Imputed Rents do their job of slowing rises in UK inflation

Today we find ourselves reviewing the data on the rise in inflation in the UK in 2017. This has been caused by a couple of factors. The first is something of a world-wide trend where the price of crude oil stopped falling and being a disinflationary influence. The second has been the fall in the value of the UK Pound which accelerated following the vote for the UK to leave the European Union just over a year ago. If we look back a year then the current US $1.269 has replaced the US $1.411 back then. So the inflation which was supposedly dead ( if you recall the Deflation hype and paranoia..) came back on the menu.

The UK establishment responds

If you do not want the public to realise that inflation is rising but do not wish to introduce any policies to stop it then the only option available to you is to change the way the numbers are measured. Last Autumn the UK statistical establishment began quite a rush to increase the use of rents in  a new headline UK inflation measure. There is of course a proper use for rents which is for those who do rent, however the extension was for those who own their house and do not actually rent it out. So yes imputed rents were required to fill the gap. Here is the official explanation.

However, it does not include the costs associated with owning a home, known as owner occupier housing costs. ONS decided that the best way to estimate these costs is a method known as ‘rental equivalence’. This estimates the cost of owning a home by calculating how much it would cost to rent an equivalent property. A new index based on CPI but including owner occupier housing costs – CPIH – was launched in 2013.

How has that gone?

This new index had some problems in 2014,

Also there is this.

We have still not yet addressed all of the necessary requirements for CPIH to become a national statistic.

So why the rush? Well last week’s numbers on rents from Homelet will have raised a wry smile for many.

UK rental price inflation fell for the first time in almost eight years in May, new data from HomeLet reveals. The average rent on a new tenancy commencing in May was £901, 0.3% lower than in the same month of 2016. New tenancies on rents in London were 3% lower than this time last year…..May’s decrease in average rental values marks a significant moment for the rented property sector. This is the first time since December 2009 the HomeLet Rental Index has reported a fall in rents on an annualised basis.

So rents were rushed in as part of the “most comprehensive measure” of UK inflation just in time for them to fall! Those who believe that rental inflation is related to wage growth will no doubt be thinking that wage growth and hence likely rental growth is lower these days. This is all rather different to house prices where lower mortgage rates can set off more price rises and inflation. I have met those responsible for this and pointed out that the word “comprehensive” is misleading as they do not actually measure the owner occupied housing market they simply impute from the rental one.

Today’s data

We see this.

The Consumer Prices Index (CPI) 12-month rate was 2.9% in May 2017, up from 2.7% in April………The Consumer Prices Index including owner occupiers’ housing costs (CPIH, not a National Statistic) 12-month inflation rate was 2.7% in May 2017, up from 2.6% in April.

So not only is the new measure again below the older one we see that the gap has now widened from 0.1% to 0.2%. As the difference must be the imputed rental section let us take a look.

Private rental prices paid by tenants in Great Britain rose by 1.8% in the 12 months to May 2017; this is unchanged from April 2017.

As you can see whilst the official data does not have the falls indicated by Homelet it is a drag on the overall inflation measure. Sir Humphrey Appleby would have a broad smile on his face right now. Oh and the reason why it is not showing falls is that the numbers are what might be called “smoothed”. The actual monthly  numbers are quite erratic ( which of course would lead to doubts if people saw them) so in fact the numbers are over a period of time and then weighted. The ONS has been unwilling to reveal the length of the period used but it used to be around 18 months. This is of course another reason why this methodology is flawed and a bad idea because rents from a year ago should be in last years indices not this months.

I have argued for a long time ( this debate began in 2012) that house prices should be used as they are of course actually paid rather than being imputed. Also they behave very differently to rents as a pattern and are more timely which is important. So what are they doing?

Average house prices in the UK have increased by 5.6% in the year to April 2017 (up from 4.5% in the year to March 2017).

As you can see house price inflation is currently treble that of rental inflation. Can anybody think why the UK establishment wanted rents rather than house prices used in the consumer inflation measure?

Our past measure

The Retail Price Index used to be used in the UK.

The all items RPI annual rate is 3.7%, up from 3.5% last month.

So the pattern of higher inflation measures being retired continues. Although it does at least serve two roles. The first is for indexation of things people pay such as mobile phone bills as my contract rises by it as of course do student loans. The second is for the indexation of Bank of England pensions where it seems strange that the establishment attack on RPI somehow got forgotten

Looking ahead

Fortunately we see that the main push is beginning to fade.

The annual rate of factory gate price inflation (output prices) remained at 3.6% for the third consecutive month and slowed on the month to 0.1%, from 0.4% in March and April……….The annual rate of inflation for materials and fuels (input prices) fell back to 11.6% in May, continuing its decline from 19.9% in January 2017 following the recent strength of sterling.

There is still momentum to push the annual rate of inflation higher which will not be helped if the post General Election dip in the value of the UK Pound persists. But the main push has now been seen. We should be grateful that the price of crude oil is around US $48 per barrel in Brent Crude terms.

