The UK inflation picture is shifting again

After disappointing news on wage growth yesterday for the Bank of England the day ended with some good news for it on this front. From the Financial Times.

The chief executives of the UK’s biggest listed companies received an 11 per cent raise last year pushing their median pay up to £3.93m, according to a report which found that full-time workers received a 2 per cent rise over the same period. The figures for FTSE 100 bosses include base salary, bonuses and other incentives and have been revealed at a time of growing shareholder activism over big payouts. Shareholders at companies including BT, Royal Mail and WPP have rebelled against chief executive pay at stormy annual investor meetings this year.

So some at least are getting above inflation pay rises Actually you can make the number look even larger if you switch to an average rather than the median as this from the original CIPD report shows.

 If we divide this amount equally among all the CEOs covered by our report, they would each receive a mean annual package worth £5.7 million, 23% higher than the 2016 mean figure of £4.6 million.

Why is this so? Well a lot of it is due to a couple of outliers as this from the FT shows.

The highest-paid chief executive in 2017 was Jeff Fairburn at housebuilder Persimmon who received £47.1m, or 22 times his 2016 pay. Ranking second, Simon Peckham of turnround specialist Melrose Industries banked £42.8m, equal to 43 times his 2016 pay, according to the analysis.

The case of Mr.Fairburn at Persimmon is an especially awkward one for the establishment as he has personally benefited on an enormous scale from the house price friendly policies of the Bank of England and the UK government. As so often we face the irony of the government supposedly being on the case of executive pay which it has helped to drive higher.  Indeed I note this seems to be a wider trend as Persimmon is not alone amongst house builders according to the CIPD report.

Berkeley Group Holding plc’s Rob Perrins, whose total pay package rose from £10.9 million in 2016 to £27.9 million.

Inflation

If we step back for a moment and look at the trends we see that they have shifted in favour of higher inflation. A factor in this has been the US Dollar strength we have seen since the spring which was not helped by the unreliable boyfriend behaviour of Bank of England Governor Mark Carney back in April. So now we face as I type this an exchange rate a bit over US $1.27 meaning we will have to pay more for many commodities and oil.

Moving onto the oil price itself care is needed as whilst we have dropped back from the near US $80 for a barrel of Brent Crude seen at the end of May to US $72 we are up around 42% on a year ago. This time around the OPEC manoeuvering has worked for them but of course not us.

There are various ways these feed into our system and perhaps the clearest is the price of fuel at the pump where a 5 pence rise raises inflation by ~0.1%. We are also experiencing another impact as we see domestic energy costs rise as NPower raised on the 17th of June, SSE on the 11th of July, E.ON will raise them tomorrow and EDF Energy will raise them at the end of the month. These are of course not only the result of higher worldwide energy prices but also a form of administered inflation via changes in energy policy for which we foot the bill. People will have different views on types of green energy which are expensive but much fewer will support the expensive white elephant which is the smart meter roll out and further ahead is the Hinkley Point nuclear plant.

Today’s data

There was a small pick-up.

The all items CPI annual rate is 2.5%, up from 2.4% in June

Some of it was from the source described above.

Transport, with passenger transport fares seeing larger price rises between June and July 2018
compared with the same period a year ago. Motor fuels also made an upward contribution,

Another was from the area of computer games where we seem to have found another area that the statisticians are struggling with.

these are heavily dependent on the composition of bestseller charts, often resulting
in large overall price changes from month to month;

Let us hope that this clams down as we have plenty to deal with as it is! As to downwards influences we should say thank you ladies as we mull whether this is being driven by the problems in the bricks and mortar part of the retail sector.

Clothing and footwear, with prices falling by 3.7% between June and July 2018, compared with a smaller fall of 2.9% between the same two months a year ago. The effect came mainly from women’s clothing and footwear.

If we look further down the inflation food chain we see a hint of what seems set to come from the lower Pound £.

Prices for materials and fuels (input prices) rose 10.9% on the year to July 2018, up from 10.3% in June 2018.

In essence it was driven by this.

 The annual rate was driven by crude oil prices, which increased to 51.9% on the year in July 2018, up from 50.2% in June 2018.

However in a quirk of the data this did not feed into output producer price inflation which dipped from 3.3% to 3.1%. Whilst welcome I suspect that this is a quirk and it will be under upwards pressure in the months ahead if we see the Pound £ remain where it is and oil ditto.

House Prices

Here we saw what might be summarised as a continuation of the trend we have seen.

Average house prices in the UK have increased by 3.0% in the year to June 2018 (down from 3.5% in May 2018). This is its lowest annual rate since August 2013 when it was also 3.0%. The annual growth rate has slowed since mid-2016.

However there is a catch because even at this new lower level it is still considerably above what we are officially told is inflation in this area.

Private rental prices paid by tenants in Great Britain rose by 0.9% in the 12 months to July 2018, down from 1.0% in the 12 months to June 2018.

This is what feeds into what is the inflation measure that the Office for National Statistics has been pushing hard for the last 18 months or so. But there also is the nub of its problem. Actually they have problems measuring rents in the first place which affects the process of measuring inflation for those who do rent but then fantasising that someone who owns a property rents it to themselves has led to quite a mess.

Comment

As we look forwards we see the prospect of inflation nudging higher again. However there are two grounds for optimism. One is short-term in that the next two monthly increases for comparison are rises of 0.6 and then 0.3 in the underlying index for CPI .The other is that I do not think that the all the prices which rose back in late 2016 early 2017 went back down again so we may see a lesser impact this time around.

