Welcome news from UK Inflation

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

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

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

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

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

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

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

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

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

What is happening?

Here is the official explanation.

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

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

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

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

In terms of the inflation data it had this impact.

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

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

If we switch to the RPI we see this.

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

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

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

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

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

Are we sure?

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

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

The next bit is curious as what is still excluded?

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

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

The Trend

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

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

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

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

Owner Occupied Housing

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

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

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

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

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

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

Here is how this is officially reported.

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

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

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

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

Comment

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

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

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

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

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

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

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

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

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

Let me explain further via my reply.

Response

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

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

2012

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

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

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

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

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

2020

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

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

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

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

Are there problems with the RPI?

Jill Leyland also highlighted this.

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

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

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

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

RPI Superiority

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

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

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

Balance

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

Conclusion

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

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

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

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

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

Royal Statistical Society

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

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

The full reply is on its website.

Weekly Podcast

 

 

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

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

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

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

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

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

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

Down pointing backhand index

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

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

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

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

Today’s Numbers

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

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

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

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

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

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

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

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

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

There was bad news for smokers and drinkers too.

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

On the other side there was some good news.

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

What is coming next?

Perhaps rather similar numbers.

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

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

Comment

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

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

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

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

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

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

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

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

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

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

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

 

The fraudsters want to raise the US inflation target

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

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

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

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

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

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

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

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

What about now?

Here is CNBC from earlier this month.

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

Actually then CNBC became refreshingly honest.

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

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

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

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

Fake tales of San Francisco
Echo through the room

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

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

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

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

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

Comment

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

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

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

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

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

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

The Investing Channel

China is suffering from food and especially pork inflation

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

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

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

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

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

Pork Prices

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

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

The annual numbers further remind us of the issue.

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

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

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

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

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

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

The official view of the Ministry of Agriculture is this.

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

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

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

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

Food Overall

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

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

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

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

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

Fuel

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

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

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

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

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

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

Comment

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

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

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

Podcast on GDP

 

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

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

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

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

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

Causes

The monthly ebbs and flows are shown below.

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

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

Measurement Problems

These are ongoing.

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

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

The Trend

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

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

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

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

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

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

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

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

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

Comment

Let me now bring in the other measures of inflation.

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

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

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

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

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

 

UK inflation measurement is in crisis

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

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

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

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

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

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

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

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

Today’s Data

A further fall was recorded in terms of the annual rate

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

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

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

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

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

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

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

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

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

Does anybody believe health costs are falling?

On the other side of the coin was this.

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

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

Retail Prices Index

This too saw a fall in the annual rate.

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

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

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

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

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

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

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

Comment

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

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

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

Indeed there was more.

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

This has a consequence.

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

Here are the numbers.

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

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

The Investing Channel

Where will all the extra US Money Supply end up?

Today brings both the US economy and monetary policy centre stage. The OECD has already weighed in on the subject this morning.

The COVID-19 outbreak has brought the longest economic expansion on record to a juddering halt. GDP
contracted by 5% in the first quarter at an annualised rate, and the unemployment rate has risen
precipitously. If there is another virus outbreak later in the year, GDP is expected to fall by over 8% in 2020
(the double-hit scenario). If, on the other hand, the virus outbreak subsides by the summer and further
lockdowns are avoided (the single-hit scenario), the impact on annual growth is estimated to be a percentage
point less.

Actually that is less than its view of many other countries. But of course we need to remind ourselves that the OECD is not a particularly good forecaster. Also we find that the official data has its quirks.

Total nonfarm payroll employment rose by 2.5 million in May, and the unemployment rate
declined to 13.3 percent, the U.S. Bureau of Labor Statistics reported today……In May, employment rose sharply in leisure and hospitality, construction, education and health services, and retail trade. By contrast, employment
in government continued to decline sharply……….The unemployment rate declined by 1.4 percentage points to 13.3 percent in May, and the number of unemployed persons fell by 2.1 million to 21.0 million.

Those figures not only completely wrong footed the forecasters they nutmegged them as well in one of the most spectacular examples of this genre I have seen. I forget now if they were expecting a rise in unemployment of eight or nine million but either way you get the gist. We do not know where we are let alone where we are going although the Bureau of Labor Statistics did try to add some clarity.

If the workers who were recorded as employed but absent from work due to “other  reasons” (over and above the number absent for other reasons in a typical May) had
been classified as unemployed on temporary layoff, the overall unemployment rate  would have been about 3 percentage points higher than reported (on a not seasonally  adjusted basis).

