The UK Plan is to turn a good inflation measure (RPI) into a bad one ( CPIH)

A feature of these times is that we see so many official attempts to hide the truth. In the UK at the moment one of the main efforts is around the inflation numbers and next week on the 25th we will get an announcement about it. The official documentation shows the real reason for the change albeit by accident.

Since 2010, the measured rate of RPI annual inflation has been on average one percentage point per annum above the CPIH.

They want to get rid of the RPI for that reason that it gives a reading some 1% higher as they can then tell people inflation is 1% higher at a stroke. The “independent” UK Statistics Authority and National Statistician have  thoroughly embarassed themselves on this issue. There have been 2 main efforts to scrap the RPI both of which have crumbed under their own inconsistencies and now the plan is to neuter it by applying some Lord of the Rings style logic.

One Ring to rule them all, One Ring to find them, One Ring to bring them all, and in the darkness bind them.

In the future we will only have one inflation measure and it will be the one that has been widely ignored since its introduction in spire of desperate attempts to promote it.

The Authority remains minded to address the shortcomings of the RPI by bringing the methods and data sources from the National Statistic, the CPIH, into the RPI. In practice this means that, from the implementation date, the RPI index values will be calculated using the same methods and
data sources as are used for the CPIH. Monthly and annual growth rates will then be calculated directly from the new index values.

So the “improvement” will involve including rents which do not exist and they comprise quite a bit of the index.

Given that the owner occupiers’ housing costs (OOH) component accounts for around 16% of the CPIH, it is the main driver for differences between the CPIH and CPI inflation rates.

For those unaware if you own your own home you are assumed to pay yourself rent and then increases in the rent you do not pay are put in the inflation numbers. Even worse they have little faith in the numbers used ( from actual renters) so they “smooth” them with an average lag of about 9 months. So today’s October rent numbers reflect what was happening around January and are therefore misleading. Putting it another way if you wish to have any idea of what is happening in the UK rental sector post pandemic do not look here for clues.

The supposedly inferior RPI uses house prices via a depreciation component ( a bit over 8%) and mortgage interest-rates ( 2.4%). Apparently using things people actually pay is one of the “shortcomings”. Meanwhile back in the real world if I was reforming the RPI I would put house prices in explicitly.

I find myself in complete agreement with the TUC on this.

Nobody is claiming the RPI is perfect. But it remains the best measure for living costs and would be straight forward to modernise.

As has been shown across Europe it would be perfectly possible to have RPI existing in parallel to CPIH (​or CPI) and have the latter measure focus on guiding monetary policy.

We are disappointed that expert calls to retain the RPI have been repeatedly ignored. The Royal Statistical Society and House of Lords Economic Affairs ​Committee have both presented compelling evidence for keeping it.

The basic issue is that the inflation numbers will be too low.In addition measures of real wages will be distorted too. These things echo around the system as for example when RPI was replaced by CPI in the GDP data the statistician Dr. Mark Courtney calculated that GDP was then higher by up to 0.5% a year. If you cant change reality then change how it is presented.

Today’s Data

We see that inflation is starting to pick up.

The Consumer Prices Index (CPI) 12-month rate was 0.7% in October 2020, up from 0.5% in September.

Remember that prices are being depressed right now by the VAT cut.

On 8 July 2020, the government announced that it would introduce a temporary 5% reduced rate of VAT for certain supplies of hospitality, hotel and holiday accommodation, and admissions to certain attractions.

I appreciated it last night when I bought a cooked chicken which has become cheaper. In terms of the inflation numbers we do have measures which allow for this. They are at 2.3% ( if you exclude indirect taxes called CPIY) and 2.4% ( if you have constant indirect tax rates or CPI-CT). We do not know exactly how prices would have changed without it but we do know that inflation would be a fair bit higher and would change the metric around Bank of England policy and its 2% inflation target.

The major movers were as follows.

Clothing; food; and furniture, furnishings and carpets made the largest upward contributions (with the contribution from these three groups totalling 0.16 percentage points) to the change in the CPIH 12-month inflation rate between September and October 2020………These were partially offset by downward contributions of 0.06 and 0.04 percentage points, respectively, from the recreation and culture, and transport groups.

You may note they have sneaked CPIH in there as it is the only way they can get it a mention as it is so poor it is widely ignored.

Another point of note is that the inflation measured by CPI is in services at 1.4% whereas good inflation is 0%.

If we look at the RPI we see another reason why it is described as having “shortcomings”. It has produced a higher number as it has risen from 1.1% in September to 1.3% in October.

The trend

In terms of the 2 basic measures we see that opposite influences are at play. The UK Pound £ has been reasonably firm and is just below US $1.33 as I type this so mo currency related inflation is on the way and maybe a little of the reverse. However the price of crude oil has been picking up lately with the January futures contract at US $44.27. Whilst this is around 30% below a year ago the more recent move this month has been for a US $7 rise.

In terms of this morning’s release there was a hint of a change.

The headline rate of output inflation for goods leaving the factory gate was negative 1.4% on the year to October 2020, up from negative growth of 1.7% in September 2020……The price for materials and fuels used in the manufacturing process showed negative growth of 1.3% on the year to October 2020, up from negative growth of 2.2% in September 2020.

So less negative and at this point crude oil was still depressing the prices so we can expect much more of a swing next time around if we stay at present levels.

Petroleum products and crude oil were the largest downward contributors to the annual rate of output inflation and input inflation respectively.

House Prices

I think you can see immediately why they want to keep house prices out of the official inflation measures.

UK average house prices increased by 4.7% over the year to September 2020, up from 3.0% in August 2020, to stand at a record high of £245,000.

They much prefer to put this in.

Private rental prices paid by tenants in the UK rose by 1.4% in the 12 months to October 2020, down from an increase of 1.5% in September 2020.

Just as a reminder home owners do not pay rent so this application of theory over reality conveniently reduces the headline inflation number called CPIH.

As ever there are regional differences in house price growth.

Average house prices increased over the year in England to £262,000 (4.9%), Wales to £171,000 (3.8%), Scotland to £162,000 (4.3%) and Northern Ireland to £143,000 (2.4%)….London’s average house prices hit a record high of £496,000 in September 2020.

Comment

Next week we will get the result of the official attempt to misrepresent inflation in the UK. All inflation measures have strengths and weaknesses but the UK establishment is trying to replace what is a strong measure (RPI) with a poor one ( CPIH). I think it is particularly insidious to keep the name RPI but in reality to make it a CPIH clone. A group that will be heavily affected is first time buyers of property who will be told there is little inflation because of a theoretical manipulation involving imputed rents but face a reality of much higher house prices.

“It takes all the running you can do, to keep in the same place. If you want to get somewhere else, you must run at least twice as fast as that!” ( Mad Hatter )

If you set out to destroy trust in national statistics then they are on the right road.

UK sees a worrying rise in inflation and record borrowing

Today has brought quite a panoply of UK economic data some of it which is hardly a surprise, but there is a section which is rather eye-catching and provides food for thought. It will only be revealed at the Bank of England morning meeting if someone has the career equivalent of a death wish.

The annual rate for CPI excluding indirect taxes, CPIY, is 2.2%, up from 1.8% last month……The annual rate for CPI at constant tax rates, CPI-CT, is 2.2%, up from 1.8% last month.

The pattern for these numbers has been for a rise as CPI-CT initially dipped in response to the Covid-19 pandemic and fell to 0.4% in May. But since then has gone 0.5%,1%,1.8% and now 2.2%.

The sector driving the change has been the services sector which has seen quite a lift-off. If we look back we see that it has been regularly above 2% per annum but after a brief dip to 1.7% in June it has gone 2.1%, 4.1% and now 5%. Something that the Bank of England should be investigating as these seems to be quite an inflationary surge going on here. It is so strong that it has overpowered the good section ( -0.4% and the energy one ( -8.5%) both of which are seeing disinflation.

Nothing to see here, move along now please

Of course the official Bank of England view will be based on this number.

The Consumer Prices Index (CPI) 12-month rate was 0.5% in September 2020, up from 0.2% in August.

On that road they can vote for more QE bond buying next month ( another £100 billion seems likely) and if one policymaker is any guide they are looking ever more at further interest-rate cuts.