Meanwhile the issue around the RPI has arisen again. Some of it has been driven by Chris Grayling suggesting the use of CPI for rail fares. Ed Conway of Sky News has been joining in the campaign against the RPI this morning on Twitter.

Don’t let anyone tell you RPI is better/different because it includes housing. First, these days CPI does include a housing element.

To the first bit I will and to the second I am waiting for a reply to my point that CPI excludes owner-occupied housing. As it happens RPI moved downwards this month which will be welcomed by rail travellers as it is the number used to set many of the annual increases.

The all items RPI annual rate is 3.2%, down from 3.4% last month.

 

 

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Lower house price inflation adds to the headache at the Bank of England

Today is inflation day in the UK where we receive the latest data but before we get to that there were some developments on the issue of how we measure it. This took place at the Economic Affairs Committee of the House of Lords where its ongoing enquiry into the Retail Price Index  or RPI continued and took evidence from the National Statistician John Pullinger. Regular readers will be aware that I have been making the case for the RPI for more than six years now as the UK establishment set a plan to try to get rid of it and more recently attempting to let it wither under a policy of neglect where they do not update it even if the changes required are ones which are easy to do because the data is already collected for other indices. Actually they have not even been consistent in that policy as they did make a change last year to bring in a new house price index as the previous one had been discovered to be incorrect.

For newer readers this matters because put simply it is the indices that give the higher readings for inflation which seem to come under official challenge. The pensioners index went about five years ago and the RPI has been under fire for most of this decade. The measure they would like to replace it with called CPIH has in its relatively short life consistently given the lowest reading. The latest numbers go RPI ( 3.4%) which of course was replaced by the CPI ( 2.4%) and then CPI (2.3%). I am sure you can see the trend for yourself but in case you think this is arcane it mattered a lot yesterday as with total wage growth being 2.5% then we get quite different answers for real wage growth. Another impact is on GDP growth where the statistician Mark Courtney has estimated that the use of CPI rather than RPI has raised recorded growth by something of the order of 0.5%. At times of low growth like now that gets even more significant.

Moving to yesterday John Pullinger said this.

The RPI is not a good measure of inflation ( slight delay) as captured by prices that capture the impact on the consumption of goods and services, it is not a good measure of inflation if you look at the impact of prices on households.

Even this opening salvo represents a change as the previous position was the bit before the slight delay whereas now room for manoeuvre is being created. As the meeting developed there was a shift to this as reported by the Financial Times.

Mr Pullinger had previously refused to consider reforms to the RPI, saying it was a legacy index that could not be changed.But in response to insistent questions by committee members, he said the statistics agency had now changed its mind, but needed to get the Treasury and the Bank of England on board before it would act.

So just like the Financial Times itself where the economics editor Chris Giles argued for some years against the RPI before mellowing recently. Let me cut to the two main issues here which are owner-occupied housing costs and the formula effect. The UK establishment have campaigned in favour of inflation measures which exclude owner occupied housing costs ( CPI) or use fantasy rents which are never paid in reality to do so ( CPIH). In some ways I think the latter is worse as it flies under a false flag as cursory readers may only read the headlines which say it covers housing costs. In reality it has been an embarrassment which I have covered many times.

The “formula effect” is more complex and many of you will have read the eloquent arguments in  favour of what was called RPIJ  by Andrew Baldwin in the comments section here which in essence is RPI without it. The UK establishment took that line for a few years then dropped it as you have to calculate it yourself now ( or wait for Andrew to do it for you). The bone of contention here is that some of it at least is due to changes in the way clothing prices were measured in 2010 which caused as Taylor Swift would put it “trouble,trouble,trouble”. You see until then there were arguments CPI under measured inflation not RPI being over. If I was in charge there would be a major project into investigating and reforming this area as before then the formula effect was smaller. It is a matter for the UK authorities as to why such work began but then stopped. Research was replaced by rhetoric.

Today’s numbers

We dodged a little bit of a bullet I think.

The all items CPI annual rate is 2.4%, unchanged from last month

What I mean by that is that there were upwards pressure as three utilities raised domestic energy costs and the comparison for petrol prices was with 115.3 pence last year. Having written what I have above it was hard not to have a wry smile at what held inflation down.

where prices of clothing fell by 2.3% between May and June this year compared with a fall of 1.1% between the same two months a year ago. Prices usually fall between May and June as the summer sales season begins but the fall in 2018 is the largest since 2012.

Fortunately in some ways this was not the reason why the RPI went the other way.

The all items RPI annual rate is 3.4%, up from 3.3% last month.

Looking Ahead

There continues to be a tug higher from the producer price numbers.

The headline rate of inflation for goods leaving the factory gate (output prices) was 3.1% on the year to June 2018, up from 3.0% in May 2018. Prices for materials and fuels (input prices) rose 10.2% on the year to June 2018, up from 9.6% in May 2018.

These do not impact on a one for one basis by any means as the effect weakens from input prices to output prices and even more so to consumer inflation. The input number is mostly ( ~70%) the impact of the oil price and changes in the value of the UK pound £.

House Prices

Finally the official data series is catching up with the other measures that we look at.

Average house prices in the UK have increased by 3.0% in the year to May 2018 (down from 3.5% in April 2018). This is its lowest annual rate since August 2013 when it was also 3.0%.

