Imputed Rent is doing its job of reducing UK consumer inflation

Today is inflation day in the UK where we receive numbers for consumer, producer and house price inflation. As there were quite a few new readers yesterday let me open today in that spirit and explain the rotten heart of the UK inflation infrastructure. It comes via the issue of the housing sector and in particular people who own their own house or flat. What this involves is paying a large sum if you are lucky enough to be able to do so or taking a mortgage and paying it off in monthly instalments over years and indeed decades or some combination of the two. This presents us with two actual numbers which can be used in the inflation process which is house prices and mortgage payments.

Instead the UK authorities have chosen to make up their own number based on what are called imputed rents. They choose to assume that someone who lives in their own property rents it out ( of course they do not) and put that rental number in the inflation figures for the index which is called CPIH. There is an obvious issue in this which is the making up of the number when you have real ones to use! Even worse they have had a lot of trouble with the rental series based on those who do rent and in fact scrapped their first effort as it went so badly. So their number series has proven unreliable but they have ploughed on anyway and if you take the case to the National Statistician I am sorry to have to tell you that the response is much more like propaganda that reasoned argument. Why do they do it? Well I doubt it is a coincidence that it leads to a lower inflation number.

The trends

We know that there was some building producer price pressure last month although September itself saw some amelioration of that as the UK Pound £ had a better month against the US Dollar ( the currency in which most commodities are priced). So it will depend on which day they did the survey. But the price of crude oil was rising and has continued to do so since September ended with Brent crude oil above US $58 per barrel as I type this so that there is some inflationary pressure again from this source.

The producer price data today indicated a sort of steady as she goes position with a hint of a dip.

The headline rate of inflation for goods leaving the factory gate (output prices) rose 3.3% on the year to September 2017, from 3.4% in August 2017…….Prices for materials and fuels (input prices) rose 8.4% on the year to September 2017, which is unchanged from August 2017.

 

What about the impact of inflation?

This sadly tends to hit the poorest the hardest as this from the BBC indicates.

Benefit freezes combined with the predicted rise in inflation could set some low-income households back £300 next year, a think tank has warned.

September’s inflation data will be released on Tuesday, and some analysts predict the Consumer Price Index (CPI) will be 2.9%……….The Resolution Foundation’s analysis found that a single unemployed person would be £115 worse off, a single parent in work with one child would be £225 worse off, and a single earner couple with two children would be £305 worse off.

You may note that the analysis concentrates on our previous inflation measure and not the new CPIH version in yet another embarrassment for the Office for National Statistics.

Today’s numbers

The headline number will capture the er headlines.

The all items CPI annual rate is 3.0%, up from 2.9% in August.

Actually it was a very marginal shift as if we look into the detail the rate was in fact 2.9593%. Also I did point out above that the CPI was what everyone still concentrates on as this from the Financial Times whose economics editor Chris Giles was one of those who argued strongly for the CPIH inflation measure shows.

How times change! Back in the day he and I were taking opposite sides at the Royal Statistical Society and it is nice to see the implied view that he now agrees with me. This leaves the Office for National Statistics somewhat short of friends for its propaganda on the subject of CPIH.

The Consumer Prices Index including owner occupiers’ housing costs (CPIH) is the most comprehensive measure of inflation.

The CPIH number gets so few mentions our statistics authority sends out its staff to get the numbers up.

You might think that after the problems with the UK trade figures I highlighted yesterday the staff there might be too busy to be on social media plugging the new inflation measure but apparently not. James has contacted me to say he is working in the prices division at the moment which gives a partial answer although if he is tweeting official information he might want to use a more accurate title.

The housing problem

Let me explain with the relevant numbers why this is an issue. Firstly let me bring the house price numbers up to date.

Average house prices in the UK have increased by 5.0% in the year to August 2017 (up from 4.5% in July 2017). The annual growth rate has slowed since mid-2016 but has remained broadly under 5% during 2017.

Now let us look at the data on which the Imputed Rental numbers for owner-occupied housing is based.

Private rental prices paid by tenants in Great Britain rose by 1.6% in the 12 months to September 2017; this is unchanged from August 2017.

Which leads to this.

The OOH component annual rate is 1.9%, unchanged from last month.

So the machinations of the UK statisticians do the following. Firstly they are using a method which reduces the annual rate of inflation from 3% to 2.8% if we use their favoured CPI series. Even worse a previous change meant that the Retail Price Index was abandoned and it is at 3.9%. Those buying a house may reasonably wonder how annual price inflation which has been circa 5% ends up reducing the inflation rate!

If you wish to follow the timing of this there was a rush late last year from the Office for National Statistics to bring CPIH ignoring some of its own guidelines as it was “not a national statistic” at that point. I did tell the National Statistician John Pullinger that doing this at a time inflation was higher but rental inflation was likely to fall ( based on wages growth) was playing with fire as regards both his personal and the body’s overall credibility in my opinion.

Comment

So we have headlines of 3% consumer inflation in the UK in spite of the official machinations to keep it below by changing the measure. The latter may strengthen in influence if London continues its pattern of being a leading indicator in this regard.

London private rental prices grew by 0.9% in the 12 months to August 2017, which is 0.7 percentage points below the Great Britain 12-month growth rate.

Those of you who pointed out that owner occupied housing would only go into UK inflation when it lowered the numbers have been proven correct so well-played.