Comment

The latest attempt by the UK establishment to “improve” the UK measurement of consumer inflation is being shown up for what it is, an attempt to manipulate the numbers lower. I guess things we receive will no longer be indexed to CPI they will be switched to CPIH! Also will the Bank of England switch its inflation target? If so it will complete a journey which has lowered the measure from 3.9% ( where what is called RPIX now is) to 2.7% or a 1.2% change when the target was only moved by 0.5%. In these times of lower wage rises, interest-rates and yields then 0.7% per annum matters quite a bit over time.

An answer to this would be to put the asset price which the Bank of England loves to inflate, house prices, in the inflation index. Let me leave you today with the price of a few basic goods if they had risen in line with them.

 

As I am off later to buy a chicken for dinner I am grateful it has not risen at such a rate.

UK Inflation continues its ascent in spite of the measurement “improvements”

Today we will find ourselves updated on the latest official data for UK inflation. Sadly we will see it move further above target and there have been two main drivers of this. Firstly it is the fact that the price of oil stopped falling. This will impact on April’s inflation data as the price of a barrel of Brent Crude Oil was around US $10 per barrel higher than in the same month last year. Here is the Office for National Statistics on the subject.

Oil rose further above $55 (44.22 pounds) a barrel, supported by another shutdown at Libya’s largest oilfield and heightened tension over Syria. Libya’s Sharara oilfield was shut after a group blocked a pipeline linking it to an oil terminal, a Libyan oil source said. The field had only just returned to production, after a week-long stoppage ending in early April. Brent crude LCOc1, the global benchmark, rose 48 cents to $55.72, not far from the one-month high of $56.08. U.S. crude CLc1 was up 37 cents at $52.61.

In addition the next factor then arrives which is the lower level of the UK Pound £ which spent much of last April in the mid US $1.40s compared to the mid US $1.20s this year. Actually later this April the UK Pound £ rose to the current level of around US $ 1.29 so the exact annual difference depends a fair bit on which day in the month is used  but the underlying issue is that the cost will have risen. For the price of crude oil there is a double whammy effect as the two changes combine. Also it impacts on domestic fuel costs although the two main rises in April ( SSE and E.ON ) were on the 26th and 28th of the month so are more likely to be in the May data.

The UK Budget will also give prices an upwards nudge.

The measures that will be implemented in the financial year ending 2017 are estimated to increase the CPIH 1-month rate by approximately 0.16 percentage points, the CPI 1-month rate by approximately 0.18 percentage points and the RPI 1-month rate by approximately 0.23 percentage points.

This compares to 0.04% last year for CPIH and 0.06% last year for RPI.

A Space Oddity

Remember the official campaign against the Retail Price Index measure of inflation saying it does not meet international best practice? It looks like someone has let their greed for higher rises to create a bit of amnesia on that subject.

The March 2017 Budget announced that from 1 April 2017 VED rates will increase in line with the RPI for cars, vans and motorcycles registered between 1 March 2001 and 1 April 2017.

A direct impact

The producer price or PPI inflation measure shows us the impact of the factors analysed above as we look at the impact on input prices.

Crude oil provided the largest contribution of 5.82 percentage points to the annual rate and on the month it provided a contribution of 0.32 percentage points.

The overall picture is as shown below.

The monthly rate of inflation for goods leaving the factory gate (output prices) was unchanged at 0.4% in April 2017, while input prices rose 0.1% following 2 months of no growth….The annual rate for factory gate price inflation was positive but unchanged at 3.6%, while the annual growth rate for input prices fell back to 16.6% from a peak of 19.9% in January 2017.

As you can see some of the input price effect is fading but output prices will continue to be affected and therefore will exert an upwards pull on the consumer inflation indices.

The headlines

These raised a wry smile and I will give you just one example which is from the Press Association which was repeated by many other media and news outlets.

#Breaking Rate of Consumer Price Index inflation rises to 2.7% in April, from 2.3% in March, the Office for National Statistics says

The wry smile was caused by the fact that the new official inflation series is now CPIH and as someone who has led a campaign against it then perhaps more people were listening than I realised. For newer readers the CPIH is where H= Housing Costs, and so far so good. But it all goes wrong when a number is calculated for what houses which are owner-occupied would be rented out for based on Imputed Rent methodology. So a theoretical construct or made up number is used as opposed to actual real world numbers such as mortgage rates and house prices. Oh and the RPI index was downgraded for not being a national statistic whereas CPIH was upgraded for being.

CPIH is not currently a National Statistic.

If we look at the numbers we see that there is another reason to raise a wry smile.

The Consumer Prices Index including owner occupiers’ housing costs (CPIH, not a National Statistic) 12-month inflation rate was 2.6% in April 2017, up from 2.3% in March.