This means that the other measures seem to be working well as a leading indicator although it is also true that there remain challenges to the new series ( there is still some debate about its treatment of new builds)

Comment

There is good news today in that inflation at least on the official measures did not rise and there is hope for something of an official rethink on how it is measured. Let me give some credit to the Economic Affairs Committee which did challenge the National Statistician yesterday. For purposes of transparency I did contact them last month to point out they should widen their evidence base and to invite them to the Royal Statistical Society meeting on the RPI at which I was one of the speakers. Sadly their Lordships were otherwise engaged but staff members did attend I am told. I note that they were also willing to reflect evidence that the CPI measure has under recorded inflation ( housing costs for a start).

Moving to today’s numbers we see that upwards pressure remains on consumer inflation but that there is plenty for the Bank of England to consider. We saw yesterday that wage growth has dipped albeit only by a small amount and now inflation has remained static. Some may consider that its eyes will be on the fall in house price inflation especially should its mood be of behaving like an unreliable boyfriend.

But even so let me compare house price growth’s 3% with this which is a basis of the CPIH housing costs section.

Private rental prices paid by tenants in Great Britain rose by 1.0% in the 12 months to June 2018; unchanged since April 2018.

Putting rents which do not exist in a consumer inflation measure is a disgrace

Yesterday the Economic Affairs Committee took a look at the Retail Price Index measure of consumer inflation in the UK. An excellent idea except as I have contacted them to point out.

Accordingly I am making contact for two reasons. Attending the event would give your members exposure to a much wider range of expertise on the subject of the RPI than the limited group you have today. Also it will help you with the subject of balance as the four speakers you will be listening too today are all against the RPI with some being very strongly so. This gives a very unbalanced view of the ongoing debate on the subject.

The event I refer too is this evening at the Royal Statistical Society at which I will be one of those who reply to the National Statistician John Pullinger.

I intend to point out that the RPI does indeed have strengths and it relates to my letter to Bank of England Governor Mark Carney from February.

“. I am not sure what is a step up from known error but I can say that ignoring something as important to the UK as that sector when UK  house prices have risen by over 29% in your term as Governor when the targeted CPI has only risen by more like 7% is exactly that.”

This is because it makes an effort to reflect this.

This is because the RPI does include owner occupied housing and does so using house prices and mortgage interest-rates. If we look at house prices we see that admittedly on a convoluted route via the depreciation section they make up some 8.3% of the index.

This compares for example with the Consumer Price Index which completely ignores the whole subject singing “la,la,la” when it comes up. There has been a newer attempt to reflect this issue which I look at below.

Also it means that the influence is much stronger that on the only other inflation measure we have which includes house prices which is CPI (NA). In it they only have a weighting of 6.8%. So the RPI is already ahead in my view and that is before you allow for the 2.4% weighting of mortgage interest-rates.

As you can see the new effort at least acknowledges the issue but comes up with a lower weighting. This is because they decided that they only wanted to measure the rise in house prices and not the land. This is what they mean by Net Acquisitions or NA.

Now with 8.3% ( 10.7%) and 6,8% in your mind look what happens with the new preferred measure CPIH.

Now let me bring in the alternative about which the National Statistician John Pullinger and the ONS are so keen. This is where rather than using house prices and mortgages of which there are many measures we see regularly in the media and elsewhere, they use fantasy rents which are never actually paid. Even worse there are all sorts of problems measuring actual rents which may mean that this is a fantasy squared if that was possible.

But this fantasy finds itself with a weight of 16.8% or at least it was last time I checked as it is very unstable. Has our owner-occupied housing sector just doubled in size?

As you can see whilst you cannot count the (usually fast rising ) value of land it would appear that you can count the ( usually much slower rising) rent on it. That is the road that leads to where we are today where the officially approved CPIH gives a lower measure than the alternatives. Just think for a moment, if there is a sector in the UK with fast rising inflation over time it has been housing. So when you put it in the measure you can tell people it is there but it gives a lower number. Genius! Well if you do not have a conscience it is.

Yet the ordinary man or woman is not fooled and Bank of England Governor Mark Carney must have scowled when he got the results of his latest inflation survey on Friday.

After all when asked ( by the Bank of England) they come up with at 3.1% a number for inflation that is closer to the RPI then the alternatives.

Just because people think a thing does not make it right but it does mean you need a very strong case to change it . Fantasy rents are not that and even worse they come from a weak base as illustrated below.

The whole situation gets even odder when you note that from 2017 to this year the weighting for actual rents went from 5.6% to 6.9%.

Who knew that over the past year there was a tsunami of new renters? More probably but nothing like a 23% rise. This brings me back to the evidence I gave to the UK Statistics Regulator which was about Imputed Rents which relies on essentially the same set of numbers. I explained the basis for this was unstable due to the large revisions in this area which in my opinion left them singing along to Fleetwood Mac.

I’m over my head (over my head)
Oh, but it sure feels nice

Today’s data

Let me start with the number which was much the closest to what people think inflation is according to the Bank of England.

The all items RPI annual rate is 3.3%, down from 3.4% last month. The all items RPI is 280.7, up from 279.7 in April.

So reasonably close to the 3.1% people think it is as opposed to.

The all items CPI annual rate is 2.4%, unchanged from last month. The all items CPI is 105.8, up from 105.4 in April

When we ask why? We see that a major factor is the one I have been addressing above.

Average house prices in the UK have increased by 3.9% in the year to April 2018 (down from 4.2% in March 2018). This is its lowest annual rate since March 2017 when it was 3.7%.

In spite of the slow down in house price inflation it remains an upward pull on inflation measures. You will not be surprised to see what is slowing it up.

The lowest annual growth was in London, where prices increased by 1.0% over the year.

Now let me switch to what our official statisticians,regulators and the economics editor of the Financial Times keep telling us is an “improvement” in measuring the above.

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

Which is essentially driven by this.