An impact of all of this is to widen the intergenerational issue as the basic state pension will rise next year by 3% which is higher than the wage growth we have seen. Of course Bank of England pensioners will do even better as theirs are linked to the higher Retail Price Index. If we stay with the Bank of England Governor Mark Carney does not have to get out his fountain pen and headed notepaper as the remit was eased and he only has to write if it exceeds 3% on the CPI measure.

Moving onto the detail we see that there has been a strong impact from the rising price of butter we have previously looked at as the oils and fats section has risen by 14.9% on a year ago. Will we now get Imputed Butter prices?

Meanwhile our old inflation target of RPIX is at 4.1% which poses a question for the “improved” measures.

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What are the prospects for inflation ( and hence wages )?

Yesterday saw a revealing insight into the establishment view of inflation. The world economic outlook of the International Monetary Fund was in general upbeat and positive but I noted this.

The outlook for advanced economies has improved, notably for the euro area, but in many countries inflation remains weak, indicating that slack has yet to be eliminated

You may note that it ignores the possible link between lower inflation and better economic growth in its rush to tell us that inflation below some arbitrary target is a bad thing. It really is old era economic thinking to say that low inflation is a sign of slack in the economy as well. Missing also is any thought that growth and inflation are being measured badly and that perhaps we have more inflation ( for example by factoring in one of the largest parts of any budget which is housing) and less growth than the IMF would like us to believe.

The same muddled thinking is evident in this excerpt as well.

Persistently low inflation in advanced economies, which could ensue if domestic demand were to falter, also carries significant risks, as it could lead to lower medium-term inflation expectations and interest rates, reducing central banks’ capacity to cut real interest rates in an economic downturn.

Central banks capacity to cut interest-rates was mostly reduced by them cutting them so much already! If that was the weapon implied here why would they need to do it again? Also as we know some central banks have been willing to employ negative interest-rates. If we move on in a word of low wage growth then most people would welcome low inflation and low inflation expectations. If we put this another way the IMF is skirting over the implication below in its view on asset valuations.

In advanced economies, monetary policy should remain accommodative until there are firm signs of inflation returning to targets. At the same time, stretched asset valuations

What are the inflation prospects?

So far in 2017 headline consumer inflation has been really rather low. For example the CPI in the Euro area is at 1.5% and the US CPI is at 1.9%. There was something of a warning though in the latest US data if we look at some of the detail.

Increases in the indexes for gasoline and shelter accounted for nearly all of the seasonally adjusted increase in the all items index. The energy index rose 2.8 percent in August as the gasoline index increased 6.3 percent.

So let us look at the oil price trend.

Crude Oil

If we look at the price of a barrel of Brent benchmark crude oil then we see it has been rising since late June when it dipped below US $45 per barrel as opposed to the US $56.62 as I type this. There have been various factors driving this of which one has been the economic growth described by the IMF. In addition there has been this factor according to Reuters.

A pact between the Organization of the Petroleum Exporting Countries (OPEC) and other producers including Russia to cut output by 1.8 million barrels per day (bpd) in order to prop up prices is due to expire by the end of March 2018. Discussions to extend the pact are taking place, but production elsewhere is rising.

There has been doubt as to how the OPEC deal has actually held but from its point of view the last 3 months or so have been a success as the oil price has risen. The other factor is the shale oil wildcatters in the United States who will also be benefitting from the higher price for crude oil as we wait to see if they expand output. If you recall the cash flow business model for the shale oil wildcatters then 2017 has been a good year as income will have been strong as we note higher prices are being accompanied by this.

U.S. producers are not participating in any pledge to restrain supply, and output has risen by 10 percent this year to over 9.5 million bpd.

Other Commodities

Reuters calculates a commodity price index which is currently at 183.2 which is just under 4% lower than a year ago albeit like in the oil price there has been a rise since late June. Back then it had dipped to 166.5. If we look at the index which excludes energy prices we see that there is a familiar if more subdued pattern as it has risen from just below 116 to 123.6 now.

If we look at metals prices we see Metal Bulletin reporting this today.

The underlying trends in the base metals are upward but those metals in or near high ground seem to be having to absorb selling which is capping the upside, while copper and nickel prices that are still some way below the highs seem to be having an easier time working higher, but neither seems in any rush. We remain quietly bullish, but expect trading to become choppier as prices run into more bouts of scale-up selling.

Dr.Copper had seen quite a surge as a year ago it was US $2.17 as opposed to the US $3.06 now as we wait to see the next move. I guess churches will be nervous about their copper pipes and roofs again. By contrast the Iron Ore price has been heading south at a rapid rate recently and this morning has fallen below the US $60 mark.

Benchmark Australian iron ore fines dropped 4.1% Tuesday to a three-month low of $59.1 a tonne, based on data provided by The Steel Index, taking losses since the start of September to more than 20%. ( Mining.com)

They attribute the fall to this factors.

Iron ore prices continued their downward trend Tuesday amid ongoing concerns that looming steel production cuts in China on environmental grounds will sap steel mill demand……..At the same time, supply from Australia — the world’s No. 1 iron ore producer — has risen,further pressuring prices.

Food Prices

The United Nations calculates an index for this.

The FAO Food Price Index* (FFPI) averaged 178.4 points in September 2017, up 1.4 points (0.8 percent) from August and 7.4 points (4.3 percent) above September 2016. Firmer prices in the vegetable oil and dairy sectors were behind the small month-on-month rise in the value of the FFPI.

So a rise overall which is influenced by the 27% rise in dairy prices over the past year as we note the influence of the butter shortage. Mind you if you have a sweet tooth and are a Maroon 5 fan the news is much better as the sugar price has fallen by 33% over the past year.

