UK Retail Sales suggest inflation of 3.1% as the Bank of England remains vigilant

Today the focus switches back to the UK at the end of what has been a long hot week if not the long hot summer that The Style Council sang about. The official release brought some good news.

Retail sales volumes increased by 0.5% between May and June 2021, and were up 9.5% when compared with their pre-coronavirus (COVID-19) pandemic February 2020 levels.

I am not sure that such an erratic series can be described as a type of old reliable but it has been the area that has demonstrated a V-shaped recovery. Remember those who told us the whole economy would do that? Well they are hoping you have forgotten.

The shape got damaged by later lockdowns but whenever they had the chance the UK consumer came out to play. This is an example of some of the savings that were built up being spent.

Breaking it Down

The driver was food sales which swung heavily between May and June.

Food store sales volumes increased by 4.2% in June 2021, following a decline of 5.5% in the previous month, when consumers had switched some food spending to hospitality as some restrictions in that sector were relaxed. Feedback from some retailers suggested that sales were positively boosted in June by the start of the Euro 2020 football championship.

If the area around me was any guide plenty of alcohol was sold too. Outside of that area we saw a different picture.

Non-food stores as a whole saw monthly sales volumes fall by 1.7% in June 2021, following strong growth in previous months.

In fact we seem to have by-passed this year’s summer sales or perhaps they have been postponed if we stay with football analogies.

Household goods stores reported a monthly fall in sales volumes of 10.9% in June 2021, driven by falls in furniture stores and electrical household appliance stores. The Bank of England Agents’ summary of business conditions for Quarter 2 (April to June 2021) notes that transportation delays have resulted in shortages of some items, such as furniture and electrical goods……..Clothing and department stores also reported monthly declines, of 4.7% and 3.6% respectively.

The catch-all category showed very strong growth but as you can see there is a lack of detail.

Other non-food stores (such as chemists, toy stores and sports equipment stores) reported monthly growth of 8.6% driven by strong growth in second-hand goods stores.


With more places open this was inevitable.

Online spending values fell in June 2021 by 4.7% when compared with May 2021, with all sectors except clothing stores reporting monthly falls in their online sales…….This resulted in a decline in the proportion of online retail spending values, which fell to 26.7% from 28.4% in May 2021.

But it remains much higher than before with all that implies for physical stores and the high street.

However, this is higher than the proportion of online retail spending in February 2020 (pre-coronavirus (COVID-19) pandemic) of 19.9%.


We do get a reading on this from the numbers because the amount spent in June was up 113.1 on last year but the volume increase was 109.7. This leaves us with an inflation rate of the order of 3.1% which gives us another warning as well as another problem for the official inflation numbers.

Markit PMI

These suggested that UK economic growth continued into July but was affected by what has become called the pingdemic where the NHS app has pinged so many for self-isolation it has left some businesses short of staff.

At 57.7 in July, the headline seasonally adjusted IHS Markit  / CIPS Flash UK Composite Output Index registered above the 50.0 nochange value for the fifth consecutive month…….. However, the latest reading was down from 62.2 in June and the lowest since the easing of lockdown restrictions began during March.

As an absolute measure they have been a poor guide and in manufacturing actually misleading so make of that what you will. One area they should be able to get right is inflation pressures.

Average cost burdens increased at the fastest pace since the survey began in January 1998, fuelled by a steeper rise in the service sector. This was linked to wage inflation, higher transport bills and price hikes by suppliers. Manufacturers also recorded another rapid upturn in purchasing prices, but the rate of inflation eased from June’s all-time high.


Bank of England

Yesterday we heard from Deputy Governor Ben Broadbent and there is a link to the above as well as my description of him as the absent-minded professor.

So with numbers like these perhaps it’s not surprising to see inflation going up, here and in other countries. In the UK, annual CPI inflation has risen from ½% to 2½% in the past four months.

Actually it has been a surprise to him as the Bank of England did not predict it.This is what we were told as recently as February.

As temporary effects fade and the impact of spare capacity diminishes over 2021, inflation rises towards the target.

Also after Brexit he told us he follows PMIs which led him in the wrong direction back then and this time he seems to have missed their inflation warning.

He deploys the usual central banking response which is to move the goal posts, Usually that involves looking a different measures but that cannot have worked so his staff will have been dispatched to change the time frame.

Over the past year and a half as a whole, so including that initial drop, headline and core CPI
have both risen at an average (annualised) rate of 1½-1¾%, a little weaker than pre-pandemic rates.

Ben has a go at claiming he has been right.

And shifts in spending of this sort, at least until (and unless) they’re met by matching shifts in supply, tend to push up
average prices.

But then no he didn’t

In January, I felt that these mismatches would probably get ironed out over time.

After all this he concludes that one day it will end although he does not know when.

And in many of these markets supply looks to be reasonably
“elastic”, at least over the medium and longer term: it responds positively to higher prices, ensuring a degree
of self-correction.

We are already being warmed up for his conclusion.

Along the way we see confirmed a point that many of you have made.

One important place to look will be wage growth. That’s also the place where any “second-round” effects of
the current inflation, via higher expectations for the future, would both appear and most matter.

I do hope Ben raised the issue below with his former colleague Dr. Martin Weale who botched a review of the average earnings figures and left us as described.

Unfortunately, the headline wage numbers are currently beset by a host of distortionary effects.

Ben misses out the fact that the self-employed are excluded as are those at smaller businesses. Still I suppose having been involved in the botching of the RPI Review I guess he feels he would be throwing stones in a glass house.

What is he going to do about it?

And if this was only a story about global goods
prices – and depending how confident you were in its transitory nature – I think the answer could well be


There is much that is familiar about the speech from Ben Broadbent. The first is that he has been wrong again but expects us to take his view on the same subject seriously. Next is the effort to pick out an individual area.

Most of the overshoot relative to target in the latest CPI numbers – more than all of it, on some measures –
reflects unusually strong inflation in goods prices.

At some point that will probably fade but he ignores the fact that other areas may take its place. No doubt when they do we will be told they are unusually strong. Rince and repeat. Next is the shift in timing that I regularly report on. When the pandemic hit the response was immediate but when we have inflation now it switches to.

I’m not convinced that the current inflation in retail goods prices should in and of itself mean
higher inflation 18-24 months ahead, the horizon more relevant for monetary policy.

As a final point as an external and thereby supposedly independent member he should never have been promoted to Deputy-Governor. It sets us all the wrong motivations as those appointed to bring diversity find that being a good boy or girl can be very remunerative. No wonder we get so many unanimous votes.

Bank of England QE is coming under increasing fire as inflation rises

This has been a bad week for central bankers as we have seen inflation soar above their predictions. The 5.4% for US CPI is not what the Federal Reserve explicitly targets but suggests a trend well above its thinking and that is before we get to the issue of the “transitory” or it you prefer “temporary” claims they have made. If you look at the statement to Congress of Chair Powell this week he shifted to expectations on inflation in response to this.

To avoid sustained periods of unusually low or high inflation, the Federal Open MarketCommittee’s (FOMC) monetary policy framework seeks longer-term inflation expectations thatare well anchored at 2 percent, the Committee’s longer-run inflation objective.

After all he can claim pretty much what he wants via them as opposed to workers and consumers paying higher prices who have no such choice. Also we had the UK with the targeted inflation measure going to 2.5% so 0.5% over and RPI at 3.9%. That is really rather awkward in a week where you have bought some £3.45 billion of UK bonds as part of a policy ( QE) to raise inflation.

House of Lords

They have published a report today which questions QE on a strategic level. One issue is how much of it is planned.