Private rental prices paid by tenants in Great Britain rose by 1.0% in the 12 months to May 2018; unchanged from April 2018.

So they take rents ( which they have had all sorts of trouble measuring and maybe underestimating by 1% per annum) and imagine that those who do not pay rent actually do and hey presto!

The all items CPIH annual rate is 2.3%, up from 2.2% in April.

I often criticise the media but in this instance they deserve praise as in general they ignore this woeful effort.

Comment

Today has been a case of me putting forwards my views on the subject of inflation measurement which I hold very strongly. This has been an ongoing issue since 2012 and regular readers will recall my successful battle to save the RPI back then. I take comfort in that because over time I have seen my arguments succeed and more and more join my cause. This is because my arguments have fitted the events. To give a clear example I warned back in 2012 that the measure of rents used was a disaster waiting to happen whereas the official view was that it was fine. Two or three years later it was scrapped and of course we saw that the Imputed Rent numbers had a “discontinuity”. The saddest part of the ongoing shambles is even worse than the same sorry crew being treated as authorities about a subject they are consistently wrong about it is that we could have spent the last 6 years improving the measure as whilst it has strengths it is by no means perfect.

Let me give credit to the Royal Statistical Society as it has allowed alternative views an airing (me) and maybe there is a glimmer from the House of Lords who have speedily replied to me.

Staff to the Committee will be in attendance this evening, and we have emailed the details to the members: the unfortunate short notice and the busy parliamentary schedule currently means it may be unlikely for them to attend. We will report back to them on the event nevertheless.

I hope the event goes well for you.

Returning to today’s we now face the risk that this is a bottom for UK inflation as signalled by the producer price numbers.

The headline rate of inflation for goods leaving the factory gate (output prices) was 2.9% on the year to May 2018, up from 2.5% in April 2018.Prices for materials and fuels (input prices) rose 9.2% on the year to May 2018, up from 5.6% in April 2018.

This has been driven by the rise in the price of oil where Brent Crude Oil is up 56% on a year ago as I type this and the recent decline in the UK Pound £. This will put dark clouds over the Bank of England as the wages numbers were a long way from what it thought and now it may have talked the Pound £ down into an inflation rise. Yet its Chief Economist concentrates on matters like this.

Multiversities ‘hold key to next leap forward’ says ⁦⁩ Chief Economist Andy Haldane ( @jkaonline)

Isn’t that something from one of the Vin Diesel Riddick films?

 

 

 

 

 

House price rises are nothing to do with us says the Bank of England

Today brings inflation and in particular UK inflation data into focus and I would like to draw your attention to yesterday’s events. That is because the evidence given by Mark Carney and other members of the Bank of England to Parliament covered pretty much everything but that subject! Food for though for those who still believe it targets an inflation rate of 2% per annum as a priority. Indeed the whole process seemed to coin a phrase to be from an Ivory Tower “far,far,away” as we note one of the written questions.

What is your current estimate of the size of the output gap, the potential rate of productivity growth, the natural unemployment rate, and the equilibrium rate of
interest?

It wouldn’t take me long to point out that the evidence is that they are concepts which mislead rather than help. Moving back to the formal reply from Gertjan Vlieghe we did get an implied view.

 so that the economy will move into excess
demand over the forecast period and domestic inflationary pressure are likely to rise even as the fading contribution from past import price rises leads to a fall in headline
inflation this year.

Gertjan followed this up by suggesting this.

I think policy rates are likely to rise, in my central view, by 25bp to 50bp per year over the forecast period.

The problem for him is that he is like tumbleweed in the wind looking at negative interest-rates then swinging round saying they will rise to 2% so far managing to be something of a reverse indicator.

The UK Pound £

This has been in a weaker phase since the Unreliable Boyfriend Mark Carney did his public U-Turn on a May Bank Rate rise. In terms of the most important currency for inflation trends the US Dollar we are now at US $1.335 some ten cents below the previous peak. Thus we are back in a phase where this will add to inflation. Not all of the move is Mark Carney’s fault because there has also been a phase of what we might call “King Dollar” but he did give it a push down the hill. This means he has operated in the opposite direction to his inflation target.

The Oil Price

Whilst the overnight news is that we have seen a dip back in the price of crude oil the trend since late June has been higher and higher. Thus we face US $79 for a barrel of Brent Crude Oil as opposed to more like US $45 when this move began. Or if you prefer it is some 47% higher than a year ago. So we face some energy price inflation.

Today’s data

If we look we see the clearest example of the two factors above below.

Prices for materials and fuels (input prices) rose 5.3% on the year to April 2018, up from 4.4% in March 2018.

As we look into the detail we get more conformation of this.

 This was driven by crude oil prices, which have increased on the year at a rate of 19.9% in April 2018, 6.4 percentage points higher than in March 2018.

As to the second factor I am sorry to have to tell you that our official statisticians are looking in the wrong place.

The sterling effective exchange rate index (ERI) rose to 80.3 in April 2018. This is a 1.4% increase from March 2018 and is the largest monthly growth since September 2017 when it rose 2.1%……..All else equal, a stronger sterling effective exchange rate will lead to cheaper inputs of imported materials and fuels.

Anyway the month on month figures confirm my theme as well.

 On the month, inflation for imported materials and fuels was up 0.5%, after prices were flat in March 2018.

So we are seeing a turn in the inflation chain from lower to higher which has not yet reached the output data but will do so in the months ahead.

The annual rate of inflation for goods leaving the factory gate (output prices) remained at 2.7% in April 2018 . On the month, output inflation was 0.3%, unchanged from March 2018.