Comment

We see that there has been a nudge higher in the beginnings of the inflation food chain over the past 3 months or so. Much of this has been the higher oil price but there have been rises in some metal prices too although not Iron Ore. However whilst the trend is low especially for this stage in the economic cycle it can still be damaging. The rising cost of one of the basic essentials ( housing/shelter ) in many places is mostly ignored and at other times claimed as growth. Secondly the fact is that wage growth is overall low too so that pockets of real wage growth are also much less abundant that we would usually expect in a boom. If the IMF gets the inflation it seems to want there is no guarantee that wages would rise as well so it would have made us all worse off.

So in essence if we look at food and energy prices they are the major players in the consumer inflation measures we have and of course the central banks and IMF try to ignore them as “non-core.” Oh well…….

 

UK Inflation rises again but more hopefully the UK pound follows it

I was not expecting to publish an article today but my knee operation planned for today was cancelled with an hour’s notice. Let me wish the trauma patients who came into Chelsea and Westminster Hospital overnight well. Returning to the economics there is a link between today’s subject of inflation and that of yesterday because inflation will be over target and of course the Bank of England choose to ease policy into an inflation rise.

The impact of higher prices on the poor

One of the issues faced by the poor is that they pay a different set of prices to the rest of us. The Joseph Rowntree Federation has looked at this and intriguingly opens with something which could have been written by me.

Reducing the cost of essential goods and services is as important as increasing incomes for reducing poverty in the UK.  The less people must spend on meeting their needs, the more cash in their pocket.

The Bank of England will be annoyed on two counts. Firstly it aims for inflation of 2% per annum and secondly the idea that what it calls non core items are important.

The JRF moves onto the problem.

New research by Bristol University has laid bare the scale of the poverty premium for the first time.  They estimate that on average the poverty premium is costing low-income households £490 per year.

We get some more details.

Some premiums seem inconsequential, such as paying an extra £5 per year for a paper copy of an electric bill because you’re not online, or find it easier to keep on top of your budget with a paper copy. Others are eye watering, such as paying £540 over the odds for a doorstep loan because you can’t access mainstream credit or an additional £120 for a payday loan.

There are various factors at play here but we know that those that are poorer tend to pay more for many products. These comes from an inability to shop around both physically and online as well as being unable to use direct debits. Some of these represent a type of exploitation but it is also true that sometimes the problems create higher costs for businesses which need to be passed on.

There have been calls at times for different inflation measures to represent different groups. What we do know is that the establishment’s choice the Consumer Price Index performs badly in this regard. This is because it is weighted and based on total spending where of course the better off are more highly represented and so this means that rather than representing the median person it tends to represent those more like two-thirds of the way up the income scale. The much maligned Retail Price Index excludes the top 4% in terms of income so performs better in this regard although it does exclude some pensioner households.

The UK establishment’s view on measuring inflation

We can see this from simply looking at the progression of UK inflation targets. First the original one.

The annual rate for RPIX, the all items RPI excluding mortgage interest payments (MIPs), is 4.1%, up from 3.9% last month.

As we note an annual inflation measure that has passed 4% we move onto the current measure.

The all items CPI annual rate is 2.9%, up from 2.6% in July.

The clear trend is downwards and let us now look at the UK statistical establishment’s favourite measure.

The all items CPIH annual rate is 2.7%, up from 2.6% in July.

Of course the reality of price rises and inflation does not change but at the current rate the inflation reality of now will perhaps be accompanied by an official inflation measure at 0% in a few decades.

A major factor

Treatment of the housing market and particularly owner-occupied housing costs is at the heart of the matter. If we look at house prices we are told this by the Office for National Statistics.

Average house prices in the UK have increased by 5.1% in the year to July 2017 (unchanged from June 2017). The annual growth rate has slowed since mid-2016 but has remained broadly around 5% during 2017.

Those buying houses in the UK have seen a considerable amount of house price inflation in recent times.

The average UK house price was £226,000 in July 2017. This is £11,000 higher than in July 2016 and £2,000 higher than last month.

This compares to a pre credit crunch peak of just over £190,000 and a nadir of just under £155,000.

We are told by the UK statistics establishment that the best method in their opinion of measuring the impact of inflation on owner-occupiers of property is to use imputed rents which leads to this.

The OOH component annual rate is 1.9%, down from 2.0% last month.  ( OOH is Owner Occupiers Housing Costs).

As you can see there is something familiar at play a much lower number which is driven by the fact that rental inflation is much lower than house price inflation.

Private rental prices paid by tenants in Great Britain rose by 1.6% in the 12 months to August 2017; this is down from 1.8% in July 2017.

So yet again we find that the lower number has been selected! A particular issue here is that it is based on something which does not actually exist. Yes rents are paid by those who rent and they should go into the inflation numbers proportionately. But owner occupiers do not actually receive rent except in the calculations for the national accounts and so a statistical and economic concept replaces what is actually paid which is either the house price or the monthly mortgage repayment.

Oh and if London is a leading indicator ( which it often is) there is this to consider.

The growth rate for London (1.2%) in the 12 months to August 2017 is 0.4 percentage points below that of Great Britain.

Inflation Trends

This month saw a rise in UK inflation across the various measures and was driven by this.

Clothing and footwear, with average prices rising by 2.4% between July and August 2017 compared with a smaller rise of 1.0% between the same two months a year ago. Prices of clothing and footwear usually rise between July and August as autumn ranges start to enter the shops following the summer sales season.

So there was less of a summer sale in clothing this year and we have seen the numbers be erratic before as we move into autumn so we need to tread carefully. Also there was this.

