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/

Advertisements

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

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

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

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

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

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

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

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

What are the inflation prospects?

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

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

So let us look at the oil price trend.

Crude Oil

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

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

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

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

Other Commodities

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

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

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

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

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

They attribute the fall to this factors.

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

Food Prices

The United Nations calculates an index for this.

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

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

Comment

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

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

 

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

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

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

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

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

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

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

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

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

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

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

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

Inflation trends

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

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

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

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

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

Inflation measurement

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

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

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

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

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

House prices

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

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

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

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

UK Manufacturing

The news this morning was good on this front.

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

A factor in this was very welcome.

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

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

Cost pressures eased in July

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

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

Comment

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

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

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

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

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

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

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

 

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

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

 

 

 

Mark Carney plans to do nothing about rising UK inflation

Today is inflation day in the UK where we receive the full raft of data from producer to consumer inflation topped off with the official house price index. We already know that December saw gains elsewhere in the world such as Chinese producer prices and consumer inflation in the Czech Republic and some German provinces so we advance with a little trepidation. That of course is the theme we were expecting for the UK anyway as the oil price was unlikely to repeat the falls of late 2015 ( in fact it rose) and this has been added to by the fall in the value of the UK Pound £ after the EU leave vote last June.

The Bank of England

Governor Mark Carney updated us in a speech yesterday about how he intends to deal with rising inflation. But first of course we need to cover his Bank Rate cut and £70 billion of extra QE ( Quantitative Easing) including Corporate Bond purchases from August as tucked away in the speech was a confession of yet another Forward Guidance failure.

Over the autumn, demand growth remained more resilient than had been expected, particularly consumer spending.

Yet at the same time we were expected to believe that by being wrong the Bank of England was in fact a combination of Superman and Wonder Woman as look what it achieved.

but an output gap of some 1½%, implying around 1/4 million lost jobs

So Mark why did you not cut Bank Rate by a further 1.5% and do an extra £350 billion of QE because then you would have pretty much eliminated unemployment? If only life were that simple! For a start it is rather poor to see a theory (the output gap) which I pointed out was failing in 2010 and did fail in 2011 having a rave from a well deserved grave. I guess any port is  welcome when you are in a storm of your own mistakes.

As to his intention to deal with inflation I summarised that last night as he spoke at the LSE.

Here is the Mark Carney speech explaining how and why he will miss his inflation target http://www.bankofengland.co.uk/publications/Pages/speeches/2017/954.aspx 

It was nice to get a mention on the BBC putting the other side of the debate.

http://bbc.in/2jsktij

You see with his discussion of algebra and “lambda,lambda,lambda” we are given an impression of intellectual rigour but the real message was here.

the UK’s monetary policy framework is grounded in society’s choice of the desired end.

What is that Mark?

monetary policymaking will at times involve striking short-term trade-offs between stabilising inflation and supporting growth and employment

As you see we are being shuffled away from inflation targeting as we wonder how long the “short-term” can last? As we do we see a familiar friend from my financial lexicon for these times.

inflation may deviate temporarily from the
target on account of shocks

So “temporarily” is back and a change in the remit will allow him to extend his definition of it towards the end of time if necessary.

Since 2013, the remit has explicitly recognised that in these
circumstances, bringing inflation back to target too rapidly could cause volatility in output and employment
that is undesirable.

Of course with his Forward Guidance being wrong on pretty much a permanent basis Governor Carney can claim to be in a state of shock nearly always. A point of note is that this is a policy set by the previous Chancellor George Osborne not the current one.

The fundamental problem is that as inflation rises it will reduce real wages ( although maybe not in the Ivory Tower simulations) and thereby act as a brake on the economy just like in did in 2011/12.

Today’s data

We are not surprised on here although I see many messages online saying they were.

The all items CPI annual rate is 1.6%, up from 1.2% in November.

In terms of detail the rise was driven by these factors.

Within transport, the largest upward effect came from air fares, with prices rising by 49% between November and December 2016, compared with a smaller rise of 46% a year earlier.

So a sign of how air travellers get singed at Christmas and also this.

Food and non-alcoholic beverages, where prices overall, increased by 0.8% between November and December 2016, having fallen by 0.2% last year

So Mark Carney and the central banking ilk will be pleased as if we throw in motor fuel rises the inflation is in food and fuel or what they call “non-core”. Of course the rest of us will note that it is essential items which are driving the inflation rise.

Target alert

I have been pointing out over the past year or so the divergence between our old inflation target and the current one. Well take a look at this.

The annual rate for RPIX, the all items RPI excluding mortgage interest payments (MIPs) index, is 2.7%, up from 2.5% last month.

