternative is to sit in the dark and with the heating off), charging 3,4,5 -10 times the normal unit rate. Don’t ever volunteer to have one in your house!!!

  2. There has been a decline in electricity production and hence distribution for the last decade as the UK deindustrialises. Efficiency has improved but its mainly because of less industry. Costs of GWh produced has increased, not because of exchange rates or price of oil, but because of ‘climate change’ legislation and the explosion in subsidies and above market rates paid to ineffiecient, asynchronous generation. The 20% increase is your contribution to the fat cats ripping off the tax payer and utility bill payer.
    Last Friday was a taste of things to come, only they will increasingly be a lot lot worse. Grid decided ( against its own rules) to go for a wind record the day Javid visited. So it reduced the CCGT requirements below 23 GW and Little Burford went off line as per its contract. Immediately the frequency dipped as there was insufficient synchronous generation to maintain it. Protectors took Hornsea off line and frequency dipped again. Instead of being able to recover in seconds as used to be the case with plenty of conventional generation on hot standby, ie spinning ready to create a magentic field, Grid took minutes to call up conventional generation from cold. The system automatically shed load, if it hadn’t there would have been a rolling cascade and the system would have taken hours/days to recover.
    Electricity Power System Engineers have been saying for two decades that for every asynchronous generator you need the same capacity of synchronous generation to keep a stable system. Batteries etc are not an answer, they would be cost prohibitive in the quantity required and would only last for only minutes given the GW requirements, at best this would only provide a stop gap before OCGTs took the strain for another short period. There is no other viable solution other than the maintenance of sufficient conventional generation to take the strain.
    So you will be delighted to know that with the last coal-fired generator to be decommissioned over the next 2/3 years and no significant CCGTs being planned, the system will fail repeatedly ; either in the depth of a cold windless day, or a very windy warm summer day/night. We have too much asynchronous generation and far too little synchronous generation. You will be further delighted to know that the Hornsea wind farm output costs £150/MWh compared to market price of approx £50/MWh.
    Isn’t it grand to know you are contributing bugger all to the earth’s CO2 ‘control’ whilst India and China are increasing their coal generation by thousands of GW, and you are being ripped off for the privilege and end up with a service that will not be there when you need it.
    Welcome to the future.

    • Thanks for the details there Jim, I suspect there was also a frequency dip Saturday morning just after 10 am as well. I was at work and it caused massive problems, but of course you can never find out for sure.

  3. Hello Shaun,

    what ever inflation index is used is a crime that two are actually used !

    One for MP’s pensions , taxes and other non expense items

    and for poor old Joe/Jane Bloggs for their bennies and pensions

    and , sorry about this but its important, all our HMG government and MSM seems concerned over is “gender” ads and “single use” plastic bags……..

    So what can you do when faced with that bubbled head mind set ?

    put some more popcorn in the microwave, but not too much in case it causes a grid brown out 😉

    Forbin

  4. note : I see Greta the Great set sail on a voyage to the state that’s totally carbon free…..

    good job , boat made from wood? no carbon fiber and plastics (!)

    and crew are breathing out carbon too , so is she …..
    ( lets not mention methane – no shower or toilet apparently – perhaps she’ll learn the nautical term ” toe -rag” ehehehehe ) .

    so to put this comment back on track , perhaps Greta will approve of CO2 taxing us ” oomies ” , after all folks its a pollutant gas …….. ( uh oh )

    come on , smile , it’s Wednesday , count down to the weekend

    Forbin

      • Like Hitler-Jugend? they believed in something. Going? bottom of the ocean with any luck. Dreadful I know, I’d get banned in the legacy media for saying such things.

  5. You should be banned from this forum for saying things like that. If I say you 70+ years old gammons like you should become soylent green I would be banned obviously. Why do you want bad things on young people when you can contribute to the green economy by not breathing anymore.

    • If Greta the Goddess can’t take the heat she shouldn’t put herself in the kitchen.
      As a non-70+ yr old, I find your comments repulsive, off with your head!

      • Your original comment was repulsive you vile, foaming in the mouth creature of definitely nowhere near any youth (if not 70+ then at least 50+). Wishing death in the bottom of the ocean of a sixteen year old. Are you Aaron Banks by any chance?

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