Fuel prices rose by 1.6% between July and August 2017. This contrasts with the same period last year, when fuel prices fell by 1.3%.

Producer Prices

These give us an idea of what is coming down the inflation chain and there was a rise here too reversing recent trends.

Factory gate prices (output prices) rose 3.4% on the year to August 2017, up from 3.2% in July 2017, with the change in the rate being driven mainly by petroleum products. Prices for materials and fuels (input prices) rose 7.6% on the year to August 2017, up from 6.2% in July 2017, with the change in the rate being driven mainly by crude oil.

Comment

Today’s reversal on the inflation front follows a month were there was better news. Not only were the annual consumer inflation  numbers higher today but the producer ones were too. Some care is needed however as it was issue with the measurement of clothing prices and inflation back in 2010 which kicked off a lot of the debate around UK inflation methodology. Actually the issues there are still in dispute!

As to the trends there is something which may help out as we go forwards.

As many commodities including crude oil are priced in US Dollars the rise in the UK Pound £ will help us going forwards. Although of course currency movements do not always last and can turn out to be a figment of our Imagination.

Could it be that it’s just an illusion
Putting me back in all this confusion?
Could it be that it’s just an illusion now?
Could it be that it’s just an illusion
Putting me back in all this confusion?
Could it be that it’s just an illusion now?

 

 

Expensive times are ahead for UK railway travellers and commuters

Before we even get to the latest UK inflation data some worrying data has emerged. What I mean by this is that Sweden has announced its inflation data which makes its monetary policy even more mind-boggling.

The inflation rate according to the Consumer Price Index (CPI) was 2.2 percent in July 2017, up from 1.7 percent in June. The Swedish Consumer Price Index (CPI) rose by 0.5 percent from June to July 2017

If we look back to the July Minutes we see that the forecasting skills of the Riksbank are unchanged.

several board members emphasised that it was not sufficient for inflation to temporarily touch the 2 per cent mark.

Actually they are considering a switch of target but in fact that poses even more of a problem.

The inflation rate according to the CPI with a fixed interest rate (CPIF) was 2.4 percent in July, up from 1.9 percent in June. The CPIF rose by 0.6 percent from June to July 2017.

So let us leave the Riksbank to explain why it has an interest-rate of -0.5% and is adding to its QE bond purchases with inflation as above and the economy growing at an annual rate of 4%? This inflation rise added to the rise in India yesterday and in terms of detail was driven by package holiday (0.3%) and air fare ( 0.2%) price rises. Transport costs rises are a little ominous on the day that we find out how much UK rail fares will rise next January.

CPIH

This is the new UK inflation measure and is described thus.

CPIH is our lead measure of inflation and offers the most comprehensive picture of how prices are changing in the economy.

As it uses imputed rents for the housing sector I have challenged them on the use of “comprehensive” so far without much success but you may note the use of “lead” where I have had more success. Efforts to call it “headline” or “preferred” have been extinguished. Meanwhile this happened at the end of July.

On behalf of the Board of the Statistics Authority, I am pleased to confirm the re-designation of CPIH as a National Statistics.

I wish to challenge this by concentrating on the issue of rents. There are two issues here the first is the fantasy economics  that owner-occupiers rent out their homes and the second is the measurement of rents has problems.

  1. There is an issue over the spilt between new lets and existing ones which matters as new let prices tend to rise more quickly.
  2. There is an issue over lags in the data which has been kept under wraps but is suspected to be as long as 18 months so today’s data for July is actually last year’s.
  3. There is the issue that we are being reassured about numbers they confess to not actually knowing.

    “. I acknowledge the efforts by ONS staff to provide reassurance around the quality of the Valuation Office Agency (VOA) private rents microdata, which are currently unavailable to ONS. “

There are alternatives which dissidents like me are pressing such as Household Costs Index designed originally by John Astin and Jill Leyland under the auspices of the Royal Statistical Society. This aims to measure what households experience in terms of inflation and thereby includes both house prices and interest-rates rather than fantasy calculations such as imputed rents. Officially it is in progress whereas in practice an effort is underway to neuter this such as the suggestion from the Office for National Statistics ( ONS) it would only be produced annually.

Why does this matter? Well look at the numbers and below is the housing section from CPIH.

The OOH component annual rate is 2.0%, unchanged from last month.  ( OOH = Owner Occupied Housing costs)

Now here are the ONS house price numbers also released today.

Average house prices in the UK have increased by 4.9% in the year to June 2017 (down from 5.0% in the year to May 2017). The annual growth rate has slowed since mid-2016 but has remained broadly around 5% during 2017.

As you can see they are quite different in spite of the slow down in house price rises. Also we took the CPI numbers to align ourselves with Europe which is using house prices in its own plans for a new measure. This is a familiar theme where rationales are pressed and pressed but then dropped when inconvenient a bit like the RPIJ inflation measure.

Today’s data

We learnt something today I think.

The all items CPI annual rate is 2.6%, unchanged from last month…….The all items CPIH annual rate is 2.6%, unchanged from last month.

Firstly we have detached a little from the recent international trend which may well be because we have been seeing higher inflation here. Also you may note that the fanfare of CPIH is currently rather pointless as it is giving the same result! Added to this there is a completely different picture to Sweden.

Transport, in particular motor fuels. Fuel prices fell by 1.3% between June and July 2017, the fifth successive month of price decreases. This contrasts with the same period last year, when fuel prices rose by 0.7%.

I checked air fares too and they fell.

Looking Ahead

There was a continuation of the good news on this front from the producer price indices.