There is some debate about the scale of the stimulus that negative rates have imparted on these economies, but the growing empirical literature finds that the effect has
generally been positive, i.e. negative rates have not been counterproductive to the aims of monetary policy.

That is hardly a ringing endorsement but there is more.

My own view is that the risk that negative rates end up being counterproductive to the aims of monetary
policy is low. Since it has not been tried in the UK, there is uncertainty about this judgement, and the MPC is
not at a point yet when it can reach a conclusion on this issue. But given how low short term and long term
interest rates already are, headroom for monetary policy is limited, and we must consider ways to extend that
headroom.

So should there be a vote on this subject he will vote yes to negative interest-rates.

Returning to inflation measurement there has been something of a misfire. In fact in terms of the establishment’s objective it has been a disaster.

The Consumer Prices Index including owner occupiers’ housing costs (CPIH) 12-month inflation rate was 0.7% in September 2020, up from 0.5% in August 2020.

The issue here is that the measure which was designed to give a lower inflation reading is giving a higher one than its predecessor CPI. Even worse the factor that was introduced to further weaken the measure is the one to blame.

The OOH component annual rate is 1.2%, up from 1.1% last month.

OOH is Owner Occupied Housing and is mostly composed of rents which are never paid as it assumes that if you own your own home you pay yourself a rent. That is a complete fantasy as the two major payments are in fact the sale price and for many the mortgage costs and rent is not paid. This is quite different to those who do rent and for them it is included. But there is another swerve here which is that the inflation report today is for September but the rent figures are not. They are “smoothed” in technical terms which means they are a composition of rents over the past 16 months or so, or if you prefer they represent the picture around the turn of the year. Yes we have pre pandemic numbers for rent rises ( there were some then) covering a period where there seem to be quite a lot of rent falls.

Returning to the inflation numbers the much maligned Retail Prices Index or RPI continues to put in a better performance than its replacements.

The all items RPI annual rate is 1.1%, up from 0.5% last month.The annual rate for RPIX, the all items RPI excluding mortgage interest payments (MIPs), is 1.4%, up from 0.8% last month.

They still have mortgage payments reducing inflation which if the latest rises for low deposit mortgages are any guide will be reversing soon.

As to this month’s inflation rise then a major factor was the end of the Eat Out To Help Out Scheme.

Transport costs, and restaurant and café prices, following the end of the Eat Out to Help Out scheme, made the largest upward contributions (of 0.23 and 0.21 percentage points, respectively) to the change in the CPIH 12-month inflation rate between August and September 2020.

Borrowing Has Surged

The theme here will not surprise regular readers although the exact amount was uncertain.

Borrowing (PSNB ex) in the first six months of this financial year (April to September 2020) is estimated to have been £208.5 billion, £174.5 billion more than in the same period last year and the highest borrowing in any April to September period since records began in 1993; each of the six months from April to September 2020 were also records.

We looked a few days ago at a suggestion by the Institute for Fiscal Studies what we might borrow £350 billion or so this fiscal year and we are on that sort of road. As to the state of play we can compare this to what the Bank of England has bought via its QE operations. Sadly our official statisticians have used the wrong number.

At the end of September 2020, the gilt holdings of the APF were £569.2 billion (at nominal value), an increase of £12.2 billion compared with a month earlier. Over the same period, the net gilt issuance by the DMO was £22.7 billion, which implies that gilt holdings by bodies other than the APF have grown by £10.5 billion since July 2020.

That will be especially out for longer-dated Gilts which are being purchased for more than twice their nominal value on occassion. The value of the APF at the end of September was £674 billion. Looking at the calendar the Bank of England bought around £21 billion of UK Gilts or bonds in September meaning it bought nearly all those offered in net terms ( it does not buy new Gilts but by buying older ones pushes others into buying newer ones).

National Debt

The total here is misleading ironically because if the numbers above. Let me explain why.

At the end of September 2020, the amount of money owed by the public sector to the private sector was approximately £2.1 trillion (or £2,059.7 billion), which equates to 103.5% of gross domestic product (GDP).

That seems simple but a reasonable chunk of that is not debt at all and it relates to the Bank of England.

The estimated impact of the APF’s gilt holdings on PSND ex currently stands at £105.6 billion, the difference between the nominal value of its gilt holdings and the market value it paid at the time of purchase. The final debt impact of the APF depends on the disposal of these financial instruments at the end of the scheme.

Further, the APF holds £19.7 billion in corporate bonds, adding an equivalent amount to the level of public sector net debt.

If we just consider the latter point no allowance at all is made for the value of the corporate bonds. In fact we can also throw in the Term Funding Scheme for good luck and end up with a total of £225 billion. Thus allowing for all that this is where we are.

public sector net debt excluding public sector banks (PSND ex) at the end of September 2020 would reduce by £225.6 billion (or 11.4 percentage points of GDP) to £1,834.1 billion (or 92.1% of GDP).

Comment

Some of the numbers come under the category described by the apocryphal civil servant Sir Humphrey Appleby as a clarification. By that he does not mean something that is clearer he means you issue it to obscure the truth. We have seen this consistently in the area of inflation measurement where the last decade has seen a litany of increasingly desperate official attempts to miss measure it. It is also hard not to have a wry smile at one inflation measure rising about the target as the Bank of England is often keen on emphasising such breakdowns. But a suspect a rise will get ignored on the grounds it is inconvenient.

Switching to the UK public finances we see that there is a lot of uncertainty as many tax receipt numbers are estimated. In normal times that is a relatively minor matter but at a time like this will be much more material. Also government expenditure is more uncertain that you might think or frankly in an IT era it should be. The national debt is also much more debatable that you might think especially with the Bank of England chomping on it like this.

Come back stronger than a powered-up Pacman ( Kaiser Chiefs )
Oh well.

 

 

 

The perversion of Inflation Targeting is accelerating

Today my topic is a subject which may seem like shuffling deck chairs on The Titanic but in fact turns out to be very important. This is because it affects workers, consumers and savers ever more because of the way that both wage growth and interest-rates head ever lower. For the latter we often see negative interest-rates and for the former the old text book concept of “sticky wages” has been in play but pretty much one way as rises are out of fashion but falls do happen. Indeed we have seen more than a few cases of wage cuts recently with the airline industry leading the way for obvious reasons. So we can afford inflation if I may put it like that much less than previously as it more quickly affects living-standards.

The Fantasy World

Central bankers have become wedded to the idea of inflation targeting but have not spotted that there is a world of difference between applying it when you are trying to reduce inflation and trying to raise it. In the former you are looking to raise living-standards via real wages and in the latter you end up trying to reduce them. Hoe does this happen? In spite of over a decade of evidence to the contrary they hang onto theories like this.

If the anchor for inflation is the inflation aim, the Phillips curve – the link between the real economy and inflation – plays a central role in allowing central banks to steer inflation towards that aim. But in the low inflation environment, prices appear to have become less responsive to the real economy. ECB research suggests that the empirical Phillips curve remains intact, but it may be rather flat. ( ECB President Christine Lagarde yesterday )

It can be any shape you like according to them which means it is useless. Accordingly it follows that they have been unable to steer inflation towards its target and for reasons I shall explain later they may well have been heading in the wrong direction. But let us move on with the Phillips curve being described by Lewis Carroll.

“When I use a word,’ Humpty Dumpty said in rather a scornful tone, ‘it means just what I choose it to mean — neither more nor less.’

’The question is,’ said Alice, ‘whether you can make words mean so many different things.’

The next issue is that they have got away with defining price stability as something else entirely. Back to Christine Lagarde of the ECB.

Since 2003, the ECB has used a double-key formulation to set our objective, defining price stability as a year-on-year increase in inflation of “below 2%”, while aiming for inflation of “below, but close to, 2%”.

This misrepresentation was exposed back around 2016 when measured inflation fell to approximately 0% but there were price shifts because the inflation fall was driven by a large fall in the price of crude oil. We saw it in another form as goods inflation fell to zero and sometimes negative where services inflation continued and in the case of my country was little affected. So the bedrock of the 2% inflation target crumbled away.

But they cannot stop clinging to the Phillips Curve.

