President Biden denies there is an inflation problem

The inflation issue is one that has been heating up on 2021. One way of looking at it is to simply note the rising numbers we see be it for consumer or producer inflation. To that we need to add house prices because they are usually omitted from consumer inflation measures. There is an issue with annual comparisons due to the pandemic but the monthly rises have reinforced the theme. Next we can look at it via the official response and also by who makes it. One effort has come from the US Federal Reserve and here is Mary Daly of the San Francisco Fed from the 17th of February.

Fed’s Daly: – “Too-high inflation” not a risk to think about at the moment

– Don’t see “unwanted inflation” around the corner

– Pressures on inflation are downward.

She has been proven to be spectacularly wrong on her third point and wrong on her third. Unless she wanted CPI inflation over 5% she was wrong on that too. Whereas in reality there were clear risks.

The problem for Mary Daly is that having expanded the Federal Reserve balance sheet to US $7.44 trillion there were always going to be consequences.

Another step was the deployment of Treasury Secretary Yellen and he she is from February 8th.

Addressing Summers’ fears that the package would cause inflation, Yellen conceded that it was “a risk that we have to consider”. But Yellen, who as former Fed chair oversaw US monetary policy, added: “I’ve spent many years studying inflation and worrying about inflation. And I can tell you we have the tools to deal with that risk if it materialises.”

So far no such tools have materialised and the Federal Reserve has done nothing apart from claim that the inflation it denied would happen will be short-lived. It has changed its view of transitory though which has gone from 2-3 months to 6-9.

President Biden

The President joined the debate on Monday.

President Joe Biden addressed voters who are worried about inflation on Monday, arguing that his domestic spending plans would help keep prices low over the next decade. ( CNBC)

You may note the shift from now to an unspecified future. Also it was pretty extraordinary stuff.

“My ‘Build Back Better’ plan will be a force for achieving lower prices for Americans looking ahead,” Biden said in a speech Monday at the White House.

Biden argued the infrastructure and family support investments contained in his $4.5 trillion domestic spending plan will fund decades of economic growth, increase the workforce and keep prices low.

“If your primary concern right now is inflation, you should be even more enthusiastic about this plan,” said the president.

These are classic political moves as he again makes claims about the future and implies they will deal with inflation now. His Treasury Secretary is mining a similar vein.

“We will have several more months of rapid inflation, so I’m not saying that this is a one-month phenomenon,” Treasury Secretary Janet Yellen told CNBC in an interview that aired Thursday.

“But I think over the medium-term, we’ll see inflation decline back toward normal levels,” she added.

If we switch to the Washington Post we see two other tactics in play.

Speaking at the White House on Monday, the president said “no serious economist” believes “unchecked inflation” is likely. He blamed the rising cost of living on the strains of economic reopening.

“You can’t flip the global economic light back on and not expect this to happen,” Biden said.

As I have already pointed out the Federal Reserve did not expect this to happen and throwing insults such as “no serious economist” only reveals the pressure they are feeling.

The Problem

Part of it was highlighted in the Washington Post.

Only once in six years had Mark Maguire raised prices at his North Dallas restaurant.

Then, some of his employees, no doubt noticing the banners touting $1,000 signing bonuses at other eateries, demanded higher wages. And his suppliers hiked the cost of chicken, beef and cooking oil.

Maguire’s costs rose so much so fast that he has had to rewrite his menu prices twice since March. Whether additional increases will follow depends upon a complex interaction of food supplies, labor availability and a shape-shifting virus.

Although there is for those who prefer theory over practice the analysis of Mark Zandi of Moodys which has been quoted by President Biden.

Worries that the plan will ignite undesirably high inflation and an overheating economy are overdone.

In a way that is true because you cannot ignite something which is already burning. Then we get his demand pull style theory.

The fiscal support it provides is only sufficient to push the economy back to full employment from the recession caused by the COVID-19 pandemic.

Yet only a sentence later the he seems to be not so sure.

Because the package includes a myriad of spending and tax initiatives, some of which are new and uncertain,

Renewable Energy

This is an associated problem for the inflation debate. President Biden plans a big increase in renewable energy but the UK which has already invested heavily in this is today highlighting what always was the obvious flaw.

GB Grid: #Wind is generating 0.11GW (0.33%) out of 33.61GW

So much for the UK being the “Saudi Arabia of wind power” as Prime Minister Johnson has claimed. Also something which we were supposed to be consigning to the past is seeing a surge.

COAL MARKET: Asian benchmark coal (Newcastle 6,000kc/kg) spikes to a fresh 13-year high of $163 per tonne. For a commodity that was left for dead, Australian (and other) coal miners are making this year an absolute killing ( Javier Bias Bloomberg )

We keep being promised electricity will get cheaper and yet the same source reports.

Spanish wholesale electricity prices have now surged to a record high of €106.57 per MWh, surpassing the previous peak set in 2002. Power prices are turning into a hot political potato in some European countries this summer.