We learn more about the state of play from the New York Federal Reserve.

The New York Fed Staff Nowcast stands at -25.5% for 2020:Q2 and -12.0% for 2020:Q3. News from this week’s data releases increased the nowcast for 2020:Q2 by 10 percentage points and increased the nowcast for 2020:Q3 by 24.5 percentage points. Positive surprises from labor, survey, and international trade data drove most of the increase.

As you can see the labo(u)r market data blew their forecasts like a gale and leave us essentially with the view that there has been a large contraction but also a wide possible and indeed probable error range.

The Inflation Problem

We get the latest inflation data later after I publish this piece. But there is a problem with the mantra we are being told which is that there is no inflation. Something similar to the April reading of 0.3% is expected. So if we switch to the measure used by the US Federal Reserve which is based on Personal Consumption Expenditures the annual rate if we use our rule of thumb would in fact be slightly negative right now. On this basis Chair Powell and much of the media can say that all the monetary easing is justified.

But there are more than a few catches which change the picture. Let me start with the issues I raised concerning the Euro area yesterday where the numbers will be pushed downwards by a combination of the weights being (very) wrong, many prices being unavailable and the switch to online prices. It would seem that the ordinary person has been figuring this out for themselves.

The May 2020 Survey of Consumer Expectations shows small signs of improvement in households’ expectations compared to April. Median inflation expectations increased by 0.4 percentage point at the one-year horizon to 3.0 percent, and were unchanged at the three-year horizon at 2.6 percent. ( NY Fed Research from Monday)

It is revealing that they describe an increase in inflation that is already above target as an “improvement” is it not? But we see a complete shift as we leave the Ivory Towers and media palaces as the ordinary person surveyed expects a very different picture. Still the Ivory Towers can take some solace from the fact that inflation is in what they consider to be non-core areas.

Expected year-ahead changes in both food and gasoline prices displayed sharp increases for the second consecutive month and recorded series’ highs in May at 8.7% and 7.8%, respectively, in May.

Just for the avoidance of doubt I have turned my Irony meter beyond even the “turn up to 11” of the film Spinal Tap.

Central bankers will derive some cheer from the apparent improvement in perceptions about the housing market.

Median home price change expectations recovered slightly from its series’ low of 0% reached in April to 0.6% in May. The slight increase was driven by respondents who live in the West and Northeast Census regions.

Credit

More food for thought is provided in this area. If we switch to US Federal Reserve policy Chair Jerome Powell will tell us later that the taps are open and credit is flowing. But those surveyed have different ideas it would seem.

Perceptions of credit access compared to a year ago deteriorated for the third consecutive month, with 49.6% of respondents reporting credit to be harder to get today than a year ago (versus 32.1% in March and 48.0% in April). Expectations for year-ahead credit availability also worsened, with fewer respondents expecting credit will become easier to obtain.

Comment

I now want to shift to a subject which is not getting the attention it deserves. This is the growth in the money supply where the three monthly average for the narrow measure M1 has increased in annualised terms by 67.2% in the three months to the 25th of May. Putting that another way it has gone from a bit over US $4 trillion to over US $5 trillion over the past 3 months. That gives the monetary system quite a short-term shove the size of which we can put into context with this.

In April 2008, M1 was approximately $1.4 trillion, more than half of which consisted of currency.  ( NY Fed)

Contrary to what we keep being told about the decline of cash it has grown quite a bit over this period as there is presently a bit over US $1.8 trillion in circulation.

Moving to the wider measure M2 we see a similar picture where the most recent three months measured grew by 40.6% compared to its predecessor in annualised terms. Or if you prefer it has risen from US $15.6 billion to US $18.1 billion. Again here is the historical perspective from April 2008.

 M2 was approximately $7.7 trillion and largely consisted of savings deposits.

So here is a question for readers, where do you think all this money will go? Whilst you do so you might like to note this from the 2008 report I have quoted.

While as much as two-thirds of U.S. currency in circulation may be held outside the United States….

The Investing Channel

 

The one thing we can be sure of is that the inflation numbers are wrong

Today’s has brought us inflation data with more and indeed much more than its fair share of issues. But let me start by congratulating the BBC on this.

The UK’s inflation rate fell in April to its lowest since August 2016 as the economic fallout of the first month of the lockdown hit prices.

The Consumer Prices Index (CPI) fell to 0.8% from 1.5% in March, the Office for National Statistics (ONS) said.