The intuition behind the first factor is that the Phillips curve is alive and well, but the euro area faced a series of large shocks that made it harder to measure economic activity relative to potential. ( Lagarde)

Let me give you an example where this failed utterly in my home country the UK. Back in 2013 the then new Bank of England Governor Mark Carney established his Forward Guidance based on a 7% Unemployment Rate. Within six months that was crumbling and we went in terms of a “full employment” estimate 6%,5.5%,5%, 4.5% and lastly 4.25%. I would argue it was worse than useless as it was both actively misleading and an attempt to claim he was on the verge of raising interest-rates without having any real intention of doing so.

How much difference does it make?

Central bankers live in a world like this.

Broadly speaking, three factors might explain why inflation responded so weakly to improvements in the economy in the run-up to the pandemic.

One of the reasons is that the economy did not improve that much. The previous peak for Euro area GDP was 2.47 trillion Euros at the start of 2008 which rose to 2.68 trillion at the end of 2019 on 2010 prices. The increase of around 8.5% is not a lot and compares badly with the previous period.

Next comes the fact that central bankers inflate their own efforts and policies according to Chicago University. From Bloomberg.

However, they also find that, on average, papers written entirely by central bankers found an impact on growth at the peak of QE that was more than 0.7 percentage points higher than the effect estimated in papers written entirely by academics. (This is a sizable difference considering the effect found on average across all studies was 1.57% at the peak.) In the case of inflation, the difference in the effect of QE at its peak between the two sets of papers was more than 1.2 percentage points. Central bankers also tended to use more positive language in summarizing their results in abstracts.

They have discovered a point I have been making for some years now.

They suggest that career concerns may have played a role and provide some evidence that central bank researchers who found the largest impact of QE had a better chance of receiving a promotion.

Measuring Inflation

An issue here is the way that official inflation indices have been designed to avoid measuring inflation. I noted this yesterday with reference to the Christine Lagarde speech.

We need to keep track of broad concepts of inflation that capture the costs people face in their everyday lives and reflect their perceptions, including measures of owner-occupied housing.

This continues a theme highlighted by Phillip Lane back in February.

I think we at the ECB would agree that there should be more weight on housing – but there is a difficulty and this has been looked at several times before.

Just for clarity they completely ignore owner-occupied housing which Mr,Lane admitted was up to 33% of people’s spending in a different speech. In other matters ignoring such a large and significant area would get you laughed out of town but as most are unaware it just means they do not believe the inflation numbers.

a lot of households think it is higher. ( Phillip Lane)

I wonder why they might think that? From UBS.

Use our interactive Global Real Estate Bubble Index to track and compare the risk of bubbles in 25 cities around the world over the last three years. Munich and Frankfurt top our list in 2020. Risk is also elevated in Toronto, Hong Kong, Paris, and Amsterdam. Zurich is a new addition to the bubble risk zone.

So the ECB has topped the charts and has four of the top seven. Makes them sound like The Beatles doesn’t it?

Comment

The situation here is an example of institutional failure. Central banks had a brief period of relative independence because politicians failed to get a grip on high inflation and so they sub-contracted the job. Whether they thought it would work or whether they wanted simply to shift the blame off themselves is a moot point? Either way it had its successes as inflation did fall as highlighted by the description of that phase as the NICE decade by the former Bank of England Governor Baron King of Lothbury.

The problems in the meantime are as follows

  1. Inflation is now below target partly due to the miss measurement of it. We are also in “I cannot eat an I-Pad” territory.
  2. They believe that 2% inflation is causal rather than something which was picked at random.
  3. They believe that they can influence it much more than the evidence suggests.
  4. Most breathtakingly of all they believe that raising the inflation target will make people better off via the wages fairy ( where wages growth will rise even faster).

Or you can take the view that this is all about keeping debt costs low for government’s and all of the above is simply a front.

Let me now address further the issue of how things have been made worse. Firstly there is the psychological impact of so-called emergency measures persisting and all the policy moves. Next has come the Zombification of many times of business as models which should have failed get bailed out. Also the use of negative interest-rates cripples much of the pensions and longer-term savings and insurance industry.

On the this road the 2% inflation which they cannot achieve and anyway would make you poorer seems likely to become 3% which is even worse….

 

Welcome news from UK Inflation

This morning has brought some good news for hard pressed UK consumers and workers from the Office for National Statistics.

The Consumer Prices Index (CPI) 12-month rate was 0.2% in August 2020, down from 1.0% in July…….The all items RPI annual rate is 0.5%, down from 1.6% last month.

As you can see there has been quite a fall which will help for example with real wages (which allow for inflation). After yesterday’s figures which showed us we have been seeing wages falls this is helpful. Although it would appear that someone at the BBC is keen to pay more for everything.

Before the latest figures were published, there had been fears that the UK inflation rate might turn negative, giving rise to what is known as deflation.

Economists fear deflation because falling prices lead to lower consumer spending, as shoppers put off big purchases in the expectation that they will get cheaper still.

They would have had REM on repeat if they had lived through the Industrial Revolution.

It’s the end of the world as we know it (time I had some time alone)
It’s the end of the world as we know it (time I had some time alone)

Briefly I thought my work was influencing them as I noted the start of the sentence below but the final bit is pretty woeful.  Mind you if you think that the Industrial Revolution was bad I guess you might also think that inflation is bad for borrowers.

Low inflation is good for consumers and borrowers, but can be bad for savers, as it affects the interest rates set by banks and other financial institutions.

What is happening?

Here is the official explanation.

“The cost of dining out fell significantly in August thanks to the Eat Out to Help Out scheme and VAT cut, leading to one of the largest falls in the annual inflation rate in recent years,” said ONS deputy national statistician Jonathan Athow.

“For the first time since records began, air fares fell in August as fewer people travelled abroad on holiday. Meanwhile. the usual clothing price rises seen at this time of year, as autumn ranges hit the shops, also failed to materialise.”

As you can see we have a market effect in travel and also a result of a government policy. It looks as though the latter was pretty successful.

Last month, discounts for more than 100 million meals were claimed through the Eat Out to Help Out scheme.

In terms of the inflation data it had this impact.

Falling prices in restaurants and cafes, arising from the Eat Out to Help Out Scheme, resulted in the largest downward contribution (0.44 percentage points) to the change in the CPIH 12-month inflation rate between July and August 2020.

As you can see they are desperate to try to push their CPIH measure. We can deduce from that number that the impact on CPI will be a bit over 0.5% via its exclusion of the fantasy imputed rents in CPIH.

If we switch to the RPI we see this.

Catering Annual rate -7.0%, down from +3.4% last month
Never lower since series began in January 1988.

In fact the catering sector reduced the RPI by 0.52%. There was also another significant factor in its fall.

Fares and other travel costs. Annual rate -8.4%, down from +0.9% last month
Never lower since series began in January 1957.

That sector resulted in a 0.33% fall in the index.

Moving onto other detail there are increasing concerns over pork prices after the discovery of a case of swine flu in Germany but so far any price changes have not impacted the UK. Pork prices were in fact 1.3% lower than a year ago with bacon 0.3% higher. I must be buying the wrong sort of tea as I am paying more yet apparently prices are 8.3% lower than a year ago.

Are we sure?

We are still failing to record more than a few prices.

we have collected a weighted total of 86.9% of comparable coverage collected previously (excluding unavailable items).

The next bit is curious as what is still excluded?

As the restrictions caused by the ongoing coronavirus (COVID-19) pandemic have been eased, the number of CPIH items that were unavailable to UK consumers in August has reduced to eight……. these account for 1.1% of the CPIH basket by weight

When I checked it was things I should have thought of like football and theatre admission.

The Trend

There is downwards pressure on the goods sector in the short-term.

The headline rate of output inflation for goods leaving the factory gate was negative 0.9% on the year to August 2020, unchanged from June 2020.

This has been reinforced by the fall in the price of oil.

The price for materials and fuels used in the manufacturing process displayed negative growth of 5.8% on the year to August 2020, down from negative growth of 5.7% in July 2020…..The largest downward contribution to the annual rate of input inflation was from crude oil.

Owner Occupied Housing

It was hard not to laugh as I read this earlier.