Curious because we kept being told Spain’s solar power was booming and the price dropping. One factor I have spotted from the UK data is that solar takes time to build within the day. For example at 10 am UK production was 3.5 gigawatts out of a maximum of about 8. So even on a hot July day it takes its time.

Thus unlike Moodys I am expecting longer-term inflation from this source. Hopefully there will be advances but with the plan to switch to electric vehicles we look to be creating a problem.


We have learnt over time that an official denial is tantamount to a confession. But as we survey the scene I see much that is familiar. One example of this is from Dylan Patel os semi-analysis.

Semiconductor shortage alone is causing nearly 2% of inflation! People often say inflation is going nuts, but most of CPI inflation is due to used car prices, vacation travel boom, and energy prices. Once you remove these, inflation is manageable.

We always see claims that there is little inflation via excluding the things which are going up! I note his chart uses only the lower core CPI. But if you are going to take things out surely you should put in things which are omitted like house prices. I am sure you have already figured why he has not done that.

Some elements will change and fade but others will emerge. For example whilst Imputed Rents are a fantasy  they will presumably pick up in response to higher hour prices. They will remain a poor guide but at 24% of the index even a small move will have an impact.

Returning to President Biden the idea that US $4 trillion of spending will not create inflation is an extraordinary effort. But in one area I do have sympathy because much of what is happening now relates to the decisions made before his term.





Inflation is back on the march

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

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

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

Thus this was not really a surprise at all.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Tax Cuts

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

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



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

Housing Costs

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

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

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

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

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

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

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

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

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

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


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

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

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

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

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

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

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

Meanwhile is some action building in services inflation?

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

Will UK inflation exceed 5%?

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

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

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

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

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

Andy Haldane

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

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

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

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

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

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

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

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

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

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

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

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

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

What does Governor Bailey think?

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

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

The next bit is a type of PR after thought.

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

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

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

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

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

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

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

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

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

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

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

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

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

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


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

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

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

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


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

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

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

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

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

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

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

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

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

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

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

UK house prices surge again

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

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

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

The Nationwide has another go here.

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

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

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

Stamp Duty

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

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

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

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


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

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

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

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

So a bounce back from these numbers compared to April.

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

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

If we look further down the chain we see this.

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

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

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


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

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

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

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

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

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

Consumer Credit

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

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

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

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


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

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

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

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

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


Are US house prices facing a boom and then bust?

This morning has brought a curious intervention from the President of the Boston Federal Reserve. Eric Rosengren has been interviewed by the Financial Times and gets straight to it.

A senior Federal Reserve official has warned that the United States cannot afford a “boom-and-bust cycle” in the housing market that would threaten financial stability, referring to growing concern about the central bank’s rising property prices.

The curious bit starts with the boom element which seems pretty clear from the development of house prices so far this year.

The S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index, covering all nine U.S. census divisions, reported a 13.2% annual gain in March, up from 12.0% in the previous month. The 10-City Composite annual increase came in at 12.8%, up from 11.7% in the previous month. The 20-City Composite posted a 13.3% year-over-year gain, up from 12.0% in the previous month.

I guess he must be grateful that Boston is not one of the leaders of the pack.

Phoenix, San Diego, and Seattle reported the highest year-over-year gains among the 20 cities in
March. Phoenix led the way with a 20.0% year-over-year price increase, followed by San Diego with a
19.1% increase and Seattle with a 18.3% increase.

Although with prices rising at an annual rate of 14.9% it is above the average. Also we see that the monthly rate of increase is on a bit of a charge.

Before seasonal adjustment, the U.S. National Index posted a 2.0% month-over-month increase, while
the 10-City and 20-City Composites both posted increases of 2.0% and 2.2% respectively in March.

Also these moves are very large in historical terms.

“More than 30 years of S&P CoreLogic Case-Shiller data put these results into historical context. The
National Composite’s 13.2% gain was last exceeded more than 15 years ago in December 2005, and
lies very comfortably in the top decile of historical performance. The unusual strength is reflected
across all 20 cities.

So this is unequivocally a boom so in that sense we are half way there.

What else did he say?

He raised a dangerous issue from the Fed’s point of view.

“It’s very important for us to get back to the 2 percent inflation target, but the goal is for that to be sustainable,” Eric Rosengren, president of the Boston Federal Reserve, told the Financial Times. And for that to be sustainable, we can’t have a boom and bust cycle in something like real estate..

The reason why it is dangerous is that real estate is not in the inflation target the much more friendly owners equivalent rent of residencies is instead and it is growing at an annual rate of 2.1% and has been rising at a monthly rate of 0.2% to 0.3%. So very different to the house prices it is supposed to proxy and of course it does not exist and is never paid. So they are at risk of being accused of making the numbers up because in this instance they have and at 23.8% of the index by weight it is a significant amount.

Rather curiously for the FT which is a vociferous supporter of the rental equivalence above it puts the boot into it via the number below.

According to data from the National Association of Realtors last week, the median price of existing home sales rose 23.6 percent year on year in May, topping $350,000 for the first time.

Even Rosengren himself cannot dodge the flying bullets.