Consumer Inflation

There was better news on this front.

The Consumer Prices Index (CPI) 12-month rate was 2.4% in April 2018, down from 2.5% in March 2018.

Where this particularly impacts on the economy is when we compare it with wage growth. This has been given a lot o media attention and we can now say that real wages have finally stopped falling on this indicator although I am more cautious about saying they are now rising unlike the Bank of England.

wage growth improves somewhat
due to reduced labour market slack, ( Vlieghe)

Perhaps they have found this from talking with Billy Bragg or from areas such as Spotify play lists. So let me help out by saying I have been playing Hold Me by Carly Rae Jepsen at the Fleetwood Mac Festival a couple of years or so ago a lot recently. Sadly the recording quality is not top-notch so if the Bank could help out I would appreciate it.

Moving to the factors giving us lower annual inflation we saw this.

The largest downward contribution to the change in the rate came from air fares, which were influenced by the timing of Easter.

Also the price of men’s clothing fell which provides a bit of gender equality as usually news from this area if from women’s clothing. Against that as I am sure many of you are aware the price of diesel and petrol at the pump rose as the factors I discussed earlier begin to impact.

House prices

We have a familiar drum beat and bass line here.

Average house prices in the UK have increased by 4.2% in the year to March 2018 (unchanged from February 2018).

Although we did get another in my series of updates on never believing anything until it is officially denied. From the Guardian.

Gertjan Vlieghe also denies that QE has fuelled Britain’s housing market.

He points out that many countries have used quantitative easing to stimulate their economies since the financial crisis – but Britain is the only one to have seen such as house price boom.

Ireland?Spain?Germany? Well anyway we could of course simply look at the impact of the Funding for Lending Scheme on mortgage rates which the Bank of England estimated at up to 2%.

Comment

The good news is that UK inflation has been moderating in 2018 so far but the not so good news is that the winds of change are now blowing in the opposite direction. We got a hint of this from the much maligned Retail Price Index today as well as a reminder of a blind spot in UK inflation measurement.

The all items RPI annual rate is 3.4%, up from 3.3% last month.

The blind spot it highlights is illustrated below.

Other housing components excluded from the CPI, which increased the RPI 12-month rate relative to the CPI 12-month rate by 0.11 percentage points between March and April 2018. The effect came mainly from house depreciation and council tax.

House depreciation is an odd way of doing it but t has house prices in it as well as mortgage rates whereas the CPI has neither. When our establishment felt that they could get away with this no longer they chose to ignore this and assume that owner occupiers pay themselves rent when they do not. That is what an Imputed Rent is and the numbers are based on this.

Private rental prices paid by tenants in Great Britain rose by 1.0% in the 12 months to April 2018; down from 1.1% in March 2018.

I hope to have the opportunity to explain this at the Royal Statistical Society next month at their public meeting. You reduce inflation by excluding things which exist and not only can be measured but are paid and replace then with ones you make up, Many have doubts that they can measure existing rental trends and suggest the numbers are too low by around 1% per annum. So let me credit the UK media who in general have roundly ignored the CPIH inflation measure as they have done exactly the right thing.

 

 

 

We have good news as the Bank of England gets an inflation headache

As our attention moves today to inflation in the UK there is something we have cause to be grateful for. Let me hand you over to the Independent.

The pound hit its highest level against the dollar since the Brexit vote in June 2016, rising to $1.4364 by mid-morning………….

It has fallen back to US $1.43 since that but the principle that we have seen a considerable recovery since we fell below US $1.20 holds. If we look back to a year ago then we were just below US $1.28 and this matters for inflation trends because so many basic materials and commodities in particular are priced in US Dollars. We have not done so well against the Euro as we are around 2% lower than a year ago here which used to be considered as a dream ticket but as ever when we get what we want we either ignore it or forget we wanted it. The Euro has been strong which we can observe by looking at it versus the Swiss Franc where it has nearly regained the famous 1.20 threshold which caused so much trouble in January 2015.  But overall for us currency driven inflation has become currency driven disinflationary pressure.

Oil

On the other side of the coin we are seeing some commodity price pressure from crude oil and those who follow trading will be worried by this development.

DG closes long USDJPY position (Short of 3 units of yen vs the dollar). Opens short WTI & Brent (one unit of each) ( @RANsquawk )

You have reached a certain level of fame or infamy in this case when you are known by your initials but Dennis Gartman has achieved this with claims like the oil price will not exceed US $44 again in his lifetime. So we fear for developments after finding out he has gone short and if we look back we see that the price has been rising. The rally started around midsummer day last year when it was just below US $45 per barrel for Brent crude as opposed to the US $72 as I type this. More specifically it was at US $53  a year ago.

If we look wider at commodity prices we see that there has been much less pressure here as the CRB Index was 423 a year ago as opposed to the 441 of now. What there has been seems to have been in the metals section which has risen from 894 to 968. We can add to that the recent Russia sanctions driven rise in the Aluminium price as it is not included in the index.

Shrinkflation

This is on my mind because as many of you will recall we were told that products were shrinking because of the lower level of the UK Pound £. Last July the Office for National Statistics told us this.

No, you’re not imagining it – some of your favourite sweets really are shrinking. In November 2016, Toblerone chocolate bars reduced in size by about 10%, provoking outrage online. And Maltesers, M&Ms and Minstrelshave gone the same way.

It’s a phenomenon known as “shrinkflation” – where manufacturers reduce the package size of household goods while keeping the price the same.