Conspiracy theorists will have noted that it has become the headline measure just in time to give a lower inflation reading than its predecessor! I tend to downplay such thoughts although the rush to make it the new headline measure at the end of last year does give some support to them. After all I was pointing out back then that I expected rents to struggle this year as opposed with what I considered hype from the real estate industry. This is now being borne out by the official data.

Private rental prices paid by tenants in Great Britain rose by 1.8% in the 12 months to April 2017; this is down from 2.0% in March 2017.

So the housing market has arrived in the numbers just in time to lower them after all the years of ignoring it as it surged. Some perspective on this has been provided by the Resolution Foundation today.

Staying with rents the official data is catching up on what has been going on in London which as usual is in the van of any changes.

London private rental prices grew by 1.4% in the 12 months to April 2017, 0.4 percentage points below the Great Britain 12-month growth rate.

If we return to my theme which is that house prices give a much better guide to inflation than rents let me point out that they continue to send a different message. Yes the inflationary burst is fading (good) but compare the number with the one for rents.

Average house prices in the UK have increased by 4.1% in the year to March 2017 (down from 5.6% in the year to February 2017).

Comment

The drumbeat in today’s numbers is that UK inflation is on the rise as was expected on here and that it is not good news. Indeed the news is more disappointing if we look at our old inflation measure.

The all items RPI annual rate is 3.5%, up from 3.1% last month.

With wage and indeed economic growth around 2% per annum the difference  between our old and newer inflation measures becomes more material. It is of course something the Bank of England should be looking into but apart from putting their own pensions in instruments benefitting from the RPI they are shamefully silent on the matter. What we can see is that each “improvement” in consumer inflation methodology seems to result in a lower number whereas other prices surge. I have already looked at house prices but whilst some of it is growth we have to wonder if inflation is also at play in this asset price as well.

The FTSE 100’s recent record breaking run showed no sign of ending as the UK’s main share index hit another record intra-day high.

In morning trade,the index climbed to 42 points, or 0.5% to 7,495.68 – meaning it is up 5% this year.

Vodafone led the way, with the mobile giant’s shares rising 4.1% as investors ignored news of a hefty annual loss and focused on its upbeat outlook.

UK Inflation is hitting the poorest hardest

As we advance on a raft of UK inflation data there has already been a reminder of one of the themes of this website which is that the UK is an “inflation nation” where the institutional bias is invariably one way. From the BBC.

Drivers saw their car insurance premiums rise by an average of £110 in the last year, a comparison site says.

More expensive repairs and recent government changes to injury payouts pushed up annual insurance costs by 16%, according to Confused.com.

It found drivers paid on average £781 on comparison sites for a comprehensive policy in the year to March 2017.

Average premiums are set to rise to a record high and could pass £1,000 next year, it added.

Up,up and away! I guess those pushing for driverless cars will be happy with this but few others. Some of this is that cars are more complex and thereby more expensive to repair but little or nothing was done about the rise in “whiplash” claims and there has been something of a stealth tax campaign.

IPT went up from 6% to 9.5% in 2015, to 10% in 2016, and will rise to 12% in June 2017. ( IPT = Insurance Premium Tax)

Inflation outlook

We get much of this from commodity prices and in particular the price of crude oil. If we start with crude oil it has returned to where it has mostly been for the last few months which is around US $55/6 for a barrel of Brent Crude Oil where the OPEC production cuts seem to be met by the shale oil producers. However today’s data will be based on March where the oil price was around US $5 lower so this is for next month.

Speaking of the price of oil and noting yesterday’s topic of a rigged price ( Libor) there was this on Twitter.

In 2 years oil price/bbl gyrated from $80->$147->$35->$80 while physical demand for consumption varied by less than 3%……..I recommended to Treasury Select Committee in July 2008 a transatlantic commission of inquiry into the completely manipulated Brent market…..I blew the whistle on LIBOR-type oil futures market manipulation in 2000 & lost everything I had. Treasury/FSA were complicit in a whitewash

I have speculated before about banks manipulating the oil price but how about the oil price rise exacerbating the initial credit crunch effect?

One area of interest to chocoholics in particular is cocoa prices as I pointed out last week. If we look at them in detail we see that London Cocoa has fallen from 2546 last July to 1579 with 2% of that fall coming this morning. How many chocolate producers have raised prices claiming increasing costs over the past few months? Even allowing for a lower UK Pound £ costs have plainly fallen here as we wait to see if Toblerone will give us a triangle back! Or will we discover that the road is rather one-way……

We get little of a signal from Dr. Copper who has been mostly stable but Iron Ore prices have moved downwards. From Bloomberg.

Iron ore dropped into bear-market territory, with Barclays analysts pinning the blame on lower demand from China……Ore with 62 percent content in Qingdao fell 1 percent to $74.71 a dry ton on Monday, according to Metal Bulletin Ltd., following a 6.8 percent drop on Friday.

So as we wait to see what the price of crude oil does next some of the other pressure for higher inflation has abated for now. This was picked up on the forward radar for the official UK data today.