Rosengren said that in the Boston real estate market, it has become common for cash-only buyers to prevail in bidding competitions, and that some have refused home inspections to gain an advantage with sellers.

It is kind of him to make my point for me because the more cash-only buyers there are the more my case that house prices should be in the inflation index gets strengthened.

It is hard not to have a wry smile as we note he is not bothered much about the poor buyers who may be over paying but instead focuses his concern on the precious.

“You don’t want a lot of glut in the housing market,” Rosengren said. “I would just highlight that boom and bust cycles in the real estate market have occurred in the United States many times, and around the world, often as a source of financial stability concerns.”

A Problem

This comes from Fed policy which has been at the minimum house price friendly. The most explicit form of this is below and the emphasis is mine.

 In addition, the Federal Reserve will continue to increase its holdings of Treasury securities by at least $80 billion per month and of agency mortgage‑backed securities by at least $40 billion per month until substantial further progress has been made toward the Committee’s maximum employment and price stability goals.

The Fed has been chomping away on these and now owns some US $2.35 trillion dollars worth. Even in these inflated times that is a lot of money and as to its effect let me take you back to January 2009 and the then Chair Ben Bernanke.

 Notably, mortgage rates dropped significantly on the announcement of this program and have fallen further since it went into operation.  Lower mortgage rates should support the housing sector.

That is as near as we will get to an official admission that the plan was to sing along with Elvis Costello.

Pump it up, until you can feel it
Pump it up, when you don’t really need it

These days the official Fed statement is much more euphemistic and circumspect.

These asset purchases help foster smooth market functioning and accommodative financial conditions, thereby supporting the flow of credit to households and businesses.

Taper Talk

We remain in the dance where they are talking about possibly doing something at some unspecified date.

Federal Reserve officials are now beginning to discuss reducing bond purchases. “When appropriate” to begin that process, Rosengren said, purchases of mortgage-backed securities should be reduced at the same rate as Treasury purchases. This means that direct support for housing finance will end more quickly.

“This means that we will stop buying MBS before we stop buying Treasuries,” he said.

So he would reduce the programmes dollar for dollar which adds another level to this as rather than simply stopping purchases he would start to turn the tap off. So this saga seems set to run and run which is revealing. Maybe we might reach the end of the beginning this year.

Given the rapid recovery, Rosengren said, “It is likely that the conditions to consider whether we have made more substantive progress before the start of next year will be met.”

We finish with that central banking standard of the two-handed economist.

“There is a great deal of uncertainty in the forecast,” Rosengren said. Some people will grow very fast [and] The terms of the tightening policy may apply sooner. And other people will think the recovery will be a little slower.”


This is what you call a hot potato. The US Federal Reserve threw everything it had at the US housing market in March 2020 and is now being forced to at least acknowledge the consequences. It can no longer get away with only pointing to claimed wealth effects as many see this.

U.S. households added $13.5 trillion in wealth last year, according to the Federal Reserve, the biggest increase in records going back three decades. Many Americans of all stripes paid off credit-card debt, saved more and refinanced into cheaper mortgages. That challenged the conventions of previous economic downturns. In 2008, for example, U.S. households lost $8 trillion.

Through this lens.

More than 70% of the increase in household wealth went to the top 20% of income earners. About a third went to the top 1%……..The Americans who gained the most during 2020 were the ones who had much more wealth to begin with. Houses, stocks and retirement accounts—which wealthier people are more likely to own—soared in value, and those boosts are likely to endure.

From that we can answer my question at the top of this piece. We have yes to the boom but the Federal Reserve response to any bust will be “over my dead body” which means that they have made the same mistake as they did in the credit crunch.

We’re caught in a trap
I can’t walk out
Because I love you too much, baby ( Elvis Presley)


A different tack this week as I was interviewed by Jana Hlistova for The Purse Podcast.




Euro area house prices surge to new records

The European Central Bank ( ECB) finds itself between something of a rock and a hard place at the moment. For a while things were relatively easy as it eased monetary policy and went with the flow. But due to the nature of the Euro area economy it has found the phases of reversing course and tightening policy more difficult. If we look back as far as 2010/11 there were the two interest-rate increases which then collided with the Euro area crisis. More recently we saw the end of the QE programme at the end of 2018 which only lasted until the autumn of 2019 when Mario Draghi restarted it as a leaving present to his replacement Christine Lagarde. In itself that was an issue as he was effectively setting monetary policy for her first year or so allowing her to gain an understanding of her newr ole. That plan however was torpedoed by the Covid-19 pandemic,

Now the ECB looks across the Atlantic as the US Federal Reserve tries to negotiate a change of emphasis whilst facing its own problems. President Lagarde found herself under fire on a familiar issue on Monday in the European Parliament.

Christine Lagarde, the ECB’s president, was questioned about the risks in the housing market at a hearing in the European Parliament on Monday.
“Young people and middle-class families are forced to participate in a rat race, overpaying in an overheated housing market,” said Michiel Hoogeveen, a Eurosceptic Dutch MEP. “This is one of the consequences of your generous money creation and low interest policies to keep weaker eurozone countries afloat.” ( Financial Times )

It is typical FT to add the “Eurosceptic” moniker as everyone faces the same house prices. Yesterday in fact brought us up to date on the state of play in the Netherlands.

