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

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.

 

 

 

Do we know where we are going in terms of inflation and house prices?

The credit crunch has posed lots of questions for economic statistics but the Covid-19 epidemic is proving an even harsher episode. Let me illustrate with an example from my home country the UK this morning.

The all items CPI annual rate is 1.5%, down from 1.7% in February…….The all items CPI is 108.6, unchanged from last month.

So the March figures as we had been expecting exhibited signs of a a downwards trend. But in terms of an economic signal one of the features required is timeliness and through no fault of those compiling these numbers the world has changed in the meantime. But we do learn some things as we note this.

The CPI all goods index annual rate is 0.6%, down from 1.0% last month…..The CPI all goods index is 105.7, down from 105.8 in February.

The existing world economic slow down was providing disinflationary pressure for goods and we are also able to note that domestic inflationary pressure was higher.

The CPI all services index annual rate is 2.5%, unchanged from last month.

So if it is not too painful to use a football analogy at a time like this the inflation story was one of two halves.

Although as ever the picture is complex as I note this.

The all items RPI annual rate is 2.6%, up from 2.5% last month.

Not only has the RPI risen but the gap between it and CPI is back up to 1.1%. Of this some 0.4% relates to the housing market and the way that CPI has somehow managed to forget that owner occupied housing exists for around two decades now. Some episode of amnesia that! Also in a rather curious development the RPI had been lower due to different weighting of products ( partly due to CPI omitting owner-occupied housing) which pretty much washed out this month giving us a 0.3% shift on the month.

Of course the RPI is unpopular with the UK establishment because it gives higher numbers and in truth is much more trusted by the wider population for that reason.

But let me give you an irony for my work from a different release.

UK average house prices increased by 1.1% over the year to February 2020, down from 1.5% in January 2020.

I have argued house prices should be in consumer inflation measures as they are in the RPI albeit via a depreciation system. But we are about to see them fall and if we had trade going on I would be expecting some large falls. Apologies to the central bankers who read my blog if I have just made your heart race. Via this factor we could see the RPI go negative again like it did in 2009 although of course the mortgage rate cuts which also helped back then are pretty much maxxed out now.

If we switch to the widely ignored measure that HM Treasury is so desperately pushing we will see changes here as well.

Private rental prices paid by tenants in the UK rose by 1.4% in the 12 months to March 2020, unchanged since February 2020…..Private rental prices grew by 1.4% in England, 1.2% in Wales and by 0.6% in Scotland in the 12 months to March 2020…..London private rental prices rose by 1.2% in the 12 months to March 2020.

Rises in rents are from the past. I have been told of examples of rents being cut to keep tenants. Of course that is only anecdotal evidence but if we look at the timeliness issue at a time like this it is all we have. Returning to the conceptual issue the whole CPIH and Imputed Rents effort may yet implode as we mull this announcement.

Cancelled

The comparison of private rental measures between the Office for National Statistics and private sector data will be published in the Index of Private Housing Rental Prices bulletin released on 22 April 2020.

Oh well! As Fleetwood Mac would say.

Oil Prices

We can look at a clear disinflationary trend via the inflation data and to be fair our official statisticians are awake.

U.S. crude oil futures turned negative for the first time in history, falling to minus $37.63 a
barrel as traders sold heavily because of rapidly filling storage space at a key delivery point.
Brent crude, the international benchmark, also slumped, but that contract is not as weak
because more storage is available worldwide. The May U.S. WTI contract fell to settle at a
discount of $37.63 a barrel after touching an all-time low of -$40.32 a barrel. Brent was down
to $25.57 a barrel. (uk.reuters.com 19 April 2020)

Actually Brent Crude futures for June are now US $18 so more is on its way than they thought but it is a fast moving situation. If we look at diesel prices we see that falls were already being noted as per litre prices had gone £1.33, £1.28 and £1.24 so far this year. As of Monday that was £1.16 which of course is well before the recent plunge in oil prices. This feeds in to the inflation data in two ways.

A 1 pence change on average in the cost of a litre of motor fuel contributes approximately 0.02 percentage points to the 1-month change in the CPIH.

Also in another way because the annual comparison will be affected by this.

When considering the price of petrol between March and April 2020, it may be useful to note
that the average price of petrol rose by 3.8 pence per litre between March and April 2019, to
stand at 124.1 pence per litre as measured in the CPIH.

If we switch to the producer price series we see that the Russo/Saudi oil price turf war was already having an impact.

The annual rate of inflation for materials and fuels purchased by manufacturers (input prices) fell by 2.9% in March 2020, down from negative 0.2% in February 2020. This is the lowest the rate has been since October 2019 and the sixth time in the last eight months that the rate has been negative.

The monthly rate for materials and fuels purchased was negative 3.6% in March 2020, down from negative 0.9% in February 2020. This is the lowest the rate has been since January 2015.

Roughly they will be recording about half the fall we are seeing now.