Since March 2020, the Bank of England has doubled the size of the quantitative easing programme. Between March and November 2020, the Bank of England announced it would buy £450 billion of Government bonds and £10 billion in non-financial investment-grade corporate bonds. In total, by the end of 2021, the Bank will own £875 billion of Government bonds and £20 billion in corporate bonds. This is equivalent to around 40% of UK GDP.

Those who have followed my “More! More! More!” theme which has been running for a decade will have a wry smile at this.

Therefore, the scale and persistence of the quantitative easing programme are substantially larger than the Bank envisaged in 2009.

It has also become the policy of first resort.

Once considered unconventional, more than a decade after its introduction, quantitative easing is now the Bank of England’s main tool for responding to a range of economic

Yet have things got better?

These problems are quite different from those of 2009.

The House of Lords does not explicitly say it at this point but let me point out that it has created problems along the way as the Cranberries told us.

In your head, in your head
Zombie, zombie, zombie-ie-ie


Their Lordships have spotted the 2021 issue.

Despite a growing economy and expansionary monetary and fiscal policy, central banks in advanced economies appear to see the risks of inflation in terms of a transitory, rather than a more long-lasting, problem.

A fair point as after all whilst the flow may stop ( presently planned to be towards the end of 2021) the stock of £895 billion including corporate bonds will remain on the books. After all, so far, the Bank of England has not redeemed a single penny. So in monetary terms there will remain an extra £895 billion in the money supply although care is needed because what follows from it is not as simple as what was thought. especially by the Bank of England itself.

Quantitative easing’s precise effect on inflation is unclear.

It has been made less clear in my view by the establishment effort to remove ways measuring this by downgrading the RPI which is a pretty transparent effort to move the focus away from the house prices it includes. Can anybody think why?

Since they finalised their thinking the statement below has been reinforced by inflation going over its target as well.

The official inflation rate is already higher than
the Bank of England’s previous forecasts.

These factors add to the challenges here.

The Bank of England forecasts that any rise in inflation will be “transitory”; others disagree.

They then pose a challenge whilst also issuing a critique. After all it should have made its thinking clear.

We call upon the Bank of England to set out in more detail why it believes higher inflation will be a short-term phenomenon, and why continuing with asset purchases is the right course of action.

This leads to the crux of the matter because as I have frequently pointed out monetary policy takes around 18 months to 2 years to have its full impact. That may even have lengthened in the modern era due to the increased numbers of fixed-rate mortgages which is considered a major transmission mechanism. Yet we have central bankers who ignore that and at times claim that they can act during or even after the event which to mt mind requires the ability to time-travel.

The Bank should clarify what it means by “transitory” inflation, share its analyses, and demonstrate that it has a plan to keep inflation in check.


Their Lordships seem to have stumbled on my point that we will not see many if any interest-rate increases because of the cost of them.

Quantitative easing hastens the increase in the cost of Government debt because interest on Government bonds purchased under quantitative easing is paid at Bank Rate, which could be much higher than it is now (0.1%) if the Bank of England had to increase Bank Rate to control inflation. As a result, we are concerned that if inflation continues to rise, the Bank may come under political
pressure not to take the necessary action to maintain price stability.

That is of course assuming they do not follow the path trod by the ECB and simply change the rules of the game.

These included an option to not pay interest on commercial bank reserves.

This bit made me laugh and I hope it is humour.

While the UK can be proud of the economic credibility of the Bank of England, this credibility rests on the strength of the Bank’s reputation for operational independence from political decision-making in the pursuit of price stability.
This reputation is fragile, and it will be difficult to regain if lost.

Like so many central banks they lost it years ago.

Michael Saunders

We can now switch to the tactical rather than the strategic and yesterday one of the policy-makers said this.

In my view, if activity and inflation indicators remain in line with recent trends and downside risks to growth and inflation do not rise significantly (and these conditions are important), then it may become appropriate fairly soon to withdraw some of the current monetary stimulus in order to return inflation to the 2% target on a sustained basis. In this case, options might include curtailing the current asset purchase program – ending it in the next month or two and before the full £150bn has been purchased – and/or further monetary policy action next year.

So there may be several votes for ending the QE programme early. Not enough to win a vote but increasing.

Oh and his confession that they had for their forecasts wrong (most of you are no doubt thinking again) is rather devastating for their “transitory” claims.


If we switch to the benefits we seem to get ever more of something that has unclear results.

We found that the available evidence shows that quantitative easing has had a limited impact on
growth and aggregate demand over the last decade.

They do not point out the moral hazard of the evidence often coming from those operating the policy. There are also losses and problems.

Furthermore, the policy has also had the effect of inflating asset prices artificially, and this has benefited those who own them disproportionately, exacerbating
wealth inequalities.

I am glad they are making this point as I believe they did note my points about house price rises when I gave evidence to the RPI enquiry. Actually even the Financial Times may be forced into a rethink as it is its economics editor Chris Giles who led the charge to remove house prices from the RPI.

Finally it is hard not to have a wry smile at Lord King of Lothbury criticising a policy he started.

“I wonder if I’ve been changed in the night. Let me think. Was I the same when I got up this morning? I almost think I can remember feeling a little different. But if I’m not the same, the next question is ‘Who in the world am I?’ Ah, that’s the great puzzle!” ( Alice In Wonderland )

Inflation is back on the march

Yesterday brought troubling news on the inflation front as the US CPI measure of inflation rose to 5.4%. Personally I was more bothered by the annual rise of 0.9% due to the problems at the moment with annual comparisons created by the Covid pandemic. That set something of an underlying theme for the UK release this morning so to any logical person it is rather curious to find this being reported by in this instance Ed Conway of Sky News.

UK CPI inflation rises above expectations again. Up to 2.5% in June.

If you had not be following the producer prices data we check each month you did get a clue from the US yesterday. It has different specific circumstances but broad trends for and other commodities will be in play.

Thus this was not really a surprise at all.

The Consumer Prices Index (CPI) rose by 2.5% in the 12 months to June 2021, up from 2.1% to May; on a monthly basis, CPI rose by 0.5% in June 2021, compared with a rise of 0.1% in June 2020.

We can break it down but the initial one helps a bit but as you can see whilst goods inflation is higher by the standards of this the gap is not large. However goods prices have seen a particular acceleration.

The CPI all goods index annual rate is 2.8%, up from 2.3% last month……The CPI all services index annual rate is 2.1%, up from 1.9% last month.

We can take that further although the official analysis is only for the similar CPIH as they try to force people to use their widely ignored favourite.

There were upward contributions to the change in the CPIH 12-month inflation rate from 9 of the 12 divisions, partially offset by a downward contribution from health.

So the move was fairly broad and we can specify it more.

The largest upward contribution (of 0.08 percentage points) to the change in the CPIH 12-month inflation rate came from transport, where prices rose by 1.3% between May and June 2021, compared with a rise of 0.5% between the same two months of 2020. The effect was principally from second-hand cars and motor fuels.

The second-hand car effect was something seen in the US where the unadjusted annual number was 45.2%. A lot of reliance was placed on the seasonal adjustment which reduced it to 10.5% as you can see by the difference in the numbers. The UK situation is not so different with second-hand cars seeing a monthly price rise of 4.4%. In terms of the technicalities they have reduced the weight by 20% which has proved convenient in keeping recorded inflation low but looks a clear mistake in hindsight.

Due to second-hand cars, where prices overall rose this year but fell a year ago. There are reports of prices rising as a result of increasing demand. This follows the end of the latest national lockdown and with some buyers turning to the used car market as a result of delays in the supply of new cars caused by the shortage of semiconductor chips used in their production.

That category was also impacted by rises in fuel prices of the order of 2.4 pence per litre which meant a 2% rise on the month for fuels.

Next come something rather troubling for those relying on seasonal adjustment.