Dutch House Price Boom

In May 2021, owner-occupied dwellings (excluding new constructions) were on average 12.9 percent more expensive than in the same month last year, representing the largest increase since May 2001.  ( Statistics Netherlands)

This has created a new record high although as you can see that is tucked away a bit.

House prices reached a low in June 2013; they have followed an upward trend since then, reaching a new record level in May 2021. Compared to the low in June 2013, house prices were 66.8 percent higher on average in May.

The June 2013 low is revealing because we see that date as being a pretty consistent turning point for many housing markets around the world. But returning to the Netherlands we see that house price growth has been over 5% for several years now. That is awkward for ECB apologists because it acted to pump things up when prices were already really rather heated. Indeed if we look at the timing of ECB action this is rather revealing from the Dutch statisticians.

 The price rise moderated in 2019 but picked up again in 2020

We could add and accelerated in 2021.

The Lagarde Response

The first response to a problem is invariably a denial and according to the FT that is what we got.

In response, Lagarde said there were “no strong signs of [a] credit-fuelled housing bubble in the euro area as a whole” but she added that there were “residential real estate vulnerabilities” in some countries and some cities in particular.

As you can see she was already trying to protect herself and the next stage in that is to deflect the blame onto someone else.

“The disconnect between housing prices and broader economic developments during the pandemic entails the risk of price corrections,” Lagarde said, calling for macroprudential policies — such as national limits on mortgage lending — to be “designed carefully”.

What has raised house prices?

We see another denial and with house prices rising like they are it is hard not to laugh at the use of “potential side effects”

Lagarde: Negative interest rates have often been criticised because of their potential side effects. Our assessment continues to be positive as the benefits continue to outweigh the costs. ( @lagarde)

Just as a reminder the Deposit Rate is at -0.5% and banks can access funding via the TLTROs at -1%, and they have been accessing it.

Decent ECB TLTRO take-up of €110bn (8th such operation, with two more to go). Total TLTRO rising to €2190bn (€2216bn including PELTROs). ( @fwred)

Sorry for the alphabetti spaghetti, but the point here is that we have seen credit easing on a large scale and the UK experience is that the road is paved with denials but it is a road which leads to the housing market.

Then there is all the QE bond buying with an extra 1.85 trillion Euros ( PEPP) added to the pre-existing 20 billion a month.

The ECB view

It was no surprise to see a report on this issue but even the ECB cannot avoid stating this.

 Year-on-year house price growth increased from 4.3% at the end of 2019 to stand at 5.8% in the last quarter of 2020 – the highest growth rate since mid-2007.

They have a good go at hiding it by translating it into central banker speak though.

Aggregate euro area house price dynamics have remained robust during the coronavirus (COVID-19) pandemic.

The first tactic is to point the blame at some thereby excluding others.

Germany, France and the Netherlands accounted for around 73% of the total increase in the last quarter of 2020 (Chart A), which is more than their weight in the overall house price index.

For the more thoughtful there is the clear implication that ECB policy is not one size fits all as they are effectively telling us policy has been too loose for Germany.

In the case of Germany, the positive contribution to euro area house prices started in mid-2010, also reflecting some catching up after a period of subdued house price developments.

But whatever the intellectual twists and turns they cannot avoid eventually agreeing with me.

Third, loans for house purchase continued to grow in 2020 and financing conditions remained favourable, with the composite lending rate for house purchase at an all-time low of 1.3% at the end of 2020.

Note they place it third though! After all the author Moreno Roma has a career to think of.

The hext effort to divide and conquer hits an inconvenient reality.

The recent resilience of the housing market appears to be broad-based and not limited to capital cities.

Also the trend seen in the UK of a move towards the country may also be in play although so far the numbers are low.

According to ECB estimates, in the course of 2020, euro area house prices in selected capital cities increased 0.7 percentage points less, year on year, than the euro area aggregate……. The observed rise in house prices outside capital cities may also reflect a preference shift associated with increased possibilities for working from home.


There is quite a bit to consider here and the ECB will have been doing this at its retreat in the hills near Frankfurt last weekend. We have looked at a signal of inflation today and it is not the only one. Let me hand you over to the Markit PMI report from this morning.

Average prices charged for goods and services
meanwhile rose at by far the fastest pace since
comparable data for both sectors were first
available in 2002, with prices rising in each sector
at rates not exceeded for approximately two

Inflation is on the march above and below we are told more is on the way.

Average input prices rose at a rate exceeded only
once (in September 2000) over the 23-year survey
history. A record increase in manufacturers’
material prices was accompanied by the steepest
increase in service sector costs since July 2008,
the latter reflecting widespread reports of higher
supplier prices, increased fuel and transport costs
plus rising wage pressures.

Some might think this is a clear signal of what to do next for an inflation targeting central bank which is supposed to look around a couple of years ahead. But instead we get this.

