Take your pick as UK Inflation rises via CPI and falls via RPI whilst staying the same via CPIH

The issue of UK inflation being above target is obviously troubling the UK establishment so much so that this morning HM Treasury has decided to tell us this.

Latest data from comes out today. Find out more about how the UK brought inflation under control:

There is a problem here as you see when we introduced inflation targeting in late 1992 the targeted measure called RPIX was below 4% and around 3.7% if the chart they use is any guide. It is currently 4% after 4.2% last month which is of course higher and not lower! So this is not the best time to herald the triumph of inflation targeting to say the least! Even worse if you look at the longer-term inflation charts in the release it is clear that the main fall in inflation happened before inflation targeting began. I will leave readers to mull whether the better phase was in fact the end of an economic mistake which was exchange-rate targeting.

The Forties problem

There will be a burst of inflationary pressure when we get the December inflation data from this issue. From the Financial Times.

The North Sea’s key Forties Pipeline System, which delivers the main crude oil underpinning the Brent benchmark, is likely to be shut for “weeks” to carry out repairs to an onshore section of the line, a spokesman for operator Ineos said on Monday. The move follows the worsening of a hairline crack in the 450,000 barrel-a-day pipe near Red Moss in Aberdeenshire over the weekend……..The FPS transports almost 40 per cent of the UK North Sea’s oil and gas production by connecting 85 fields to the British mainland.

If I was Ineos I would be crawling over the contract to buy the pipeline as they only did so in October and may have been sold something of a pup by BP. But in terms of the impact we have seen Brent Crude Oil move above US $65 per barrel in response to this. Also a cold snap in the UK is not the best time for gas supplies to be reduced as we wait to see how prices will respond. No doubt some of the production will get ashore in other ways but far from all. Also other news is not currently helping as this from @mhewson_CMC points out.

U.K. GAS FUTURES SURGE ON BAUMGARTEN EXPLOSION, NORWAY OUTAGE………front month futures jump about 20%.

Today’s data

This will have received a particularly frosty reception at the Bank of England this morning.

CPI inflation edged above 3% for the first time in nearly six years, with the price of computer games rising and airfares falling more slowly than this time last year. These upward pressures were partly offset by falling costs of computer equipment.

The annual reading of 3.1% means that Governor Mark Carney will have to write a letter to the Chancellor of Exchequer Phillip Hammond to explain why it is more than 1% over its target. I have sent via social media a suggested template.

Of course the official version could have been written by Shaggy.

I had tried to keep her from what
She was about to see
Why should she believe me
When I told her it wasn’t me?

We will not find out precisely until February as one of the improvements to the UK inflation targeting regime was to delay the publication of such a letter until it was likely to be no longer relevant.

How can we keep the recorded rate of inflation down?

This will have troubled the UK establishment and they came up with the idea of making a number up based on rents which are never paid. They rushed a proposal in last year as they noted that it was likely to be a downwards influence on inflation in 2017. How is that going? I have highlighted the relevant number.

The CPI rate is higher than the CPIH equivalent principally because the CPI excludes owner occupiers’ housing costs. These rose by 1.5% in the year to November 2017, less than the CPI rate of 3.1% and, as a result, they pulled the CPI rate down slightly, to CPIH.

That number which is a fiction as the Imputed Rents are never actually paid has a strong influence on CPIH.

Given that OOH accounts for around 17% of CPIH, it is the main driver for differences between the CPIH and CPI inflation rates.

This is like something straight out of Yes Prime Minister where a number which is never paid is used to reduce the answer. Just for clarity rents should be in the data for those who pay them but not for those who own their home and do not. Those who own their homes will be wondering why actual real numbers like the ones below are not used.

Average house prices in the UK have increased by 4.5% in the year to October 2017 (down from 4.8% in September 2017). The annual growth rate has slowed since mid-2016 but has remained broadly around 5% during 2017.

What do you think it is about a real number that would INCREASE the recorded inflation rate that led it to be rejected for a fake news one which DECREASES the recorded inflation rate?

House Prices

Tucked away in the release was this which may be a sign of a turn.

The average UK house price was £224,000 in October 2017. This is £10,000 higher than in October 2016 and £1,000 lower than last month.

A 0.5% monthly fall. As the series is erratic we will have to wait for further updates.

What is coming over the hill?

We are being affected by the higher oil price.

The one-month rate for materials and fuels rose 1.8% in November 2017 (Table 3), which is a 0.8 percentage points increase from 1.0% in October 2017, driven by inputs of crude oil, which was up 7.6% on the month.

This meant that producer price inflation rose on the month.

The headline rate of inflation for goods leaving the factory gate (output prices) rose 3.0% on the year to November 2017, up from 2.8% in October 2017. Prices for materials and fuels (input prices) rose 7.3% on the year to November 2017, up from 4.8% in October 2017.

This is more than a UK issue as this from Sweden Statistics earlier indicates.

The rise in the CPI from October to November 2017 was mainly due to a price increase of vehicle fuels and lubricants (4.5 percent),

Comment

There is a lot to consider here as headlines will be generated by the fact that Bank of England Governor Mark Carney will have to write an explanatory letter about the way CPI inflation has risen to more than 1% above its annual target. He might briefly wish that the old target of RPIX was still in use.

The annual rate for RPIX, the all items RPI excluding mortgage interest payments (MIPs), is 4.0%, down from 4.2% last month.

Although actually he would soon realise that he would have had to have written a formal letter a while ago for it. For the thoughtful there is interest in one measure rising as another falls and here are the main reasons.

Other differences including weights, which decreased the RPI 12-month rate relative to the CPI 12-month rate by 0.15 percentage points between October and November 2017.

Ironically putting house prices into the inflation measure would have reduced it last month.

Other housing components excluded from the CPI, which decreased the RPI 12-month rate relative to the CPI 12-month rate by 0.06 percentage points between October and
November 2017. The effect came mainly from house depreciation.

