The UK government plans to rip us all off

This morning has seen the publishing of some news which feels like it has come from another world.

The all items CPI annual rate is 1.7%, down from 1.8% in January…….The all items RPI annual rate is 2.5%, down from 2.7% last month.

Previously we would have been noting the good news and suggesting that more is to come as we look up the price chain.

The headline rate of output inflation for goods leaving the factory gate was 0.4% on the year to February 2020, down from 1.0% in January 2020. The price for materials and fuels used in the manufacturing process displayed negative growth of 0.5% on the year to February 2020, down from positive growth of 1.6% in January 2020.

There is something that remains relevant however as I note this piece of detail.

Petroleum products made the largest downward contribution to the change in the annual rate of output inflation. Crude oil provided the largest downward contribution to the change in the annual rate of input inflation.

That is something which is set to continue because if we look back to February the base for the oil price ( Brent Crude) was US $50 whereas as I type this it is US $27.50. So as you can see input and output costs are going to fall further. This will be offset a bit by the lower UK Pound £ but I will address it later. In terms of consumer inflation the February figures used are for diesel at 128.2 pence per litre whereas the latest weekly number is for 123.4 pence which is some 7.7% lower than a year ago. So there will be a downwards pull on inflation from this source.

There is a bit of an irony here because the Russo/Saudi turf war which began the oil price fall on the supply side has been overtaken by the large falls in demand we are seeing as economies slow. According to The Guardian we may run out of spaces to put it.

Analysts at Rystad estimate that the world has about 7.2bn barrels of crude and products in storage, including 1.3bn to 1.4bn barrels onboard oil tankers at sea.

In theory, it would take nine months to fill the world’s remaining oil stores, but constraints at many facilities will shorten this window to only a few months.

The Rip-Off

The plan hatched by a combination of HM Treasury and its independent puppets the UK Statistics Authority and the Office for National Statistics is to impose a type of stealth tax of 1% per annum. How?

In drawing up his advice, the National Statistician considered the views of the Stakeholder Advisory Panel on Consumer Prices (APCP-S). The Board accepted his advice and that was the basis of the proposals we put to the Chancellor to cease publication of RPI and in the short term to bring the methods of CPIH into RPI.The Chancellor responded that he was not minded to promote legislation to end RPI, but that the Government intended to consult on whether to bring the methods in CPIH into RPI between 2025 and 2030, effectively aligning the measures.

The emphasis is mine and the plan is to put the fantasy Imputed Rents that are used in the widely ignored CPIH into the RPI. There is good reason that the CPIH has been ignored so let me explain why. In the UK the housing market is a big deal and so you might think what owner-occupiers pay would be a considerable influence on inflation. But in 2002 a decision was made to completely ignore it in the new UK inflation measure called CPI ( Consumer Prices Index).

Putting it in was supposed to be on its way but plans took a decade and the saga took a turn in 2012 when the first effort to use Imputed Rents began. It got strong support from the Financial Times economics editor Chris Giles at the time. He stepped back from that when it emerged that there had been a discontinuity in the numbers, which in statistical terms is a disaster. So the fantasy numbers ( owner-occupiers do not pay rent) are based on an unproven rental series.

Why would you put a 737 Max style system when you have a reliable airplane? You would not, as most sensible people would be debating between the use of the things that are paid such as house prices and mortgage payments. That is what is planned in the new inflation measure which has been variously called HII and HCI. You may not be surprised to learn that there have been desperate official efforts to neuter this. Firstly by planning to only produce it annually and more latterly by trying to water down any house price influence.

At a time like this you may not think it is important but when things return to normal losing around 1% per year every year will make you poorer as decisions are made on it. Also it will allow government’s to claim GDP and real wages are higher than they really are.

Gold

There is a lot going on here as it has seen its own market discontinuity which I will cover in a moment. But we know money is in the offing as I note this from the Financial Times.

Gold continued to push higher on Tuesday as a recent wave of selling dried up and Goldman Sachs told its clients the time had come to buy the “currency of last resort”. Like other asset classes, gold was hit hard in the recent scramble for US dollars, falling more than 12 per cent from its early March peak of around $1,700 a troy ounce to $1,460 last week.  The yellow metal started to see a resurgence on Monday, rising by more than 4 per cent after the Federal Reserve said it would buy unlimited amounts of government bonds and the US dollar fell.