The Consumer Prices Index including owner occupiers’ housing costs (CPIH) 12-month inflation rate was 0.5% in August 2020, down from 1.1% in July 2020.

Why? This is because the imputed rents used to keep the number lower have ended up producing a higher number than CPI.This is because they are smoothed are in fact on average from the turn of the year rather than now.

Private rental prices paid by tenants in the UK rose by 1.5% in the 12 months to August 2020, up from 1.4% in the 12 months to July 2020.

Quite a shambles may be building here because Daniel Farey-Jones has been following rent changes in London and here is an example from the last 24 hours.

Bloomsbury 1-bed down 21% to £1,300……….Waterloo 2-bed down 16% to £2,000……..Shoreditch 1-bed down 23% to £1,842.

Here is how this is officially reported.

London private rental prices rose by 1.3% in the 12 months to August 2020.

Whilst Daniel’s figures started as anecdotes he has built up a number of them which suggests there is something going on with rents that is very different to the official data.

Switching to house prices the official series is way behind so here is Acadata on the state of play.

In August, Halifax and Rightmove are showing broadly similar annual rates of price growth of 5.2%
and 4.6% respectively, with Nationwide and e.surv England and Wales reporting lower figures of 3.7%
and 1.5%

Comment

The lower inflation news is welcome but a fair bit of it is temporary as the Eat Out To Help Out scheme is already over. There is a feature in the numbers which is something that has popped up fairly regularly in recent times.

The CPI all goods index annual rate is -0.2%, down from 0.0% last month….The CPI all services index annual rate is 0.6%, down from 2.1% last month.

Goods inflation is lower than services inflation and in this instance went into disinflation.

However I think we are in for a period of price shifts as I note this.

The annual rate for CPI excluding indirect taxes, CPIY, is 1.8%, up from 1.0% last month.

So once the tax cuts end we will see a rally in headline inflation. Some places will need to raise prices but it is also true that others are cutting. For example Battersea Park running track and gym has just cut its monthly membership fee.

My Response to the plan to neuter the UK Retail Price Index inflation measure

A feature of the last 8 years or so has been the increasingly desperate attempts by the UK establishment to scrap and now neuter the Retail Price Index measure of inflation. Why? That is easy as HM Treasury would save a lot of money via paying out less money for inflation linking on benefits and pensions and be able to present higher economic growth (GDP)  figures They have had some success with the latter as replacing the RPI with the CPI in the GDP calculations has raised annual growth estimates by up to 0.5% according to the statistician Dr. Mark Courtney.

Having failed to scrap the RPI some bright spark came up with the idea of keeping the name by changing it so much it would in fact become a cypher or copy of the CPIH inflation measure including the much derided fantasy imputed rents. This “cunning plan” ( Blackadder style) has been backed by the Office of National Statistics and the UK Statistics Authoriity who have danced like puppets on the end of a string held by HM Treasury. In my financial lexicon for these times you will find “independence” defined as independently deciding to agree with those who decide your career path

Let me explain further via my reply.

Response

The saddest part of this enquiry is that we keep going down the same road and now I note that it is apparently only to choose when change should happen rather than if. The reason for that is because since 2012 we keep having enquiries and the official view has kept losing them and/or found itself ignored. The former happened in 2012 when the vote was 10-1 against and the latter happened in 2015 when Paul Johnson recommended the CPIH inflation measure which has been so widely ignored, in spite of the increasingly desperate efforts by the Office of National Statistics (ONS) to promote it.

If I kept losing on this scale maybe I too would want to take away the possibility of yet another defeat, but it is no way to run a proper public consultation.

2012

Back in 2012 I wrote to that inflation consultation as follows.

Accordingly making changes on a rushed and ill considered basis as is being proposed in this document will affect many people adversely and lead to a loss of confidence in and credibility of long-term contracts in the UK financial system.

That remains true for many pensioners both present and future and index-linked Gilts, as does this suggestion of mine.

For an investigation to be launched into both RPI and CPI as inflation measures and for there to be no change until BOTH have been thoroughly investigated and debated.

No such investigation has ever taken place and we have ended up in a situation where confidence in work produced by the ONS has been shaken and the UK Statistics Authority has been asleep at the wheel.

2020

A powerful indictment of what has happened in this period was provided by Jill Leyland at the recent Royal Statistical Society webinar on this issue. From the Webinar transcript.

In the 50 years of my working life, I’ve been a user of ONS statistics or, in the past, CSO statistics. And, for most of those years, ONS at its best is a world leader. At its best it is open-minded, has a sense of discovery, it is innovative, it listens, it has expertise. But the RPI saga since 2010 has been a very sorry one. Sometimes ONS has looked like a rabbit in the headlights.

I do hope that there will be a change Not just for all the reasons that Tony Cox and I have mentioned, but because I think the ONS is better than what it has proposed at the moment.

That was some message from a former vice president of the Royal Statistical Society,and fellow of the ONS. In her polite and considered way it is a devastating critique of the last decade which has become a lost decade for inflation measurement as the UK statistics establishment has continued to bash its head not only on the same wall but the same brick.

Are there problems with the RPI?

Jill Leyland also highlighted this.

I believe, and I’m fairly similar to Tony Cox here, that the RPI only has one real flaw. That is the combination of the Carli index with the way that clothing prices are collected. And that could be mended……. Turning back to the one flaw I do see. We are going to have scanner data which will give us a lot more opportunity to use weighted indices and that should come on-stream in the next few years.

So in fact there is only one problem which over the timescale we are looking at can certainly be improved and probably be fixed. Indeed if we look at the evidence provided by Tony Cox of the RPICPI User Group at the same webinar it puts the RPI in a better position than CPI and by implication CPIH.

It is also worth drawing attention to the greater use of weighted information in the RPI when compared to the CPI, which is generally regarded as providing the basis for a more accurate calculation.

In his presentation he showed that the RPI used direct weights for 43% of its composition whilst the CPI only uses it for 32% so it is in fact the RPI which is superior in this area. Indeed Carli is only 27% of the RPI whereas from the official rhetoric you might assume it is pretty much all of it, That, unfortunately has been a feature of ONS work which has been more like propaganda than disinterested and unbiased evidence

RPI Superiority

This comes in the area of owner occupied housing where the RPI wins hands down. It does so without a fight versus the Consumer Price Index or CPI which ignores the whole area, so if it was a boxing match it would be a walkover. In some ways the situation is worse for the CPIH inflation measure as its attempt to apply a fantasy has been exposed as exactly that.

There is a clear problem in assuming owner occupiers pay rent to themselves when they do not. I understand that the report of the 1986 advisory committee concluded that any inflation measure should be generally regarded as relevant to people’s concerns and a fair reflection of their experience. Rental Equivalence fails both tests and there is another problem with it. I’ve been asking about the actual rental figures that have been used and it turns out that they’re weighted back to some extent over the last 16 months,or if you prefer they are smoothed. So, they’re not even the actual rents from that month and are in some respect last year’s.That matters a lot when as happened this week the ONS tells people it has produced inflation figures for July 2020 when in fact a solid portion of the index was not even for 2020.

Those factors were no doubt involved in the way that the Economic Affairs Committee of the House of Lords rejected Rental Equivalence and thereby the CPIH measure itself. After all it is 16.3% of it by weight at the time of writing. My critique above of the methodology also applies to the genuine rent numbers which are another 6.3% of the index. So nearly 23% of the index is in effect based on last year rather than the month declared which is not only misleading but something which brings the whole measure into question.This is reinforced by the fact that the weights themselves have been unstable and therefore uncertain.

Balance

There has not been any and the ONS has produced work which is one-eyed and partial.

Conclusion

The reality is that the RPI is a good measure of inflation which is in many respects SUPERIOR to the officially supported CPI and CPIH. I have described the reasons for this above. This means that the effort to reduce it to a cypher and copy of CPIH is even worse than a mistake as it embarrasses those who make such a case. Thus this consultation should be scrapped and quickly forgotten.

Then we can set about improving the RPI in the way intimated by Jill Leyland and Tony Cox above. In addition we could replace the hidden use of house prices via depreciation with house prices themselves which would be another step forwards.