I just wondered if any of you have seen signs of prices going back down or more specifically pack sizes growing? If we move to the price of ingredients which was blamed I note that sugar prices are lower over the past year from above US $17 to below US $12 and whilst cocoa prices have risen this year they are still below where they were in early 2016.

Even if the picture for chocoholics is a little mixed there were plenty of products which rose in price which we were told was due to the lower Pound £, have any of these fallen back now it is higher? I can tell you that the new running shoes I have just received were at the new higher £65 rather than the previous £55. I also recall Apple raising prices did they come back down?

Moving back to a more literal shrinkflation there was this a week ago. From City AM

According to new research from LABC Warranty, average house sizes have shrunk by over 12 square metres over the last 50 years.

The study looked at 10,000 houses built between 1930 and the present day, using open data from property sites Rightmove and Zoopla. The analysis concluded that house sizes are smaller than they were in the 1930s, after reaching a peak in the 1970s.

How does that work with the obesity crisis?

Today’s data

There was more of the welcome news we have been expecting on here although I note that the Financial Times has called it “disappointing.”

The all items CPI annual rate is 2.5%, down from 2.7% in February.

We do get a hint that the rally in the UK Pound £ has helped from this part of the detail.

The CPI all goods index annual rate is 2.4%, down from 3.0% last month.

Good prices were pushed up by the previous fall in the currency but now inflation in this area is rather similar to that in the services sector ( 2.5%) so after the recent drops we may see a plateau of sorts. As to the factors at play this month as I have noted several times in the past couple of years it is time to say thank you ladies.

Large downward effect…….. Prices overall rose this year by less than a year ago, with the main downward contributions coming from women’s dresses, jumpers, cardigans and coats, and boys’ T-shirts.

The good news carried on with the Retail Prices Index although of course with a higher number albeit less of a gap than we have got used to.

The all items RPI annual rate is 3.3%, down from 3.6% last month.

Producer Prices

These give us an idea of what is “coming up that hill” as Kate Bush would put it. Here we see some better news at the start.

The headline rate of inflation for goods leaving the factory gate (output prices) was 2.4% on the year to March 2018, down from 2.6% in February 2018.

However we do see the beginnings of the influence of the higher oil price further in the distance.

Prices for materials and fuels (input prices) rose 4.2% on the year to March 2018, up from 3.8% in February 2018.

House Prices

We even had better news on this front.

Average house prices in the UK have increased by 4.4% in the year to February 2018 (down from 4.7% in January 2018). The annual growth rate has slowed since mid-2016 but has remained generally under 5% throughout 2017 and into 2018. Average house prices in the UK decreased by 0.1% on the month.

Of course if we look at all the different measures we seem to be bouncing between 0% and 5% but that in itself is better and the 5% upper barrier looks like it might be set to fall.

Comment

Just in time for the sunny spring weather the UK economy has produced two days of good data. Yesterday’s employment data has been followed by a fall in nearly all our inflation measures which of course sprinkles a few rays of sunshine on the prospects for real wages. These numbers will take time to filter into the other data such as consumption and GDP ( from the autumn perhaps) but the worm has now turned in this respect albeit not in time for the first quarter of this year.

Meanwhile there are two pockets of trouble and they are centred within our establishment. Firstly Bank of England Governor Carney has apparently had a headache and asked for some ibuprofen as he mulls how an inflation targeting central banker can raise interest-rates into falling inflation having ignored its rise?

Also the Office of National Statistics has argued itself into an increasingly lonely corner with this.

The all items CPIH annual rate is 2.3%, down from 2.5% in February.

Why has it become the economics version of “Johnny no mates”? Because nobody believes this version of property inflation.

The OOH component annual rate is 1.2%, unchanged from last month

If you have to make up a number my tip is to make at least some effort at credibility.

 

 

 

It is time to replace consumer inflation measures with inflation faced by us

Let me open today by agreeing with the Bank of England. As many of you are aware I wrote to Governor Carney challenging the testimony he gave to the House of Lords on the 30th of January. Here is part of the response from the Bank.

No measure of consumer prices is perfect.

A good start however sadly they then claim to agree with me whilst putting  a word in my mouth so to speak that I did not say. I have highlighted it below. Also as CPI has been used as their inflation target since 2003 one might wonder where this point of view has been the last 15 years.

We agree that the single biggest shortcoming of the current CPI is that it excludes the consumption price of owner-occupied housing.

If you could sum up what is wrong with the UK establishment view on inflation that single word does it. By putting it like that you go from an owner occupier spending quite a bit of their income over time on their home to someone who spends far less as it is put into another category as it is an asset which doesn’t count and/or an investment which doesn’t count either. Fantastic isn’t it? Chelsea fans like me would have loved to have done that to Barcelona;s goals last Wednesday night but even the murky world of football does not stoop so low.

On the consumption road the owner-occupier does this.

As you will know, measuring this is not straightforward because the consumption cost of owner-occupied housing services is not directly observable. As you note, people do not pay rent to themselves to live in their own home.

Of course it is not directly observable as it is a fantasy number which is imputed as it does not exist. Theory over reality again, what could go wrong?

This is considered an economically sound concept and it is easy to understand, the price a homeowner would have to pay to rent a home similar to their own, but it is clearly an imputed one.

Is “economically sound” an oxymoron? Also it may just be where I live but I have little idea of what they rental value of my flat is and as I live there am not much bothered. As to the idea that it is easy to understand may be so in the Ivory Towers of the Bank of England but I bet if you asked people you would get the reply “but I don’t”. If we go deeper there has been a lot of trouble with measuring this as the Office for National Statistics does not get the source data and is on its second effort in terms of overall series. Those of you willing to look back to 2012 on here will note that I warned about problems with the original series back then but the establishment of course knew better and when it failed it was as usual nobody’s fault. I have seen arguments that its failure to properly stratify between new and old rents means that it is perhaps 1% per annum to low. If we now move to today’s data release you can see the significance of this.