A final, large, upward contribution (of 0.05 percentage points) came from clothing and footwear. Prices, overall, rose by 0.8% between May and June this year, compared with a fall of 0.1% between the same two months a year ago. Normally, prices fall between May and June as the summer sales season begins  but the seasonal patterns have been influenced by the timing of lockdowns since the onset of the coronavirus pandemic.

The US Bureau of Labor Statistics which adjusted US used car prices so heavily may have an itchy collar when reading that.

The ongoing issue of how to treat prices in area’s which see heavy discounting or the same from going in and out of best-seller charts swung the other way this month.

The largest downward contribution of 0.06 percentage points came from games, toys and hobbies, where prices fell this year but rose a year ago, with the main effects coming from computer games and games consoles.

Also the rate of increase of prices for pills,lotions and potions has faded.

A partially offsetting, small downward contribution (of 0.03 percentage points) to the change in the CPIH 12-month inflation rate came from health. Prices of pharmaceutical products, other medical and therapeutic equipment rose by 0.8% between May and June 2021, compared with a larger rise of 3.1% between the same two months a year ago.

Tax Cuts

There have been some indirect tax cuts of which the largest has been the cuts to VAT. If you fully factor them in then the inflation episode is a fair bit larger.

The annual rate for CPI excluding indirect taxes, CPIY, is 4.2%, up from 3.8% last month.



No perhaps it will not all be passed through but even if you halve the impact you end up at 3.4%

Housing Costs

This has been a contentious issue for some time and the heat is not only on it is getting hotter all the time. Why? Well the official view is this.

The OOH component annual rate is 1.6%, up from 1.5% last month. ( OOH = Owner Occupiers Housing Costs)

I had to look that up because they quote all sorts of numbers to try to hide what is so obviously embarrassing. Even the man from Mars that Blondie sang about is probably aware that house prices are soaring and will be wondering how costs are only rising .

by that little? Especially when only 2 and and half hours later we are told this.

UK average house prices increased by 10.0% over the year to May 2021, up from 9.6% in April 2021.

So prices are up 10% but costs only by 1.6%! So what fell? Well mortgages are doing little so our official statisticians have to explain how their smoothed ( it is up to 16 months out of date) number for rents which do not exist impacts with reality.

After all how can you add soaring housing costs to the CPI at 2.5% and manage to then get 2.4% as CPIH does…..

I have regularly pointed out that this is an area of strength for the Retail Prices index or RPI and the reason why is shown below.

Annual rate +4.3%, up from +3.8% last month

It is picking up the rises that everyone can see much more accurately and let me specify that. It uses house prices via depreciation which is good but even it is handicapped by the smoothing process I described earlier and would change given the chance. If so it would give a higher reading right now and be a better measure.


I thought you might enjoy my perspective on the official inflation view..

The official inflation story
1. There wont be any
2. It will be transitory
3. It was above expectations
4. It is too late to do anything about it now.

Next there is the house price issue which if we put into the CPI measure at current weights would put it at 4%. Regular readers will have noted Andrew Baldwin commenting on this and so let me refine it. In reality if they let house prices in they will have the weights even though no brick is moved,window opened or door closed. But even if we so that we get to 3.2% and the Governor of the Bank of England is in the zone where he has to write an explanatory letter. That would be awkward as this afternoon the Bank of England will buy another £1.15 billion of UK bonds in an attempt to raise the inflation rate.

Looking ahead we see that whilst the shove is not as large as last month there still is a large one.

The headline rate of output prices showed positive growth of 4.3% on the year to June 2021, down from 4.4% in May 2021.

The headline rate of input prices showed positive growth of 9.1% on the year to June 2021, down from 10.4% in May 2021.

The monthly rise for output prices was 0.4% so the beat goes on. In terms of the input ones there was a 0.1% dip but this was mostly driven by the swings in oil so we need to check again next month.

Meanwhile is some action building in services inflation?

The annual rate of growth for the Services Producer Price Index (SPPI) showed positive growth of 2.0% in Quarter 2 (Apr to Jun) 2021, up from 1.3% in Quarter 1 (Jan to Mar) 2021.

The Bank of England will be vigilant in its efforts to ignore house price rises

This morning has been one where a little known committee has emerged blinking into the spotlights. It is the Financial Policy Committee (FPC) of the Bank of England and just to prove that they are central bankers they got straight to what is the beating heart of their concerns.

he UK banking system has the capacity to continue to provide that support. The FPC continues to judge that the banking sector remains resilient to outcomes for the economy that are much more severe than the Monetary Policy Committee’s central forecast. This judgement is supported by the interim results of the 2021 solvency stress test.

We have learnt to be more than suspicious about the use of the word “resilient” especially after noting how across the Irish Sea what was labelled the best bank in the word suddenly collapsed in the credit crunch.  As so often it was time to throw The Precious a bone.

The FPC supports the Prudential Regulation Committee’s (PRC’s) decision that extraordinary guardrails on shareholder distributions are no longer necessary, consistent with the return to the Prudential Regulation Authority’s (PRA’s) standard approach to capital‐setting and shareholder distributions through 2021

How many civil servants does it take to let the banks pay dividends again? As you can imagine it has gone down well with bank shareholders.

Whilst they are there I guess they felt they also needed to help keep the lending taps open.

To support this, the FPC expects to maintain the UK countercyclical capital buffer rate at 0% until at least December 2021. Due to the usual 12‐month implementation lag, any subsequent increase would therefore not be expected to take effect until the end of 2022 at the earliest.

What about the real economy?

Some businesses have been hit hard.

The increase in indebtedness has not been large in aggregate, but has been more substantial in some sectors and among small and medium‐sized enterprises (SMEs)…..companies with weaker balance sheets, particularly in sectors most affected by restrictions on economic activity and SMEs, may be more vulnerable to increases in financing costs.

But it is not going to worry about them because others have not.

UK businesses’ aggregate interest payments as a proportion of earnings did not increase over 2020, and are around historic lows.

Such statements can hide a lot of woes especially for businesses where earnings have been hit hard.

As to households things are not as bad as when things collapsed last time.

The share of households with high debt‐servicing burdens has increased slightly during the course of the pandemic, but remains significantly below its pre‐global financial crisis level

Pumping up house prices was one of the few things we could do.

House price growth and housing market activity during 2021 H1 were at their highest levels in over a decade, reflecting a mix of temporary policy support and structural factors.

We need to find a way that people can borrow even more.

However, so far, there has only been a small increase in mortgage borrowing relative to income in aggregate, and debt‐servicing ratios remain low.

It has been good to see that low equity mortgages are back but in case that backfires again we had better cover ourselves.

The FPC’s mortgage market measures are in place and aim to limit any rapid build‐up in aggregate indebtedness and in the share of highly indebted households. The FPC is continuing its review of the calibration of its mortgage market measures.


This is an awkward area for central bankers. After all their main policy lever these days is pumping up asset prices via purchases of government bonds. The Bank of England will do another £1.15 billion of that this afternoon. So we get this sort of buck passing statement.

Risky asset prices have continued to increase, and in some markets asset valuations appear elevated relative to historical norms. This partly reflects the improved economic outlook, but may also reflect a ‘search for yield’ in a low interest rate environment, and higher risk‐taking.

Ah the very yields the central banks have set out to take away! This is also why those who set interest-rates and have previously been so busy cutting them are always in a rush to blame secular trends. It wasn’t their fault you see. Of course if it had worked it would have been their triumph.

It gets worse in the next bit. The Bank of England piled into the Corporate Bond market in spite of the fact that previously it had got into a mess in doing so. This is because UK businesses of that size are mostly international and thus often choose to issue in Dollars and Euros to match currency risk. Thus the £ sterling market is smaller than you might think and it ended up being like The London Whale in there. Also it was so desperate to find bonds to buy it bought the ones of Apple. Exactly what support did the richest company in the world need? Yet it tries to point put what is below as if it had nothing to do with it.