Lagarde: Inflation has picked up over recent months in the euro area, largely owing to temporary factors, including strong increases in energy prices. Headline inflation is likely to increase further towards the autumn, continuing to reflect temporary factors.

If we return to the subject of including owner-occupied housing in the inflation measure it is quite a hole. I still recall ECB chief economist Lane telling us up to a third of expenditure went on an area ignored by the inflation numbers. But caution is the watch word because as recently as 2018 the ECB abandoned the plans to do so after wasting a couple of years or so of those of us following its progress.

UK Inflation posts a warning as it rises above target

Today has brought something of an inflation warning for the UK as we note this from earlier.

The Consumer Prices Index (CPI) rose by 2.1% in the 12 months to May 2021, up from 1.5% to April; on a monthly basis, CPI rose by 0.6% in May 2021, compared with little change in May 2020.

The first thing to note is the monthly increase of 0.6% which means that we have now gone 0.3%, and 0.6% twice which is a signal of acceleration in inflation. That is I think more significant than the 2.1% reading although it does have significance for the Bank of England. If you heard a loud sigh of relief from Threadneedle Street this morning it will have been from Governor Andrew Bailey who now looks to be clear of the phase when he had to write an explanatory letter for inflation being more than 1% below target. However it does present a problem because this afternoon the Bank will but another £1.15 billion of UK bonds to boost UK inflation. That is now somewhat awkward when it is boosting inflation which is above target.

Continuing the theme of inflation above target there are these two variants of the inflation measure.

The annual rate for CPI excluding indirect taxes, CPIY, is 3.8%, up from 3.2% last month…….The annual rate for CPI at constant tax rates, CPI-CT, is 3.8%, up from 3.2% last month.

I point this out continuing the Bank of England theme because they have been keen on using such variants in the past when they fit their views. So I will leave it to your imagination whether they will be pointing this out! As a matter of fact UK inflation would be quite a bit above target without the temporary tax cuts. Maybe not the full amount as these things are not always fully passed on but it would be over 3%.

What is driving the move?

The biggest factor was transport.

where prices rose by 0.3% between April and May 2021, compared with a fall of 1.0% between the same two months of 2020. The effect was principally from motor fuels, with the price of petrol rising by 1.7 pence per litre this year, compared with a fall of 2.8 pence per litre a year ago as prices reached a four year low of 106.2 pence per litre in May 2020. Similarly, diesel prices rose by 1.5 pence per litre this year,

Next comes two categories which have proven very difficult to measure over time.

There was also a large upward contribution of 0.15 percentage points from recreation and culture, where prices rose by 1.2% between April and May 2021, compared with a fall of 0.1% between the same two months a year ago.

This is because the main movers here were computer games and music ( downloads and CDs) where this happens.

It is equally likely to be a result of the CDs, DVDs, music downloads and computer game downloads in the relevant bestseller charts. Price movements for these items can often be relatively large depending on the composition of these charts.

That is not well explained. Essentially prices are high when in the charts but are then discounted heavily and that is not easy to capture properly in an inflation measure. That principle applies to the next category where the advent of ever more fashion clothing with newer retailers like Primark reacting fast means prices can go from (relatively) top dollar to being discounted very quickly.

The rise this year has been influenced by a fall in the amount of discounting recorded in the dataset between April and May,

So with that warning we have this.

Clothing and footwear contributed 0.13 percentage points to the change in the CPIH 12-month inflation rate. Prices, overall, rose by 2.3% between April and May this year, compared with a smaller rise of 0.3% between the same two months a year ago

The Trend

The moves in producer prices have been harbingers of the consumer inflation rise and the beat goes on.

The headline rate of output prices showed positive growth of 4.6% on the year to May 2021, up from positive growth of 4.0% in April 2021.

The headline rate of input prices showed positive growth of 10.7% on the year to May 2021, up from positive growth of 10.0% in April 2021; this is the highest the rate has been since September 2011.

Some of the move is the result of the plunge in oil prices last year.

Petroleum products had the highest annual growth rate of any component of output prices in May 2021, at 67.0%

However if we bring things up to date we see that right now the price of crude oil is rising again. Yesterday for example the price of a barrel of Brent Crude Oil went above US $74 yesterday for the first time since April 2019. As we look around we see some things going the other way as Lumber for example has fallen back somewhat after the surges we saw in previous weeks and months. But in terms of the overall picture the 1.1% monthly rise in UK input inflation continues the 2021 trend of it being around 1% every month. So as Hard-Fi put it.

Pressure, Pressure, Pressure
Feel the pressure

Housing Costs

This area continues to be quite a problem. So let me start with what is officially claimed to be the most comprehensive measure of UK inflation.

The Consumer Prices Index including owner occupiers’ housing costs (CPIH) rose by 2.1% in the 12 months to May 2021, up from 1.6% to April…….On a monthly basis, CPIH rose by 0.5% in May 2021, compared with little change in May 2020.

It’s problem is the bit which is claimed to make it so comprehensive.