The annual rate of inflation for goods leaving the factory gate slowed for the third time this year, mainly as a result of 2016 price movements dropping out of the annual comparison.

Much of the effect here comes from the change in the exchange rate where the post EU leave vote is beginning now to drop out of the annual data comparisons. Below are the latest numbers.

Factory gate prices (output prices) rose 3.2% on the year to July 2017, from 3.3% in June 2017, which is a 0.5 percentage points decline from their recent peak of 3.7% in February and March 2017……Prices for materials and fuels (input prices) rose 6.5% on the year to July 2017, from 10% in June 2017; as per factory gate prices, the drop in July’s rate is due to 2016 price movements dropping out of the annual comparison.

In the detail there is something which will only be welcomed by farmers and central bankers ( who for newer readers consider food and energy inflation to be non-core)

Food production continued to be the main source of upward contributions to input and output price inflation fuelled by rising prices for home food materials and food products respectively.

We get a little more detail but not much.

Within home food materials the largest upward contribution came from crop and animal production, with prices rising 12.3% on the year to July 2017.

Comment

We see a welcome development in that the pressure for UK inflation rises has faded a bit. But commuters and rail travellers will be noting that my theme that the UK is a country with administered inflation is in play here.

The all items RPI annual rate is 3.6%, up from 3.5% last month.

You see the “Not a National Statistic” Retail Prices Index is suddenly useful when setting things like rail fares or mobile phone contracts. A rough summary is that the ordinary person pays using the higher RPI but only receives ( pensions, tax allowances indexation) the lower CPI. This reminds me that the gap is 1% which gets little publicity. Indeed the gap between our old inflation measure and the new one continues to be much wider than the change in the target.

The annual rate for RPIX, the all items RPI excluding mortgage interest payments (MIPs) index, is 3.9%, up from 3.8% last month.

As a final note UK new car prices edged higher as used car prices nudged lower. I mention this because there are falling prices in the US leading to worries about the car loans situation.

 

Remember rebalancing? Is UK manufacturing really picking- up as housing cools?

Today has opened with a reminder of both  a major economic issue of 2017 for the UK and the theme that the UK is an inflation nation. From the BBC.

British Gas will increase electricity prices by 12.5% from 15 September, its owner Centrica has said, in a move that will affect 3.1 million customers.

However, the company’s gas prices will be held at their current level.

The average annual dual-fuel bill for a typical household on a standard tariff will rise by £76 to £1,120, up by 7.3%.

Unless you live in an all electric property it is the last number I guess which is the most relevant. However the reason is not what you might think according to Centrica.

Centrica chief executive Iain Conn told the BBC’s Today programme that wholesale costs had gone down and were not the reason for the price rise.

“We have seen our wholesale costs fall by about £36 on the typical bill since the beginning of 2014 and that is not the driver”

A fascinating viewpoint and he rammed home what were the real causes.

It is transmission and distribution of electricity to the home and government policy costs that are driving our price increase

We are back to the UK being an inflation nation theme as whilst out political class regularly promise energy cost price caps and the like they then sign us all up to policies often but not always green based which will cost us all more money as time passes. The headline feature in this regard was the promise of £92.50 per megawatt hour to EDF for electricity from the proposed Hinkley Point nuclear power station or around double current prices.

Perhaps that is why the Bank of England targets an inflation rate of 2% per annum and claims that is sound money as in fact there is a steady drip feed away from us. These days the impact of even such a rate of inflation is larger due to the weak level of wage rises.

Inflation trends

The good news on this front has been the rally in the UK Pound £ versus the US Dollar which passed US $1.32 yesterday. Of course the US Dollar is weak overall but the price we pay for commodities will be helped by this. Less hopeful has been the rise in the  price of a barrel of Brent Crude Oil has risen above US $52 per barrel. Some other commodity prices have been rising too as the Reserve Bank of Australia reported earlier.

Using spot prices for the bulk commodities, the index increased by 7.4 per cent in July in SDR terms and remains 21.9 per cent higher over the past year.

These things are of course very volatile with The Australian reporting this earlier.

According to Platts’ The Steel Index, benchmark 62 per cent iron ore at Chinese ports rose $US4.10, or 6 per cent, to $US73.10 last night, the highest since early April and up from lows of $US53 hit in mid June.

So there are inflationary pressures around for the rest of this year.

Inflation measurement

This was released yesterday by the UK Office for Statistics Regulation ( OSR ).

On behalf of the Board of the Statistics Authority, I am pleased to confirm the re-designation of CPIH as a National Statistic.

I gave evidence to the OSR suggesting that they should not do so. In my opinion they have not demonstrated that they can estimate imputed rents and prices accurately. The situation below is apparently just fine.

 I acknowledge the efforts by ONS staff to provide reassurance around the quality of the Valuation Office Agency (VOA) private rents microdata, which are currently unavailable to ONS…………. ONS’s lack of assurance over these data in 2014 played a significant role in our decision to remove National Statistics status.

How can you reassure about data you do not know? Anyway the result was no surprise however  the ONS ( Office for National Statistics) will be damaged but what has been a tin eared propaganda campaign in favour of CPIH and I fear the OSR has shown that it looks and sounds good but in reality simply rubber stamps the establishment viewpoint. Even past fans and supporters  of CPIH such as the economics editor of the Financial Time Chris Giles seem to lack any real enthusiasm for it.

House prices

We got an estimate of what has been going on with Nationwide customers today.

The annual pace of house price growth remained broadly stable in July at 2.9%, only a touch lower than the 3.1% recorded in June.