Comment

These times are providing lots of challenges for economic statistics. For example if we stay with oil above then it is welcome that consumers will see lower prices but it is also true we are using less of it so the weights are wrong ( too high). As to this next bit I hardly know where to start.

Air fares have shown variable movements in April which can depend on the position of Easter.

I could of course simply look at the skies over Battersea which are rather empty these days. I could go on by looking at the way foreign holidays are in the RPI and so on. There will of course be elements which are booming for example off-licence alcohol sales. DIY is booming if the tweet I received yesterday saying paint for garden fences had sold out is any guide. So you get the drift.

Returning to other issues the UK remains prone to inflation as this suggests.

“It’s right that retailers charge a fair price for fuel that reflects the price of the raw product, and in theory petrol prices could fall below £1 per litre if the lower wholesale costs were reflected at the pumps – but at the same time people are driving very few miles so they’re selling vastly lower quantities of petrol and diesel at the moment. This means many will be at pains to trim their prices any further.” ( RAC)

We learnt last week that some areas are seeing a fair bit of it as the new HDP ( Higher Demand Products) inflation measure recorded 4.4% in just 4 weeks.

So there are plenty of challenges. Let me give you an example from house prices where volumes will be so low can we calculate an index at all? Regular readers may recall I have pointed this out when wild swings have been recorded in Kensington and Chelsea but based on only 2 sales that month. What could go wrong?

Also we are in strange times. After all someone maybe have borrowed at negative interest-rates this week to buy oil at negative prices and then maybe lost money. If so let us hope they get some solace from some glam-rock from the 70s which is rather sweet.

Does anyone know the way?
Did we hear someone say
“We just haven’t got a clue what to do!”
Does anyone know the way?
There’s got to be a way
To Block Buster!

 

 

We are facing both inflation and disinflation at once

Before we even get to the issue of inflation data we have been provided an international perspective from China Statistics.

According to the preliminary estimates, the gross domestic product (GDP) of China was 20,650.4 billion yuan in the first quarter of 2020, a year-on-year decrease of 6.8 percent at comparable prices.

This provides several perspectives. Firstly there is clear deflation there and as this gets confused let me be clear that it is a fall in aggregate demand and whether you believe the China data or not there has clearly been a large fall. That is likely to have disinflationary influences but is not necessary the same thing as many assume.

After all China has had an area where the heat is on as Glenn Frey would say for some time.

pork up by 122.5 percent, specifically, its prices went up by 116.4 percent in March, 18.8 percentage points lower than February.

This contributed to this.

Grouped by commodity categories, prices for food, tobacco and alcohol went up by 14.9 percent year on year;

Vegetable prices were up by 9% too adding to the food inflation and this led to the Chinese being poorer overall.

In March, the consumer price went up by 4.3 percent…….In the first quarter, the nationwide per capita disposable income of residents was 8,561 yuan, a nominal increase of 0.8 percent year on year, or a real decrease of 3.9 percent after deducting price factors.

Regular readers will be aware that a feature of my work is to look at the impact of inflation on the ordinary worker and consumer as opposed to central bankers who love to torture the numbers to get the answer they wanted all along. An example of this is the use of core inflation which excludes two of the most vital components which are food and energy. Also if you use the European measure called CPI in the UK you miss a dair bit of shelter as well as owner-occupied housing is ignored.

The Bank of England

One of its policymakers Silvana Tenreyro was drumming a familiar beat yesterday.

During Covid-19, large, temporary changes in relative prices and consumption expenditure shares will make inflation data difficult to interpret.

Many of you are no doubt thinking that higher prices will be “looked through” and falls will led to some form of a central banking war dance. In an accident of timing we were updated on this subject by the Office for National Statistics yesterday as well.

Prices for the HDP basket increased by 1.8% from 30 March to 5 April (week 3) to 6 April to 12 April (week 4) with prices for all long-life food items decreasing by 1.5% and all household and hygiene items increasing by 1.1%.

At a more detailed level, prices for pet food and rice rose by 8.4% and 5.8% respectively, while prices of pasta sauce fell by 4.5% (note that the size of the sample means that sometimes single retailers can contribute to substantial movements at the item level).

Firstly let me welcome this new initiative from the ONS which in fact is likely to be too low as to be fair even they admit. If you look at the Statsusernet website I have made some suggestions but for now let me point out that something were prices are likely to have shot up ( face masks) have been dropped. The overall picture is as below.

Movements in the all HDP items index show a stable increase over time, with an increase of 4.4% since week 1. Pet food has a high weight in the all HDP items basket and is one of the main drivers of this change.

Up is the new down

Silvana seems to be heading in another direction though.

.Current policy actions will help counterbalance some of
this underlying weakness in inflation.

If she was aware of the numbers above maybe she has a sense of humour. Sadly we then get an outright misrepresentation.

Low and stable inflation is an essential pre-requisite for longer-term economic prosperity.

For example the Industrial Revolution must have seen quite large disinflation and in modern times areas of technology have seen enormous advances and price falls. This next bit is wrong too.

And it allows households, businesses and governments to finance their spending without introducing inflation risk premia to their borrowing costs.