Falling petrol and diesel prices, plus lower energy bills, were the main drivers pushing inflation lower.

But prices of games and toys rose, which the ONS said may have come as people occupied their time at home.

They have used the CPI inflation measure rather than the already widely ignored CPIH which the propagandists at HM Treasury are pushing our official statisticians to use. Although in something of an irony CPIH was lower this month! Also it would be better to use the much more widely accepted RPI or Retail Prices Index and the BBC has at least noted it.

Inflation as measured by the Retail Prices Index (RPI) – an older measure of inflation which the ONS says is inaccurate, but is widely used in bond markets and for other commercial contracts – dropped to 1.5% from 2.6%.

Yes it is pretty much only the establishment which makes that case about the RPI now as supporters have thinned out a lot. It also has strengths and just as an example does not require Imputed or fantasy Rents for the housing market as it uses actual prices for houses and mortgages.

So as an opener let us welcome the lower inflation numbers which were driven by this.

Petrol prices fell by 10.4 pence per litre between March and April 2020, to stand at 109.0 pence per litre, and
diesel prices fell by 7.8 pence per litre, to stand at 116.0 pence per litre……..which was the result of a 0.2% rise in
the price of electricity and a 3.5% reduction in the price of gas between March and April 2020, compared with price rises of 10.9% and 9.3% for electricity and gas over the same period last year.

Problems. Problems,Problems

Added to the usual list of these was the fact that not only did the Office for National Statistics have to shift to online price collection for obvious reasons which introduces a downwards bias there was also this.

Hi Shaun, the number of price quotes usually collected in store was about 64% of what was collected in February – so yes just over a third. This is for the local collection only.

Let me say thank you to Chris Jenkins for replying so promptly and confirming my calculations. However the reality is that there is a problem and let me highlight with one example.

prices for unavailable seasonal items such as international travel were imputed for April 2020. This imputation was calculated by applying the all-items annual growth rate to the index from April 2019.

Yes you do read that correctly and more than one-third of the index was imputed. In addition to this rather glaring problem there is the issue of the weighting being wrong and I am sure you are all already thinking about the things you have spent more on and others you have spent less on. Officially according to our Deputy National Statistician Jonathan Athow it does not matter much.

A second was to also account for lower consumption of petrol and diesel, which has been falling in price. Reducing the weight given to petrol and diesel gives a figure similar to the official CPI estimate.

Sadly I have learnt through experience that such research is usually driven by a desire to achieve the answer wanted rather than to illuminate things. If we switch to the ordinary experience I was asked this earlier on social media.

Are face masks and hand sanitiser included in the CPI basket? (@AnotherDevGuy)

I have just checked and they are not on the list. This poses a couple of issues as we note both the surge in demand ( with implications for weighting) and the rise in price seen. A couple of area’s may pick things up as for example household cleaners are on the list and judging by their suddenly popularity albeit in a new role lady’s scarves but they are on the margins and probably underweighted.

The New Governor Has A Headache

If we check the inflation remit we see that the new Governor Andrew Bailey will be getting out his quill pen to write to the new Chancellor Rishi Sunak.

If inflation moves away from the target by more than 1 percentage point in either direction, I
shall expect you to send an open letter to me, covering the same considerations set out above
and referring as necessary to the Bank’s latest Monetary Policy Report and forecasts, alongside
the minutes of the following Monetary Policy Committee meeting.

He will of course say he is pumping it up with record low interest-rates and the like. He is unlikely to be challenged much as this morning has brought news of a welcome gift he has given the Chancellor.

Negative Interest-Rates in the UK Klaxon!

For the first time the UK has issued a Gilt (bond) with a negative yield as the 2023 stock has -0.003%. So yes we are being paid to borrow money.

A marginal amount but it establishes a principle which we have seen grow from an acorn to an oak tree elsewhere.

There is trouble ahead

There are serious issues I have raised with the ONS.

How will price movements for UK houses be imputed when there are too few for any proper index? The explanation is not clear at all and poses issues for the numbers produced.

Also this feeds into another issue.

“It should be noted that the methodologies used in our consumer price statistics for many of these measures tend to give smoothed estimates of price change and will therefore change slowly.”

The suspension of the house price index below after today poses big problems for the RPI which uses them and actually as happens so often opens an even bigger can of worms which is smoothing.

In other words we are being given 2019 data in 2020 and this is quite unsatisfactory. So whilst the ONS may consider this a tactical success it is a strategic failure on the issue of timeliness for official statistics. I think all readers of this would like to know more detail on the smoothing process here as to repeat myself it goes against the issue of producing timely and relevant numbers.