In the background further work could be done on the Household Costs Index (HCI) and perhaps the ONS could find a way of putting capital costs (yes another official effort to avoid inflation relating to housing) in it. I am a supporter of the concept as for example the idea to include student loans is an advance to match the modern era and reality. But it is not yet ready and may not be for some time.

At the same time the CPIH measure needs to face up to the fact that those who developed this inflation concept in the Euro area have been too embarrassed to put Rental Equivalence in it. Also that the European Central Bank has realised that the underlying CPI measure cannot go on without allowing for owner-occupied housing costs.

Thus it is the CPIH inflation measure which should be put in the recycling bin and if you need someone to do that I volunteer.

Royal Statistical Society

It has been good to see its response be so powerful.

The RSS has today said that it “strongly disagrees” with the Treasury and UK Statistics Authority’s (UKSA) plans for the Retail Prices Index (RPI).

The full reply is on its website.

Weekly Podcast

 

 

UK inflation measurement is a case of lies damned lies and statistics

This morning has brought us up to date with the latest UK inflation data and we ae permitted a wry smile. That is because we have been expecting a rise whereas there was a load of rhetoric and panic elsewhere about deflation ( usually they mean disinflation). The “deflation nutters” keep being wrong but they never seem to be called out on it. The BBC report put it like this.

The rise was a surprise to economists, said Neil Birrell, chief investment officer at money manager Premier Miton. “It’s a bit early to call the return of inflation, but it does show that there is activity in the economy,” he said.

Perhaps they should find some better economists. Also only last night they were reporting on inflation were they not?

Manctopia: Billion Pound Property Boom……..Meet the people living and working in the eye of Manchester’s remarkable housing boom. ( BBC 2 )

Indeed it has been right in front of them as they now operate from Salford so at least they did not have to travel to do their research. Indeed this is how the BBC 5 live business presenter Sean Farrington tweeted the data.

Happy inflation day, by the way. Prices up 1% in 1yr FYI Inflation that everyone talks about came in at 1% (CPI) Inflation the @ONS prefers came in at 1.1% (CPIH) Inflation used for capping rail fares came in at 1.6% (RPI)

Down pointing backhand index

Here’s @ONS‘s view on RPI (tl;dr – it’s rubbish)

At least he bothered to say what the numbers for the Retail Price Index or RPI were and he gets credit for reporting numbers which the economics editor Faisal Islam has ignored but it touched a raw nerve with me and let me explain why below.

You might think with the BBC launching a flagship programme on property that you might mention that the RPI looks to measure housing inflation whereas CPI completely ignores it and CPIH uses fantasy imputed rents that are never paid. For those unaware the RPI includes owner-occupied housing ( it uses house prices via a depreciation component and mortgage costs). Whereas CPI has intended to include them for around 20 years now and been in a perpetual situation of the dog eating its homework. CPIH is based on the view that the truth ( rises in house prices) is inconvenient as they tend to rise too fast so they invented a fantasy where home owners charge themselves rent and use that to get a lower reading. Oh and the rents themselves are not July’s rent they are based on rents over the past 16 months or so because the series needs to be “smoothed” as it is so unreliable. I would say you really could not make it up but of course they have!

Where I agree is on the bits he goes onto which is the way that RPI is used for rail fares ( and student loans) which is a case of cherry-picking as we find ourselves paying the higher RPI but only receiving the lower CPI.

Today’s Numbers

The rises noted above were driven by several factors but one will be no surprise.

prices at the pump have started to increase as movement restrictions eased. Between June and July 2020,
petrol prices rose by 4.9 pence per litre, to stand at 111.4 pence per litre, and diesel prices rose by 4.0 pence per litre, to stand at 116.7 pence per litre. In comparison, between June and July 2019, petrol and diesel prices fell by 0.9 and 2.3 pence per litre.

I doubt anyone except the economists referred to above will have been surprised by that as negative oil price futures have been replaced by ones above US $40. Also there was this.

As government travel restrictions were eased, there were upward contributions from coach and sea fares, where prices rose between June and July 2020 by more than a year ago.

I have pulled those numbers out because this is going to be a complex and difficult area going forwards. Why? Well I was passed by several London buses yesterday and the all had “only 30 passengers” on the side so in future there is going to be a lot less output and higher inflation in that sector. Not easy to measure as the inflation will likely be in higher subsidies rather than bus,coach or rail fares. I am reminded at this point that the GDP data showed National Rail use at a mere 6%. That will have improved in July but even if we get to 50% we have a lot of inflation hidden there.

Another reason for the fall was that the summer clothing sales have been less evident so far.

Clothing and footwear, where prices overall fell by 0.7% between June and July 2020, compared with a fall of 2.9% between the same months in 2019.

Actually clothes for kids saw a price rise, do parents have any thoughts on what is going on?

prices for children’s clothes rose by 0.1% between June and July 2020 but fell by 2.6% between June and July 2019, with the stand out movements coming from clothes for children aged under four years old and from T-shirts for older boys.

There was bad news for smokers and drinkers too.

Alcoholic beverages and tobacco, where overall prices across a range of spirits increased by 0.6% between June and July 2020, but fell by 1.4% in 2019.

On the other side there was some good news.

Food and non-alcoholic beverages, with food prices falling by 0.3% this year, compared
with a rise of 0.1% a year ago

What is coming next?

Perhaps rather similar numbers.

The headline rate of output inflation for goods leaving the factory gate was negative 0.9% on the year to July 2020, unchanged from June 2020.

There is ongoing upwards pressure but it is also true that the stronger UK Pound £ ( US $1.32 as I type this ) is offsetting it.

Comment

Let me explain how we should measure inflation and the problems in the current approach. The text books say it is a continuous rise in prices which does not help much as even the actively traded oil price struggles to do that. So we measure price changes and we should do this.

  1. Measure as many as we can to represent as best we can the impact of price rises on the ordinary consumer. The use of consumer is important as it prevents a swerve I shall explain in a moment.
  2. Use mathematical formula(e) that works as best as possible and head towards using direct weights as much as we can.
  3. Do not make numbers up that do not exist ( Yes the made up fantasy rents in the officially approved CPIH I am looking at you).

The use of consumer matters because if we stay with housing costs we see Phillip Lane of the ECB recently estimate them as a third of consumer spending which is similar to the US CPI shelter measure. Yet if we use the officially approved word consumption then house price changes are an asset and go in it 0%. Do you see the problem? It is one that fantasy rents that are never paid make worse and not better and is why I spend so much time on this issue.Just for clarity rents for those who pay rent are the right measure although the UK effort at this has so much trouble they smooth it over 16 months to avoid embarrassing themselves too obviously.

Next comes the issue of the maths formula used which are Carli,Jevons and Dutot. Each have strengths and weaknesses and regular readers will have seen Andrew Baldwin and I debate them on here. In a nutshell he prefers Jevons and I Carli although you would also have seen us note that we could sort that sharpish as opposed to the 8 years going nowhere that the official UK bodies have done. The RPI now gets 43% of its data via direct weights and more of this would help to make things better. This was represented at the recent discussion at the Royal Statistical Society.

I believe, and I’m fairly similar to Tony here, that the RPI only has one real flaw. That
is the combination of the Carli index with the way that clothing prices are collected. And that could
be mended………………………Turning back to the one flaw I do see. We are going to have scanner data which will give us a lot
more opportunity to use weighted indices and that should come on-stream in the next few years.  ( Jill Leyland)

I will simply point out that there has been a decade now to sort this out.

I hope that that gives you a picture of a debate that has gone on for a decade and have been dreadfully handled by our official bodies. I will not bore you with the details just simply point out they have lost every consultation so the latest one only involves the timing of changes which have kept being rejected ( by 10 to 1 back in 2012). It is very 1984.

Inflation measurement is not easy and let me give you an example of a problematic area from today’s numbers.

The effect came almost entirely from private dental examinations and non-NHS physiotherapy sessions, where price collectors reported that prices had risen, in part, as companies make their workplace COVID-secure;

Regular readers will know I have a big interest in athletics and sport and as part of that I have been noting reports of physiotherapy being ineffective due to Covid-19 changes. So the service is inferior. That is not easy to measure but we should measure steps backwards as well as forwards. As my dentist is able to inflict pain on me, may I point out that I am sure that is not true of her and the service will be superb…….