Will the UK establishment do another u-turn and suddenly decide that house prices are fit for use ( now they may be falling) in the same way they abandoned aligning us with Europe by not using them or the way they dropped RPIJ?

The trend now sees two forces at play. The trend towards higher inflation from the lower UK Pound £ is not far off over. However we are seeing a higher oil price offset that for the time being and I am including the likely data for December in this. So we will have to wait for 2018 for clearer signs of a turn although the Retail Price Index may already be signalling it.

Meanwhile the “most comprehensive measure of inflation” and the Office for National Statistics favourite CPIH continues to be pretty much ignored. The punch may need fortifying for this years Christmas party.

Meanwhile I guess it could be (much) worse.

The Financial Times said Avondale Pharmaceuticals bought the rights to Niacor from Upsher Smith, a division of Japan’s Sawai Pharmaceutical, earlier this year. The company also bought the rights to a drug used to treat respiratory ailments, known as SSKI, and increased the price by 2,469 per cent, raising the cost of a 30ml bottle from $11.48 to $295.

 

 

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Car production for export is boosting the UK economy

This morning has brought us a barrage of news on the UK economy and no I do not mean the apparent progress on the negotiations with the European Union. Though even if we dodge the politics it is nice to see a better phase for the UK Pound £ with it rising to above US $1.34 and 1.14 to the Euro as well as above 153 Yen. The barrage came as it is one of the theme days at the Office for National Statistics giving us an outpouring of data on the UK economy.

Let us start with a nod to my subject of Wednesday which was the automotive or car sector.

In October 2017, car production grew by 4.6% compared with September 2017 to match the record index level reached in July 2017.

If we look into the detail we see this.

Motor vehicles, trailers and semi-trailers provided a similar contribution and rose by 6.3%. An increase in export turnover of 20.7% was reported by this sub-industry compared with October 2016;

This further reinforces the view that UK car production is mostly for export as otherwise the rise in production of 4.6% in October would look very odd with the fall in registrations of 11.2% on a year on year basis. Here is the data in chart form.

A little care is needed as this is a value or turnover index and not volume so it is a little inflated but not I would suspect a lot. With the same caveat it is in fact a record.

 Within the MBS production industries dataset, the value of exports for the motor vehicle, trailers and semi-trailers were at a record level in October 2017, exceeding £4 billion for the first time.

Of course single monthly data can be misleading but the news remains good if we look further back for more perspective.

Within this sector, transport equipment provided the largest contribution, rising by 2.5%, due mainly to an increase of 3.2% in motor vehicles, trailers and semi-trailers following an increase of 4.2% in the three months to September 2017. The index level for motor vehicles, trailers and semi-trailers averaged 107.1 in the three months to October 2017 due to a strong increase in exports during October 2017, compared with 103.8 in the three months to July 2017, due mainly to a weak June 2017.

If we look further back we see that vehicle production was blitzed by the credit crunch falling from 95.1 in August 2007 where  2015 = 100 to a chilling 45.6 in February 2009. It is no coincidence that the Bank of England introduced QE then when you look at that icy cold plummet. We did not reach the levels of the summer of 2007 until the spring of 2014 which makes one think. Over that period there was scope for plenty of what might come under the category of “tractor production is increasing” but it is also true that there were nearly seven lost years. Since then we have done well with both exports and home sales rising but the latter has been a smaller influence which is fortunate as it is now over!

Over the years and decades I have followed the UK economy it is not that often one can say or type that the economy is being helped by strong car production and exports.

Manufacturing

This is also having a good phase.

The largest upward contribution came from manufacturing, which increased by 3.9%. There was broad-based strength throughout the sector, with 11 of the 13 sub-sectors increasing.

So there was a strong increase on a year ago and as well as the car sector we have already looked at we seem to have ambitions for what in the end will be the largest market of all.

Within this sub-sector, air and spacecraft and related machinery increased by 11.5%, continuing the prolonged month-on-same-month a year ago strength for this sub-industry since November 2014.

Not quite the “space aliens” that Paul Krugman once opined we needed but we seem to be doing well in the more mundane business of satellites and the like.

Just for clarity the pharmaceutical industry seems to be growing modestly as opposed to the yo-yo movements we did see and the overall picture still could do with some improvement.

manufacturing output has risen but remain below its level reached in the pre-downturn gross domestic product (GDP) peak in Quarter 1 (Jan to Mar) 2008, by 2.1% respectively in the three months to October 2017.

At least we are getting there.

Trade

Some might say that the better vehicle export data might take us from our desert of deficits in this area into an oasis. But maybe we will have to live forever to see that.

When erratic commodities are excluded, the value of the total UK trade deficit widened by £0.8 billion to £6.9 billion in the three months to October 2017.

 

We did export more but in a familiar pattern we imported at an even faster rate.

The widening excluding erratic commodities was due primarily to trade in goods imports increasing 2.9% (£3.3 billion) to £116.5 billion, which was offset slightly by a 0.5% (£0.2 billion) decrease in trade in services imports. Although trade in goods exports increased 1.7% (£1.4 billion) to £81.7 billion, the increase in imports was larger, therefore the total trade deficit excluding erratic commodities widened.

 

However if we switch to volumes maybe there is a little by little improvement.

Total goods export volumes increased 3.2% in the three months to October 2017, which was the fourth consecutive and largest increase since January 2017. Import volumes increased 0.5% over the same period.

 

Production

This was driven higher by the manufacturing data.

In the three months to October 2017, the Index of Production was estimated to have increased by 1.2% compared with the three months to July 2017…….Total production output for October 2017 compared with October 2016 increased by 3.6%

The other factor pushing it up was North Sea Oil and Gas where not only less maintenance but some new oilfields opened in the summer. Thus for once we seem to have higher output with higher prices ( Brent Crude is ~ US $63 as I type this).