Input prices for producers increased at a slower rate in the 12 months to March compared to the beginning of 2017………PPI input price increased by 17.9% in 12 months to March 2017, down from 19.4% in February, as prices remained fairly flat on the month and prices increased in the previous year.

There was also a slight fading of output price inflation.

Factory gate prices (output prices) rose 3.6% on the year to March 2017, from 3.7% in February 2017, which is the ninth consecutive period of annual price growth.

Our official statisticians point us to higher food prices which has been a broad trend.

In the 12 months to February 2017, vegetable prices in the EU 28 countries increased by 12.4% and in Germany they increased by 22.5%.

However whilst this was true this may well be fading a little as well. We had the issues with broccoli from Spain earlier this year but more recently I note there are cheaper prices for strawberries from er Spain. So whilst there was an impact from the lower Pound £ we wait to see the next move.

CPIH 

This is the new headline measure of inflation for the UK although those who remember the official attacks on the Retail Price Index for being “not a National Statistic” will wonder how a measure which isn’t one either got promoted?! Or why it was done with such a rush?

Some may wonder if this news was a factor? From the London Evening Standard a few days ago.

In London, where rents are by far the most expensive in the country, prospective tenants saw prices fall 4.2 per cent year on year………The average cost of renting a home in the UK remained almost the same as at the start of 2016, rising just 1.8 per cent, compared to the 3.9 per cent annual growth recorded a year ago, thanks to a significant increase in the number of properties available.

It does make you wonder if they thought the buy-to let rush of early 2016 might depress rents? Anyway even the official numbers published today are seeing a fading.

Private rental prices paid by tenants in Great Britain rose by 2.0% in the 12 months to March 2017; this is down from 2.1% in February 2017………London private rental prices grew by 1.6% in the 12 months to March 2017, which is 0.4 percentage points below the Great Britain 12-month growth rate.

If London leads like it usually does…

Oh and Scotland is seeing rent disinflation albeit only marginal.

Scotland saw rental prices decrease (negative 0.1%) in the 12 months to March 2017.

So we see that rents are currently a downwards pull on the annual inflation rate.

The all items CPIH annual rate is 2.3%, unchanged from last month.

Whereas if we look at house prices we see this.

Average house prices in the UK have increased by 5.8% in the year to February 2017 (up from 5.3% in the year to January 2017).

The weasel words here are “owner occupied housing costs” which give the impression that house prices will be used without actually saying it. For newer readers this inflation measure assumes the home is rented out when it isn’t and then estimates the rent and uses that.

Comment

Whilst the headline number is unchanged there is a lot going on under the surface. For example the apparent fading of rents means that the new promoted measure called CPIH seems likely to drop below its predecessor or CPI in 2017. However under the surface there are different effects in different groups. Take a look at this from Asda.

The strongest decrease in spending power has been felt by the poorest households, whose weekly discretionary income in February was 18% lower than in the same month before, falling from -£20 to -£23. This implies that the basket of essential products and services is even less affordable than previous year for the bottom income group.

The clue here is the term essential products and services which of course is pretty much what central bankers look away from as for them essential means non core. You could not make it up! But what we are seeing here is the impact of higher fuel and food prices on the poorest of our society. Those economists who call for higher inflation should be sent to explain to these people how it is benefiting them as we wonder if there will be another of these moments?

I cannot eat an I-Pad!

Meanwhile the UK establishment continues its project to obfuscate over housing costs. The whole area is an utter mess as I note that @resi_analyst ( Neal Hudson) has been pointing out inconsistencies in the official price series for new houses. Back months are being quietly revised sometimes substantially.

A challenge to our statisticians

With the modern GDP methodology we see that the explosion in Airbnb activity has had a consequence.

Colin (not his real name) contacted the BBC when he discovered the flat he rents out on Airbnb had been turned into a pop-up brothel.

You see the ladies concerned were no doubt determined to make sure the UK does not go into recession.

Looking at both their ads, some of the rates were about £1,300 a night. So if they were fully booked for the two nights that’s £2,600 each – £5,200 in total.

But as we mull the issue and wonder how our statisticians measure this? There is a link to today’s topic as the inflation numbers ignore this. Meanwhile if there was evidence of drug use as well would they be regarded as a modern version of Stakhanovite workers by the Bank of England? As Coldplay so aptly put it.

Confusion never stops

 

 

Headline UK Inflation or CPIH is an example of official “Alternative News”

Today is inflation data day in the UK and the National Statistician is about to make a major change. Firstly there is a confession to a current omission in the CPI or Consumer Prices Index ( one which is especially important in the UK economy) and then the detail. The emphasis is mine.

However, it does not include the costs associated with owning a home, known as owner occupier housing costs. ONS decided that the best way to estimate these costs is a method known as ‘rental equivalence’. This estimates the cost of owning a home by calculating how much it would cost to rent an equivalent property.