So we know that the blood funnel of the Vampire Squid is up and sniffing. On its view of ordinary clients being “Muppets” one might reasonably conclude it has some gold to sell.

Also there have been problems in the gold markets as I was contacted yesterday on social media asking about the gold price. I was quoting the price of the April futures contact ( you can take the boy out of the futures market but you cannot etc….) which as I type this is US $1653. Seeing as it was below US $1500 that is quite a rally except the spot market was of the order of US $50 below that. There are a lot of rumours about problems with the ability of some to deliver the gold that they owe which of course sets alight the fire of many conspiracy theories we have noted. This further went into suggestions that some banks have singed their fingers in this area and are considering withdrawing from the market.

Ole Hansen of Saxo Bank thinks the virus is to blame.

Having seen 100’s of anti-bank and anti-paper #gold tweets the last couple of days I think I will give the metal a rest while everyone calm down. We have a temporary break down in logistics not being helped by CME’s stringent delivery rules of 100oz bars only.

So we will wait and see.

Ah, California girls are the greatest in the world
Each one a song in the making
Singin’ rock to me I can hear the melody
The story is there for the takin’
Drivin’ over Kanan, singin’ to my soul
There’s people out there turnin’ music into gold ( John Stewart )

 

Comment

Quite a few systems are creaking right now as we see the gold market hit the problems seen by bond markets where prices are inconsistent. Ironically the central banks tactics are to help with that but their strategy is fatally flawed because if you buy a market on an enormous scale to create what is a fake price ( lower bond yields) then liquidity will dry up. I have written before about ruining bond sellers ( Italy) and buyers will disappear up here. Please remember that when the central banks tell us it is nothing to do with them and could not possibly have been predicted. Meanwhile the US Federal Reserve will undertake another US $125 billion of QE bond purchases today and the Bank of England some £3 billion. The ECB gives fewer details but will be buying on average between 5 and 6 billion Euros per day.

Next we have the UK deep state in operation as they try to impose a stealth tax via the miss measurement of inflation. Because they have lost the various consultations so far and CPIH has remained widely ignored the new consultation is only about when and not if.

The Authority’s consultation, which will be undertaken jointly with that of HM Treasury, will begin on 11 March. It will be open to responses for six weeks, closing on 22 April. HM Treasury will consult on the appropriate timing for the proposed changes to the RPI, while the Authority will consult on the technical method of making that change to the RPI.

Meanwhile for those of you who like some number crunching here is how a 123.4 pence for the price of oil gets broken down. I have done some minor rounding so the numbers add up.

Oil  44.9 pence

Duty 58 pence

VAT 20.5 pence

18 thoughts on “The UK government plans to rip us all off

  1. Got to keep the inflation rate down for all the printing they’ve done and will continue to do, as it’ll enable them to delay raising interest rates and keep them lower than they should be.

    All this for a 10 year debt/property/feckless spending boom from 1997-2007 that wasnt allowed to correct itself.

  2. Great blog as usual, Shaun. In addition to the CPI update for February, today saw the update of the measures of owner-occupied housing costs for October to December 2019. I quote from the release: “The Owner occupiers’ housing costs (OOH) in the UK under the rental equivalence approach have grown by 1.2% over the 12 months to December 2019. OOH according to the net acquisitions approach have grown by 1.6% over the 12 months to December 2019.” A lot of the difference would appear to be due to the increase in stamp duty in December, since the rental equivalence series does not include stamp duty or any other transaction costs. We are a long way from the staggering differences between the two series in earlier months: in May 210, the OOH(RE) series showed 8.8 percentage points less inflation than the OOH(NA) series. However, it is not surprising in a weak housing market. If there were a housing bust, one could see the OOH(RE) series registering 10.5 percentage points more inflation than the OOH(NA) series as happened in April 2009.
    In any case, we shouldn’t overthink this. The ONS has monthly OOH(NA) series that can be incorporated in the CPI. This CPIH(NA) series should be published not with a two-month lag, but at the same time as the regular CPI. The lag in availability of house price data would require that the series be subject to revision over a month or several months. This should be no problem as the series is not intended for use in upratings anyway. Once it is published it should with a minimum of delay become the target inflation indicator of the Bank of England, replacing the CPI.
    You think that housing prices are underweighted in the CPIH(NA) and I agree, but the best should not be the enemy of the good. Now that the stamp duty series has been revised, the differences between the CPIH(NA) and CPIH(RE) series are more meaningful than they were before. If CPIH(NA)is not pushed for strongly then the CPIH(RE) may well become the one index to rule them all and in the darkness bind them, which would be very sad indeed. Besides, it would probably be much easier to justify resources to tweak the CPIH(NA) series this way or that way if it were the target inflation indicator of the Bank of England than it is now, when it is simply an experimental series.