We also got an example of why economics is called the dismal science as most people would be pleased to have better weather and not to have to turn the heating on!

 energy supply provided the largest downward contribution, decreasing by 3.3%, mainly because of unseasonably warm temperatures in October 2017,

Its effect was to subtract 0.39% from production in October meaning the monthly change was 0%.

The overall picture here lags the manufacturing one partly due to the decline of North Sea Oil.

production output has risen but remains below their level reached in the pre-downturn gross domestic product (GDP) peak in Quarter 1 (Jan to Mar) 2008, by 6.1% in the three months to October 2017.

Construction

These did fit with the view I expressed on Monday. The present seems recessionary.

Construction output contracted for the sixth consecutive period in the three-month on three-month time series, falling by 1.4% in October 2017.

The future looks brighter.

New orders saw record growth in Quarter 3 (July to September) 2017, growing by 37.4% compared with the previous quarter.The record growth was driven predominantly by growth in the infrastructure sector, caused by the awarding of several high-value new orders relating to High Speed 2 (HS2).

So a definitely maybe then especially as we note that it is for HS2 which seems so set in stone such that we will have to roll with it I guess.

Comment

In terms of official data and business surveys the UK is seeing a good period for manufacturing particularly in the vehicle sector which is pulling overall production higher. Whilst it is only 14% of our economy these days the improvement is welcome. The rise in vehicle exports has not yet been picked up by the trade figures as I note the use of the phrase “to be exported” in the production data so hopefully we will see this in the trade figures for November and December.

The trade figures have a problem as you see there is plenty of detail on the goods sector but virtually nothing on services! I have scanned it again and can only seem a mention of services imports. This is pretty woeful if you consider it is the largest sector of our economy and frankly no wonder these numbers are “not a national statistic”. It is frightening that they then go into the GDP numbers and even more frightening that we will get monthly GDP data soon.

The construction series is “not a national statistic” meaning that in this instance I have to disagree with Meatloaf about the three main series analysed today.

Now don’t be sad (Cause)
‘Cause two out of three ain’t bad

 

 

 

 

The economics of energy

There was something that barely got a mention in the UK Budget on Wednesday and yet is a big deal in people’s lives and is perhaps the number one factor in any economy. Let me present it from a different perspective given by a BBC Four documentary which I watched. It pointed out that civilisations if they were to survive and thrive need to harvest enough energy from their local star or stars not only to live but to allow them to travel. If nothing else they need to get to the next star for a type of refuelling. Otherwise such a civilisation can rise but also will fall when its local star eventually fades. It or they may have existed but there would be no chance of ET coming visiting unless such a breakout is managed. In times to come that will apply to us as well which provides food for thought when our own space travel technology often involves lighting the blue touch-paper and sending a firework forth. Not quite to boldly go and all that is it?

It is easy to forget the wonder of nature and the way that a combination of chlorophyll and photosynthesis gives us the energy to exist and live although of course we normally think of it as food. That process has also provided us with what we more conventionally consider energy as our various sources such as wood, peat, crude oil and natural gas come from that. I sometimes wonder if future generations will curse us for our use of oil for energy when it can be used for so many other useful purposes. Though of course there is an irony in that we have got into quite a literal mess with the over use of plastic. Indeed it is rather symbolic that those who are supposed to be leading the green charge do this. From the Guardian.

More than 2.5m disposable cups have been purchased by the UK’s environment department for use in its restaurants and cafes over the past five years – equivalent to nearly 1,400 a day………..the House of Commons itself is also failing to get to grips with disposable cup waste, using almost 4m disposable cups in the past five years.

Much of this is based around the element carbon to which we also need to doff our caps as I recall the Star Trek episode where the alien robot described us as “carbon based units”.

Of course we have other sources of power one which is very old ( the wind) and two which are much newer which are solar or photo-voltaic and nuclear. These all have a flexibility problem though which is the first two rely on the weather and in the latter case daylight and the last one you turn on for say 6 months and let it run. So nuclear is for what is called your base load ( minimum power requirement) and the other two need some storage. Whilst there have been some improvements such as the large battery built by Elon Musk  anyone with a laptop or smart phone will know the problem. I am no great Apple expert but I understand the latest I-Phone has had particular problems in this area. So let us wish Elon well with this. From Mashable UK.

Tesla has completed installing its colossal lithium ion battery in South Australia, a Powerpack system with 100 megawatts of capacity. But now comes the test. Regulatory testing will begin in the next few days to ensure the battery is optimised and meets AEMO and South Australian Government requirements, before operation commences on Dec. 1.

South Australia had seen blackouts due to its reliance on renewables.

Hinkley Point

This links in with this weeks news because going forwards it looks set to have a large influence on not only individual and company budgets in the UK but also economics. The former comes from this.

 the UK government has guaranteed EDF a fixed price for the electricity it produces for 35 years.That fixed price, or strike price, is £92.50 per megawatt-hour………The strike price of £92.50 is in 2012 pounds, so will be considerably higher by 2025. Already, if you adjusted for CPI inflation, the figure would be about £97.

Phew, At least it is not RPI! This compares to a price of more like £44 in July. Even at the peak of last winter when if I recall correctly there was a shortage at one point it only just nudged over £67. So all electricity consumers will be dipping into their wallets and purses to pay for this and if it is repeated energy is on its way to getting a lot more expensive yet there is only flickers of debate. Imagine if a tax was raised for this! In a way it is but it is a hidden stealth one.

In terms of wider economics there is the issue of importing technology and the impact on the balance of payments. Even worse somehow we have involved the Chinese as well. As the problems mount there is also the issue that the technology involved has hit problems elsewhere. Just google Flamanville if you want to know more.

Wind power

This has seen successes. From the UK government about the second quarter of this year.

Onshore wind generation increased by 50 per cent (2.0 TWh), the highest increase across the technologies, to 6.0 TWh, while offshore wind rose by 22 per cent (0.7 TWh), to 4.0 TWh.