The proportion of corporate bonds issued that are high‐yield is currently at its highest level in the past decade, and there is evidence of loosening underwriting standards, especially in leveraged loan markets.

Encouraging that was official Bank of England policy. Below is as close to admitting they have stored up trouble for the future as they will ever get.

This could increase potential losses in a future stress, and highly leveraged firms have also been shown to amplify downturns in the real economy.

Next is even more classic central banker speak which completely ignore their role in creating this.

Asset valuations could correct sharply if, for example, market participants re‐evaluate the prospects for growth or inflation, and therefore interest rates.

Even Bloomberg pointed this out last week. What did central bankers think would happen in response to this?

Central banks in the U.S., Europe and Japan have become ultimate market whales during the pandemic, with combined assets of $24 trillion.

Is there any market-based finance left after all their interference?

Any such correction could be amplified by vulnerabilities in market‐based finance, and risks tightening financial conditions for households and businesses.

Many reviewing this will think The Beatles were rather prescient here about QE.

You never give me your money
You only give me your funny paper

Especially if their situation is like this.

Out of college, money spent
See no future, pay no rent
All the money’s gone, nowhere to go


There are a couple of contexts here. I have critiqued the FPC as being a waste of space where people you have mostly never heard of are selected because they have the “right” views. The official view was that the FPC would set macroprudential policies which would keep house prices under control. Remember macropru as it became called? Where are all its supporters now as they seem to have disappeared?

“Over the last twelve months, our index has shown the average price of a home sold in England and
Wales has increased by some £32,500, or 10.7%. If we exclude London from this then the figure is a
very considerable 14%. Nevertheless, even including the capital, this is the highest annual rate since
February 2005. It is now fourteen months since any of the areas in our index have recorded a fall in
house prices, and this is while the UK economy has been under the severest pressure it has faced in
living memory.” ( Acadata)

So where are they then?

Still it looks as though one member has been checking his own position.



Should we raise taxes to deal with the new debt?

The establishment response to the Covid-19 pandemic was to reach for the fiscal policy button and press it. This was in addition to what are called the fiscal stabilisers where more unemployment benefits are paid and less tax is collected. So for example we saw the furlough scheme deployed on a grand scale which was both a new venture and an adventure for the UK. Actually we got some news on it only yesterday.

provisional figures show that the number of employments on furlough has decreased by 1.2 million from 30 April to 2.4 million on furlough at 31 May 2021, down from 3.5 million on 30 April. (These figures do not sum exactly due to rounding.) Numbers on CJRS last peaked at 5.1 million in January and have fallen since. ( HMRC)

In case you were wondering the main falls were as you might expect.

across all more detailed industry sectors, the beverage serving activities group saw the largest reduction in jobs on furlough between 30 April and 31 May: a decrease of 179,700. This was followed by the restaurants and mobile food service activities group which saw a reduction of 133,000.

But for our purposes today the main impact was that these were rather different numbers to what the Office for National Statistics had told us.

The proportion of UK businesses’ workforce who are reported to be on furlough has decreased to 6% (approximately 1.5 million people) in early June 2021; this is the lowest level reported since the furlough scheme began.

It does go into June but as you can see has given us a very different answer as this seems to have misfired.

This number is based on multiplying the BICS weighted furlough proportions by HM Revenue and Customs (HMRC) Coronavirus Government Retention Scheme (CJRS) official statistics eligible employments1 for only those industries covered by the BICS sample.

It posts a warning about economic statistics but also for today it suggests that the path of public borrowing is going to be higher than we were thinking based on the ONS data.

Social Care

The news above may have rattled things a bit at HM Treasury which is always nervous about this sort of thing. A sort of institutional memory if you like. This presumably led to this from the Financial Times.

New health secretary Sajid Javid is to form a powerful alliance with chancellor Rishi Sunak to insist that major reform of England’s creaking social care system must be funded through higher taxes.

Presumably aides for the two politicians wrote the “powerful alliance” bit for the FT. Then we get to the crux of the matter.

Boris Johnson has promised to fix the social care funding crisis — with annual costs estimated at up to £10bn — but his reluctance to raise taxes has caused tensions with Sunak, who wants to tackle the £300bn deficit accumulated during the coronavirus pandemic.

So this is the crux of the matter and is why we have seen other tax raising moves floated such as reduction in the tax relief on personal pensions for higher-rate payers. That has various problems though. Firstly it does not apply to those imposing it as they usually have taxpayer funded final or average salary pensions. Next the pension structure has taken various hits around the areas of likely returns and especially the very low level of annuity rates. We have seen it appear before as a suggestion and then disappear although of course the deficit is larger now.

Indeed the drumbeat may even have reached The Sun.

NEARLY 2.5 million Brits are still on furlough as the scheme winds down — with the total bill reaching £66billion.

A conceptual issue here is that governments seem to have lost the power to raise rates for income tax. In the past the response would be to add a penny or two to the basic rate or to raise higher rates. They do seem able not to raise the various thresholds and thus get more money via people getting wage rises but that is about it. So a passive rather than an active move.

They are now thinking of a different route which is a specific tax for a policy.

Javid is sympathetic to a Japanese-style levy on the over-40s to fund social care, according to colleagues, while the Treasury is looking at whether a dedicated tax could be introduced.

The UK does not do this although some still think that National Insurance contributions do pay for the NHS and pensions. Whilst they do help there is no direct link at all as it just goes into one big pot and is then spent. One reason for this is that they do not want people objecting to specific areas such as conscientious objectors saying no to their taxes going to defence.

Actually using a Japanese example rams it  home as they have struggled to raise taxes at all as the two attempts with the Consumption Tax have taken quite some time partly because they have torpedoed the economy. So we may have a touch of The Vapors in more than one respect.

I’m turning Japanese, I think I’m turning Japanese, I really think so
Turning Japanese, I think I’m turning Japanese, I really think so

Oh and I did say that HM Treasury loves this sort of thing.

Nick Macpherson, Treasury permanent secretary from 2005 to 2016, told the Financial Times that now was a good time to introduce a new tax.

They miss out the bit that they always think that! He even has a PR line ready

“The public want greater NHS capacity and a better social care and this can’t be financed by fiddling around the edges of the tax system,” he said. “A social solidarity charge payable by all adults at a rate of 2 to 3 per cent of their income could put the health and social care sector on a sustainable footing.”

He has even dropped the over-40s bit in what no doubt seems a cunning plan to a Treasury Mandarin.

But we return to the question posed by The Jam.

And the public gets what the public wants

Or is it?

And the public wants what the public gets


The Chancellor is trying to have his cake and eat it here as he tries to manoeuver around this.

Johnson has so far insisted the Conservatives should honour their 2019 election manifesto commitment to freeze the rates of the “big three” taxes: income tax, national insurance and value added tax.

The undercuts to this are that whilst we are borrowing very heavily there are contexts. For example we can borrow very cheaply as the 50-year yield is 1.04% as I type this. As we stand there is more of a risk from higher inflation and our topic of yesterday nudging debt costs higher via our index-linked debt.

Also there is the swerve of our times via all the Bank of England QE purchases where some £808 billion as of the end of June has been if not wiped from the ledger (and there are roads where that is true) charged at a Bank Rate of 0.1%. That is one of the reasons why they are so reluctant to increase it.

Next is the fact that the UK economy is growing quickly and recovering the lost ground. Here though there is a catch, because once we do will we return to the slow growth we had before? That is not so hopeful for the public finances as we find ourselves returning to the Turning Japanese theme.