If the inflation target of 2% per annum is hit as is her claimed objective then that is a clear inflation risk premium that needs to be paid. We are back to the central banking fantasy that 2% per annum is of significance rather than plucked out of thin air because it seemed right.

Indeed she continues in the same vein.

Our recent policy decisions will help ensure price stability by mitigating any deflationary pressures arising
from recent events.

Just for clarity central bankers merge both deflationary and disinflationary pressures and as she says there has already been a policy response.

The MPC’s policy actions have involved reducing Bank Rate from 0.75% to 0.1%, introducing a Term
Funding scheme with additional incentives for Small and Medium-sized Enterprises (TFSME) and increasing
the size of our asset purchase programme, or quantitative easing, by £200 billion.

That gets awkward when she shifts to agreeing with me about inflation trends..

The exact effect of these issues, or even the sign of their effect, is going to be difficult to gauge.

Why? Again we are in agreement.

The key conceptual challenge is that there have been large shifts in spending patterns, which will change the
representative household consumption basket. Spending on social consumption has stopped almost
completely, for example, while spending on essentials from supermarkets has increased markedly.

Then she is in agreement again.

There are also likely to be considerable shifts in the prices of some goods still in high demand relative to
those no longer being purchased

Trouble is she had already acted.

Disinflation

A clear sign of a disinflationary trend is the price of crude oil. There are all sorts of issues with measuring it but according to oilprice.com the WTI benchmark is around US $25 and Brent Crude around US $28. Both have more than halved compared to this time last year.

Silvana looks at this with relation to labour costs and maybe my influence is beginning to spead as she wonders about the numbers.

While not mismeasurement per se, measured
productivity growth has been stronger in consumer goods producing sectors than in aggregate. Thinking
about how the consumption basket relates to inflation behaviour may be crucial over the coming years, given
the vast changes we are currently seeing in spending patterns.

We diverge on the fact that I think there has been mismeasurement.

As to the weakness in commercial rents I think most of you can figure that one out merely be looking at your local high street.

There are a range of possible explanations for the weakness in rent inflation over the past few years.

Comment

Let me welcome a Bank of England policymaker actually looking at inflation developments and doing some thinking. But as an external member I think one should be going further. For example I know she is looking mostly at commercial rents but there have been similar issues with ordinary rents but where is the challenge to these numbers being foisted on the owner-occupied housing sector. Or indeed the attempt to gerrymander the inflation data by replacing house prices and mortgage rates with Imputed Rents in the Retail Prices Index?

The UK Statistics Authority (the Authority) and HM Treasury are jointly consulting on reforming the methodology of the Retail Prices Index (RPI).

If you like it will be a case of one inflation measure to rule them all and in the darkness bind them. At least the consultation has now been extended until August as believe it or not they were hoping to get away with running it during the lockdown. As to the changes let me hand you over to the RPI-CPI User Group of the Royal Statistical Society.

1. The UKSA is consulting on how to splice the RPI and CPIH together – effectively replacing RPI with CPIH, but retaining the name RPI.
2. The Treasury is consulting on when (between 2025 and 2030) this change should take place.
Importantly, neither is consulting on whether this change should be made.

Looking ahead we will see pockets of inflation in for example medical areas and as some are reporting essential goods too. Or rather what are called non-core by central bankers and Ivory Towers.

My usual essential shopping has cost between £32 – £38 for months, now jumped to £42 – £48. Inflation, the quiet poverty maker. ( @KeithCameron5 )

In other areas like fuel costs we will see disinflation. But further ahead as we see production of some items brought back to domestic industry we are likely to see higher prices. So our central bankers have abandoned inflation targeting if you look several years ahead as they are supposed to.

 

 

 

The UK government plans to rip us all off

This morning has seen the publishing of some news which feels like it has come from another world.

The all items CPI annual rate is 1.7%, down from 1.8% in January…….The all items RPI annual rate is 2.5%, down from 2.7% last month.

Previously we would have been noting the good news and suggesting that more is to come as we look up the price chain.

The headline rate of output inflation for goods leaving the factory gate was 0.4% on the year to February 2020, down from 1.0% in January 2020. The price for materials and fuels used in the manufacturing process displayed negative growth of 0.5% on the year to February 2020, down from positive growth of 1.6% in January 2020.

There is something that remains relevant however as I note this piece of detail.

Petroleum products made the largest downward contribution to the change in the annual rate of output inflation. Crude oil provided the largest downward contribution to the change in the annual rate of input inflation.

That is something which is set to continue because if we look back to February the base for the oil price ( Brent Crude) was US $50 whereas as I type this it is US $27.50. So as you can see input and output costs are going to fall further. This will be offset a bit by the lower UK Pound £ but I will address it later. In terms of consumer inflation the February figures used are for diesel at 128.2 pence per litre whereas the latest weekly number is for 123.4 pence which is some 7.7% lower than a year ago. So there will be a downwards pull on inflation from this source.