It is above target and whilst there are dangers in using one month’s data we see that this month implies that our inflation target was loosened in 2002/03 by around 0.6%. Good job nothing went wrong later……Oh hang on.

What happens next?

We get a strong clue from the producer prices numbers which tell us this.

Factory gate prices (output prices) rose 2.7% on the year to December 2016 and 0.1% on the month,

As you see they are pulling inflation higher and if we look further upstream then the heat is on.

Prices for materials and fuels paid by UK manufacturers for processing (input prices) rose 15.8% on the year to December 2016 and 1.8% on the month.

The relationship between these numbers and consumer inflation is of the order of the one in ten sung about by the bank UB40 so our rule of thumb looks at CPI inflation doubling at least.

House Prices

What we see is something to make Mark Carney cheer but first time buyers shiver.

Average house prices in the UK have increased by 6.7% in the year to November 2016 (up from 6.4% in the year to October 2016), continuing the strong growth seen since the end of 2013.

So whilst I expect a slow down in 2017 the surge continues or at least it did in November. Surely this will have been picked up by the UK’s new inflation measure which we are told includes owner-occupied housing costs?

The all items CPIH annual rate is 1.7%, up from 1.4% in November……The OOH component annual rate is 2.6%, unchanged from last month.

So no as we see a flightless bird try to fly and just simply crash. That is what happens when you use Imputed Rent methodology which after all is there to convince us we have economic growth and therefore needs a low inflation reading.

As an aside we got an idea of the boom and then bust in Northern Ireland as the average house price rose to £225,000 pre credit crunch but is now only £124,000. Is that a factor in its current crisis?

Comment

Last night saw a real toadying introduction to the speech by Mark Carney at the LSE.

He is someone who thinks very deeply about the big responsibilities he has, and he has that very rare talent of being able to think and act at the same time

The introducer must exist in different circles to me as I know lot’s of people like that and of course the last time Governor Carney acted the thinking was wrong. I did have a wry smile as this definition of the distributional problems that the extra QE has and will create.

He has been thinking very hard about distributional issues

What we actually got was a restatement of Bank of England policy which involves talking about the inflation target as if they mean it and then shifting like sand to in fact giving the reasons why they will in fact look the other way. Last time they did this the growth trajectory of the UK economy fell ( with real wages) rather than rose as claimed. The only ch-ch-changes in the meantime are that the current inflation remit will make it even easier to do.

 

 

 

 

The return of inflation to the UK will pose yet another issue for the Public Finances

Today gives us another look at the developing inflation situation in the UK and in a linked development the first dose of reality for the fantasies aired in the forecasts in the UK Budget last week. The reason they are linked is that lower inflation estimates were used as a way of improving the numbers last week especially around future pensions costs. This may of course be further confirmation that like the image of the blind old lady turning the wheel of fortune in the play King Lear the inflation wheel is beginning to turn. Also today we get actual public finance numbers rather than official and “independent” OBR forecasts which are lauded and then turn out to be wrong again.

Before I come to the detail I wish to express my sympathy for the people of Belgium and Brussels today after this morning’s events which continue to develop as I type this. good luck to those of you who read this website there.

Inflation is slowly returning

Let me remind you of this from the St.Louis Federal Reserve which I posted on the 2nd of this month.

oil prices would need to fall to $0 per barrel by mid-2019 in order to validate current inflation expectations.

In reality we have seen rather a different pattern as the crude oil price has risen from the lows that we saw. The price of a barrel of Brent Crude Oil is just over US $41 as I type this as opposed to the just under US $29 it fell to in mid-January. So year on year we have a 25% fall replacing the circa 50% falls we previously had. Also the UK Pound £ has been singing along to Alicia Keys and been “fallin'” since the US $1.59 of the middle of June 2015 which has now been replaced by US $1.43 so we are also facing a lower exchange-rate to buy the oil with.

If we look at petrol prices at the pump they do not fully reflect this yet as they have nudged higher from the low of the beginning of February at 100.8p for a litre of diesel. We also still have the impact of the fall in diesel prices to match petrol but the impact is beginning to wear off.

As we look forwards there are factors which we would expect to raise inflation in the future. The first is the introduction of the National Living Wage which in itself at a time of reduced real wages is welcome. The danger is that it sets off inflation which will erode any gain. As of next month it will be 10.8% higher than a year ago and according to the Resolution Foundation will apply to around 2.7 million workers and affect 3 million others via differentials.The Centre for Retail Research thinks it will have this impact.

It will increase inflation by 1.1% per year to 2020,

So a welcome development will have unwelcome side-effects.