    • Hi Andrew and thank you

      You correctly thought I would point out the weighting issue! For those unaware of this it is something that I raised at the meeting at the Royal Statistical Society in June 2018. As we stand the issue of owner occupation has a weighting of 16.3% if you use Imputed Rents but only 6.6% if you use house prices. Not one brick, door or window has changed!

      I think that your argument for publishing CPIH (NA) is a very good one. However our statistical bodies will resist for the very good reason that it would work! Plus they would fear eyes would turn to the weights issue rather than it being a backwater. Sad isn’t it that an idea is likely to be rejected because it might work too well?

  3. Hello Shaun,

    Why not change it to some party approved figure ? the current restrictions on supermarkets and even refuse tips ( closed ) are very draconian and remind me of East Germany . Even the police have Stazi like powers…..

    and in case any one is reading this – yes I have a disabled daughter and in lock down for 12 weeks, etc ,etc

    I’ll just remind you of how democracy is so frail……. just one good enemy and an unlimited emergency ……. we’ll see what happens when the emergency is over , if it ever is.

    be safe

    Forbin

    .

    • Forbin, I agree with your point about removing the crisis legislation after this is over, rather like ending ’emergency interest rates’ when the 2008-09 crash was over.

      There was an article in the weekend’s FT by Yuval Noah Harari on this subject and he noted that many of the temporary measures brought in by Israel during the 1948 War of Independence were still in place, although he was relieved that the ’emergency pudding decree’ was abolished in 2011.

      If it takes 63 years to loosen restrictions on puddings, what chance civil liberties!

      • Friedman said nothing is so permanent as a temporary govt programme. God, did I get that from Grant Shapps? Pass me the hand lotion double quick.

  4. Hello Shaun,

    current Salisburys petrol 106.9 per ltr , ques were in place going around the rather large car park as social imprisonment law enforced – I reckon a hour or so to get in

    Local coop was open with mostly empty shelves a la East Germany – no ques as nothing much to buy….

    lots of Easter eggs though 😉

    This will not end well, I have heard reports of fighting over ques, anecdotal I know but human nature is going to rear its ugly head sooner or later.

    Forbin

    • Off-licences will be “essential” now – let’s just get p155ed and forget everything, especially up here in Scotland where we like a drink.

    • forbin

      “This will not end well, I have heard reports of fighting over ques, anecdotal I know but human nature is going to rear its ugly head sooner or later.”

      The likelihood is it cannot end well more and more people will catch the virus in supermarkets because there is no one else to go and a professor said today 50% of the population probably already got the virus.

      One has to bear in mind many will carry the virus and show no symptoms, that is the way a virus works, it has no conscience it jumps about wherever it wants its doesn’t care about who it affects it has no conscience.

  5. No great surprised and in the words of Jo Moore, a good day to bury bad news. So, it’s my birthday and I am heading home on a near-deserted train. Someone on the second floor has tested positive, although they haven’t been in the office for twelve days (by my reckoning that is the 14-day incubation period) but the office is shut for a 72 hour deep clean – most would say it needs that anyway and who knows what lives in it normally.