There is a bit of an irony here because the Russo/Saudi turf war which began the oil price fall on the supply side has been overtaken by the large falls in demand we are seeing as economies slow. According to The Guardian we may run out of spaces to put it.

Analysts at Rystad estimate that the world has about 7.2bn barrels of crude and products in storage, including 1.3bn to 1.4bn barrels onboard oil tankers at sea.

In theory, it would take nine months to fill the world’s remaining oil stores, but constraints at many facilities will shorten this window to only a few months.

The Rip-Off

The plan hatched by a combination of HM Treasury and its independent puppets the UK Statistics Authority and the Office for National Statistics is to impose a type of stealth tax of 1% per annum. How?

In drawing up his advice, the National Statistician considered the views of the Stakeholder Advisory Panel on Consumer Prices (APCP-S). The Board accepted his advice and that was the basis of the proposals we put to the Chancellor to cease publication of RPI and in the short term to bring the methods of CPIH into RPI.The Chancellor responded that he was not minded to promote legislation to end RPI, but that the Government intended to consult on whether to bring the methods in CPIH into RPI between 2025 and 2030, effectively aligning the measures.

The emphasis is mine and the plan is to put the fantasy Imputed Rents that are used in the widely ignored CPIH into the RPI. There is good reason that the CPIH has been ignored so let me explain why. In the UK the housing market is a big deal and so you might think what owner-occupiers pay would be a considerable influence on inflation. But in 2002 a decision was made to completely ignore it in the new UK inflation measure called CPI ( Consumer Prices Index).

Putting it in was supposed to be on its way but plans took a decade and the saga took a turn in 2012 when the first effort to use Imputed Rents began. It got strong support from the Financial Times economics editor Chris Giles at the time. He stepped back from that when it emerged that there had been a discontinuity in the numbers, which in statistical terms is a disaster. So the fantasy numbers ( owner-occupiers do not pay rent) are based on an unproven rental series.

Why would you put a 737 Max style system when you have a reliable airplane? You would not, as most sensible people would be debating between the use of the things that are paid such as house prices and mortgage payments. That is what is planned in the new inflation measure which has been variously called HII and HCI. You may not be surprised to learn that there have been desperate official efforts to neuter this. Firstly by planning to only produce it annually and more latterly by trying to water down any house price influence.

At a time like this you may not think it is important but when things return to normal losing around 1% per year every year will make you poorer as decisions are made on it. Also it will allow government’s to claim GDP and real wages are higher than they really are.

Gold

There is a lot going on here as it has seen its own market discontinuity which I will cover in a moment. But we know money is in the offing as I note this from the Financial Times.

Gold continued to push higher on Tuesday as a recent wave of selling dried up and Goldman Sachs told its clients the time had come to buy the “currency of last resort”. Like other asset classes, gold was hit hard in the recent scramble for US dollars, falling more than 12 per cent from its early March peak of around $1,700 a troy ounce to $1,460 last week.  The yellow metal started to see a resurgence on Monday, rising by more than 4 per cent after the Federal Reserve said it would buy unlimited amounts of government bonds and the US dollar fell.

So we know that the blood funnel of the Vampire Squid is up and sniffing. On its view of ordinary clients being “Muppets” one might reasonably conclude it has some gold to sell.

Also there have been problems in the gold markets as I was contacted yesterday on social media asking about the gold price. I was quoting the price of the April futures contact ( you can take the boy out of the futures market but you cannot etc….) which as I type this is US $1653. Seeing as it was below US $1500 that is quite a rally except the spot market was of the order of US $50 below that. There are a lot of rumours about problems with the ability of some to deliver the gold that they owe which of course sets alight the fire of many conspiracy theories we have noted. This further went into suggestions that some banks have singed their fingers in this area and are considering withdrawing from the market.

Ole Hansen of Saxo Bank thinks the virus is to blame.

Having seen 100’s of anti-bank and anti-paper #gold tweets the last couple of days I think I will give the metal a rest while everyone calm down. We have a temporary break down in logistics not being helped by CME’s stringent delivery rules of 100oz bars only.

So we will wait and see.

Ah, California girls are the greatest in the world
Each one a song in the making
Singin’ rock to me I can hear the melody
The story is there for the takin’
Drivin’ over Kanan, singin’ to my soul
There’s people out there turnin’ music into gold ( John Stewart )

 

Comment

Quite a few systems are creaking right now as we see the gold market hit the problems seen by bond markets where prices are inconsistent. Ironically the central banks tactics are to help with that but their strategy is fatally flawed because if you buy a market on an enormous scale to create what is a fake price ( lower bond yields) then liquidity will dry up. I have written before about ruining bond sellers ( Italy) and buyers will disappear up here. Please remember that when the central banks tell us it is nothing to do with them and could not possibly have been predicted. Meanwhile the US Federal Reserve will undertake another US $125 billion of QE bond purchases today and the Bank of England some £3 billion. The ECB gives fewer details but will be buying on average between 5 and 6 billion Euros per day.