However there are cost issues too with offshore wind. From the Guardian on Wednesday.

Innogy recently secured a subsidy of £74.75 per megawatt hour of power to build a windfarm off the Lincolnshire coast, which is £17.75 cheaper than Hinkley and should be completed about three years earlier.

It may be a cunning plan to compare your product with something which is outrageously expensive but offshore wind remains reliant on subsidy and is very expensive too.

Solar

Wags will no doubt claim that the often cloudy UK is unsuitable for solar power but in fact we do have some and of course this is an area which has seen large advances in technology.

Generation from solar photovoltaics increased by 3.4 per cent (0.1 TWh) to a record 4.0 TWh
compared to 2016 Q2, due to increased capacity.

It is not so easy to find a wholesale price for the electricity but according to the US EIA this has happened in the last 7 years.

solar photovoltaic (down 81%),

Biomass

I have to confess this surprised me as I looked at the data from the UK government.

In 2017 Q2, generation from bioenergy1
, at 7.7 TWh, was down slightly (0.5 per cent) on a year
earlier. Within this, generation from biodegradable waste was up 30 per cent (0.2 TWh), due to
increased capacity; however, this was offset by reduced generation from landfill gas and plant
biomass.
Bioenergy had the largest share of generation (34 per cent)

Comment

There is much to consider here in a world of stealth taxation. But let me use this from Joel Hills of ITV.

Centrica boss says 20% of energy bills now “government policy costs”. He wants these transferred to general taxation as unfair on the poor.

Next whilst there has been leaps and bounds in technology both wind and solar need some form of back-up which requires us to have something on standby which in the UK’s case is mostly gas. Thus their economics needs to allow for that which it rarely does. Meanwhile there is the shambles which is nuclear in the UK. After all we do make reactors for the Royal Navy which are no doubt very different to domestic power but I cannot escape the feeling that we could have done it.

Next though is one of perhaps the most bizarre features of our time which is the ( so far) boom,boom,boom of Bitcoin. From Power Compare.

Bitcoin’s ongoing meteoric price rise has received the bulk of recent press attention with a lot of discussion around whether or not it’s a bubble waiting to burst.

However, most the coverage has missed out one of the more interesting and unintended consequences of this price increase. That is the surge in global electricity consumption used to “mine” more Bitcoins.

According to Digiconomist’s Bitcoin Energy Consumption Index, as of Monday November 20th, 2017 Bitcoin’s current estimated annual electricity consumption stands at 29.05TWh.

That’s the equivalent of 0.13% of total global electricity consumption. While that may not sound like a lot, it means Bitcoin mining is now using more electricity than 159 individual countries (as you can see from the map above). More than Ireland or Nigeria.

If Bitcoin miners were a country they’d rank 61st in the world in terms of electricity consumption.

Here are a few other interesting facts about Bitcoin mining and electricity consumption:

  • In the past month alone, Bitcoin mining electricity consumption is estimated to have increased by 29.98%
  • If it keeps increasing at this rate, Bitcoin mining will consume all the world’s electricity by February 2020.
  • Estimated annualised global mining revenues: $7.2 billion USD (£5.4 billion)
  • Estimated global mining costs: $1.5 billion USD (£1.1 billion)
  • Number of Americans who could be powered by bitcoin mining: 2.4 million (more than the population of Houston)
  • Number of Britons who could be powered by bitcoin mining: 6.1 million (more than the population of Birmingham, Leeds, Sheffield, Manchester, Bradford, Liverpool, Bristol, Croydon, Coventry, Leicester & Nottingham combined) Or Scotland, Wales or Northern Ireland.
  • Bitcoin Mining consumes more electricity than 12 US states (Alaska, Hawaii, Idaho, Maine, Montana, New Hampshire, New Mexico, North Dakota, Rhode Island, South Dakota, Vermont and Wyoming)

Time for Snap

I’ve got the power
I’ve got the power
It’s gettin’ it’s gettin’ it’s gettin’ kinda hectic
It’s gettin’ it’s gettin’ it’s gettin’ kinda hectic
It’s gettin’ it’s gettin’ it’s gettin’ kinda hectic
It’s gettin’ it’s gettin’ it’s gettin’ kinda hectic

 

 

Has UK inflation peaked?

Yesterday we heard from Bank of England Chief Economist Andy Haldane.

On 3 November, I visited Greater Manchester on the latest of my Townhall tours.

He makes himself sound like a rock band doesn’t he? It is good to see him get out and about after years and indeed decades of being stuck in a bunker in the depths of the Bank of England. Although sadly for him the hopes of becoming Governor via a “man of the people” approach seem to be just hopes. I do hope that he takes the message below back to his colleagues as not only would some humility be welcome but the reality encapsulated in it would be too.

For most of the people I spoke with, small adjustments in the cost of borrowing were unlikely to have a significant impact on their daily lives.  The borrowing costs they faced for access to consumer credit were largely unaffected by changes in Bank Rate

The latter point was one of my earliest themes when I started this website which had its 7th anniversary over the weekend so you can see that our Andy is not the quickest to pick things up.

Moving to today’s theme of inflation Andy did have some thoughts for us.

It is well-known that increases in the cost of living hit hardest those on lowest incomes.  Rising inflation worsens the well-known “poverty premium” the poorest in society already face in the higher costs they pay for the everyday goods and services they buy.

I hope that Andy thought hard about the role his “Sledgehammer QE” and “muscular” monetary easing in August 2016 had in making the lot of these people worse by contributing to the fall of the UK Pound and raising UK inflation prospects. Speaking of inflation prospects what does he think now?

 Price rises across the whole economy are currently running well above the 2% inflation target and are expected to remain above-target for the next few years.