The new headline measure called CPIH is claimed to include owner occupied housing costs but in fact uses the same methodology as used for Imputed Rents. As the renting does not actually happen they have to estimate which as I will come to later has gone badly. The alternative is to measure real costs and prices such as mortgage costs and house prices which not only exist but are understood by most people. So as a critique we start with the simple issue of why use a made up or Imputed concept when you have real prices available?

Sadly the UK Office for National Statistics has become an organisation which does not want debate and instead publishes propaganda or “fake news”. Here is an example.

(CPIH is…) the most comprehensive measure of inflation

As I have explained earlier it omits house prices and mortgage costs which are for many people substantial expenses and whilst I welcome Council Tax being introduced other housing costs are still missed out.

At the Public Meeting to discuss this the statistician John Wood made a powerful case against the change which was to point out why housing was being singled out to be imputed? Here are his words from the Royal Statistical Society online forum.

The CPI is based on acquisition costs, which is not the same as consumption costs for products (such as cars, furniture, electrical goods, jewellery) that are consumed over many years. I asked John Pullinger at the meeting whether ONS was going to apply the rental equivalence principle to such products and the answer was no. He accepted that they should be so treated in principle but ONS was not going to do so for “practical convenience”. So the only product in CPIH that will conform to the consumption principle will be owner occupied housing.

The problem of measurement

I argued when this saga began back in 2012 that the rental series being used was unreliable but was told our official statisticians knew better. What happened next?

ONS needs to take more time to strengthen its quality assurance of its private rents data sources, in order to provide reassurance to users about the quality of the CPIH.

There was an announcement that CPIH had been some 0.2% too low but the principle that the football chant “You don’t know what you are doing” applies as that series was abandoned and a new one introduced. Let me switch to the regulator’s view from last month.

This matter was considered at the UK Statistics Authority’s Regulation Committee at its meeting on 16 February 2017.

At that meeting, the Regulation Committee decided not to confer the National Statistics status of CPIH at this point in time. This is because although considerable progress has been made, ONS has not yet fully addressed some of the Requirements in the Assessment Report, particularly related to comparisons with other sources, explanations of the methods of quality assurance and description of the weights used in the calculation of CPIH.

I was contacted and gave evidence arguing for such a decision and just to give you a flavour I pointed out that there had just been announced a £9 billion revision to the Imputed Rental numbers which added to so many others that the series is now in my opinion a complete mess.

Also how is CPIH now the headline inflation measure when it is “not a national statistic”? Demotion was grounds for removing the RPI so why does this not apply to CPIH?

Smoothing

There is a further problem which is that the UK monthly rental series is erratic and would send out very different messages from month to month. Accordingly each month we do not get that month’s data but a stream from the past to “improve” the data. The first issue is that it is not that month’s data as claimed but this has another problem which is that it takes a long time for changes in the economy to show up ( around 3 years). This is two-fold and the opening effort is that rents take time to respond to economic changes in a way that house prices do not. Next the data is smoothed so it takes even longer to pick it up. What could go wrong here?

Today’s numbers

If we look at the numbers released this morning we would expect our “comprehensive” measure of inflation which now has housing costs or CPIH to push above CPI.

Average house prices in the UK have increased by 6.2% in the year to January 2017 (up from 5.7% in the year to December 2016), continuing the strong growth seen since the end of 2013.

So CPI was?

The Consumer Prices Index (CPI) 12-month rate was  2.3% in February 2017, compared with 1.8% in January.

Should we be nervous before looking at CPIH? Er no…

The Consumer Prices Index including owner occupiers’ housing costs (CPIH, not a National Statistic) 12-month inflation rate was 2.3% in February 2017, up from 1.9% in January.

So owner occupied housing costs make no difference at all? Not only is that embarrassing it comes under the banner of Fake News in my opinion. Actually Torsten Bell of the Resolution Foundation made a good point earlier.

https://twitter.com/TorstenBell/status/843760157494595584

So what is the point of the switch other than to claim you are representing something which you are not?! If we think of the period since the early 1990s the argument that there has been little or no inflation from the housing sector is a very bad joke.

Retail Price Index

This has been dropped from the Statistical Bulletin which is very poor from the UK’s statistical bodies as after all being “not a national statistic” has been no barrier to the advancement of CPIH. Here are the numbers.

The all items RPI annual rate is 3.2%, up from 2.6% last month. • The annual rate for RPIX, the all items RPI excluding mortgage interest payments (MIPs) index, is 3.5%, up from 2.9% last month.

For all the barrage of abuse it has received if you look at UK house prices it continues in my opinion to provide a better snapshot of the UK situation than CPI or CPIH.

Let me also mention the “improved” version or RPIJ which was pushed for a couple of years by our statisticians as it is now RIP for it. More than a few were led up a garden path which now is on its way to be redacted from history.