Next we have the UK deep state in operation as they try to impose a stealth tax via the miss measurement of inflation. Because they have lost the various consultations so far and CPIH has remained widely ignored the new consultation is only about when and not if.

The Authority’s consultation, which will be undertaken jointly with that of HM Treasury, will begin on 11 March. It will be open to responses for six weeks, closing on 22 April. HM Treasury will consult on the appropriate timing for the proposed changes to the RPI, while the Authority will consult on the technical method of making that change to the RPI.

Meanwhile for those of you who like some number crunching here is how a 123.4 pence for the price of oil gets broken down. I have done some minor rounding so the numbers add up.

Oil  44.9 pence

Duty 58 pence

VAT 20.5 pence

The plan to castrate the Retail Prices Index brings shame on UK statistics credibility

The Retail Prices Index or RPI has come in for quite a bit of official criticism over the past decade sometimes around the issue of what is called the Formula Effect and more rarely about the way it deals with the housing sector. The latter is more rare because many of the critics are not well informed enough to realise that house prices are in it as they are implicit via the use of depreciation. However to my mind this has been something of a sham and the real reason was highlighted in yesterday’s post.

UK real regular pay is now above its pre-crisis peak! If you like the CPIH measure of consumer prices. For CPI enthusiasts, it’s -1.8% below. For the RPI crew, it’s -7% below, for the RPIX hardcore, it’s -10.4%.

As you can see the RPI consistently gives a higher inflation reading hence using it real wages are lower. That is why official bodies such as the UK Statistics Authority with the dead hand of HM Treasury behind them keep trying to eliminate it. Let me illustrate by using the measures they have recommended RPI, then CPI and then CPIH as you can see from the quote above they keep recommending lower numbers. What a coincidence! This flatters real wages and GDP as consumer inflation is around 24% of the inflation measure used there so yes UK GDP has been inflated too. In fact by up to 0.5% a year,by the changes according to the calculations of  Dr.Mark Courtney.

They are back as this from the Chair of the UK Statistics Authority Sir (hoping to be Lord) David Norgrove shows.

We have been clear for a long time that RPI is not a good measure of inflation and its use should be discouraged. The proposals we put to the Chancellor are consistent with this longheld view.

That is very revealing as we have had several consultations and they have lost each one. In fact my view has gained more support over time because if you look at the facts putting a fantasy number as 17% of your inflation index as is done by putting Imputed Rents in CPIH is laughable when you can use an actual number like house prices. This is how they explain they lost. It does allow me to update my financial lexicon for these times where “wide range of views” equals “we keep losing”

There has since then been extensive consultation
and discussion about inflation measurement. All the statistical issues have been well aired. A
notable feature of these discussions was the wide range of opinions

They have lost so badly that this time around they have taken the possibility of losing out of the new plan.

The Authority’s consultation, which will
be undertaken jointly with that of HM Treasury, will begin on 11 March. It will be open to responses for six weeks, closing on 22 April. HM Treasury will consult on the appropriate timing for the proposed changes to the RPI, while the Authority will consult on the technical method of making that change to the RPI.

As you can see it is about how and when it will be done rather than what should be done. The plan is to put Imputed Rents in the RPI so it also records lower numbers. Regular readers may have noted Andrew Baldwin asking me to support his effort to stop a change to the inflation numbers calculated, which I did. You see that change will stop people like him and me being able to calculate what the impact of changing the RPI will be. You see at this point how the deep state operates. Along the way it exterminates an inflation measure which Andrew has supported after I may note the UK statistics establishment presented it ( RPIJ) as the next best thing to sliced bread. Before behaving like a spoilt child and taking their football home with them so no-one else can play.

Let me also address the Formula Effect issue. I have just explained above how suddenly they do not want people to be able to calculate it. Suspicious eh? But it is worse than that because all of the official propaganda ignores the fact that a lot of it is due to clothing prices and fashion clothing. We could find out as the statistician Simon Briscoe has suggested by suspending some of the clothing section for a while or producing numbers with and without it. After all CPI was the official measure for over a decade and it ignored owner occupied housing which is 17% of the index when included. But apparently you cannot exclude less than 1% which leads me to believe they already know the answer which presumably would be found in the 2012 pilot scheme which has been kept a secret.

Today’s Data

There was a quirk in the series meaning a rise was likely but not this much.

The all items CPI annual rate is 1.8%, up from 1.3% in December.

The factor which was mostly expected was this.

In January 2020, the largest upward contribution to the CPIH 12-month inflation rate came from housing and household services……….However, in January 2020, its contribution increased to 0.55 percentage points (an increase of 0.19 percentage points from December 2019), as the gas and electricity price reductions from January 2019 unwound.

I was a bit slack yesterday in saying that inflation will fall to help real wage growth when I should have put it is heading lower but the impact of regulatory moves will cause bumps in the road. Apologies.