Meanwhile the inflation measure in the GDP numbers ( deflator) picked up inflation of 6.2% in the quarter and 7.9% for the year. Now the gap between that and the official consumer inflation measure is something for the UK Statistics Authority to investigate.

 

The fraudsters want to raise the US inflation target

Today brings us a new variation on an old theme. This is the issue of what is the right level for an inflation target and sometimes we go as far as to whether there should be one at all? This begins with something of a fluke or happenstance. This is the reality that inflation targets are usually set at 2% per annum following the lead set by New Zealand back in the day. This has become something of a Holy Grail for central banksters in spite of the fact that it had no theoretical backing as this from the Riksbank of Sweden explains.

There was no relevant academic research from which to draw support; instead, the New Zealand authorities had to launch the new regime more or less as an “experiment” and quite simply see how well it worked in practice.

In fact it was as we see so often a case of trying to fit later theory to earlier practice.

This shows that it does not seem to be until the mid-1990s, i.e. about five years after its introduction in practice, that inflation targeting began to attract any significant interest in the academic research.

Basocally it was from a different world where inflation was higher and they wanted something of an anchor and an achievable objective.

Also there is another swerve as other time the central bankster preference for theory over reality has led to claims that it provides price stability when it does not. Let me illustrate from the European Central Bank or ECB.

 The ECB has defined price stability as a year-on-year increase in the Harmonised Index of Consumer Prices (HICP) for the euro area of below 2%.

The truth is in some ways in the “as defined” bit because if we return to the real world it simply isn’t. Also the inflation measure ignores owner-occupied housing an area where we often find inflation. It was relative price stability when inflation was higher but was never updated with the times leaving central bankers aping first world war generals and fighting the previous war.

What about now?

Here is CNBC from earlier this month.

Recent statements from Fed officials and analysis from market veterans and economists point to a move to “average inflation” targeting in which inflation above the central bank’s usual 2% target would be tolerated and even desired.

Actually then CNBC became refreshingly honest.

To achieve that goal, officials would pledge not to raise interest rates until both the inflation and employment targets are hit. With inflation now closer to 1% and the jobless rate higher than it’s been since the Great Depression, the likelihood is that the Fed could need years to hit its targets.

Not fully honest though because we only need to look back to yesterday and the Japanese experience which has gone on for (lost) decades. This theme was added to last week by an Economic Letter from the San Francisco Fed.

Average-inflation targeting is one approach policymakers could use to help address these challenges. Taking into account previous periods of below-target inflation, average-inflation targeting overshoots to bring the average rate back to target over time. If the public perceives it to be credible, average-inflation targeting can help solidify inflation expectations at the 2% inflation target by providing a better inflation anchor and thus maintain space for potential interest rate cuts. It importantly can help lessen the constraint from the effective lower bound in recessions by inducing policymakers to overshoot the inflation target and provide more accommodation in the future.

I have helped out by highlighting the bits which exhibit extreme Ivory Tower style thinking. In general people think inflation is under recorded and would be more sure of this id they knew that housing inflation is either ignored or in the case of the US fantasy rents which are never paid are used to estimate it. It turns into something the Arctic Monkeys dang about.

Fake tales of San Francisco
Echo through the room

Yesterday Bloomberg suggested such a policy was on its way but got itself in something of a mess.

But the Fed’s preferred measure of inflation has consistently fallen short, averaging just 1.4% since the target’s introduction.

The preferred measure PCE ( Personal Consumption Expenditure) was chosen because it gives a lower reading than the more commonly known CPI in the US. This is a familiar tactic by central banksters and if we add in the gap which is often around 0.4% we see things change. Next apparently things move in response to what the Fed is thinking as opposed to the interest-rate cuts, bond buying and credit easing.

“Rising inflation expectations are, in part, indicative of the market beginning to price in the Fed’s shift,” said Bill Merz, senior portfolio strategist and head of fixed-income research at U.S. Bank Wealth Management in Minneapolis.

Rising inflation expectations are presented as a good thing whereas back in the real world the old concept of “sticky wages” is back and in more than a few cases involves wage cuts.

Comment

There is an air of unreality about this which is extreme even for the Ivory Towers of economic theory. After all the last decade has given them everything they could dream of in terms of zero and sometimes negative interest-rates and bond buying on a scale they could not have even dreamt of. If we go back a decade they believed it would work and by that I mean hit the 2% inflation target and rescue the economy. But they have turned out to be the equivalent of snake-oil sales(wo)man where the next bottle will always cure you and even has “Drink Me” written on it in big friendly letters.

But it did not work and even worse like a poor general they left a flank open which is that by having no exit strategy they were exposed to any future downturn. So the Covid pandemic was unlucky in severity but not the event itself as something was always going to come along. To my mind the policy failure has been that central banksters got caught up in the here and now and forgot they had defined a fair bit of inflation away. So they did not realise the  real choice was to lower the target to 1.5% or 1% or to put in a measure of housing inflation that represents inflation reality rather than a non-existent fantasy.

Take a ride in the sky, on our ship fantasii
All your dreams will come true, right away ( Earth Wind & Fire)

Thus they have ended up on a road to nowhere where in their land of confusion they have ended up financing government deficits. This rather than inflation targeting is the new role. Next up they look to support the economy but the truth is that we see another area where they have seen failure. Keynes explained that well I think in that you can shift expectations or trick people for a while but in the end Kelis was right.

Seen it in your one to many times
Said you might trick me once
I won’t let you trick me twice.

So whether they end up targeting average inflation or simply raise the target does not matter in the way it once did. The real issue now is getting politicians weaned off central banks financing their deficits for them. Good luck with that…….

The Investing Channel

China is suffering from food and especially pork inflation

The week has opened with an additional focus on China. We have been reminded of the nature of its style of government by the arrest of the pro democracy business tycoon Jimmy Lai in Hing Kong. This adds to the issue of how the economy its doing post the original Covid-19 outbreak. Typically even the inflation data comes with a fair bit of hype and rhetoric.

In July , under the strong leadership of the Party Central Committee with Comrade Xi Jinping as the core, all regions and departments coordinated the epidemic prevention and control, emergency rescue and disaster relief, and economic and social development work, actively implemented the policy of ensuring supply and stabilizing prices, and the overall market operation was orderly.

Switching now to the actual numbers we are being told this.

From a month-on-month perspective, the CPI went from a decline of 0.1% last month to an increase of 0.6% ………From a year-on-year perspective, CPI rose by 2.7% , an increase of 0.2 percentage points from the previous month .

So out initial picture is that inflation is picking up a little again and that it is not far below the target which is around 3% ( one report said 3.5%). Yet again we see that those who rush to tell us inflation is over look like being wrong yet again.

Pork Prices

This is an important issue in China due to its importance in the diet and the swine flu problem which preceded the Covid-19 outbreak. According to this it has not gone away.

In food, with the gradual recovery of catering services, the demand for pork consumption continues to increase, and floods in many places have a certain impact on the transportation of pigs. The supply is still tight. The price of pork rose by 10.3% , an increase of 6.7 percentage points over the previous month.

The annual numbers further remind us of the issue.

In food, the price of pork increased by 85.7% , an increase of 4.1 percentage points from the previous month

The pig333 website only takes us to the end of July but reports a price of just under 37 Renminbi compared to a bit under 20 this time last year.

I also noted this on the same website and the emphasis is mine.

Senasa (National Service of Agri-Food Health and Quality) officials certified exports of 18,483 tons of pork products and by-products sent between January and June of 2020, representing an improvement of 49% compared to the 12,336 tons sent in the same period in 2019. The main destinations were: China (9,379 tonnes); Hong Kong (2,599 t), Russia (1,845 t), Chile (1,400 t) and Angola (644 t).

So some extra demand for Argentinian farmers which will no doubt be welcome in its difficulties. But Hub Trade China suggests it may be a while before things get better.

#China‘s #pork prices, which jumped in June and edged up in July, will continue to rise in coming months due to seasonal factors and the influence of #COVID19. But tight supplies will begin to ease in the 4th. quarter thanks to boosting hog production and the expansion of imports.