That is not cheerful stuff from Andy but there are several problems with it. Firstly you cannot forecast inflation ahead like that in the credit crunch era as for example you would have been left with egg on your face when oil prices dropped a couple of years ago. In addition Andy’s own record on forecasting or if you like Forward Guidance is poor as in his role of Chief Economist he forecasts an increase in wage inflation every year and has yet to be correct. Of course when you take out a lottery ticket like that you will eventually be correct but that ignores the years of failure.

International Trends

This mornings data set seems to indicate a clear trend although there is a lack of detail as to why Swedish inflation fell so much.

The inflation rate according to the Harmonised Index of Consumer Prices (HICP) was 1.7 percent in October 2017, down from 2.2 percent in September.

Germany saw a smaller decline but a decline nonetheless.

Consumer prices in Germany were 1.6% higher in October 2017 than in October 2016. The unflation rate, as measured by the consumer price index, was +1.8% in both September and August 2017.

Today’s data

This will be received in mixed fashion at the Bank of England.

The all items CPI annual rate is 3.0%, unchanged from last month.

The Governor Mark Carney will be pleased that his quill pen and foolscap paper will not be required for an explanatory letter to the Chancellor of the Exchequer whereas Andy Haldane will mull that his Forward Guidance has not started well as a rise was forecast this month.

The MPC still expects inflation to peak above 3.0% in October, as the past depreciation of sterling and recent increases in energy prices continue to pass through to consumer prices.

The factors keeping inflation up were as shown below/

In October 2017, the food category, which grew by 4.2% since October 2016, contributed 0.3 percentage points to the overall 12-month growth rate……Recreation and culture, with prices rising by 0.5% between September and October 2017, compared with a smaller rise of 0.2% a year earlier.

There was also a rise in electricity prices. On the other side of the coin we saw transport and furniture and household services pulling in a downwards fashion on the annual inflation rate.

CPIH

The additional factor in CPIH which is the addition of rents which are never paid to the owner occupied housing sector did its planed job one more time in October.

Housing and household services, where owner occupiers’ housing costs had the largest downward effect, with prices remaining unchanged between September 2017 and October 2017, having seen a particularly large increase of 0.4% in the same period a year ago.

This is essentially driven by this.

Private rental prices paid by tenants in Great Britain rose by 1.5% in the 12 months to October 2017; this is down from 1.6% in September 2017.

I would be interested to know if those who rent are seeing lower inflation but also you can see how this pulls down the annual inflation rate. Fair enough ( if accurate as our statisticians have had problems here) for those who rent but the  impact is magnified by the use of Imputed Rent for those who own their property so the measure of inflation is pulled down even more.

The OOH component annual rate is 1.6%, down from 1.9% last month.

This means that what our official statisticians call our “most comprehensive” measure tells us this.

The all items CPIH annual rate is 2.8%, unchanged from last month.

Now let me take you to a place “far,far away” where instead of fictitious prices you use real ones like those below. What do you think the effect would be?

Average house prices in the UK have increased by 5.4% in the year to September 2017 (up from 4.8% in August 2017). The annual growth rate has slowed since mid-2016 but has remained broadly around 5% during 2017.

Thus the inflation measure would be higher with the only caveat being the numbers are a month behind the others. As owner occupied housing costs are 17.4% of the measure you can see that it would have a big effect. Up is the new down that sort of thing.

The whole episode here has reflected badly on the UK statistics establishment as this new measure is mostly being ignored and CPI is used instead as this from the BBC demonstrates.

The UK’s key inflation rate remained steady at a five-and-a-half-year high of 3% in October, according to official figures.

The use of the word “key” is a dagger to the heart of the plans of the Office for National Statistics.

The trend

This mornings producer price dataset suggested that the inflation peak has passed.

The input Producer Prices Index (input PPI) grew by 4.6% in the 12 months to October 2017, down from 8.1% in the 12 months to September 2017. The output Producer Prices Index (output PPI) grew by 2.8% in the 12 months to October 2017, down from 3.3% in the 12 months to September 2017.

So there is good news there for us although awkward again for Andy Haldane. On the other side of the coin there has been around an US $5 rise in the price of Brent Crude Oil since October so that will impact the November data if it stays there. Also more political crises could weaken the Pound like they did only on Monday.

Comment

We find ourselves in the peak zone for UK inflation as we may get a nudge higher but the bulk effect of the fall in the UK Pound £ has pretty much completed now. Back in late summer 2016 I suggested that its impact would be over 1% and if we look at the numbers for Germany and Sweden today that looks to be confirmed. Last year saw monthly CPI rise by 0.2% in November and 0.5% in December as inflation rose so the threshold is higher.

However we remain in a mess as to how we calculate inflation as the Retail Price Index measure has it at 4% as opposed to 3% and of course the newer effort CPIH is at 2.8%. So a few more goes and they may record it at 0% and we could have an “unflation rate”!

I have argued against CPIH for five years now for the reasons explained today and warned the National Statistician John Pullinger of the dangers of using it earlier this year. Meanwhile former supporters such as the economics editor of the Financial Times Chris Giles ( who was on the committee which proposed CPIH) now longer seem to be keeping the faith as this indicates.

CPIH is (probably) better since it has a big proxy for housing services of owner occupiers, but with hindsight I worry occasionally that it doesn’t proxy security of tenure well. And security of tenure is a big service you acquire when buying not renting.

 

 

 

 

 

Russia has similar inflation to the UK but interest-rates are ~8% higher

As a contrast to the Bank of England move or not at midday which I analysed yesterday let us look at developments at another point of the interest-rate cycle. To do this we need merely to look at Russia where this was announced this last Friday.

On 27 October 2017, the Bank of Russia Board of Directors decided to reduce the key rate by 25 bp to 8.25% per annum.

We learn various things here. Firstly even in this time of Zero Interest Rate Policy ( ZIRP) and indeed NIRP where N = Negative we see that there are countries where the trend has bypassed. Much of Africa has been too. I also note that 0.25% moves seem to be en vogue for which we in the UK should be grateful as I recall the Bank of England hinting at a 0.15% cut this time last year as its Forward Guidance shot itself in the foot. Returning to the Russian situation on the face of it the move looks a bit weak in the circumstances as frankly what is moving from 8.5% to 8.25% really going to achieve? Especially if we note this about inflation.