Will UK inflation exceed 5%?

The last 24 hours have seen the inflation debate move on in the UK and some of that has happened in the last ten minutes as the speech by Governor Andrew Bailey has been released. Many of the issues are international ones and trends so let me open by taking a look at what the Riksbank of Sweden has announced today.

Both in Sweden and abroad, the recovery is proceeding slightly faster than expected and the Riksbank’s forecasts have been revised up somewhat.

So like the Bank of England it has been caught out but its view attracted my attention because it is somewhat different.

Inflation has varied to an unusually large degree during the pandemic. This is partly due to energy prices but also to measurement problems and people’s changed consumption patterns during the pandemic. Inflationary pressures are still deemed moderate and it is expected to take until next year before inflation rises more persistently.

Not the inflation technicalities which are a generic but the fact they expect it next year which is different to the US view for example of “transitory” from now. We already ready know from one Fed member that “transitory” has gone from 2/3 months to 6/9 but more next year is a different view. Also “persistently” is the sort of language that will get you banned from central banking shindigs.

Andy Haldane

The Bank of England’s chief economist gave us his view on inflation trend yesterday which started with philosophy.

The first, nearer-term, is discomfort at whether continuing monetary stimulus is consistent with central banks hitting their inflation targets on a sustainable basis.

The fact he is publicly asking the question means he thinks it isn’t. But then we get the gist of his views for 2021.

With public and private financial fuel being injected into a macro-economic engine already running hot, the result could well be macro-economic overheating. When resurgent, and probably persistent, demand bumps up against slowly-emerging, and possibly static, supply, the laws of economic gravity mean the prices of goods, services and assets tend to rise, at first in a localised and seemingly temporary fashion, but increasingly in a generalised and persistent fashion.

As you can see he too uses the word “persistent” and does so twice, which is about a revolutionary as a 32 year bank insider can get I think. Then we see significantly added into the mix.

This we are now seeing, with price surges across a widening array of goods, services and asset markets. At present, this is showing itself as pockets of excess demand. But as aggregate excess demand emerges in the second half of the year, I would expect inflation to rise, significantly and persistently.

Actually aggregate excess demand is not what it was. What I mean by that is the change to us predominantly being a service economy means that there is a much wider range of responses to demand now.

For instance, hairdressing and personal grooming inflation was strong in particular, at an annual rate of 8%, and saw a 29 year high.

This is one example ironically in a way from Governor Bailey’s speech where there is a clear limit as hairdressers can work harder but only so much. Whereas other areas in the services sector may not be far off no limits at all. Oh and after him being on TV during the England game versus Germany I suspect we are onto the 2021 look now.

Pent-up demand, essential need, or recreating the early 1990s David Beckham look, I leave that to others to judge.

Returning to Andy Haldane his musings lead him to conclude this.

By the end of this year, I expect UK inflation to be nearer 4% than 3%. This increases the chances of a high inflation narrative becoming the dominant one, a central expectation rather than a risk. If that happened, inflation expectations at all maturities would shift upwards, not only in financial markets but among households and businesses too.

That has been reported as 4% which is not quite what he said but by the time one converts it from CPI to Retail Prices Index ( a 1%+ rise as for example it was 1.2% in May) we arrive at the 5% of my headline.

What does Governor Bailey think?

The opening part of the section on the economic recovery illustrates something of a closed mind on the subject.

what conclusions can we draw on the temporary nature of the causes of higher inflation

The next bit is a type of PR after thought.

and what should we look out for to judge if those causes might be more sustained?

Under his plan we look set to go to stage four of the Yes Minister response which is “It’s too late now”. One area where there is plenty of inflation is in the use of the word temporary.

There are plenty of stories of supply chain constraints on commodities and transport bottlenecks, much of which ought to be temporary.

Those dealing in shipping costs seem much less clear about that.

International #container #freight rates cont. their almost vertical ascent with the Drewry global composite rising to $8k some 6X the normal rate. Routes out of China surging on #SupplyChains disruptions, some temporarily triggered by Covid-19 outbreaks reducing loadings ( @Ole_S_Hansen)

Another problem is that the Bank of England has under estimated both the UK economy recovery and consequent inflation.

CPI inflation rose to 2.1% in May, just above the MPC’s target and above where we thought it would be in the MPC’s May forecast.

In the May forecast they said it would be below 2% in both the second and third quarters. I do not know about you but I would not be assuring people inflation will be temporary when these are in play.

 Further up the supply chain, food input prices were up, and producer input inflation was around a 10-year high.

Also if we look at the absolute disaster area the concept of rebalancing was for his predecessor it is brave and perhaps courageous to deploy it again.

Over time, this should lead to an easing of inflation as spending is redirected towards sectors with more spare capacity. But, initially, that rebalancing may be uneven.

I note that he is already tilling the ground should he be wrong.

His first point is no more than stating he might be wrong ( rather likely on his track record). Next up we get this.

Second, we could see demand pressures on either side of the most likely outcome.


Third, we could also see wage pressures arising if the number of people in work or seeking work does not return to pre-Covid levels, and inactivity remains at a higher level. A return of labour supply is therefore important.

The last sentence is rather curious in the circumstances. And finally.

Fourth, a further challenge would arise if these temporary price pressures have a more persistent impact on medium-term inflation expectations, which shift to a higher level inconsistent with the target.

That is a type of psychobabble as it is based on what exactly?


We have here the two main courses of the inflation debate with a side order from the Riksbank. The main debate has been about this year and it is the first to break ranks about 2022.  If we start with the Governor’s view we see the asymmetry problem repeated yet again.

It is important not to over-react to temporarily strong growth and inflation, to ensure that the recovery is not undermined by a premature tightening in monetary conditions.

So if things go well you wait and if they are not going well you wait too, oh hang on.

Over the last sixteen months we have used monetary policy decisively to respond to an unprecedented crisis which was disinflationary.

Decisively on one side and on the other “we watch” is the new “vigilant”.

But it is also important that we watch the outlook for inflation very carefully, which of course we do at all times, particularly for signs of more persistent pressure and for a move of medium term inflation expectations to a higher level.

There is also an elephant in the room that everyone seems to be ignoring in the same manner as the UK inflation target does. So let us remind ourselves of how we started Tuesday.

Annual house price growth accelerated to 13.4% in June,
the highest outturn since November 2004. While the
strength is partly due to base effects, with June last year
unusually weak due to the first lockdown, the market
continues to show significant momentum. Indeed, June saw
the third consecutive month-on-month rise (0.7%), after
taking account of seasonal effects. Prices in June were almost 5% higher than in March. ( Nationwide).

Also remember inflation will be higher when the tax cuts ( VAT and Stamp Duty) expire.

Let me end with some good economic news via Sky but with the kicker that it is in an area that has proved highly inflationary.

Nissan announces £1bn ‘gigafactory’ boosting electric car production and creating thousands of jobs.

UK house prices surge again

One economic story of the Covid-19 pandemic has been the surge in house prices.Only yesterday we took a look at the way the US Federal Reserve is trying to manage public expectations.  Today we see a further challenge for the vigilant Bank of England.

Annual house price growth accelerated to 13.4% in June,
the highest outturn since November 2004. While the
strength is partly due to base effects, with June last year
unusually weak due to the first lockdown, the market
continues to show significant momentum. Indeed, June saw
the third consecutive month-on-month rise (0.7%), after
taking account of seasonal effects. Prices in June were almost 5% higher than in March. ( Nationwide)

As you can see they have had a go at doing the Bank of England’s job for it with the mention of what we prefer to call exit effects. But the final sentence rather torpedoes that effort as it points out prices are up nearly 5% since March.

The Nationwide has another go here.