Changes to Ofgem’s energy price cap introduce some volatility — with CPI inflation expected to pick up to 1.8% in 2020 Q1, before falling back to around 1¼% in the middle of the year. The expected reduction in water bills as a result of action by the regulator Ofwat is also expected to contribute to the fall in inflation in 2020 Q2.  ( Bank of England)

As it does not happen often let us congratulate the Bank of England on being on the money so far. Returning to UK inflation it was also pushed higher by this.

Rising pump prices and upward contributions from transport services (in particular, airfares) meant transport’s contribution rose to 0.22 percentage points in January 2020.

There was also a nudge higher ( 0.07% in total) from a more surprising area as we are know the retail sector is in trouble but clothing and footwear prices saw a slightly lower sales impact. There was a similar impact on restaurants and hotels where prices fell less than last year.Meanwhile.

The all items RPI annual rate is 2.7%, up from 2.2% last month.

House Prices

Sadly there are ongoing signs of a market turn.

The latest house price data published on GOV.UK by HM Land Registry for December 2019 show that average house prices in the UK increased by 2.2% in the year to December 2019, up from 1.7% in the year to November 2019 (Figure 1). Over the past three years, there has been a general slowdown in UK house price growth (driven mainly by a slowdown in the south and east of England), but there has been a pickup in annual growth since July 2019.

I was contacted on social media yesterday to be told that the market has really turned in Wales. The official numbers seem to have turned the other way though…

House price growth in Wales increased by 2.2% over the year to December 2019, down from 5.5% in November 2019, with the average house price in Wales at £166,000.

Maybe they will turn back in January.

Comment

A lot of today’s article has been comment via fact based opinions. Let me add two more factors. Firstly the UK establishment just as the Euro area has released it cannot get away any longer with ignoring the owner-occupied housing sector in its official inflation measure. Meaning the screams of those unable to afford housing have even penetrated the clouds around the skyscraper Ivory Towers of the ECB. Next whilst this may seem like a fait accompli it has seemed like this as every consultation has begun but each time so far I have ended up winning. If you think about it they are admitting they cannot win on the arguments by trying to eliminate them from the consultation.

As to this month’s data it is a shame to see a rise but with the UK Pound £ and the oil price where they are the trend should remain downwards. But there will be swings and roundabouts as the impact of utility price regulation comes into play.

UK Real Wages have not regained their previous peak

As we switch out focus to the UK labour market we see two contrasting forces being applied to it. The first comes from the better news being reported for the UK economy recently.

Financial wellbeing expectations hit survey-record high in
February ( IHS Markit )

That came only yesterday and according to it the outlook is brightening.

Looking ahead, UK households signalled positive expectations towards their financial health. The Future Household Finance Index – which measures expected change in financial health over the next 12 months – rose to 52.7 in February, from 49.6 in January. The level of optimism was at its highest since the data were first collected in February 2009, exceeding the previous
peak seen in January 2015.

This led according to the survey to a better labour market situation.

UK households recorded a lessened degree of pessimism
towards their job security during February, with the respective index rising (but remaining below 50.0) to a seven-month high. Meanwhile, the rate of growth in both workplace activity and income from employment accelerated from January.

This survey is a curious beast because the headline index which went from 44.6 to 47.6 in this report has never been in positive territory. Whilst in some ways that does cover out experience ( real wages for example) it does not cover the employment situation which has been pretty good.

This backed up the survey of the wider UK economy conducted by IHS Markit earlier this month.

At 53.3 in January, up from 49.3 in December, the seasonally adjusted IHS Markit/CIPS UK Composite Output Index posted above the neutral 50.0 mark for the first time since last August. The latest reading signalled a faster pace of growth than the earlier ‘flash’ estimate (52.4 in January) and was the highest for 16 months.

This too came with positive news for the labour market.

This uplift in success also created some business pressures
as the rush to increase staffing levels resulted in demands
for higher salaries.

Apple and HSBC

Last night, however, brought a reminder that on a world wide scale there is an ongoing economic impact from the Corona Virus.

Apple Inc become the latest company to flag lower revenue as a result of the epidemic, saying it would not meet its revenue guidance for the March quarter because of slower iPhone production and weaker demand in China. ( Reuters)

The main Apple market is not yet open due to yesterday being Presidents Day but more minor markets have suggested it will open more than 4% lower. I note that Reuters is also reporting this for the Chinese economy.

Analysts at Nomura again downgraded their China first-quarter economic growth forecast, to 3%, half the pace in the fourth quarter, and said there was a risk it could be even weaker.

This morning we have seen another consequence of the era of treating banks as The Precious.

HSBC posted plummeting profits for 2019 today as it outlined plans to get rid of $100bn (£77bn) of assets and dramatically downsize its investment banking arm in a restructure that will cost 35,000 jobs over the next three years. ( City-AM )

We know that the situation is really poor because the chief executive has deployed the word “resilient” which we have learnt means anything but.

Today’s Data

Employment

The long sequence of good news in this area continues.

The UK employment rate was estimated at a record high of 76.5%, 0.6 percentage points higher than a year earlier and 0.4 percentage points up on the previous quarter.

If we look further we see that such numbers are based on this.