Annual inflation holds close to 4%. Estimates as of 23 October 2017 indicate that annual inflation is 2.7%. Its downward deviation against the forecast is driven mainly by temporary factors. In September, food prices showed stronger-than-expected annual price decline, on the back of larger supply of farm produce. This extra supply owes its origin to growing crop productivity and the shortage of warehouse facilities for long-term storage. The slowdown of inflation was also triggered by exchange rate movements.

Inflation is projected to be close to 3% by late 2017; going forward, as the temporary factors run their course, it will approach 4%.

So we see that the inflation situation currently has quite a few similarities with the UK as our inflation will also be close to 3% late this year and our inflation has a strong exchange rate influence as well. Yet interest-rates are around 8% different! Central bankers eh?

Let us look deeper.

Oil and Gas

This is a powerful player in the Russian economy and the recent rise in the oil price will put a smile on economic developments. In July an economic paper from the University of St. Petersburg put it like this.

In the first phase of the shock, the government’s income suddenly increases. In other words, the price rise enhances the real national income through the increase in the petroleum exports revenues. This might lead to the reinforcement of the national currency value (or foreign currency depreciation) in the exchange rate systems (fixed or managed floating systems). In the floating exchange rate system, the foreign exchange coming from the increase in the world oil prices would lead to the appreciation of the real exchange rate.

Actually the value of the Rouble and the oil price are correlated over time. If we look back to a nadir for oil prices back in early 2016 when the Brent Crude benchmark fell into the mid-30s in US Dollar terms then it took 75 Roubles to buy one US Dollar. If we skip forwards to today when Brent Crude is around US $60 we see that it takes only 58 Roubles to buy one US Dollar. They do not always move in lock step but over time there is usually a similar trend.

Thus we get to the conclusion that a higher oil price reduces Russian inflation. This does not mean that it does not raise domestic inflation as of course there will be familiar price rises from fuel costs which will trigger other price rises. But that there will be an offsetting move from a higher currency that usually is larger. Accordingly I find this from the Bank of Russia a little strange.

Inflation expectations remain elevated. Their decline has yet to become sustainable and consistent.

We are back to a timing issue as in you need to move ahead of events rather than waiting for them to happen and chasing them.

Impact on the Russian economy

The US Energy Information Authority published this on Tuesday.

Russia was the world’s largest producer of crude oil including lease condensate and the third-largest producer of petroleum and other liquids (after Saudi Arabia and the United States) in 2016, with average liquids production of 11.2 million barrels per day (b/d). Russia was the second-largest producer of dry natural gas in 2016 (second to the United States), producing an estimated 21 trillion cubic feet.

So a big deal which has this impact domestically.

 Russia’s economic growth is driven by energy exports, given its high oil and natural gas production. Oil and natural gas revenues accounted for 36% of Russia’s federal budget revenues in 2016.

Also it is the major export.

In 2016, Russia exported more than 5 million b/d of crude oil and condensate……..Russia also exports fairly sizeable volumes of oil products. According to Eastern Bloc Research, Russia exported about 1.3 million b/d of fuel oil and an additional 990,000 b/d of diesel in 2016. It exported smaller volumes of gasoline (120,000 b/d)[50] and liquefied petroleum gas (75,000 b/d) during the same year.

As to the impact on the overall economy it is not easy to be precise as Factosphere points out.

Experts estimate the share of Oil&Gas sector in the Russian GDP to vary from 15% to 20%, but that does not take into consideration effect of a number of related and supporting industries that depend on O&G sector performance (equipment producers, transportation, etc.). Therefore, the overall influence of the sector on the Russian economy and GDP shall be much higher.

Comment

There is a fair bit to consider here but if we stick with the inflation issue then with Brent Crude Oil around US $60 per barrel it seems unlikely that Russia will see much imported inflation generated. Quite possibly the reverse. We know that the Urals production is cheaper but the principle remains. Thus the difference between it and the UK in terms of inflation prospects hardly seems to justify an around 8% interest-rate gap.

There is one clear difference though which ironically would be seen as a success in the UK. From Trading Economics.

Real wages in Russia rose 2.6 percent year-on-year in September 2017, following a downwardly revised 2.4 percent gain in August and missing market expectations of 3.9 percent. Average nominal wages jumped 5.6 percent to RUB 37,520 while annual inflation rate slowed to 3 percent, the lowest since at least 1991.

So higher interest-rates yes but nothing like that much higher. The fun comes in figuring out how much the Bank of Russia and the Bank of England are wrong!

Meanwhile it seems set to be a relatively good year for the Russian economy and a nod from it to OPEC for its efforts in raising the crude oil price. Looking ahead there are of course issues as we mull the impact of having large resources on the wider economy or what became called the Dutch Disease. One of them is the transfer of resources and wealth or if you prefer the oligarch issue.

Currently there is also the issue of economic sanctions on Russia.

Me on Core Finance TV

http://www.corelondon.tv/bank-of-england-timing-mess/

What will the Bank of England be considering today?

Later on today the Bank of England will be considering and voting on something it has not done for more than a decade. Let me take you back to July 2007 when it told us this.

The Governor invited the Committee to vote on the proposition that Bank Rate should be increased by 25 basis points to 5.75%. Six members of the Committee (the Governor, John Gieve, Kate Barker, Tim Besley, Andrew Sentance and Paul Tucker) voted in favour of the proposition. Rachel Lomax, Charles Bean and David Blanchflower voted against, preferring to maintain Bank Rate at 5.5%.