The second influence only seems to have bad effects which is the impact of Smart meters on UK fuel bills. I have long struggled to see how they help and the best I could manage was that they might transfer some energy use into the early hours. The problem? Well my mum’s tumble dryer caught fire some years ago and I note that other have done so in recent times so there is a danger risk. Also those living in flats like me hardly want noisy equipment turning on in the night. So how will it help? It is certainly expensive. I sympathise with the thoughts of Paul Lewis who presents BBC’s Money Box on Radio 4.

Smart meters will cost customers £11bn and bring few benefits……….The purpose of smart meters is to get consumers to manage the load rather than the grid through time of use tariffs

It all seems very Dunian (Harkonnen) and with potentially penal overtones doesn’t it?

According to the cheerleaders at today’s conference merely by existing they will save £6 billion by “behaviour changes”. It used to be that things responded to us now we have to respond to them.

Today’s numbers

Let me look at it from the other side today and what I mean is the clearest evidence of inflationary pressure in the UK.

UK house prices increased by 7.9% in the year to January 2016, up from 6.7% in the year to December 2015……On a seasonally adjusted basis, average house prices increased by 0.9% between December 2015 and January 2016.

This is of course why first-time buyers need so much official “Help” these days. Even with mortgage-rates being forced ever lower by the Bank of England these prices are not affordable for many.

Average mix-adjusted house prices in January 2016 stood at a record high of £306,000 in England, £174,000 in Wales, £195,000 in Scotland and £153,000 in Northern Ireland

Let us see how our official consumer inflation measures pick up on this.

The Consumer Prices Index (CPI) rose by 0.3% in the year to February 2016, unchanged from January 2016.

Oh well never mind we have a measure recommended by the National Statistician John Pullinger and a man treated by the media with awe over the past few days Paul Johnson of the Institute of Fiscal Studies. How is it doing?

In February 2016, the 12-month rate (the rate at which prices increased between February 2015 and February 2016) for CPIH stood at 0.6%, unchanged from January 2016.

Not so good then especially as we note that this is the result of it all.

Owners occupiers’ housing costs increased by 0.1% between January and February 2016,

 

The house price bubble and hence the credit crunch never existed!

 

As you can see there never was much of a problem according to our national statistician. Has the credit crunch been a mirage? Houses are in fact rather cheap……

Meanwhile the “discredited” Retail Prices Index continues to reflect reality more accurately.

The RPI 12-month rate for February 2016 stood at 1.3%

The RPIJ is at 0.6% as our official statisticians try to get rid of something they introduced only 3 years ago. The shame of it! If you wish to see the other side of the debate Andrew Baldwin made a case for reforming it in the comments on March 10th.

The Public Finances

On a grim day let us open with some welcome news.

Central government received £53.6 billion in income in February 2016. This was around 5% higher than in the same month last year, largely due to receiving more income tax and taxes on production such as VAT and stamp duty.

However the underlying position is this.

So far this financial year (April 2015 to February 2016), the public sector has borrowed £70.7 billion. This was £14.0 billion lower than at the same point in the previous financial year.

So better but slow progress considering the economic growth we have seen and the traditional scape goat used by the media ( lack of tax growth) is not available as you can see above. Part of the reshuffle is the way that Bank of England income gains from its QE portfolio have influenced the interest and dividends section.

interest & dividends decreased by £1.7 billion, or 9.5%, to £16.1 billion

It was only last week that the hapless OBR forecast borrowing of £72.2 billion for the whole financial year. Maybe with the help of a few more ruses like this we might even get there!

On the back of progress we have made in strengthening the bank’s balance sheet in recent years, I am pleased that we are today able to repay the UK Government £1.193 billion to finally retire the Dividend Access Share.

Progress? RBS? You would think we owned 80% or something…..Prince got it right.

Oh why, oh why?
Sign o’ the times, unh

Comment

As I pointed out on the 16th of February the inflationary runes have shifted. Once the oil based disinflationary pressure fades from good prices we will be concentrating on this.

The CPI all services index annual rate is 2.4%, up from 2.3% last month.

Added to this we have the institutional inflationary pressure I have described above. If we feed that into the Public Finances then a lot more RBS style ruses will need to be found. After all the meddling surely we should be running out of one-offs?! Of course as Prince has already reminded us they are perhaps the clearest Sign O’ The Times.

Meanwhile I note that the English language is under attack again. From Gabriel Sterne.

Unconventional central bankers cant help treading on political toes says Surely time for less independence

Less than none? I was intrigued to find out that Mark Carney was “appointed by non-political process” as I thought that the Chancellor George Osborne courted and then appointed him. The UK Treasury Select Committee seems to agree with me.

The Chancellor himself interviewed the six candidates “deemed appointable” by the panel. He then made his recommendation to the Prime Minister, who made the same recommendation to the Queen, who approved the appointment.

Oh and whilst house prices are rising overall there are issues in Scotland (last month) and now Wales where this was recorded -0.3%. Thoughts?