Some of you may recall the disaster smoothing had on the with-profits investment industry and once people understand its use in inflation data there will be plenty of issues with it there too. My full piece for those who want a fuller picture is linked to below.

https://www.statsusernet.org.uk/t/measuring-prices-through-the-covid-19-pandemic/8326/2

Comment

As the media projects lower inflation ahead sadly the picture is seeing ch-ch-changes,

Oil prices rose for a fourth straight session on Tuesday amid signs that producers are cutting
output as promised just as demand picks up, stoked by more countries easing out of curbs
imposed to counter the coronavirus pandemic. Brent crude, climbed 25 cents or 0.7% to
$35.06 a barrel, after earlier touching its highest since April 9. (uk.reuters.com 19 May 2020)

That may not feed into the May data but as we move forwards it will. That also highlights something which may be one of the Fake News events of our time which is the negative oil price issue. Yes it did happen but since then we have seen quite a bounce as we are reminded that some issues are complex or in this instance a rigged game.

How much of other price rises the inflation numbers will pick up is open to serious doubt. Some of this is beyond the control of official statistics as they could hardly be expected to know the changes in the patterns for face masks for example. But the numbers will be under recorded right now due to factors like this from the new HDP measure.

Out of stock products have been removed where these are clearly labelled, however, there may be products out of stock that have still been included for some retailers. If the price of these items do not change, this could cause the index to remain static.

What do you think might have happened to prices if something is out of stock?

Meanwhile there is another signal that inflation may be higher ahead.

BoE Deputy Governor Ben Broadbent said it might go below zero around the end of 2020

The reality is of a complex picture of disinflation in some areas and inflation sometimes marked inflation in others.

 

 

 

The Bank of England sets interest-rates for the banks and QE to keep debt costs low

This morning has seen a change to Bank of England practice which is a welcome one. It announced its policy decisions at 7 am rather than the usual midday. Why is that better? It is because it voted last night so cutting the time between voting and announcing the result reduces the risk of it leaking and creating an Early Wire. The previous Governor Mark Carney preferred to have plenty of time to dot his i’s and cross his t’s at the expense of a clear market risk. If it was left to me I would dully go back to the old system where the vote was a mere 45 minutes before the announcement to reduce the risk of it leaking. After all the Bank of England has proved to be a much more leaky vessel than it should be.

Actions

We got further confirmation that the Bank of England considers 0.1% to be the Lower Bound for official UK interest-rates.

At its meeting ending on 6 May 2020, the MPC voted unanimously to maintain Bank Rate at 0.1%.

That is in their terms quite a critique of the UK banking system as I note the Norges Bank of Norway has cut to 0% this morning and denied it will cut to negative interest-rates ( we know what that means) and of course the ECB has a deposit rate of -0.5% although to keep that it has had to offer Euro area banks a bung ( TLTRO) at -1%

Next comes an area where action was more likely and as I will explain we did get a hint of some.

The Committee voted by a majority of 7-2
for the Bank of England to continue with the programme of £200 billion of UK government bond and sterling
non-financial investment-grade corporate bond purchases, financed by the issuance of central bank reserves, to
take the total stock of these purchases to £645 billion. Two members preferred to increase the target for the
stock of asset purchases by an additional £100 billion at this meeting.

The two who voted for “More! More! More!” were Jonathan Haskel and Michael Saunders. The latter was calling for higher interest-rates not so long ago so he has established himself as the swing voter who rushes to vote for whatever is right in front of his nose. Anyway I suspect it is moot as I expect them all to sing along with Andrea True Connection in the end.

(More, more, more) how do you like it, how do you like it
(More, more, more) how do you like it, how do you like it

What do they expect?

The opening salvo is both grim and relatively good.

The 2020 Q1 estimate of a fall in GDP of around 3% had been informed by a wide range of high-frequency indicators, as set out in the May Monetary Policy Report.

A factor in that will be that the UK went into its version of lockdown later than many others. But then the hammer falls.

The illustrative scenario in the May Report incorporated a very sharp fall in UK GDP in 2020 H1 and a
substantial increase in unemployment in addition to those workers who were furloughed currently. UK GDP was
expected to fall by around 25% in Q2, and the unemployment rate was expected to rise to around 9%. There were large uncertainty bands around these estimates.

As you can see GDP dived faster than any submarine But fear not as according to the Bank of England it will bounce like Zebedee.