    This will not only allow fiddling on tax allowances, benefit rates etc. but we will also hear about how the NHS has received inflation-busting rises, conveniently also ignoring the fact that there is little correlation between NHS inflation and the RPI or whatever fiddled figure they are going to use. Of course, imputed rents must bear some relation to house prices, since actual rents represent part of the return for landlords. So, the inclusion of CIPH must mean values are about to tank, otherwise what is the point of another fiddle, when you are fiddling the figures anyway?

    • Happy Birthday Dave

      I have never been entirely clear about the deep clean concept as once humans came back in it all falls apart. I understand it from the point of view of an operating theatre or ICU but much less so elsewhere. On the other side of the coin I cleaned one of the mats at the Battersea Park Gym and the cloth got so dirty I decided to see it as a positive in that my immune system must be in shape after all the years of training there.

      As to rents and hence imputed rents they seem correlated to wages and real wages which of course is an issue especially the latter one.

      • Interesting – I have not really thought about all this. Certainly the problem with real wages is what inflation you deduct from nominal wages. I suppose rents are a supply/demand market unlike the prices of houses. That demand will be a function of wages and the non-owning population size. Given the latter is stable or growing, wages must be the expected problem as there is no scope for a significant change in supply.
        The other way one might look at it is that a BTL investor is looking for capital appreciation and income, like a less volatile version of equities. Given that capital appreciation cannot be guaranteed, then the rent should be related to the amount invested on purchase at least. I suppose the relationship between monetary policy and house price expectations is so one-sided that rent is not really a direct consideration and thus it is the market, which determines them.
        Have to read up on this – hence why I find your interest in indices so useful.

  6. Shaun, this month marks the first month that the formula effect series that show the difference between the RPI and the no-longer-published RPIJ series are no longer published. Faute de mieux, I updated my own RPIJ series assuming the formula effect for 12-month percent changes in February was the same as in January (i.e. 0.6 percentage points) and will continue to do so at least until the ONS replaces the existing accounting approach to OOH in the RPI with an equivalent rent approach. Although very upset that the ONS did not maintain these series, I think the result is still reasonable. RPIJ inflation goes from 2.1% in January to 1.9% in February, so while it shows about the same movement as the CPI, it is showing a higher level of inflation. Although housing prices as measured by the depreciation component are showing less inflation than the overall CPI, the higher RPIJ inflation rate is not so strange. Council tax, excluded from the CPI has a 12-month inflation rate of 4.7%. Dwelling insurance and ground rate, although it showed monthly decreases in both January and February, still has an annual inflation rate of 4.1%. Of course, if housing prices took off again, the RPIJ inflation rate would again soar far above the CPI’s.
    In today’s update of the measures of owner-occupied housing costs one finds: “OOH(payments) is not our favoured method for measuring owner occupiers’ housing costs in the Consumer Prices Index including owner occupiers’ housing costs (CPIH). This is because a consumer price index aims to measure consumption, and interest payments represent the cost of borrowing money rather than the cost of consumption. However,OOH(payments) is our preferred measure for the Household Costs Indices (HCIs), which depart from consumption principles, and aim to capture households’ experience of changing prices and costs.” The second sentence is a little odd, as imputed rents conceptually do include mortgage interest cost. While a payments approach and an imputed rent approach are different from each other, a user cost approach that would include a mortgage interest component identical with that in this payments index could well be a component of a user cost index, which, properly designed would give the same result as the OOH(RE) series. This OOH(payments) series represents the OOH approach used in the current HCIs. And as the passage shows, ONS as an institution is not keen on going to the next step and adding a series for equity payments that would bring housing prices into the HCIs into a much bigger way. So while the ONS still promises to calculate an HCI-Capital series, one has to be a little skeptical if it will ever make its way into a mainstream consumer price series, published every month at the same time as the CPI. The HCIs, as opposed to the proposed HCI-Capital, is a long way from John Astin and Jill Leyland’s vision of a Household Inflation Index.

    • Hi Andrew

      Reading your reply reminded me one more time how ridiculous it is that Council Tax and Dwellings Insurance are excluded from CPI. I too believe that the HCI-Capital is the way forwards but that the establishment will resist it. Why? Once the public realises what it is then they will ignore the “lead” or whatever the official inflation number is at the time.

      Thanks for the RPIJ update.

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