The idea of interest-rates being at 5.5% let alone 5.75% seems from a universe “far,far away” doesn’t it? Also if the public pronouncements of the current Monetary Policy Committee or MPC are any guide there is likely to be a split vote this time around. It is not that MPC members have not individually voted for rises as for example Ian McCafferty has had two phases of it before the current one it is the lack of company they have received. Perhaps most telling in the recent era is that the current Governor Mark Carney has yet to cast a single vote for a Bank Rate rise in spite of 2 clear periods before now ( in 2014 and 2015/16) when he has clearly hinted at delivering one.

Some are completely convinced as this from Reuters suggests.

Britain’s National Institute of Economic and Social Research said it expects the Bank of England to start a sustained rate-tightening cycle on Thursday, which will lead to interest rates peaking at 2 percent in 2021.

Inflation

There is something of a myth that the Bank of England simply targets 2% per annum inflation when this days it is not that simple. There has been some meddling in its remit particularly by the previous Chancellor George Osborne such that it now considers it to be this.

The Bank of England’s Monetary Policy Committee (MPC) sets monetary policy to meet the 2% inflation target,
and in a way that helps to sustain growth and employment.

The “and” is misleading as the two objectives can be contradictory. That was seen as recently as August 2016 when the Bank of England cut Bank Rate to 0.25% and undertook its Sledgehammer of QE. This was supposed to boost the economy but anticipation of it ( as it was well leaked) meant that the UK Pound fell further than otherwise raising imported inflation. So the current inflation issue where the official measure is at 3% is awkward to say the least because it is a consequence of past Bank of England action. A nudge higher to 3.1% would be even more awkward as Governor Carney would have to write a letter to the Chancellor explaining how he was going to reduce something he had helped push up!

Also current inflation is not really something the MPC can do much about now as it takes time for any policy move to have an impact and this usually takes between 18 months and two years to fully work. If we look ahead then the MPC itself thinks that domestically generated inflation is not a big problem or at least it did in August.

Wage Inflation

This deserves a heading of its own as it comes part of domestic inflation ( via labour costs) but is also a target variable itself. Back in August the Bank of England picked out wage inflation as something it expected to rise. However like all its other Forward Guidance on this issue it has been wrong so far as wages have progressed on a pretty similar trajectory and not as it suggested.

We have a relatively tight job market and we do think that wages are going to begin to firm. We’re seeing, and one doesn’t want to over-interpret, but certainly on a survey
basis and some very recent data, some elements of that firming.

Imported Inflation

If we look for the level of the Pound £ last August we see that it has not changed much against the US Dollar although care is needed as it fell after the Bank of England meeting as some felt it had hinted at an interest-rate rise then. One different factor is the price of crude oil as depending on its exact level when you read this it is a bit over nine US Dollars higher than then. So a little push higher in the inflationary chain although the effect of the 2016 fall in the Pound will begin to wash out in a few months.

So the two main issues are whether you think the price of oil can go much higher? Party time for the producers and the shale oil wildcatters if it can. Also what you think about the UK Pound’s prospects after its 2016 drop?

Employment

This is another of the target areas these days but whilst it has been a happy record for UK workers it has been a woeful one for the Bank of England in the era of Forward Guidance. We can argue now about how much importance it put on an unemployment rate of 7% back in 2013. But what is not in dispute is the fact that it was rescinded at express pace and the “threshold” has gone 6.5%,6%,5.5% and now 4.5%. With the unemployment rate now 4.3% with record employment and no sign of wage pressure the last number may soon be due a demotion as well giving the MPC a rather full recycling bin.

Growth

There are two ways of looking at this. The first is to say that the current expansion is getting rather mature. Or as the Office for National Statistics puts it.

Following growth of 0.4% in Quarter 3 2017, GDP has grown for 19 consecutive quarters.

So you could say that it is past time to ease the monetary stimulus although of course that would have people looking over your shoulder to August 2016! The other way of looking at it is more awkward as having cut Bank Rate when GDP growth was of the order of 0.6/7% a rise now would be doing so when it is 0.3/4%. Ooops!

Comment

If we look at this as the Bank of England is likely too then there are various issues for it. We see that it can do very little about the current inflationary episode and that its claims of seeing higher wage growth after so many mistakes may bring laughter even at what is often a supine media at the press conference ( after all they want to be able to get in an early question….). It will be doing so at a level of economic growth that has often made it cut not raise interest-rates. If we look at the unsecured credit growth issue that I analysed on Monday the problem is that it has been at the same growth rate for a while and the Bank of England lit the blue touch-paper for it in August 2016,

Thus if it does raise Bank Rate it is likely to involve a downbeat assessment of productivity and the supply side of the UK economy. This will then allow it to continue its post EU leave vote pessimism and attempt to dodge the obvious timing problem. The catch is that its theoretical efforts in this area have had about as much success as Chelsea’s defence last night.

As for my views the first bit is easy yes Bank Rate should be 0.5% as part of an effort to take it higher, the catch is in the timing as this inflationary episode is past us in monetary policy terms. But as we can see from the current level of the UK Pound ( US $1.33 and Euro 1.14) it can help going forwards. The market is settled it will happen but I expect some to vote against as intriguingly two inside members ( Cunliffe and Ramsden) have hinted they will and of course Silvana Tenreyro was reported as saying this by Reuters only last month.

New Bank of England rate-setter Silvana Tenreyro said she was not ready to vote to raise the Bank’s record low interest rates in November although she might do so in the coming months if inflation pressure builds in Britain’s labour market.

Could the “unreliable boyfriend” emerge again or will it be a case of one and done like in Canada under Governor Carney? ( correction as Andrew Baldwin points out in the comments rates were raised to 1%).

Oh and as a reminder take care from late this afternoon as that is when the MPC actually vote. The delay between this and the announcement which was introduced by Governor Carney is something that can only go wrong ( i.e leak) in my opinion.

 

 

 

 

 

What is happening in the US economy?

It is time and in some ways past time for another delve into the state of play in the US economy which some would have you believe has been doing extraordinarily well. I spotted this from @Trickyjabs on Twitter earlier this week.