There was a 180,000 increase in employment on the quarter. This was, again, mainly driven by quarterly increases for full-time workers (up 203,000 – the largest increase since March to May 2014), and for women (up 150,000 – the largest increase since February to April 2014). The quarterly increase for women working full-time (also up 150,000) was the largest since November 2012 to January 2013.

Actually this continues to be a remarkable performance and is a clear gain in the credit crunch era. However we do need context because there is for example an element of subjectivity in the definition of full-time work. Those completing the survey are guided towards 16 hours per week which is a bit low in itself but they can also ignore that. Also the rise in female employment is no doubt influenced by the rise in the retirement age for them.

The overall position is that on this measure things turned for the UK economy in 2012 a year earlier that GDP picked up. Regular readers will recall that back then we were worried about it being part-time but that has changed. Overall though there has been a pick-up in self-employment with ebbs and flows which is currently flowing.

Whilst there is an implicit rather than explicit link to unemployment ( as there is also the inactivity category) the good employment news has driven this.

the estimated UK unemployment rate for all people was 3.8%; this is 0.2 percentage points lower than a year earlier and 0.1 percentage points lower than the previous quarter…..For October to December 2019, an estimated 1.29 million people were unemployed. This is 73,000 fewer than a year earlier and 580,000 fewer than five years earlier.

Wages

Here the news has been less good. Let me explain using today’s release.

Estimated annual growth in average weekly earnings for employees in Great Britain slowed to 2.9% from 3.2% last month for total pay (including bonuses), and to 3.2% from 3.4% for regular pay (excluding bonuses).

This gives us two contexts. We have been in a better phase for wages growth but it has been slowing recently and that has continued. Things get more complex as we look at real wages as there are serious problems with the official representation of them.

In real terms (after adjusting for inflation), annual growth in total pay is estimated to be 1.4%, and annual growth in regular pay is estimated to be 1.8%.

The problem is that a simply woeful inflation measure is being used, via the use of fantasy imputed rents in the official CPIH inflation measure. This ensures that housing inflation is under-recorded and thus real wages are over recorded. A much better context is provided by this from Rupert Seggins.

UK real regular pay is now above its pre-crisis peak! If you like the CPIH measure of consumer prices. For CPI enthusiasts, it’s -1.8% below. For the RPI crew, it’s -7% below, for the RPIX hardcore, it’s -10.4%. If the household deflator’s your thing, then it happened in 2016 Q1.

Can anybody think why Her Majesty’s Treasury is trying to replace house prices in the RPI with Imputed Rents?! Actually trying to measure housing inflation stops the establishment claiming house prices are a Wealth Effect rather than the more accurate gains for existing owners but inflation for present and future buyers. Returning to real wages as you can see it makes a very large difference.

Having established that I have been disappointed to see so many news sources copy and paste this part of the release.

In real terms, regular pay is now at its highest level since the series began in 2000, whereas total pay is still 3.7% below its peak in February 2008.

As The Zombies pointed out.

And if she should tell you “come closer”
And if she tempts you with her charms
Tell her no no no no no-no-no-no
No no no no no-no-no-no
No no no no no

If we look into the monthly data we see that the UK chemicals sector is doing well and wage growth has picked up to 8.9%. Care is needed with such detail but it has been around 7% for over 6 months. However other areas of manufacturing are more troubled with the clothing and textiles sector seeing no increase at all. Whilst I am all for higher wages I have to confess that fact that the real estate sector is seeing consistent rises above 6% has a worrying kicker.

Comment

We find ourselves in broadly familiar territory where the quantity news for the UK economy is again very good but the quality news is not as good. At least these days the real wages position is improving a little. But to claim we are back to the previous peak is frankly a case of people embarrassing themselves.

The numbers themselves always need a splash of salt. For example I have pointed out already the growth of the self-employed, so their omission from the wages data is increasingly significant. Also whilst we are employing more people this time around hours worked was not as strong.

Between October to December 2018 and October to December 2019, total actual weekly hours worked in the UK increased by 0.8% (to 1.05 billion hours), while average actual weekly hours decreased by 0.2% (to 31.9 hours).

I look at such numbers because out official statisticians have yet to cover the concept of underemployment adequately. There is an irony here in that productivity will be boosted by a shorter working week. Maybe even by this.

In October to December 2019, it was estimated that there were a record 974,000 people in employment on a “zero-hour contract” in their main job, representing a record 3.0% of all people in employment. This was 130,000 more than for the same period a year earlier.

The good news from lower UK inflation ( think real wages) may not last

Today brings the various UK inflation numbers into focus as we get the updates for consumer, producer and house prices. Already though the Bank of England has given its view on the general outlook.

Second, the most likely outlook is a further period of subdued growth, and hence a disinflationary backdrop
of a persistent – albeit modest – output gap.

That is from Michael Saunders who is giving a speech in Northern Ireland and we see him backing up the previously expressed view of UK inflation falling towards 1.25% in the early part of this year. It is sad though that he still uses the “output gap” that has worked so poorly even some ex-central bankers are being forced to admit it has been a failure. Here is the former Vice-President of the ECB ( European Central Bank) Vitor Constancio.