The official view of the Ministry of Agriculture is this.

In the first half of 2020, live pigs and sows have maintained momentum towards recovery. At the end of June, the national sow population of 36.29 million heads changed from negative to positive for the first time year-on-year, up 5.49 million head from the end of last year. The current sow population has recovered to represent 81.2% of the herd at the end of 2017.

We are left wondering what “largely under control” means in reality.

African swine fever has been largely under control, and no major regional animal epidemics occurred in the first half of the year.

I have tried to look at the underlying indices but the England version has not been updated but up until June we have seen them be 170% to 180% of what they were in the previous year.

Food Overall

In fact the annual rate of inflation is being driven by food prices.

Among them, food prices rose by 13.2% , an increase of 2.1 percentage points, affecting the increase in CPI by about 2.68 percentage points.

A major player in this is of course the pork prices we have just analysed, but it is far from the only player.

the price of fresh vegetables increased by 7.9% , an increase of 3.7 percentage points; the price of aquatic products rose by 4.7% , a decrease of 0.1 percentage point; the price of eggs fell 16.6% , The rate of decline expanded by 0.8 percentage points; the price of fresh fruits fell by 27.7% , and the rate of decline narrowed by 1.3 percentage points.

So if you can get by on eggs and fresh fruit you are okay, otherwise you are not. Although on a monthly basis egg prices rose so that trend mat have turned.

Fuel

I note these because after the excitement around the period when we saw negative prices for some crude oil futures things are rather different now. Brent Crude Oil was essentially above US $40 throughout July. So we see this in the report.

gasoline and diesel prices rose by 2.5% and 2.7% ( monthly)…….

If we switch to the producer prices report we see that the times they are a-changing.

Affected by the continued rebound in international crude oil prices, prices in petroleum-related industries continued to rise. Among them, the prices of petroleum and natural gas extraction industries rose by 12.0% , and the prices of petroleum, coal and other fuel processing industries rose by 3.4% .

So the situation has turned for oil and the overall picture is as follows.

PPI rose by 0.4% , the same rate as last month…….From a year-on-year perspective, PPI fell by 2.4% , and the rate of decline narrowed by 0.6 percentage points from the previous month

Comment

The rise in inflation in China is being reported as good news or rather a reason for a rally in equity markets. But in fact a look at the consumer inflation data shows that food prices have been rising in many areas with the price of pork continuing to surge. So the Chinese consumer and worker will be worse off. Of course central bankers love to ignore this sort of thing as for newer readers basically they define everything that is vital as non-core for inflation purposes. Also inflation calculations assume you substitute products when the price rises to keep the numbers lower, although here they may be correct because poorer Chinese may not be able to afford pork at all now.

On the other side of the coin should China find a way out of the pork problem then inflation would be very low. Well for consumers and workers that would be a good thing because as we stand the chances for wage rises seem slim and I fear the reverse.

Looking at the exchange rate we get regular reports of a collapse on the way but whilst it has joined the rise against the US Dollar it has not done much. At just below 7 versus the US Dollar it is down 1% on the year. Are they running a pegged currency?

Podcast on GDP

 

UK Inflation Problems are not helped by the official attempts to mislead us

Today brings the UK inflation situation situation into focus. Or rather the official attempt to measure it which has more than a few problems in a virus pandemic.  To that we can add the fact that the Office for National Statistics has spent several years attempting to mislead about inflation with its use of fantasy Imputed Rents which are never paid outside its Ivory Tower. For now let us look at the measure used and targeted by the Bank of England

The Consumer Prices Index (CPI) 12-month rate was 0.6% in June 2020, up from 0.5% in May.

This gives us two perspectives. The most sensible one would be one of relief that in a time of trouble for economies at least inflation is not adding to it. Some of you will recall the “Misery Index” where the inflation rate was added to the unemployment rate. At least inflation is not contributing much to the misery being provided by unemployment right now. It will also help real wages.

The other perspective is the central banker one where low inflation is a bad idea as they pursue their Holy Grail of it being 2 percent per annum. So the Bank of England will see the number as a justification for all its monetary easing which it is adding to with its weekly dose of £6.9 billion buying of UK bonds or Gilts. They ignore the reality that this would make people worse off via lower real wage growth and frankly right now they would be causing real wage falls. Furthermore their policies raise the asset prices the inflation number are set up to ignore. The CPI measure ignores owner – occupied housing and has taken longer than it took to put a man on the moon to do nothing about that.

Causes

The monthly ebbs and flows are shown below.

The largest contribution to the CPIH 12-month inflation rate in June 2020 came from recreation and culture (0.32 percentage points).
Rising prices for games and clothing resulted in the largest upward contributions to the change in the CPIH 12-month inflation rate between May and June 2020.
Falling prices for food resulted in a partially offsetting downward contribution to the change.

The lower prices for food will be welcome as we also note two problem areas.Computer games and clothing are longstanding issues due to the role of fashion in their sectors.  A game which people are rushing to pay £60 for might go out of fashion and then be cut to £30. Objectively it is the same game but subjectively it is not  and in that gap is a world of problems for inflation measurement. Fashion clothing was the orginator of the official campaign against the Retail Price Index or RPI but as so often when the answer is inconvenient nothing happens or if you prefer we have seen another form of a lost decade. We could as the statistician Simon Briscoe suggested suspend fashion clothing for a while because as he pointed out it is about 0.2% of the index whereas owner – occupied housing is officially 17%. So it is revealing that you cannot ignore a small factor but a large one is just fine. I will leave readers to figure out for themselves what the impact on inflation would be.

Measurement Problems

These are ongoing.

As a result of the ongoing coronavirus (COVID-19) pandemic, we identified 67 CPIH items that were unavailable to UK consumers in June, as detailed in Table 58 of the Consumer price inflation dataset; these account for 13.5% of the CPIH basket by weight and made a downward contribution of 0.02 percentage points to the change in the CPIH 12-month rate; the number of unavailable items is down from 74 in May and 90 in April; for June, we have collected a weighted total of 84.0% (excluding unavailable items) of the number of price quotes collected for February (the most recent “normal” collection).

So we are missing a fair bit of the data and this is worse for e CPI measure as it ignores owner- occupied housing so it rises to around 20 percent for it. You may note apparently we cannot exclude fashion clothing for a while but can produce numbers excluding factors one hundred times larger. Indeed we can produce clothing numbers when department stores are shut.

The Trend

We get a guide to the direction of travel from the producer price series.

The headline rate of output inflation for goods leaving the factory gate was negative 0.8% on the year to June 2020, up from a negative 1.2% in May 2020.

The price for materials and fuels used in the manufacturing process showed negative growth of 6.4% on the year to June 2020, up from negative growth of 9.4% in May 2020.

So we see that the downward push on prices is fading and there is another factor.

Prices for both petroleum products and crude oil have increased on the month as lockdown and travel restrictions have eased and global demand has picked up; the monthly rate for petroleum products is the highest since May 2018 whilst crude oil has seen the largest monthly increase since PPI records began; the annual growth rates have picked up partly because of a base effect as crude oil prices rose sharply between May and June 2020 but fell sharply the same time last year.

The problem here is that we recorded inflation falls from lower oil prices when the use of oil had fallen quite sharply. I used my car for the first time in a while two weeks ago. for example. This issue is a very large one for the producer price series because is we add energy to the UK Pound we have about three-quarters of the usual changes. So we have mostly been measuring changes in products which have fallen sharply in use. Awkward but I guess I will be the only person pointing this out.

Also there are to be “improvements” in line with international standards as we switch from net to gross. You will not be surprised to see the impact.

 For the net output PPI, the annual growth fell to negative 0.8% in June 2020, up from negative 1.2% in May 2020. For the gross output excluding duty PPI, the annual growth in June 2020 was negative 3.3%, up from negative 4.4% in May 2020.

I am thinking of offering a prize for anyone who spots an international standard that raises the inflation rate. I would offer a bottle of wine but fear it will have gone off before any claims.

Comment

Let me now bring in the other measures of inflation.

The all items CPIH annual rate is 0.8%, up from 0.7% in May………….The all items RPI annual rate is 1.1%, up from 1.0% last month. The annual rate for RPIX, the all items RPI excluding mortgage interest payments (MIPs), is
1.3%, unchanged from last month.