Comment

Regular readers will be aware that I have been predicting a rise in UK inflation for some time even during the phase when the “deflation nutters” were in full panic mode. Once the oil price stopped falling we were always coming back to this sort of situation and of course there has been the fall in the value of the UK Pound which in my opinion will lead to higher inflation of the order of 1.5%. If we look at today’s producer price numbers with output price rising at an annual rate of 3.7% more of that is on its way, sadly as we now face the fact that real wage growth has ended and will soon be negative even on the official inflation numbers.

Meanwhile as I have given a lot of detail today on the inflation changes let me end with something very prescient from Yes Minister.

Sir Humphrey Appleby: “If local authorities don’t send us the statistics that we ask for, than government figures will be a nonsense.”
James Hacker: “Why?”
Sir Humphrey Appleby: “They will be incomplete.”
James Hacker: “But government figures are a nonsense anyway.”
Bernard Woolley: “I think Sir Humphrey wants to ensure they are a complete nonsense.”

Update 2:45 pm

Someone has a suggestion about why there was such an official rush to include Rental Equivalence in the UK inflation numbers.

With UK inflation heading above target why are we getting more Bank of England QE?

Today we arrive at the latest UK inflation data series and the Bank of England will be facing a situation it has not been in for a while. This is that consumer inflation is now quite near to its official target as the CPI ( Consumer Prices Index) gets near to 2%. This poses yet another question about its policy as we see that the Bank of England is buying another £775 million of UK Gilts today. Even worse these are longs and ultra longs as it will be making offers out into the 2060s. So it will be creating a problem for our children and grandchildren all in the name of boosting an economy which has so far down well and boosting inflation which is now pretty much on target.

Of course the Bank of England thinks that inflation will rise further in 2016 as it explained at its Inflation Report earlier this month.

Beyond that, inflation is expected to increase further, peaking around 2.8% at the start of 2018, before falling gradually back to 2.4% in three years’ time. This overshoot is entirely because of sterling’s fall, which itself is the product of the market’s view of the consequences of Brexit.

The Sterling fall was exacerbated by the policy easing from the Bank of England which drove it lower when the UK economy was already getting a substantial boost. To be specific it was expectations of easing which drove it lower after Governor Carney’s rhetoric promised it and ignored the fact that there are 8 other voting members.

As an aside I await the views of the inflationolholics who want a 4% inflation target such as Professor Tony Yates and Professor Wren-Lewis. No doubt their Ivory Tower models love the inflation rise as their economic models tell them that wages will rise in response although of course the real world is apt to remain so inconvenient and inconsiderate. Of course I suppose Professor Yates has a model which shows he was right when he and I debated monetary policy last September on BBC Radio 4’s Moneybox whereas of course the real world shows exactly the reverse.

Today’s data

Let me first open with an alternative universe.

The annual rate for RPIX, the all items RPI excluding mortgage interest payments (MIPs) index, is 2.9%, up from 2.7% last month.

So this has gone even further above its old target of 2.5% and would now be signalling that it was time for the Bank of England to consider reducing all its monetary stimulus rather than adding to it. No wonder it was scrapped! However we do learn something by looking at the new measure.

The all items CPI annual rate is 1.8%, up from 1.6% in December.

So we immediately learn two things the first is that there is a gap of 1.1% between two measures which are supposed to both measure UK inflation. You will no doubt not be surprised that the lower number has got the official nod or we have seen an “improvement”. But there is the secondary issue of the fact that the target was only changed by 0.5% or less than half. So there was a monetary policy easing that gets little publicity. Some of the difference is that in spite of the fact that mortgage costs are excluded RPIX still has an influence from owner occupied housing costs which the official CPI turns its blind eye to.

What are house prices doing?

Here are the numbers.

Average house prices in the UK have increased by 7.2% in the year to December 2016 (up from 6.1% in the year to November 2016), continuing the strong growth seen since the end of 2013.

Many of you will no doubt be having a wry smile at the way these were moved out of the headline inflation number (2003) just ahead of a boom in house prices. But the UK establishment is about to claim it is including them whilst not actually doing so. I explained in full detail on the 15th of November last year.

There is another issue which the National Statistician has attempted to fudge by writing “the inclusion of an element of owner occupiers’ housing costs”. How very Sir Humphey Appleby! I have noted that many people have reported that house prices are being included but you see they are not. Instead there is a statistical swerve based on the Imputed Rent methodology where they assume house owners receive a rent and then put growth in that in the numbers. The same rental growth measurement that according to their own missives  they need to “strengthen”.

Let us look at this month’s number.

The all items CPIH annual rate is 2.0%, up from 1.7% in December.

Lets is start with the good which is that when it becomes the first measure on the statistical bulletin next month it will give a higher number than the one it replaces. The bad is that if you look at  house prices it is still way behind them because the number it makes up or “imputes” tells us this about housing costs.

The OOH component annual rate is 2.5%, down from 2.6% last month.

Apologies to any first time buyers who are now choking on their coffee or tea. The ugly is that this made up number is not even a national statistic because of their failures in simply measuring rents. This has led to revisions and an abandonment of the past rental series.