The OOH component annual rate is 1.5%, up from 1.4% last month. ( OOH = Owner-Occupiers Housing )

There are probably amoeba on Jupiter smelling a rat here because the issue of rising house prices has been in the news everywhere. Indeed it has been official policy to pump them up via the Stamp Duty Cut for example. Even the official house price series illustrates that.

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

Average house prices increased over the year in England to £268,000 (8.9%), in Wales to £185,000 (15.6%), in Scotland to £161,000 (6.3%) and in Northern Ireland to £149,000 (6.0%).

So if we take a broad sweep we see that house price rises of 10% or so become the much more friendly 1.5% or so via the use of Imputed Rents. They assume owners pay themselves rents in a methodology which is going spectacularly wrong all around the world right now. It is amazing that it has not been questioned more. There is a British spin to this because our official statisticians have so little faith in the reliability of the rental data they collect they “smooth” it. This means that the number above is really last years rents rather than May’s.


We are receiving something of an inflation warning in the UK as we note that we have nudged above the 2% target and would be above 3% without the indirect tax cuts. Another way of putting this is to replace the fantasy imputed rents in the official measure CPIH with a something which is paid which is house prices. Doing so gives a 3.5% reading if you use current house prices.

The irony is this means that our past measure of inflation the Retail Price Index is giving a better guide to the state of play.

The all items RPI annual rate is 3.3%, up from 2.9% last month……..The annual rate for RPIX, the all items RPI excluding mortgage interest payments (MIPs), is 3.4%, up from 3.2% last month.

If we take an international perspective we can be grateful that for once we are not at the front of the pack. Why is the US at 5%.If we put aside different measures.  Looking into it the rise in the price of “Gasoline” is much more marked there due to lower taxes as it is up 56%. Also used car prices have surged (29.7%) and that is different to our experience. Yes we have a marked monthly rise ( 1.2% in May) but it only has a weight of 0.12% so the impact is minor. Also the stronger period for the UK Pound £ has helped this year.

Meanwhile perhaps Scotland has given us a clue about what might happen when the Stamp Duty Cut full expires.

The slowdown in house price growth in Scotland may have been driven by the end of the Land and Buildings Transaction Tax holiday on 31 March 2021.


The UK inflation debate is heating up

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

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

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

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

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

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

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

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

The next bit meshes several arguments together.

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

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

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

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

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

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

Finally we end as we started.

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

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

Andy Haldane

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

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

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

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

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

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

This bit is really rather confused.

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

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

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

The final punchline according to Reuters was this.

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


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

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

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

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

Ignoring house prices halves the UK inflation rate

So far on our economic journey through 2021 we have seen warning signs for inflation ahead but they have mostly passed the official UK consumer inflation measures by. However as I pointed out on the 21st of April there was a sign of trouble brewing.

The UK gets an inflation warning from producer prices (5.9%)

Also there has been the issue of house prices where we have seen several different measures suggest it is around 8% and one as high as 12%. Of course they are kept out of the official consumer inflation measures so they can be claimed as wealth effects.

This morning brought the beginning of a change as the producer price numbers start to filter in.

The Consumer Prices Index (CPI) rose by 1.5% in the 12 months to April 2021, up from 0.7% growth to March; on a monthly basis, the CPI rose by 0.6% in April 2021, following a 0.3% increase in March 2021.

The reasons for the move are below.

This compares with a fall of 0.2% in April 2020. Again, price movements for household utilities and clothing are the main reasons for the higher monthly rate this year than a year ago.

Clothing and footwear rose by 2.4% on the month and food rose by 0.8% with the latter affected by these.

Due to bread and cereals; and sugar, jam, syrups, chocolate and confectionery; and, to a lesser extent, milk, cheese and eggs.

Maybe the chocolate issue was a forerunner of the apparent shortage of flake bars to put in a “99” ice cream, although the UK weather is presently doing its best to reduce demand for them as well. The household utilities issue is mostly electricity and gas which rose by 8.3% in the month presumably in response to the rise in the government’s price cap. As someone just ending a one year fix in this area I can vouch for the fact that there has been a substantial price rise this year.

There are other measures which further highlight the issue.

The annual rate for CPI excluding indirect taxes, CPIY, is 3.2%, up from 2.3% last month…….The annual rate for CPI at constant tax rates, CPI-CT, is 3.2%, up from 2.4% last month.

Whilst they assume 100% pass through of the tax changes which is the maximum even if we discount that we can expect a solid rise in CPI inflation as the tax cuts expire.

Retail Price Index

This is a measure which is discouraged by our official statisticians and we see  part o the reason below.

The all items RPI annual rate is 2.9%, up from 1.5% last month…….The annual rate for RPIX, the all items RPI excluding mortgage interest payments (MIPs), is 3.2%, up from 1.6% last month.