George Osborne, January 2015:
“Britain could be richer than US by 2030”

2.5 years later:
US GDP +21.5%
UK GDP +4.5%

If we skip the attempt to make a political point this is the sort of thing to cheer Donald Trump especially if he could find a way to argue it had all happened this year! Sadly of course the lesson here is not to use figures you do not understand as the US figures are realised in an annualised version. So still better than the UK but not by much.

Perspective

If we look back we see that the US Bureau of Economic Analysis or BEA tells us that economic output as measured by GDP peaked at 14.99 Trillion US Dollars in the last quarter of 2007 ( 2009 prices). If we jump forwards to the second quarter of this year we see that it had risen to 17.03 Trillion US Dollars. So if we allow for the likely growth in the third quarter an increase of the order of 14%. This tells us that the US has done relatively well on this measure but that growth is lower than what used to be considered normal. Putting it another way we have a type of confirmation that as output did not reach its previous peak until halfway through 2011 the new normal for economic growth may be of the order of 2% per annum.

Also the BEA gives us an insight into the structure of the US economy which goes as follows. 69% is consumption, just under 17% is investment and just over 17% is the government. You may have spotted a mathematical flaw which is solved when we put in net trade which is -3%.So investment has fallen as has the relative size of the government and the gap has partly been filled by services consumption rising from 44% to 47%.

Perhaps the most interesting change is the decline in the trade deficit which peaked at just under 6% of GDP before the credit crunch but is now around 3%. I wonder how much of a role the shale oil industry has played in this.

Looking ahead

One view was expressed by the Donald back in August. From CNBC.

“If we achieve sustained 3 percent growth that means 12 million new jobs and $10 trillion of new economic activity. That’s some number,” Trump said during a speech last month in Missouri promoting tax reform. “I happen to be one that thinks we can go much higher than 3 percent. There’s no reason we shouldn’t.”

If the US Federal Reserve was on board with that then we would have seen more interest-rate increases but its latest forecasts suggest annual economic growth of around 2%. So belatedly they have caught up with us on here!

Interest-Rates

This is an intriguing one as markets expect another rise to circa 1.25% in December and it became more intriguing as we learnt this from the European Central Bank and its President Mario Draghi yesterday.

Real GDP increased by 0.7%, quarter on quarter, in the second quarter of 2017, after 0.6% in the first quarter. The latest data and survey results point to unabated growth momentum in the second half of this year

So better than the US so far in 2017 and the Euro area has seen growth for a while.

Growth is growing and momentum is also growing and labour market and everything is doing – well, I think it’s, I can’t remember how many quarters of consecutive growth, 17 I believe.

But the picture for interest-rates is completely different.

The sequence stays what it is, namely this – the interest rates will stay and they remain at their present – are expected to remain at their present levels for an extended period of time and well past the horizon of our net asset purchases.

So President Draghi is giving us Forward Guidance that the ECB deposit rate will remain at -0.4% for at least the next couple of years and maybe beyond. This is because the cut to the monthly amount of QE to 30 billion Euros a month was accompanied by not only an extension of its term but more hints that it might go “on and on and on ” to coin a phrase.

Whilst 2017 looks like being somewhere between a good year for both the US and Euro area economies sooner or later a recession will come along. Oh except of course in the forecasts of central bankers which seem to actually believe they have ended them! But my point is should it come then we will see a US central bank which has raised interest-rate but an ECB with them starting it in negative territory. The rationale as we look at comparisons is given here.

As such, the US recovery is way more advanced than ours

Quite a compliment for the United States I think.

Inflation

This remains by historical standards relatively mild with this being the latest release from August.

The PCE price index increased
0.2 percent. Excluding food and energy, the PCE price index increased 0.1 percent.

This means that the annual rate for Personal Consumption Expenditure has fallen from 2.2% in February to 1.4% in August. So good news overall and in case you are wondering why CPI is not used the gap between the two measures is variable but tends to see CPI around 0.4% higher.

Wages

From the Bureau of Labour Statistics or BLS.

Real average hourly earnings increased 0.7 percent, seasonally adjusted, from September 2016 to
September 2017. The increase in real average hourly earnings combined with no change in the average
workweek resulted in a 0.6-percent increase in real average weekly earnings over this period.

So there is some growth but hardly stellar.

Comment

In many ways the US economy has done pretty well in the credit crunch era but this does not mean that there are not begged questions. This start in an apparent area of strength because the unemployment has fallen to 4.2% and the underemployment rate to 8.3%. But the catch as was discussed in the comments section yesterday comes from the participation rate which in spite of an improvement in September is some 3% lower than pre credit crunch. So what has happened to nearly 8 million people or ten million if we look further back?

The next issue is one of debt. I am not particularly thinking of the level of it but the way that it seems to have permulated and percolated back down to the sub-prime level again. From Bloomberg in August.

There’s a section of the auto-loan market — known in industry parlance as deep subprime — where delinquency rates have ticked up to levels last seen in 2007, according to data compiled by credit reporting bureau Equifax.

“Performance of recent deep subprime vintages is awful,” Equifax said in a slide show on second-quarter credit trends.

I dread to think what “deep subprime” means don’t you? As to the car market itself this from Automotive News does not seem entirely reassuring.

October is on track to be the second-best month of 2017 for U.S. new-vehicle sales, analysts said, partly due to surging demand in states recovering from hurricane damage, though volume is projected to fall slightly from the same month last year.

When will the next big hurricane come along to boost sales and I note what is happening with prices.

Fleming said incentives have risen to 11 percent of average transaction prices — “an indicator that new-vehicle demand is still contracting, and production cuts could be on the horizon to prevent oversupplies.”
Discounts are all but certain to rise further in the coming months, as automakers roll out year-end promotions that typically start in the next few weeks and stretch into early January.

My financial lexicon for these times of course defines an “incentive” as a price cut.