I made these points to the UK National Statistician John Pullinger in late January as I reported on the 31st.

I was pleased to point out that his letter to the Guardian of a week ago made in my opinion a case for using real numbers for owner-occupied housing such as house prices and mortgage-rates as opposed to the intended use of an imputed number such as Rental Equivalence.

What drove things this month?

If we look at the detailed data then it was clothing and footwear which held inflation back.

Overall, prices fell by 4.2% between December 2016 and January 2017, compared with a smaller fall of 3.1% last year

That tugged it back by 0.1% on the annual rate and offset some of the 0.29% rise from transport costs.

What is coming over the hill?

I am sorry to say that our valiant professors will be pleased by this.

Factory gate prices (output prices) rose 3.5% on the year to January 2017, which is the seventh consecutive period of annual price increases and the highest they have been since December 2011.

So as you can see the heat is on and that is being pushed by prices further up the chain.

Prices for materials and fuels paid by UK manufacturers for processing (input prices) rose 20.5% on the year, which is the fastest rate of annual growth since September 2008.

These only impact on some of the numbers and so get filtered out as well as reaching consumer inflation but they will continue to nudge consumer inflation higher as we move into the spring of this year.

Comment

There is much to consider here as we note that under our old regime inflation would be above target rather than just below it. However where we are poses a serious question for the Bank of England as it is pushing inflation higher with its ongoing monetary easing which even the inflationistas must now question. Indeed even the CPIH measure which next month will be first in the statistical bulletin with its imputed rents would if it had a 2% annual target be on it. I do hope that Governor Carney and Chief Economist Andy Haldane will soon be available to explain why a solidly growing economy with inflation heading above target needs a “Sledgehammer” of monetary easing. Actually Andy has been quiet of late has he been put back in the cellar he has spent most of the last 28 years in? How can he build an Ivory Tower from there?

Meanwhile the rest of us face higher inflation and I fear we will see 3% inflation on the CPI measure and 4% on the RPI measure as 2017 develops. I can say that I will be having more contact with the UK statistics establishment on the subject of their planned changes and will express my views to the best of my ability.

Seer of the year

There are many candidates for this but to be so wrong in only 24 house deserves a special mention. So step forwards European Commissioner Pierre Moscovici only yesterday.

After returning to growth in 2016, economic activity in is expected to expand strongly in 2017-18.

And the Greek statistics authority today.

The available seasonally adjusted data1 indicate that in the 4 th quarter of 2016 the Gross Domestic Product (GDP) in volume terms decreased by 0.4% in comparison with the 3 rd quarter of 2016,

To coin a phrase Pierre is a specialist in failure. Still he does have a famous song to sing.

Yesterday all my troubles seemed so far away.
Now it looks as though they’re here to stay.
Oh, I believe in yesterday.

 

Mark Carney plans to do nothing about rising UK inflation

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

The Bank of England

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

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

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

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

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

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

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

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

http://bbc.in/2jsktij

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

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

What is that Mark?

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

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

inflation may deviate temporarily from the
target on account of shocks

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

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

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

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

Today’s data

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

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

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

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

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

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

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

Target alert

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

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

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

What happens next?

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

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

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

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

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

House Prices

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

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

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

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

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

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

Comment

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

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

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

He has been thinking very hard about distributional issues

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

 

 

 

 

Why use real numbers to measure inflation when you can make them up?

Today brings us yet more evidence on the rise of consumer inflation in the UK. Regular readers will recall that I warned earlier in the year and indeed pre the EU leave vote that a pick-up in inflation was on the cards. Back then much of this view was simply based on the likelihood that the crude oil price would stop falling and the disinflationary effect from it would fade and then end. Then we would see some of the institutionalised inflation of the UK come into play. An example of this has been inflation in services which has rumbled on at about 2% per annum and thus pretty much ignoring the phase of good price disinflation we have just experienced.

Crude Oil

This was in the high 30s if we look at the US Dollar price for Brent crude oil at this time last year and was about to fall so that it fell below the US $30 mark in early January. This compares to a price of just below US $56 so even allowing for daily fluctuations we are on a higher trajectory now and seem set to remain so. Even a rush of production from the shale sector seems unlikely to get us back below US $30 anytime soon. So we see that rather than disinflation we are now seeing some inflationary pressure from the oil price.

The UK Pound £

In spite of the recent rally it has been a poor battered UK Pound for most of 2016. It was in fact falling before the EU leave vote but then it fell sharply creating inflationary pressure via higher prices for imports. This is not something which happens in full immediately as it takes time for fixed-price contracts for example to be replaced with new and higher terms but it is in progress.

If we look at the numbers then this time last year the UK Pound was about to dip below US $1.50 whereas it is now just below US $1.27. Thus we see that commodities prices including the oil one above have around a 15% nudge higher from the exchange rate. Ouch! Other prices will have risen too as the UK Pound has fallen albeit mostly less against many other currencies as well. Even the currency against which it feels there has been a strong bounce back the Japanese Yen is only back to 146 Yen.