Despite the increase in house prices to new all-time highs,
the typical mortgage payment is not high by historic
standards compared to take home pay, largely because
mortgage rates remain close to all-time lows.

The problem is that for the more thoughtful that is a reminder that mortgage rates and hence interest-rates cannot rise by much without causing what Taylor Swift would describe as “trouble,trouble,trouble”. Also it is kind of them to point out that mortgage payments are a third of take-home pay reinforcing the insanity of the targeted inflation measure ( CPI) ignoring this area. Also in spite of their efforts to tell us everything is fine they cannot avoid a consequence in terms of capital required.

However, house prices are close to a record high relative to
average incomes. This is important because it makes it even
harder for prospective first time buyers to raise a deposit. For example, a 10% deposit is over 50% of typical first time
buyer’s income.

Stamp Duty

We got a hint of what will happen when the holiday here is over from Scotland.

But conditions were more muted in Scotland, which saw a
modest increase in annual growth to 7.1% (from 6.9% last
quarter) and was also the weakest performing part of the UK.
This may reflect that the stamp duty (LBTT) holiday in
Scotland ended on 31 March.

So still growth but much slower reminding us that such holidays simply seem to add any tax gain to prices. So the real winners are in fact existing owners.

By contrast Northern Ireland at 14% and Wales at 13.4% led the rises and would presumably be higher now if we had June numbers rather than quarterly ones.


The Nationwide points out that there has been anther official effort to juice the mortgage market.

The improving availability of mortgages for those with a
small deposit (and the continued availability of the
government’s Help to Buy equity loan scheme) is helping
some people over the deposit hurdle, but it is still very
challenging for most.

Maybe that was in play at least in part in the latest mortgage data from the Bank of England.

Net mortgage borrowing bounced back to £6.6 billion in May. This followed variability in the previous couple of months in anticipation of the reduction in stamp duty ending, which has been extended to the end of June. Net borrowing was £3.0 billion in April, following a record £11.4 billion of net borrowing in March

So a bounce back from these numbers compared to April.

Net borrowing in May was slightly higher than the monthly average for the six months to April 2021 and above the average of £4.2 billion in the year to February 2020.

So a combination of the stamp duty extension and an attempt to make more low deposit mortgages available has pumped up the volume.

If we look further down the chain we see this.

Approvals for house purchases increased slightly in May to 87,500, from 86,900 in April. They have fallen from a recent peak of 103,200 in November, but remain above pre-February 2020 levels. Approvals for remortgage (which only capture remortgaging with a different lender) rose slightly to 34,800 in May, from 33,400 in April. This remains low compared to the months running up to February 2020.

So a small rise and Neal Hudson has looked back for some perspective on them.

Mortgage approvals for house purchase were still 32% higher than recent average (2014-19) in May.


These are another factor in the game because we have seen them soar in the pandemic era as some received furlough payments whilst having lower bills ( no commuting) and less ability to spend due to lockdown. In spite of the increased freedoms it still seems to be happening.

Households deposited an additional £7.0 billion with banks and building societies in May. The net flow has fallen in recent months, and compares to an average net flow of £16.5 billion in the six months to April 2021  and a series peak of £27.6 billion in May 2020. The flow is nevertheless relatively strong – in the year to February 2020, the average inflow was £4.7 billion. ( Bank of England)

So there is money potentially available for house purchase deposits from this source as prospective buyers boost savings or perhaps the bank of mum and dad is more flush with funds.

Whilst we are on the subject of saving we saw more from another source as people who could increased their rate of mortgage repayment.

Gross lending was a little higher at £24.2 billion, while gross repayments dropped to £18.9 billion.

That was of course another example of central bank policy misfiring as a type of precautionary saving acted in the opposite direction to the hoped for one. We see this a lot well except in central banking research.

Consumer Credit

If we look back to the heady pre credit crunch days we can recall that even this area was deployed to boost housing credit as people were able to sign their own income chits. More recently that has been unlikely as we have seen falls but of you hear feet hammering on the floor earlier it was probably at the Bank of England as staff rushed to be first to inform Governor Andrew Bailey about this.

However, for the first time since August 2020, consumers borrowed more than they paid off in May, with net borrowing of £0.3 billion.

We even got some detail from the numbers which is rare. Regular readers will know I have been keen to track car finance movements but we only get an occasional glimpse behind the curtains.

The increase in net consumer credit reflected an additional £0.4 billion of ‘other’ forms of consumer credit, such as car dealership finance and personal loans. Credit card lending remained weak compared to pre-February 2020 levels, with a net repayment of £0.1 billion.


The monetary push from the Bank of England goes on as we note the reason for the Nationwide being able to claim that mortgage repayments are affordable.

The rate on the outstanding stock of mortgages remained unchanged at a series low of 2.07%……..The ‘effective’ rate – the actual interest rate paid – on newly drawn mortgages rose 2 basis points to 1.90% in May.

It was no surprise we saw a nudge higher in May but since then not much has happened in terms of bond yields and hence fixed-rate mortgages. As to supply of mortgages we saw the Bank of England funnel cash to the banks only for the furlough schemes to mean they had plenty of new deposits too.

As ever Bank of England research is focused on this area and if you read between the lines you see that banks rip customers off if they can. Their way of explaining that is highlighted below.

What drives these patterns of customer choices and price dispersion? We show that customers facing large price dispersion are typically those borrowing large amounts relative to both their income and the value of their house. These tend to be younger customers, and are more likely to be buying a house for the first time. Lenders thus price discriminate, offering menus with greater price dispersion to customers who may be less able to identify and avoid expensive options, or have fewer options to go elsewhere.


What can we expect next from the Bank of England?

Welcome to Super Thursday as it is Bank of England day. Well of a sort anyway as they actually voted yesterday evening in one of former Governor Mark Carney’s changes where he preferred bureaucratic convenience( having the Minutes ready) over the risk of a market leak. The latter has in fact happened with if I recall correctly The Sun newspaper being in the van of providing an “early wire” into the last QE expansion.

There is a particular significance due to the change in the situation and this was highlighted yesterday by some news from the United States.

Now the one thing you said, which is something that we are looking at, is that when I talk to businesses, they are saying that it’s going to be temporary, but temporary is going to be a little longer than we had expected initially. So rather than it being a two- to three-month, it may be a six- to nine-month factor. And this is something that we’re going to have to pay attention to see if that changes how people approach the economy.

That was Raphael Bostic of the Atlanta Fed and the emphasis is mine. It was not only me noting that as the next question from NPR shows.

KING: And if it is six to nine months, as opposed to two to three months, is there something specific that the Fed should be doing?

The reply is fascinating.

BOSTIC: Well, I think there are a couple of things that we would do. First of all, we’d monitor very closely what’s happening with expectations. That is the key to determining whether there are some real structural changes in how the economy is playing out. And then the second is really to dive deeper into this to see if there are things that policymakers might be able to do to break the – those dynamics and leave the crisis to return to normal.

So basically nothing and here he is later explaining that.

We’re still 7.5 million jobs short of where we were pre-pandemic, and that is a benchmark that I think we all need to keep our eye on.

Later he told reporters this.

“Given the upside surprises and recent data points, I pulled forward my projection for a first move to late 2022” Adds he has 2 moves in 2023 ( @bcheungz )

So not much use for now and in fact it gets worse because he is projecting interest-rate moves for years in which he is a non-voter. Also there was a question which will have discomfited them as it asked about an area they normally ignore which is necessities which in central banking terms are mostly non-core.

Are we seeing the rise – a rise in prices of basics, things that families need, like bread and milk and diapers?