Private rental prices paid by tenants in Great Britain rose by 1.1% in the 12 months to February 2018; unchanged from January 2018.

RPI

If we move to the Retail Prices Index or RPI the Bank of England tells us this.

RPI suffers from this problem.

Which is?

In any event, an important factor in any measure of consumer prices is avoiding the influence of movements in asset price valuations (such as land prices and asset valuations of housing structures)…………. Indeed, by the inclusion of mortgage interest payments, RPI conflates the consumption cost of housing not only with asset valuations, but also with the costs of financing the acquisition of those assets.

Again theory trumps reality as something which is a large part of people’s budgets disappears from the inflation data as reality gets twisted in the clouds inhabited by the Ivory Towers. Indeed when someone is really dismissing you they tell you are important but….

We should stress that none of this is to say that house prices and mortgage interest payments do not matter. Accurate information on these is central to much of the work of the Bank’s Monetary Policy and Financial Policy Committees as well as many other economic and financial policymakers.  They matter a great deal,

They matter so much that they need to be excluded. If we look at other perspectives this matters I note some work by the NIESR suggesting that 62% of households are owner-occupiers and that this has happened.

There is a genuine question of affordability with housing.,,,,,Essentially since 1997, house prices have become twice as expensive relative to incomes.

That is the real reason that house prices are kept out of the inflation data as you see then the rises are increases in wealth and filter their way into economic growth.Maybe some is but a lot of this is inflation as first-time buyers will not noting ruefully.

Let me put this another way by noting this from the Bank of England.

As you suggest, the other main alternative is the net acquisitions approach.

No I said house prices as  my support for the net acquisitions approach has faded and let me explain why with two numbers. The weight of owner occupiers in CPIH is 17.4% but the weight using net acquisitions is 6.8%. Just as a reminder it is the same housing stock. But even with that manipulation there is a clear difference.

Owner occupiers’ housing costs (OOH) in the UK under the rental equivalence approach have grown by 1.5% in Quarter 4 (Oct to Dec) 2017 compared with the corresponding quarter of the previous year.

OOH according to the net acquisitions approach have grown by 2.9% in Quarter 4 2017 compared with the corresponding quarter of the previous year.

This comes from a release which in my opinion was part of a propaganda campaign to convince us that all roads led to the same answer. As you can see that is misfiring and perhaps like the effort with the RPIJ measure will find its way into the recycling bin both friendless and abandoned.

Comment

If we look at today’s data the news is better as we see a fall in consumer inflation with the CPI measure falling to an annual rate of 2.7% and RPI to 3.6%. Those of you mulling the potential for a second Battle of the Thames today as well as those who like to keep up to date on the price of fish might like to know that fish prices rose by 1.3% this February as opposed to 4.7% last year. Looking deeper into the inflation chain we see this.

The headline rate of inflation for goods leaving the factory gate (output prices) was 2.6% on the year to February 2018, down from 2.8% in January 2018. Prices for materials and fuels (input prices) rose 3.4% on the year to February 2018, down from 4.5% in January 2018.

The media report this as the fall in the Pound £ dropping out of the numbers actually especially in the input series it is the stronger £ versus the US Dollar at play as it has a pretty direct line in. It will impact on the other measures as 2018 develops and help to bring down their numbers

Returning to my theme we end up with a pretty clear conclusion as to the establishment’s game as RPI at 3.6% is rubbished and CPI at 2.5% is promoted. I wrote some time back that they always promote things which give the lowest number and if I am ever wrong fell free to let me know. Meanwhile my arguments are hitting home as I notice some of my opponents are getting cold feet.

It has only taken 6 years. If we move onto planning ahead I think we have to move from consumer inflation to the inflation people experience as otherwise we miss this as explained by Edward Harrison.

Using the Minsky model, it’s wholly possible that asset price inflation is through the roof even while consumer price inflation barely budges. For example, say you have a credit crisis that throws people out of work and causes mass unemployment. In that case, it would take many years to get back to full employment. You won’t see inflation rising robustly. Yet, during that period, the central bank could set interest rates at a level that encourages an increase in speculative and then, eventually, Ponzi financing. That’s a recipe for asset price inflation without consumer price inflation.

Whatever your views on the Minsky model that bit is pretty much impossible to argue with. Now should we go forwards with that or backwards with “economically sound concepts” which keep failing?

UK Inflation looks set to fall as 2018 progresses

Today brings us face to face with the UK context on what many are telling us has been the cause of the recent troubled patch for world equity markets. This is because a whole raft of inflation data from the consumer producer and housing sector is due. The narrative that inflation has affected equities markets has got an airing in today’s Financial Times.

The inflation threat has simmered for months, but the missing link had been wage growth, which made the rise in the US jobs figures for January so important, fund managers say. Indeed, the yield on the 10-year Treasury is 40 basis points higher this year, driven almost entirely by inflation expectations. Strong global economic data, coupled with sweeping tax cuts and the recent expansionary budget deal in Washington, should stir price pressures.

Actually that argument seems to be one fitted after the events rather than before as the rise in bond yields could simply be seen as a response to the expansionary fiscal policy in the US combined with interest-rate increases and a reduction albeit small in the size of the Federal Reserve balance sheet. Actually as the FT admits inflation is often considered to be good for equities!