Bank of England

We do not get reminded often these days of the latter effect of this statement about QE or Quantitative Easing.

This process aims to directly increase private sector spending in the economy and return inflation to target.

So they are pushing inflation higher just as it was about to surge anyway. A clear policy error and yet another Forward Guidance failure.

Today’s numbers

We saw this.

The all items CPI annual rate is 1.2%, up from 0.9% in October

I pointed out last month that the dip in the numbers was something of a statistical fluke although the media and analysts either forgot or did not notice that by the mentions of an “unexpected” rise. Anyway here is a reminder of the continuing shambles which is the efforts of the Office of National Statistics to measure UK clothing inflation.

This is the largest October to November rise since 2010 and continues the rather volatile movements observed during 2016, especially over the latest 3 months.

This is a fundamental issue which I posted on the Royal Statistical Society website about a month ago highlighting the situation about ladies coats which I am told lack any lining this year and are therefore cold. I have opened a can of worms I think

http://www.statsusernet.org.uk/communities/community-home/digestviewer/viewthread?MessageKey=be4841f9-ef68-4d1b-80a9-7d859cf6b53c&CommunityKey=3fb113ec-7c7f-424c-aad9-ae72f0a40f65&tab=digestviewer#bmbe4841f9-ef68-4d1b-80a9-7d859cf6b53c

If we move back to today’s news then we are seeing in the November figures the effect of the weaker UK Pound in essence. Also there is a significant change as it may only be 0.2% but the trend is clear.

The CPI all goods index annual rate is 0.2%, up from -0.4% last month.

Coming over the horizon

The producer prices situation is beginning to have its effect.

Factory gate prices (output prices) for goods produced by UK manufacturers rose 2.3% in the year to November 2016, compared with an increase of 2.1% in the year to October 2016.

We see that in the goods prices I discussed above and further down the line we see more ch-ch-changes.

The overall price of materials and fuels bought by UK manufacturers for processing (total input prices) rose 12.9% in the year to November 2016, compared with a rise of 12.4% in the year to October 2016.

Housing Costs

I would like to demonstrate today why the planned change in the main UK inflation measure will leave us with the equivalent of a chocolate teapot. The UK National Statistician put out his thoughts late last week and I replied confining myself to a sentence plus one word.

Dear Danny

Thank you for posting the letter from John Pullinger to Tony Cox. There is much I would like to reply on but we learn so much from one sentence which I have copied below.

 

“Our view is that neither mortgage payments nor house prices are a good measure of housing costs. ”

 

So the largest payment someone ever makes in regards a house and/or the largest stream of payments are both to be ignored! They are then replaced by a number under the banner of Rental Equivalence which by contrast is neither paid nor received and in fact is imputed.

The banking sector got itself into quite a mess by replacing mark to market accountancy with mark to model or as some called the latter myth. It has still to recover from this “advantage”.

As this news filters through to the public, confidence in official statistics will be reduced rather than enhanced. This will not be helped by the timing of this as inflation moves above the Bank of England’s target next year.

As of March we will use what is called CPIH as our main inflation measure where H supposedly measures housing costs. Except you see for owner-occupiers it does not and instead with its made up number sings along with Earth Wind & Fire.

Take a ride in the sky
On our ship, fantasize
All your dreams will come true right away

My message has got a decent response already and this one from Arthur Barnett hits home.

Shaun,

You have picked up on an interesting sentence from the National Statistician’s letter.

I would add another sentence –

 

“It is for the above reasoning we believe that the treatment of housing costs in RPIJ is weak.”

 

The two sentences refer to views and beliefs rather than evidence – indeed the National Statistician’s letter does not appear to include the word evidence.

If we switch to the numbers we see that house prices are rising at an annual rate of 6.9% whilst CPIH does this.

The all items CPIH annual rate is 1.4%, up from 1.2% in October

Comment

So we are now on course to hit the UK’s inflation target and maybe quite quickly. One way this may be achieved will be from the price of petrol at the pumps. We have been told today that it is some 10 pence higher than a year ago which adds some 0.3% to consumer inflation all other things being equal. This is not something that I welcome although economists such as my debating partner on Radio 4’s Moneybox Tony Yates presumably does although it is still a long way short of the 4% inflation target he has argued for. Still anyway here is a link from 3 months ago to it when I was pointing out that the Bank of England had made an inflationary policy error.

Also the numbers looked like they were leaked again and I do not necessarily mean the way those in authority get them 24 hours before. Traders in the UK Pound £ seemed to have an Early Wire yet again.

Meanwhile RPI inflation rises at 2.2% or if you exclude mortgage interest payments RPIX is at 2.5%. I remind you of this because our official statisticians have spent the last 3/4 years trying to rubbish it. Yet even the Bank of England has to admit this.

Asked to give the current rate of inflation, respondents gave a median answer of 2.3%, compared to 1.8% in August.

Apparently everyone is wrong again.