The new headline measure CPIH which includes fantasy imputed rents is one which the Office for National Statistics is pushing hard. Fortunately it is being widely ignored and that is before people are aware that the rents are for the last 16 months not for June.

Moving to the RPI there has been quite a campaign to discredit it. This is based on its use of house prices via a depreciation measure and the clothing issue I pointed put earlier. However there are those who argue that clothing inflation has been under recorded since this issue began which means that the RPI has been right if true. I have seen many examples of people thinking inflation is higher than the official series and there are genuine reasons to support that. There is the problem with weights right now and I notice in the US there are suggestions for people to keep diaries and use them which seems worth a go.

But the real issue right now is that not only are the inflation numbers wrong they are adding to an official campaign to mislead via the use of last year’s fantasy Imputed Rents. Let me give you another example from their alternative basket. You all know fuel use has been lower but they think we will not spot this.

This is particularly apparent for motor fuels, which made a negative contribution to the 12-month growth rate of the official series in June 2020. Figure 2 shows that the downward contribution to the 12-month growth rate from motor fuels was even more pronounced for the rescaled basket as it has a higher weight.

 

UK inflation measurement is in crisis

It is Wednesday so it is inflation numbers day in the UK. If that feels a little out of key then you are right as they used to be on a Tuesday and the labour market data set followed the next day. But in a sad indictment of our rulers it was decided that releasing the labour market numbers at 9:30 today did not give then enough time to spin, excuse me, analyse the numbers in time for Prime Ministers Questions at lunchtime. The theme of being out of tune though continues today as we note the ongoing problems in simply collecting the prices.

As a result of the ongoing coronavirus (COVID-19) pandemic, we identified 74 CPIH items (or 14.2% of the CPIH basket by weight) that were unavailable to UK consumers in May, as detailed in table 58 of the Consumer price inflation dataset; this is down from 90 unavailable items in April; compared with the February 2020 index (the most recent “normal” collection), we have collected a weighted total of 81.6% (excluding unavailable items) of the number of price quotes for the May 2020 index, although the coverage varies across the range of items.

There is a clear issue with being unable to collect some of the data. Added to that is the fact that prices which are unavailable are likely to be the ones which have risen in price. For example the new HDP ( High Demand Products) measure had to drop out things like face masks and hand sanitiser for a while which introduces a downwards bias to the reading. What happens when they cannot record something? Well let me hand you over to the BBC explanation.

The ONS admitted that it had difficulty compiling inflation statistics for May, since many areas of the economy were completely shut down.

For instance, inflation figures for holidays had had to be “imputed”, it said.

Of course some will be pleased by this as there is a lot of official enthusiasm for imputing prices as they have demonstrated in the area of rents. For newer readers the official CPIH measure uses fantasy rents to impute owner-occupied housing costs. This is the reason in spite of all the official effort it remains widely ignored as I doubt anyone charges themselves rent to live in their own home. Even worse they have had real trouble measuring actual rents and you do not have to take my word for it,just read the release from earlier this week.

To achieve this, completely new innovative methodology will be needed. In October 2019, we started building a prototype using a new methodology with the capability to meet the aims specified in Section 3.

Perhaps we will get inflation numbers with this year’s rents rather than last years? It is rather conspicuous that they have failed to answer my question on this subject

Today’s Data

A further fall was recorded in terms of the annual rate

The all items CPI annual rate is 0.5%, down from 0.8% in April……The all items CPI is 108.5, unchanged from last month.

As you can see prices were unchanged on a monthly basis although there were shifts in the structure.

The CPI all goods index annual rate is -0.9%, down from -0.4% last month……The CPI all services index annual rate is 1.9%, down from 2.0% last month.

That is intriguing as we see disinflation in the good sector but not that much impact at all on services.That teaches us a little about pricing in that sector as it has seen a volume drop that for once justifies the word collapse and yet the pricing impact has been small. Looking at specific areas we see this.

Transport, where the price of motor fuels fell this year but rose a year ago, contributing 0.12 percentage points to the easing in the headline rate. Petrol prices fell by 2.8 pence per litre between April and May 2020, compared with a rise of 4.2 pence per litre between the same two months a year ago. Similarly, diesel prices fell by 2.6 pence per litre this year, compared with a rise of 2.8 pence per litre a year ago.

I doubt any of you are surprised by this and it was joined by Recreation and Culture which is of note as a problem area popped up again.

Within this broad
group, there was a downward contribution (of 0.06 percentage points) from games, toys
and hobbies, with the effect coming from a variety of traditional toys and games, plus
computer games consoles and computer games

For newer readers this is the effect of computer games being discounted when they go out of fashion which the numbers struggle to cope with.Fashion clothing has the same problem and actually in an odd link led to them trying to neuter the RPI. Next we get an attempt at humour, at least I hope it is humour.

Health, where prices overall fell by 1.4% this year compared with a rise of 0.2% a year ago.
The effect came from pharmaceutical products, particularly pain killers and antihistamine
tablets, and other medical and therapeutic products, particularly daily disposable soft
contact lenses.

Does anybody believe health costs are falling?

On the other side of the coin was this.

Food and non-alcoholic beverages, with prices rising by 0.5% this year compared with a smaller rise of 0.1% a year ago.

The details are for the CPIH measure because our statistical establishment is so desperate to get it a mention they only break the numbers down for it. From the point of view of the Bank of England Governor Andrew Bailey can add the new CPI number to the letter he is presently composing to the Chancellor to explain why it is more than 1% below target. His quill pen is probably being dipped into the Bank of England official ink no doubt being held by a flunkey right now as he explains how he will expand QE by another £100 billion or so in response. That is something of a Space Oddity as of course QE will boost the asset prices it ignores. Oh well! As Fleetwood Mac would say.

Retail Prices Index

This too saw a fall in the annual rate.

The all items RPI annual rate is 1.0%, down from 1.5% last month……..The all items RPI is 292.2, down from 292.6 in April.

I note that on a monthly basis the RPI fell. If it did that more often it would quickly be back in official favour! Also even under the old system the Governor of the Bank of England would have to get his quill pen out.

The annual rate for RPIX, the all items RPI excluding mortgage interest payments (MIPs), is
1.3%, down from 1.6% last month

As to credibility of our inflation numbers I am afraid this is another downgrade.

The published RPI annual growth rate for April 2020 was 1.5%. If the index were to be recalculated
using the correct interest rate, it would reduce the RPI annual growth rate by 0.1 percentage points
to 1.4%.

To get mortgage rates wrong is really rather poor and it was not the only mistake.

In addition, an error has been identified in the adjustment made to reflect a change in product size
for a single price quote for “canned tuna” collected in April 2020.

Comment

As you can see there is a large amount of doubt about the inflation numbers right now. This has not stopped much of the media from already setting the scene for more monetary policy easing. The Bank of England votes later today and it has the problem that the Deputy Governor for this area Ben Broadbent has actively demonstrated a wide-ranging ignorance of the issues. Just as a reminder I expect them to vote for at least another £100 billion of QE bond buying. This is in spite of the fact that the asset prices it will boost are ignored by the CPI inflation measure they target.

Meanwhile some new research has suggested that prices are in fact rising more quickly, and the emphasis is mine.

In this paper, we use detailed scanner data to provide a portrait of inflation during the Great Lockdown, covering millions of transactions in the UK fast-moving
consumer goods sector. We find that there was an unprecedented spike in inflation at the beginning of lockdown, which coincided with a reduction in product variety.

Indeed there was more.

The price increases we found for many categories, including those not subject to demand spikes, indicate supply disruptions and changes in market power may be playing an important role.

This has a consequence.

Many households are subject to reduced
income and liquid wealth, and higher prices for foods, drinks and household goods
will feed into squeezed household budgets

Here are the numbers.

First, we find that in the first month of lockdown month-to-month inflation was
2.4%. This sharp upturn in inflation is unprecedented across the preceding eight
year

So thank you to Xavier Jaravel and Martin O’Connell for this paper which suggests that as well as Fake News we also have to contend with fake official statistics.

The Investing Channel