There is an irony here as the effort to exclude house price rises from the inflation data applies just as it is pretty much the same as the official inflation measure. Also the market is looking rather becalmed.

Survey data point to relatively sluggish levels of new buyer enquiries, but at the same time surveyors report that relatively few properties are coming onto the market

UK Manufacturing

The news this morning was good on this front.

The rate of improvement in UK manufacturing operating conditions accelerated for the first time in three months at the start of the third quarter.

A factor in this was very welcome.

foreign demand rose at the second-strongest rate in the series history, beaten only by that recorded in April 2010. Companies reported improved inflows of new work from clients in North America, Europe, the AsiaPacific region and the Middle-East.

Are we finally seeing that bit of economic theory called the J-Curve applying after the fall in the value of the UK Pound? Perhaps we got that as well as a benefit from the recent higher Pound.

Cost pressures eased in July

This would be rare for the UK as movements in the currency invariably seem bad! Just to be clear these are movements over different periods of time where prices respond more quickly than business. Also there was a further improvement in the UK employment situation.

The ongoing upturns in output and new orders encouraged further job creation in July. Staffing levels rose for the twelfth straight month. The pace of expansion was among the best registered over the past three years.

Comment

Let us briefly bask in the glow of a UK manufacturing renaissance especially if we add in the CBI report of a week or two ago. We have even managed to nudge above the economic boom in France as our PMI ( Purchasing Manager’s Index) reading at 55.1 was slightly above its 54.9. Meanwhile house price growth has notably faded. Much more of this and the “rebalancing” of former Bank of England Governor Mervyn King will be on the menu again or if we add a dose of reality for the first time. Also 0.2 on this measure is simply spurious accuracy. Indeed if you note this piece of research from them the margins are much wider.

In fact, periods of sustained downturns, the extent to which takes the annual rate of growth of manufacturing output into negative territory, have only ever been recorded when the PMI surveys output index has fallen below 52.6 for more than one month.

So is 50 the threshold for growth or 52.6? Also there is the issue that on this measure the UK had manufacturing growth in the second quarter as opposed to this.

The latest ONS data meanwhile estimated that manufacturing output fell 0.5% in the second quarter.

So we are either booming or contracting? That makes the “on the one hand….on the other hand” of economists seem accurate! Here is the conclusion of the Markit analysis.

The relationship between the PMI and ONS data therefore suggest that the current weakness in the ONS data is merely another temporary downturn and that a resumption to growth will be seen in the third quarter, providing PMI data remain above 52.6 in August and September.

Let’s be upbeat and hope for that although the real message here is that all the numbers are unreliable. Indeed as is news from my old employer Deutsche Bank. From the Financial Times.

 

Landsec, the property company, said on Tuesday it had signed an agreement for Deutsche to take at least 469,000 square feet at 21 Moorfields, a site under construction in the City of London.

Only last week it was supposed to be flooding out of London. No doubt some will go to Frankfurt but how many?

 

 

 

Welcome relief for UK real wages from lower inflation numbers

Today is inflation day in the UK as we get the official data for consumer, producer and house price inflation. In case you were wondering why they all come out on one day  meaning that some details get ignored in the melee ( mostly producer price inflation) well that is the point! Previously when the data were released separately there were potentially three days of embarrassment for the government and establishment which they have reduced to just one. Job done in a way.

However even before we get today’s numbers the subject is in the news in several ways. From the BBC.

Motorists are being saddled with the fastest year-on-year rise in insurance premiums since records began five years ago, the industry has warned. Average car insurance premiums have gone up by 11% in the past year, according to the Association of British Insurers (ABI). The typical bill for an annual policy is now £484, it said.

One of my themes which is institutionalised inflation is on the march here.

The ABI says the change in the discount rate is the main reason behind the rise, but also blames the latest increase in insurance premium tax which went up from 10% to 12% on 1 June…….That is why the government reduced the discount rate to -0.75%.

I have included the discount rate as it is a consequence of the way Bank of England QE has driven real bond yields into negative territory. Oh what a tangled web, and that is before we get to the plague of false claims and deliberate accidents which mar this area and drive up premiums.

Buttering us up

An odd feature of the current phase is high butter prices which stretch well beyond the UK as this from @Welt indicates.

price has risen this week in Germany by another 30 Cent or 20% to 1.79€, highest price ever after WWII.

In France there are worries about rises in croissant prices and maybe even a shortage of them. The causes are in essence the farming boom/bust cycle combined with a rise in demand as the Financial Times explains.

 

The combination of falling milk output in key producing countries and adverse weather sent the international butter price to a record high in June, according to the UN Food and Agricultural Organization…..

 

Raphael Moreau, a food analyst at Euromonitor, says that butter consumption has been lifted by demand for “natural” products among shoppers as they move away from spreads such as margarine. “In the UK, butter consumption has also been supported by the home-baking boom,” he says.

So far this has yet to be fully reflected in consumer prices but as supply is inelastic or inflexible in the short-term this could carry on for the rest of 2017.

The other side of the coin

On the 13th of June I pointed out this about the trend for producer prices.

Fortunately we see that the main push is beginning to fade.

Also adding to this is that the UK Pound has been improving against the US Dollar. Friday’s surge that took it to US $1.31 is of course after today’s numbers were calculated but the lower UK Pound will be a decreasing effect as we go forwards.

Today’s Numbers

There was a very welcome change today.

The Consumer Prices Index (CPI) 12-month rate was 2.6% in June 2017, down from 2.9% in May 2017.