Pack animal behaviour

The reason I am emphasising the points about is that these days central bankers the world around are mostly like clones. So they believe and do the same things, to the extent that they believe anything. Thus the points made apply to the Bank of England as well. So it too is more bothered about unemployment than inflation. It too will look through the recent inflation rise and will suggest interest-rate rises that are far enough away to be meaningless as right now we can only see a few months ahead.Actually the Bank of England has already played that card when Gertjan Vlieghe told us this at the end of last month.

In that scenario, the first rise in Bank Rate is likely to become appropriate only well into next year, with
some modest further tightening thereafter.

There is a curious link in that he will not have a vote then like Raphael Bostic. But the point is the same especially as we recall the period of Forward Guidance with all its promises of interest-rate rises when in fact the next move was a cut.


This is an issue with several contexts. The simplest is that we are now above the inflation target and with the numbers from producer prices look set to remain there for at least a bit. Then there is the way that the numbers ignore the rises in house prices which are well above such levels.

UK average house prices increased by 8.9% over the year to April 2021, down from 9.9% in March 2021.

This was reinforced yesterday by a metric which the Bank of England regularly tells us it follows as the Markit PMI headline included this.

 but inflationary pressures also strengthen

It went on to ram the point home.

Also hitting previously unsurpassed levels, however, were rates of inflation of input costs and output prices as supply-chain disruption fuelled price pressures.

And later.

The rate of input cost inflation accelerated for the fifth month running and was the joint-fastest on record, equal with that seen in June 2008. While inflation continued to be led by the manufacturing sector, service providers also posted a marked increase in input prices. In turn, the rate of output price inflation hit a fresh record high for the second month running.

The Economy

The same survey told us it was pretty much full speed ahead.

Businesses are reporting an ongoing surge in demand in
June as the economy reopens, led by the hospitality sector,
meaning the second quarter looks to have seen economic
growth rebound very sharply from the first quarter’s decline.

I did my little bit by going out for some drinks and dinner, the first tome I has been out in that way for 7 months.


A picture like that would have conventional central bankers taking away the stimulus and maybe even raising interest-rates. According to Getjan Vlieghe that was all wrong.

First, given the proximity of the effective lower bound (even with the possibility of modestly negative rates),
tightening too early would be a much costlier mistake than tightening too late

A curious assertion considering we have seen interest-rates only reach 0.75% Next is a curiosity as central bankers keep chanfing their mind on this as I recall the ECB telling us that policy responses had slowed.

Second, monetary policy does, in fact, work quite quickly

Indeed he rather contradicts his prediction of future interest-rate rises.

That was apparent before we were hit by the Covid shock, when Bank Rate was just 0.75% and inflation pressures were too weak.

If 0.75% was too high then and things are worse now well you do the maths.

As you can see there are good reasons for the Bank of England to change course but I do not expect it too and today will be unchanged. It seems set to mimic the four stage plan described in Yes Minister.

Sir Richard Wharton“In stage one, we say nothing is going to happen.”

Sir Humphrey Appleby“Stage two, we say something may be about to happen, but we should do nothing about it.”

Sir Richard Wharton“In stage three, we say that maybe we should do something about it, but there’s nothing we can do.”

Sir Humphrey Appleby“Stage four, we say maybe there was something we could have done, but it’s too late now.”




The UK Public Finances are picking up

A feature of the credit crunch was the punishment it provided for public finances around the world. Deficits rose due to the economic weakness and also due to the banking bailouts and this left public debt much higher. If we look at the UK experience the recovery period helped but as I pointed out at the time the return to a surplus and debt reduction was a mirage which was 2/3 years away at whatever point in time you choose. Or at least it was under Chancellor George Osborne as his successors watered down the objective and now we find that fiscal stimulus is much more en vogue although as I shall explain later not at the inner sanctum of HM Treasury.

Next came the Covid-19 pandemic which impacted after fiscal policy was more popular and that combined with the economic decline led to this.

Expressed as a ratio of gross domestic product (GDP), public sector net borrowing (PSNB ex) in FYE March 2021 was 14.3%, the highest such ratio since the end of World War Two, when it was 15.2% in FYE March 1946.

For those wondering about a comparison the credit crunch was thought to have had a 10% impact back then and we now believe it to have been 10.1%. So this time around the impact has been larger although tucked away in the detail there was a marginal improvement reported today.

Public sector net borrowing (PSNB ex) in the financial year ending (FYE) March 2021 was estimated to have been £299.2 billion, revised down by £1.1 billion from last month’s provisional estimate, but remains the highest borrowing since financial year records began in FYE March 1946.

It would not be the public finances without that hardy perennial the first rule of OBR ( Office of Budget Responsibility) Club which is that the OBR is always wrong.

Since November, the official estimate of how much the government would have to borrow in 2020/21 has dropped by £95 billion pounds (from £394bn to £299bn). ( @andyverity )

May Figures

There was better news from the figures for May as well although not really in the comparison with last year.

Public sector net borrowing (excluding public sector banks, PSNB ex) was estimated to have been £24.3 billion in May 2021; this was the second-highest May borrowing since monthly records began in 1993, £19.4 billion less than in May 2020.

What I mean by that is that we would have to have remained in a dark place to repeat May 2020.

One signal that also gives us a guide to the underlying economy had a better month.

Central government receipts were estimated to have increased by £7.5 billion (or 15.2%) in May 2021 compared with May 2020, to £56.9 billion, including £41.4 billion in tax receipts.

The increase on last year saw an unsurprising rise of £2.3 billion in VAT and a more than doubling ( up 133%) of fuel duty to £2.3 as perhaps the best signal of economic reopening. However I think we get a better signal of change from the monthly numbers. Here there is the issue of the fact that last year was abnormal so let us look back to 2019. There going from April to May saw receipts fall by just under £5.1 billion whereas this year they fell by £1.7 billion so a net £3.4 billion improvement as a signal of the economy picking up.

One number which is a signal of sorts in spite of the tax cut is Stamp Duty on property which rose from £0.4 billion last year to £0.7 billion this.

If we switch to spending then one would pretty much expect this I think.

Central government bodies spent £81.8 billion in May 2021, £10.9 billion (or 11.7%) less than in May 2020.

The big mover here has been the various furlough schemes.

Central government paid £8.3 billion in subsidies to businesses and households in May 2021, £11.6 billion (or 58.4%) less than in May 2020. This includes the £5.2 billion cost of the job furlough schemes, the Coronavirus Job Retention Scheme (CJRS) and the Self Employment Income Support Scheme (SEISS).

We can look a the CJRS in more detail.

In May 2021, the government spent £2.5 billion on the CJRS, £7.6 billion (or 75.4%) less than in May 2020.

Also there is hope that the final number will be better than that because the OBR has consistently under recorded the UK post Covid-19 recovery.

the May 2021 amount is based on the OBR’s latest estimates

It also helped that the self employment furlough scheme was some £4 billion lower than last year. But it has followed an erratic path ( for example this March saw a £6 million payment recorded which is bizarre) and so is not much use as a signal.

Debt Costs

These are the dogs which have not barked for some time. There are two factors here and one feeds through to yesterday when the UK’s longest yield ( 50 year) nearly fell to 1%. So in spite of the extra public debt we have taken on it has remained very cheap to finance. Also inflation was cut by the pandemic leading to this being recorded.

Interest payments on central government debt were £4.3 billion in May 2021, £0.9 billion (or 26.0%) more than in May 2020. Changes in debt interest are largely a result of movements in the Retail Prices Index to which index-linked bonds are pegged.

So debt payments were cut by the plunge in inflation. That is now changing with the RPI at 3.3% in May so it will be much more of a factor going forwards. Also whilst interest payments on new bonds remain very low we are still issuing at a fast rate so over time the impact will build.

An example of the ch-ch-changes in this area is that an expensive bond matured earlier this month. On the 7th a bond paying 8% per year matured and so for that £24.6 billion the UK will if we do a back of the envelope calculation be paying at least 7% per year less or around £1.7 billion a year.