While faster inflation would typically be good for stocks, lifting companies’ pricing power and suggesting economic growth is accelerating.

Wages

There is also a theme doing the rounds about wage inflation. Yesterday Gertjan Vlieghe of the Bank of England joined this particular party according to Reuters.

 a pick-up in wages ……..signs of a pick-up in wages

The problem for the Bank of England on this front is two-fold. Firstly it has been like the boy ( and in some cases) girl who has cried wolf on this front and the second is that the official data has picked up no such thing so far. Thus we are left essentially with one higher wages print of 2.9% for average hourly earnings in the United States. So the case is still rather weak as we wonder if even the current economic recovery can boost wages in any meaningful sense.

Trends

The first trend which should first show in the producer price numbers is the strength of the UK Pound versus the US Dollar over the past year. It was if we look back about 14 cents lower than the current US $1.388. Also the price of crude oil has dipped back from the rally which took it up to US $70 in terms of the Brent benchmark to US $62.47 as I type this. This drop happened quite quickly after this.

Goldman Sachs has held one of the most optimistic views on the rebalancing of the oil market and oil prices in the near term, and the investment bank is now growing even more bullish, predicting that the oil market has likely balanced, and that Brent Crude will reach $82.50 a barrel within six months. ( OilPrice.com)

The Vampire Squid is building up quite a track record of calling the market in the wrong direction as back in the day it called for US $200 a barrel and when prices fell for a US dollar price in the teens. I will let readers decide for themselves whether it is simply incompetent or is taking us all for “muppets”.

Today’s data

The good news was that the trends discussed above are beginning to have an impact.

The headline rate of inflation for goods leaving the factory gate (output prices) rose 2.8% on the year to January 2018, down from 3.3% in December 2017…….Prices for materials and fuels (input prices) rose 4.7% on the year to January 2018, down from 5.4% in December 2017.

Tucked away was the news that the worst seems to be passing us as this is well below the 20.2% peak of this time last year.

The annual rate of inflation for imported materials and fuels was 3.5% in January 2018 (Table 2), down 1.7 percentage points from December 2017 and the lowest it has been since June 2016.

It is a little disappointing to see the Office for National Statistics repeat a mistake made by the Bank of England concentrating on the wrong exchange rate.

The sterling effective exchange rate index (ERI) rose to 79.0 in January 2018. On the year, the ERI was up 2.6% in January 2018 and was the fourth consecutive month where the ERI has shown positive growth.

Commodities are priced in US Dollars in the main.

Consumer Inflation

This showed an example of inflation being sticky.

The all items CPI annual rate is 3.0%, unchanged from last month.

However prices did fall on the month due to the January sales season mostly.

The all items CPI is 104.4, down from 104.9 in December

The inflation rate was unaffected because they fell at the same rate last year.

There was something unusual in what kept annual inflation at 3%.

The main upward contribution came from admission prices for attractions such as zoos and gardens, with prices falling by less than they did last year.

I will put in a complaint when I pass Battersea Park Childrens Zoo later! More hopeful for hard pressed budgets was this turn in food prices.

This effect came from prices for a wide range of types of food and drink, with the largest contribution coming from a fall in meat prices.

My friend who has gone vegan may be guilty of bad timing.

An ongoing disaster

The issue of how to deal with owner-occupied housing remains a scar on the UK inflation numbers. This is the way they are treated in the preferred establishment measure.

The OOH component annual rate is 1.2%, down from 1.3% last month. ( OOH = Owner Occupied Housing).

Not much is it, so how do they get to it? Well this is the major player.

Private rental prices paid by tenants in Great Britain rose by 1.1% in the 12 months to January 2018; this is down from 1.2% in December 2017.

If you are thinking that owner occupiers do not pay rent as they own it you are right. Sadly our official statisticians prefer a fantasy world that could be in an episode of The Outer Limits. They have had a lot of trouble measuring rents which means their fantasies diverge even more from ordinary reality.

If they had used something real then the numbers would look very different.

UK house prices rose 5.2% in the year to December 2017, up from 5.0% in November 2017.

This makes inflation look much lower than it really is and is the true purpose in my opinion. A powerful response to this at one of the public meetings pointed out that due to the popularity of leasing using rents for the car sector would be realistic ( they do not) but using it for owner-occupied housing is unrealistic ( they do).

If you want a lower inflation reading thought it does the trick.

The all items CPIH annual rate is 2.7%, unchanged from last month.

Comment

The underlying theme is that UK consumer inflation looks set to trend lower as 2018 progresses which is good news for both consumers and workers. The initial driving force of this was the rally of the UK Pound £ against the US Dollar and as it has faded back a little we have seen lower oil prices. We also get a sign that prices can fall combined with annual inflation.

The all items CPI is 104.4, down from 104.9 in December…..The all items RPI is 276.0, down from 278.1 in December…….The all items CPIH is 104.5, down from 105.0 in December.

One issue that continues to dog the numbers is the treatment of housing and for all the criticisms levelled at it a strength of the RPI is that it does have house prices ( via depreciation).

The all items RPI annual rate is 4.0%, down from 4.1% last month.

Meanwhile the Bank of England seems lost in its own land of confusion. It cut interest-rates into an inflation rise and then raised them into an expected fall! This is of course the wrong way round for a supposed inflation targeter. Now they seem to be trying to ramp up the rhetoric for more increases forgetting that they need to look 18 months ahead rather than in front of their nose. Perhaps they should take some time out and listen to Bananarama.

I thought I was smart but I soon found out
I didn’t know what life was all about
But then I learnt I must confess
That life is like a game of chess