The drivers of this were as follows.

Fuel prices fell by 1.1% between May and June 2017, the fourth successive month of price decreases. This contrasts with the same period last year, when fuel prices rose by 2.2%. Taken together, these movements resulted in prices for motor fuels making a large downward contribution to the change in the rate………Recreational and cultural goods and services, with prices overall falling by 0.1% between May and June 2017, compared with a rise of 0.6% a year ago.

If we look at the pattern actually there was no inflation in the month itself.

The all items CPI is 103.3, unchanged from last month.

Oh and the period where the oil price drove goods prices lower is over as we see that goods and services inflation are now pretty much the same.

The CPI all goods index annual rate is 2.6%, down from 2.9% last month. ……..The CPI all services index annual rate is 2.7%, down from 2.8% last month.

Looking Ahead

As we noted last month the pressure coming from higher producer price inflation is looking like it is fading.

Factory gate prices (output prices) rose 3.3% on the year to June 2017 from 3.6% in May 2017, which is the slowest rate prices have increased since December 2016…….Input prices rose 9.9% on the year to June 2017 from 12.1% in May 2017, meaning the annual rate has fallen 10 percentage points since January 2017.

This is mostly about one thing.

Inputs of crude oil is the main driver of the recent slowing of input price inflation as annual price growth for crude oil fell from 88.9% in February 2017 to 9.1% in June 2017.

Two factors are at play here as we see the impact of the oil price no longer falling and the UK Pound/Dollar exchange rate which has risen from its lows of January.

Housing Inflation

We have an official measure that includes imputed rents as a way of measuring housing costs for owner-occupiers. As you can see they are in fact reducing the level of inflation measured.

The all items CPIH annual rate is 2.6%, down from 2.7% in May. …….The OOH component annual rate is 2.0%, down from 2.1% last month( OOH= Owner Occupied Housing Costs)……..Private rental prices paid by tenants in Great Britain rose by 1.8% in the 12 months to June 2017;

The problem for our official statisticians is that few people have bothered much with the change in its headline measure as this from Adam Parsons the Sky News business correspondent indicates.

CPIH – the stat that nobody wants, and nobody quotes

Oh and it is still not a national statistic which were the grounds for demoting RPI but seem to be ignored in the case of CPIH.

Meanwhile house price inflation is rather different to rental inflation.

Average house prices in the UK have increased by 4.7% in the year to May 2017.

This is why they put imputed rents into the new headline inflation measure! It was always likely to give a lower number because house prices can and indeed have been inflated by the way that mortgage costs have been driven lower by the Bank of England. As to troubles here we saw another sign last week. From whatmortgage.co.uk.

The Bank of England has warned mortgage lenders of the possible risks posed by the recent trend of longer loan terms………Woods highlighted the recent trend of mortgage terms rising from 25 years to 35 years or “even longer”.

Comment

First let me welcome the better inflation data which will help with the economic issue of the day which is real wage growth. Or to be more specific it is seems set to be less poor than it might have been. Good.

In terms of inflation I would like to draw your attention to a problem which the UK establishment does its best to try to sweep under the carpet. This is that the old inflation target called RPIX is at 3.8% but the newer CPI is at 2.6% with the gap now being 1.2% which is very significant. Also there is the issue that we pay things at RPI ( Retail Price Index) currently at 3.5% but only receive CPI currently at 2.6% which is quite an establishment scam. This particularly affects students who find that costs in their loans are escalating into the stratosphere with implications for matters such as mortgage affordability if not final repayment as so many of these will never be repaid.

Looking ahead we are certainly not out of the inflation woods as there are still dangers of higher numbers in the autumn as we note the butter and insurance effects discussed earlier. We do not know what the Pound £ and the oil price will do. As to comparisons with Euro area inflation at 1.3% we get a guide to how much the lower Pound £ has affected our inflation rate which has turned out to be pretty much along the lines I suggested back on the 19th of July last year.

I expect a larger impact on the annual rate of inflation than the Draghi Rule implies and estimate one of say 1%.

 

The Brexit Breakfast saga

Yesterday saw quite an extraordinary missive from the offices of KPMG that combined economics and an insight into the apparent habits of staff at that organisation. It led to some debate and indeed some humour so let us take a look. From the Guardian.

Brexit breaks breakfast? Hard Brexit could mean hard luck for fry-up fans…….Shoppers would be forced to pay £3 more for a traditional British fry-up if the government fails to secure a trade deal with the EU, piling more pressure on already cash-strapped consumers.

That is a bit of a shock is it not as it implies such a breakfast would be £3 more each which seems rather extreme. Of course some products have risen in price already due to the lower value for the UK Pound £ as the UK imports quite a bit of the food it consumes.

Here is how Bloomberg released this.

The price attracted my attention so I enquired if they only ate in five-star hotels? It quickly turned out that I wasn’t the only one.

let’s just say I enjoyed a full English last week £7.50. Same price as a year ago at my same local coastal cafe. ( @mhewson_CMC )

 

Read this (and its comments) with your breakfast. £5 here at Totnes Waterside (  @RSR108 )

 

Tesco all you can eat £4,95 KPMG making a real dogs dinner of their analysis. No doubt you can get cheaper elsewhere ( @BarrattPeter )

The analysis stated that the ingredients came from the mid-range of a UK supermarket although some were not convinced.

“KPMG UK analysed the cost of mid-range ingredients of a fry-up from a leading UK supermarket” where…Fortnum and Mason??! ( @maximbroking )

I am not sure if the Guardian re wrote their article but anyway it now states that this was for a family breakfast, something missing from the original Bloomberg article. The debate then shifted to the choice of ingredients with the choice of olive oil to the fore.