National Debt

There are a lot of complications in the calculations here mostly around the activities of the Bank of England.

If we were to remove the temporary debt impact of these schemes along with the other transactions relating to the normal operations of the BoE, public sector net debt excluding public sector banks (PSND ex) at the end of May 2021 would reduce by £226.4 billion (or 10.2 percentage points of GDP) to £1,969.4 billion (or 89.0% of GDP).


The public finances are another economic signal of the recovery. The analysis of the OBR shows this.

Public sector net borrowing (PSNB) totalled £24.3 billion in May 2021 and £53.4 billion in April and May combined. These figures are respectively £4.2 billion and £14.1 billion below the monthly profiles consistent with our March forecast. For the year to date, the figure is raised by
the timing of the ONS’s recording of payments to the EU (the so-called Brexit ‘divorce bill’).

So we are on a much better path than they expected and if we switch to actual receipts there looks to be some further hope from Corporation Tax.

Corporation tax cash receipts in May were £2.0 billion, up £1.1 billion higher than last year and fully £1.1 billion (123 per cent) above our March forecast profile. Receipts
are now £2.1 billion above profile for the year to date. This is largely due to nonfinancial companies, with the strength related to both upward revisions to firms’ views
of last year’s profits and liabilities, and higher payments on this year’s liabilities.

Meanwhile we can look at this another way. The era of the Office for Budget Responsibility has been one of anything but as we doff our cap to George Orwell one more time.

Oh and I did mention the inner sanctum of HM Treasury that has picked up what is for it a hardy perennial which is changing pension tax relief.

Another change would see people contributing to pensions getting the same rate of tax relief, which would hit higher-rate taxpayers, while another is changing the taxation on employer contributions. ( City-AM)

Curiously that misses out those on final salary type schemes such as HM Treasury staff. I am sure that is just an oversight.

Also the way that the Lifetime Allowance has been cut is a disgrace, Believe it or not it started at £1.5 million and was raised to £1.8 million.

Government is reportedly looking at cutting the lifetime allowance from £1,073,100 to £800,000 or £900,000, lowering the point above which tax charges kick in.

This has for example caught doctors out amongst others.

The UK inflation debate is heating up

The last 24 hours have seen quite a pick-up in the debate over likely levels of infation in the UK. The starting gun was fired by a letter to the Financial Times from Baron King of Lothbury although I note it is described as coming from Mervyn King. Actually the opening is really rather curious.

Price stability is when people stop talking about inflation. It is a long time since inflation was a talking point and memories of an inflationary past are short.

That is because much of 2021 in financial markets has revolved around talk about inflation. Indeed whilst I doubt the word “transitory” is used on the modern equivalent of the Clapham omnibus those who follow financial markets will be aware of its significance. We have inflation building in the world financial system and central bankers are ignoring it because they claim it will fade quickly. The headline case of this comes tomorrow with the US CPI numbers for May. But perhaps such matters do not get discussed at the House of Lords.

Our member of the most noble order of the garter is on much warmer ground here I think.

First, the large monetary and fiscal stimulus injected in the advanced economies is out of all proportion to the magnitude of any plausible gap between aggregate demand and potential supply.

Whilst in many areas we have little idea of potential supply the stimulus has been so large he has a case which is also true about the area below.

The silence of central banks on current high growth rates of broad money has been deafening.

This is a subject to which a blind eye has in general been turned. Actually central bankers will be keen on part of the formal monetarist argument here. That is that the broad money growth flows straight into nominal GDP ( Gross Domestic Product) growth with a lag. They are hoping this will happen much more quickly than the 18/24 month lag of traditional theory. Also their swerve if you will, is assuming it will turn into real growth rather than inflation. The latter is the rub and if history is any guide we will see some and as the push has been large the risk is that the inflationary impact is large too.

The next bit meshes several arguments together.

Second, a combination of political pressure to assist in financing budget deficits, unwise central bank promises not to tighten policy too soon and an expansion of central bank mandates into political areas such as climate change, all threaten to weaken de facto central bank independence leading to a slow response to signs of higher inflation.

It is nice to agree with him for once as the bit suggesting central bank “independence” has effectively morphed into keeping bond yields low is true. The mission creep argument is also true as central banks get out tins of green wash. The Bank of England got out another tin yesterday.

Today we launch an exercise to find out how climate-related risks could affect large UK banks and insurers. Our Climate Biennial Exploratory Scenario investigates the effects of taking climate action early, late or not at all.

Considering the problems they have had with economic models which is supposedly an area of expertise then if I was them I would steer clear of scenarios about which it must know even less.

Our climate scenarios help us to understand the risks UK banks and insurers may face from a hotter world. In our scenario where no additional action is taken, global warming reaches 3.3 °C.

As to the mention of unwise central bank promises our Merv is on weaker ground as he made his own.

Finally we end as we started.

It is when central banks stop talking about inflation that we should be concerned.

The issue is summarised by the use of the word “transitory” again. It is being talked about meaning it is the assumed conclusion that is the problem. It leads us to one of the core central banking problems which is if you dither and delay you will be too late. That leads us to the suspicion that this is an excuse not to act as it feeds the “It’s too late now” line of Sir Humphrey Appleby in Yes Minister.

Andy Haldane

Proof that central bankers are discussing inflation was provided this morning by the Bank of England’s chief economist.

Bank of England Chief Economist Andy Haldane said on Wednesday there were already “some pretty punchy pressures on prices” and the central bank might need to turn off the tap of its huge monetary stimulus.

“If both pay, and costs are picking up, inflation on the high street isn’t very far behind. And that’s something, you know, people like me are paid to keep a close eye on and we are,” ( Reuters)

He was on LBC Radio and frankly that could have been from a script written by Baron King of Lothbury. As was this.

“And that may mean that at some stage we need to start turning off the tap when it comes to the monetary policy support we have been providing over the period of the COVID crisis.”

Although even he is being rather vague “at some stage” albeit to be fair he did vote to reduce the planned amount of QE bond buying of which there will be another £1.15 billion today.

This bit is really rather confused.

He has previously warned of the risk of a jump in inflation as the economy bounces back from its lockdown crash.

Haldane told LBC that there was still a need to encourage households to spend which might be made easier if companies paid their workers more.

How can you encourage people to spend in a boomlet ( Bloomberg quote him saying the economy is “going gangbusters”) without risking inflation? The inflation risk rises further if he gets the higher wages he wants.

The final punchline according to Reuters was this.

“The risks at the moment for me are that we might overshoot that number for a bit longer than we’ve currently planned,” Haldane said.


There are several issues here and let’s start with our former Governor. He claims there has been no debate when in fact there has been one but that is the issue as it has been one-sided. Also he has two skeletons in his own cupboard. Back in 2010/11 he “looked through” a rise in UK inflation ( both CPI and RPI) went above 5% and even more significantly that led to a decline in real wages we have never really recovered from. Also in spite of claiming he wanted owner-occupied housing costs in the inflation measure it was on his watch ( the switch from RPI to CPI) they were removed and even more significantly have never been replaced after nearly two decades. So news like this from Monday points straight at him.

“House prices reached another record high in May, with the average property adding more than £3,000 (+1.3%) to its
value in the last month alone” ( Halifax)

If we now switch to our “loose cannon on the deck” Andy Haldane there is the issue of wages. These have been struggling in the UK for more than a decade. Recent evidence albeit from the US is that firms have resisted raising wages in response to shortages. Also some workers have found the furlough schemes to be a disincentive. Thus the picture here is both cloudy and complex.

But there is something behind this because the central banks have ignored history and seem determined to continue doing so.