The first reason for it being officially discouraged is the fact that it gives a higher reading. This matters for more than you might think because consumer inflation goes into the GDP economic growth numbers and replacing RPI with CPI has given it a boost of up to 0.5%. Also from the point of view of the Bank of England we see that the targeted measure at 3.2% is some 0.7% above what was its target (2.5%). This would have given a rather different perspective on monetary policy and the questioning of the Bank of England by the Economic Select Committee of the House of Lords yesterday afternoon.

Housing Costs

There is a hint of the issue here from the RPI breakdown which tells us it rose 0.09% more than CPIH in April due to depreciation ( house prices). This is another reason it is disliked by the establishment as they do their best to hide this issue. Let me explain via their preferred measure.

The Consumer Prices Index including owner occupiers’ housing costs (CPIH) rose by 1.6% in the 12 months to April 2021, up from 1.0% growth to March.

Sounds good doesn’t it but it is misleading because they do not actually measure owner occupied housing costs. For example they have released one of them today.

UK average house prices increased by 10.2% over the year to March 2021, up from 9.2% in February 2021; this is the highest annual growth rate the UK has seen since August 2007…….Average house prices increased over the year in England to £275,000 (10.2%), in Wales to £185,000 (11.0%), in Scotland to £167,000 (10.6%) and in Northern Ireland to £149,000 (6.0%).

As you can see house prices are on fire and you are probably wondering how they can be in an overall number which is only 1.6%. Easy they use something else.

Private rental prices paid by tenants in the UK rose by 1.2% in the 12 months to April 2021, down from 1.3% in the 12 months to March 2021.

But owners do not pay rent Shaun! Correct but in terms of economic theory this is supposedly the same thing as if they did. Except it is not the same because at the moment there is a gap of just under 9% per annum between the two. This is significant because this is a large component of CPIH.

Given that the owner occupiers’ housing costs (OOH) component accounts for around 19% of the CPIH, it is the main driver for differences between the CPIH and CPI inflation rates.

So if you replace the assumed or imputed price with a real price (house prices) you get a CPIH of around 3.3% which is very different to what has been published today.

This attempt to mislead people was in play only last week when in an official online Zoom seminar Dr.Martin Weale who used to be at the Bank of England spoke about Imputed Rents being paid. When I challenged him about this he did not reply.

Looking Ahead

The amber signal we observed last month from producer prices has continued  this month and perhaps with a dash of red.

The headline rate of input prices showed positive growth of 9.9% on the year to April 2021, up from positive growth of 6.4% in March 2021, this is the highest the rate has been since February 2017.

So the increases in the oil price and other commodities is impacting pretty much as we have been expecting.

Transport equipment, and metals and non-metallic minerals provided the largest upward contribution to the annual rate of output and input inflation respectively.

The more eagle-eyed amongst you will have spotted that March was revised up by 0.5%. We also see it feeding into output prices.

The headline rate of output prices showed positive growth of 3.9% on the year to April 2021, up from positive growth of 2.3% in March 2021.


This is a saga we have seen before. Like a remake of a film. There has been a consistent effort to under record inflation. I do not mean at the level of many statistician’s who do their best to get the numbers right. I mean at the definitions in the first place as we see 19% of the official measure is a number that is a fantasy and one at the moment is running at a rate some 9% below what an actual number is increasing at.

Thus on any sensible and realistic measure UK inflation is now over target and probably by enough to mean the Bank of England Governor would have to write an explanatory letter. The mess above means he has been writing ones explaining why it is too low.

Oh what a tangled web we weave/When first we practice to deceive ( Sir Walter Scott)

Looking ahead I see two clear trends of which the first is the push from commodity inflation which is still around. Indeed even the Governor of the Bank of England implicitly admitted that yesterday. The other is that once the Stamp Duty holiday ends ( 30th June) we should see house price inflation fade. But the catch with the latter is that house prices are 10% more expensive or even more unaffordable.

Of course if you actually believe wage growth is 9.8% as we were told yesterday then this is much less of a problem.

“Alice laughed. ‘There’s no use trying,’ she said. ‘One can’t believe impossible things.’

I daresay you haven’t had much practice,’ said the Queen. ‘When I was your age, I always did it for half-an-hour a day. Why, sometimes I’ve believed as many as six impossible things before breakfast.  ( Lewis Carroll)

Oh and I get asked regularly on social media why I support a firmer UK Pound £. Well right now is an example as its rally is helping with the inflation issue.

The Federal Reserve should be challenged about US house price growth of 12%

Yesterday brought news that would have had staff at the US Federal Reserve running to the office of Chair Jerome Powell in the hope of being the first to tell him about it.

The S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index, covering all nine U.S. census divisions, reported a 12.0% annual gain in February, up from 11.2% in the previous month. The 10-City Composite annual increase came in at 11.7%, up from 10.9% in the previous month. The 20-City Composite posted an 11.9% year-over-year gain, up from 11.1% in the previous month………Before seasonal adjustment, the U.S. National Index posted an 1.1% month-over-month increase, while the 10-City and 20-City Composites both posted increases of 1.1% and 1.2% respectively in February.

Chair Powell would have smiled benevolently and would have appreciated this addition.