Somewhere that cooks its breakfasts in a litre of olive oil? ( @dsquaredigest)

I have to confess I was beginning to feel a little queasy especially as it turned out that some might do this albeit if course we do not know what oil was used here.

I used to have a friend who did their fryups in about two inches depth of fat…utterly inedible! ( @MattBrookes3 )

There were some alternative suggestions for the use of olive oil.

You don’t cook in it, you barbarian. You wash down your meal with a couple of pints of it. ( @Birdyworld)

One Bloomberg journalist did appear willing to give it a go.

As I mulled the list I was curious about the addition of French butter to the list for two reasons as what I buy is mostly UK butter and of course French butter is usually unsalted giving a very different taste. I wasn’t the only one it would seem.

Welsh butter with mine please boyo ( @putt1ck )

 

I’m remain/internationalist but I always buy UK for my fry up, I don’t think these calcs will effect me? PS toss the oil, use butter! ( @LukeMcElligott )

Some took this a stage further.

I find Swiss organic grass-fed butter goes better with baked beans………but only ever fair-trade Himalayan Yak butter with my Japanese Kotoka Strawberry jam. Obviously, ( @WEAYL )

The issue of strawberry jam got a mention.

and who puts strawberry jam on their fry-up!? ( @ChrisB_IG )

Although hope springs eternal for one Bloomberg customer.

Bacon=NL,bread=local,Cherry vine tomato=Spain/NL/or Kent UK 😉 Strawberry jam= free with Bloomburg subscription (I would hope) ( @Svedenmacher )

We did discover someone keen on French butter albeit for a modern reason.

I often buy President butter, especially lately … to piss off the Brexiteers ;). ( @ClausVistensen )

Thus we found quite a bit of debate over the ingredients which then seemed to be reflected off Bloomberg Towers.

Also there’s no ketchup or hash browns. The moral of this story is don’t go for breakfast at KPMG ( @Lucy_meakin )

Considering the cost some were unhappy with the quality.

Funny looking sausage anyway. I think I’ll give it a miss. ( @PaulKingsley16 )

As ever some were hoping for a bright side to the issue.

Does anyone know if KPMG have vacancies for analysts economists researchers -will come out of retirement for their hourly Breakfast rates. ( @BarrattPeter)

Whereas the other side of the atlantic felt we needed to widen our perspective somewhat.

You Europeans are so dense. It’s the labor cost component of the typical Chinese household cook that’s driving up breakfast costs. ( @EquityTrader44 ).

Still it could all have been much worse. Imagine this for breakfast or anything really.

Another salvo in the war on cash

There is much to consider in the report on the gig economy by Matthew Taylor today but one bit in particular caught my eye.

The author of a government review into work practices would like to see an end to the “cash-in-hand economy”.

Matthew Taylor, whose report is out on Tuesday, said cash jobs such as window cleaning and decorating were worth up to £6bn a year, much of it untaxed.

Although he wants to present it as progress.

Mr Taylor also said he did not want to ban cash payments outright, but hoped, over time, the increasing popularity of transaction platforms such as PayPal and Worldpay would see a shift from cash-in-hand work.

“In a few years time as we move to a more cashless economy, self-employed people would be paid cashlessly – like your window cleaner. At the same time they can pay taxes and save for their pension,” he said.

This has many of the features of so-called blue sky thinking reports. In itself the cash in hand economy is hard to defend because tax is not paid and it is therefore unfair on those who pay taxes on income. However his effort to claim it would benefit the workers is risible “they can pay taxes and save for their pension.” From a magic money tree? Also it is hard not to think that the establishment wanted this review as part of an effort to raise more tax like the Chancellor’s attempt to increase National Insurance on the self-employed of a fee months ago. If they cannot make a relatively minor change without a fast U-Turn how exactly will they tax these workers?

But we have a theme of more tax being paid which will please the establishment and another feature these days which is of things being leaked before they are announced properly. Why not wait a few hours? It is all about expectations management which moves me to my  main point which is that the establishment seems ever more desperate to get rid of cash.

You would think that it is one of the barriers to them introducing negative interest-rates in the future……Oh hang on!

Comment

Economic life is often much more complicated than it first appears as for example we are on the road to more electronic payments. Over the past few years I have found myself paying for things with a card that would have been unthinkable before. Yet this is also true . From the Bank of England.

Despite speculation to the contrary, the number of banknotes in circulation is increasing. During 2016, growth in the value of Bank of England notes was 10%, double its average growth rate over the past decade.

Evidence of stockpiling?

As to the breakfast saga there are a few bits to consider. The first is the British obsession with a fry-up which goes in hot pursuit of our obsession with tea. Although apparently not the latter at KPMG who drink coffee. Next we have the click bait effort of claiming breakfast would cost £26.61 where even the family addition from the Guardian does not work unless you use all of the olive oil ( I am getting queasy again) and drink several gallons of coffee with slabs of butter.

Meanwhile there are issues one of which is a regular theme of mine which is that we import so much food in the UK and could do much better on that front. Some things we cannot grow (oranges) but some we can. Actually KPMG seems unaware of what we do produce as apparently we grow a lot of mushrooms. Of course we could end up paying higher tariffs for some products as we seem to have become rather dependent on Danish bacon. But for other products such as olive oil ( assuming you use it) Europe is not the only source and transport costs are often low.

Could the Bank of England step in with some Sledgehammer Breakfast QE?