UK GDP in the scenario falls by 14% in 2020 as a whole. Activity picks up materially in the latter part of 2020 and into 2021 after social distancing measures are relaxed, although it does not reach its pre‑Covid level until the second half of 2021 . In 2022, GDP growth is around 3%. Annual household consumption growth follows a similar
pattern.

Is it rude to point out that it has been some time since we grew by 3% in a year? If so it is perhaps even ruder to point out that it is double the speed limit for economic growth that the Bank of England keeps telling us now exists. I guess they are hoping nobody spots that.

Anyway to be fair they call this an illustrative scenario although they must be aware it will be reported like this.

NEW: UK GDP set for ‘dramatic’ 14% drop in 2020 amid coronavirus shutdown, Bank of England predicts ( @politicshome )

Inflation Problems

In a way this is both simple and complicated. Let us start with the simple.

CPI inflation had declined to 1.5% in March and was likely to fall below 1% in the next few months, in large
part reflecting developments in energy prices. This would require an exchange of letters between the Governor
and the Chancellor of the Exchequer.

So for an inflation targeting central bank ( please stay with me on this one for the moment) things are simple. Should the Governor have to write to the Chancellor he can say he has cut interest-rates to record lows and pumped up the volume of QE. The Chancellor will offer a sigh of relief that the Bank of England is implicitly funding his spending and try to write a letter avoiding mentioning that.

However things are more complex as this sentence hints.

Measurement challenges would temporarily increase the noise in the inflation data, and affect the nature and behaviour of the index relative to a normal period.

It is doing some heavy lifting as I note this from the Office for National Statistics.

There are 92 items in our basket of goods and services that we have identified as unavailable for the April 2020 index (see Annex B), which accounts for 16.3% of the CPIH basket by weight. The list of unavailable items will be reviewed on a monthly basis.

There is their usual obsession with the otherwise widely ignored CPIH, But as you can see there are issues for the targeted measure CPI as well and they will be larger as it does not have imputed rents in it. A rough and ready calculation suggests it will be of the order of 20%. Also a downwards bias will be introduced by the way prices will be checked online which will mean that more expensive places such as corner shops will be excluded.

Also I am not surprised the Bank of England does not think this is material as the absent-minded professor Ben Broadbent is the Deputy Governor is in charge of this area but I do.

The ONS and the joint producers have taken the decision to temporarily suspend the UK House Price Index (HPI) publication from the April 2020 index (due to be released 17 June 2020) until further notice……..The UK HPI is used to calculate several of the owner occupiers’ housing costs components of the RPI. The procedures described in this plan apply to those components of the RPI that are based on the suspended UK HPI data.

Perhaps they will introduce imputed rents via the back door which is a bit sooner than 2030! Also the point below is rather technical but is a theme where things turn out to be different from what we are told ( it is annual) so I will look into it.

 

Unfortunately, since weights are lagged by two years, we would see no effect until we calculate the 2022 weights1. This means that the current weights are not likely to be reflective of current expenditure and that the 2022 weights are unlikely to be reflective of 2022 expenditure.

That sort of thing popped up on the debate about imputed rents when it turned out that they are (roughly) last year’s rather than the ones for now.

Comment

There are three clear issues here. Firstly as we are struggling to even measure inflation the idea of inflation-targeting is pretty much a farce. That poses its own problems for GDP measurement. Such as we have is far from ideal.

The all HDP items index show a stable increase over time, with an increase of 1.1% between Week 1 and Week 7. The index of all food has seen no price change from Week 5 to Week 7, resulting in a 1.2% price increase since Week 1.

As to Bank of England activity let me remind you of a scheme which favours larger businesses as usual.

As of 6 May, the Covid Corporate Financing Facility
(CCFF), for which the Bank was acting as HM Treasury’s agent, had purchased £17.7 billion of commercial
paper from companies who were making a material contribution to the UK economy.

I wonder if Apple and Maersk are on the list like they are for Corporate Bonds?

Within that increase, £81 billion of UK government bonds,
and £2.5 billion of investment-grade corporate bonds, had been purchased over recent weeks.

By the way that means that their running totals have been wrong. As to conventional QE that is plainly targeted at keeping Gilt yields very low ( the fifty-year is 0.37%)

Let me finish by pointing out we have a 0.1% interest-rate because it is all the banks can stand rather than it being good for you,me or indeed the wider business sector. Oh did I mention the banks?

As of 6 May, participants had drawn £11 billion from the TFSME

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