Phoenix, San Diego, and Seattle reported the highest year-over-year gains among the 20 cities in February. Phoenix led the way with a 17.4% year-over-year price increase, followed by San Diego with a 17.0% increase and Seattle with a 15.4% increase. Nineteen of the 20 cities reported higher price increases in the year ending February 2021 versus the year ending January 2021.

So the gains are broad based and in fact are the best that have been seen for some time.

More than 30 years of S&P CoreLogic Case-Shiller data help us to put February’s results into historical
context. The National Composite’s 12.0% gain is the highest recorded since February 2006, exactly 15
years ago, and lies comfortably in the top decile of historical performance.

There is an obvious issue here in this taking place in a pandemic when the economy has taken a large step backwards. If we look forwards to March I see that Zillow are telling us this.

Already rising at a blistering pace, home price appreciation pressed higher in February as competition for housing remained red hot……… Annual growth is expected to accelerate across the board.

They expect an annual rate of growth of 12.8% when the March data is released caused by factors like these.

As more signs emerge that the economy’s recovery is gathering steam, a wave of eager buyers – many of them seeking their first home purchase – remain determined to find their next home. But with relatively few for-sale homes on the market, bidding wars have become increasingly common, pushing sale prices higher and leading homes to sell at a record pace. In the near-term, it appears unlikely that these upward price pressures will relent meaningfully, particularly as recent retreats in mortgage rates offer many home shoppers increased buying power.

According to Mortgage News Daily the retreats in mortgage rates have continued this month as well.

Mortgage rates have fallen almost every single day in April…….To be fair, sub-3% rates are currently available–especially for purchases–but they’re the exception.  The average lender is closer to 3.125% on refi transactions, and 3.25% for cash-out refis.  Well-qualified borrowers who are willing to pay points (aka, higher closing costs in exchange for a lower rate) can easily get under 3%.


If we now switch to the most followed inflation number for the US we were told this by the Bureau of Labor Statistics.

In March, the Consumer Price Index for All Urban Consumers rose 0.6 percent on a seasonally adjusted basis; rising 2.6 percent over the last 12 months, not seasonally adjusted.

Believe it or not and after reading that house price rises are in double-digits it is likely to be not the official increase in housing inflation called Shelter is officially recorded at 1.7%. We can refine that further because 24% of the US CPI reflects owner occupied housing costs and they assume that home owners pay rent to themselves and they record this rent as rising at 2%. As you are no doubt already thinking they do not pay themselves rent but of course at some point that will have paid to buy the property.

Anyway as the numbers roll out we see that using house prices rather than fantasy rents would give us a US CPI of 5%. Actually if Zillow are right about March slightly higher. But the principle remains that this measure of US inflation would have people knocking on the US Federal Reserve’s door demanding to know why this was still policy?

First, the Committee expects to delay liftoff from the ELB until PCE inflation has risen to 2 percent and other complementary conditions, consistent with achieving this goal on a sustained basis, have also been met.

Second, with inflation having run persistently below 2 percent, the Committee will aim to achieve inflation moderately above 2 percent for some time in the service of keeping longer-term inflation expectations well anchored at the 2 percent longer-run goal. ( Vice Chair Clarida)

Effective Lower Bound ( ELB) sounds so much more scientific that 0% ( strictly ~0.1% ) doesn’t it? You could add that it does not address the places with negative interest-rates with Switzerland some 0.85% below it. But as you can see arguing that inflation is persistently below target would simply not be possible with CPI at 5%.

Just for clarity the Federal Reserve targets the inflation measure based on Personal Consumption Expenditures or PCE.  Why? Well it does run around 0.4% lower on average. In terms of adjusting it for house prices it is less detailed than the CPI, but if we put in a weighting of 10% for owner-occupied housing then using house prices puts it at 2.6% or above target.

The Economy

We will get the official US GDP reading tomorrow but the New York Fed  now cast tells us this.

The New York Fed Staff Nowcast stands at 6.9% for 2021:Q1 and 4.6% for 2021:Q2. ( annualised numbers)

President Biden seems set to keep pumping up government spending although the outright stimulus plans seem to be changing. Now I note he is saying policies will be funded with taxes. Whilst most well welcome the plan to reverse some of the tax benefits given to the most wealthy that often turns out to be easier said than done.


Part of the issue here is how the establishment has managed to manipulate the debate so that official numbers do not reflect reality. Thus house price rises are presented as wealth effects ignoring the fact that those who actually gain ( sellers and those withdrawing equity) are relatively few. Whereas those entering the market or buying a larger property are facing inflation which is ignored. According to Case-Shiller there is a lot of the latter going on.

many of them seeking their first home purchase

There are many consequences to this such as the young facing a future of rent rather than owning in many cases. But if we return to the US Federal Reserve we see that if we start using real prices to measure inflation rather than imputed or fantasy ones it should now be tightening policy. Instead it seems to make the credit crunch mistake which is to wait and wait rather than look ahead as it is supposed to.

There have been other regular hints about policy. From Yahoo on Monday.

The S&P 500 ticked up to narrowly eke out a record high.