In “FED listens” events, they found that:..”there is more “slack” than the Fed had thought — more people who could still come into the labour force, particularly in poorer areas”. I am sure the same is true in Europe. Forget output gaps

If only those still in power would see the light and accept reality!

There is an irony in all of this as we note that whilst the Bank of England expects lower inflation it is presently trying to raise it and Micheal Saunders has another go.

Fourth, against this backdrop, it probably will be appropriate to maintain an expansionary monetary policy
stance and possibly to cut rates further, in order to reduce risks of a sustained undershoot of the 2% inflation
target. With limited monetary policy space, risk management considerations favour a relatively prompt and aggressive response to downside risks at present.

This is via the impact of their words on the value of the UK Pound £ and the way a lower value ( mostly via the role of the US Dollar in setting commodity prices) tends to raise subsequent inflation. You may note that the bi-polar view of monetary policy space continues to be in play as he joins Mark Carney’s statement that it is limited from last Wednesday which morphed into the equivalent of a Bank Rate cut of 2.5% as quickly as Thursday. What a difference a day made!

twenty four little hours
Brought the sun and the flowers where there use to be rain ( Dinah Washington )

If we complete the points made by Michael Saunders we see something of an obsession with output gap theory.

First, with softer global growth and high Brexit uncertainty, the UK economy has remained sluggish. The
slowdown has created a modest output gap, and there are signs that the labour market is turning.

Also something perhaps even sillier.

Third, the neutral level of interest rates may have fallen further over the last year or two, both in the UK and
externally.

Or, of course, it may not.

Consumer Inflation

The backdrop was worrying because US consumer inflation had risen yesterday and Euro area inflation had risen last week and that is before we get to this.

Also, Zimbabwe’s annual inflation rate (the one that is officially concealed) rose to 521% in December. ( Joseph Cotterill)

But the numbers were good possibly showing that a little knowledge is a dangerous thing.

The Consumer Prices Index (CPI) 12-month rate was 1.3% in December 2019, down from 1.5% in November 2019.

There were two main factors at play and I wonder if any of you spotted this one?

Restaurants and hotels, where prices for overnight hotel accommodation fell by 7.5% between November and December 2019, compared with a rise of 0.9% between November and December 2018;

Also the next one may have affects elsewhere because the last time we saw a burst of this as we saw retail sales rise in response ( thank you ladies) which is against the present consensus.

Clothing and footwear, where the largest individual downward contributions came from women’s casual jackets and cardigans, where prices fell between November and December 2019 but rose between the same two months in 2018. There were also small individual downward contributions from formal trousers and formal skirts

Also if we continue to look wider we see a possible impact from the slow down in car sales.

There was also a smaller downward contribution from the purchase of vehicles where prices overall were little changed in 2019 but increased by 0.7% in 2018.

Let us move on but not without noting that the impact of the UK Pound £ is for once zero compared to the Euro as we have the same inflation rate.

Euro area annual inflation is expected to be 1.3% in December 2019,

What Happens Next?

There is still a slight downwards push but the impetus has gone.

The growth rate of prices for materials and fuels used in the manufacturing process was negative 0.1% on the year to December 2019, up from negative 1.9% in November 2019.

Indeed if we switch to output prices we see that there are ongoing albeit small rises in play.

The headline rate of output inflation for goods leaving the factory gate was 0.9% on the year to December 2019, up from 0.5% in November 2019.

If we look to future influences we know that 70% of the input number comes from the £ and the oil price. As we stand at US $64.40 for a barrel of Brent Crude that is where it roughly was in mid-December so maybe not much influence. With the Bank of England engaging in open mouth operations against the £ it may come into play.

House Prices

There was a worrying change here.

UK average house prices increased by 2.2% over the year to November 2019, up from 1.3% in October 2019……Average house prices increased over the year in England to £251,000 (1.7%), Wales to £173,000 (7.8%), Scotland to £155,000 (3.5%) and Northern Ireland to £140,000 (4.0%).

This adds a little credibility to the Halifax 4% reading for December although we await the official December data. As to the breakdown we have observed parts of the Midlands leading the line in recent times.

The annual increase in England was driven by the West Midlands and North West…..The lowest annual growth rate was in the East of England (negative 0.7%) followed by London (positive 0.2%).

Although that is for just England so we should also look wider and whilst it looks an anomaly there was this.

House price growth in Wales increased by 7.8% over the year to November 2019, up from 3.6% in October 2019, with the average house price in Wales at £173,000.

Comment

There is some much needed good news in today’s report for real wage growth as we see inflation dip. However we need context because if we switch to the UK’s longest running measure of inflation there is a different story in play.

The all items RPI annual rate is 2.2%, unchanged from last month.

The difference neatly illustrates my major theme in this area.

Other housing components, which increased the RPI 12-month rate relative to the CPIH 12-month rate by 0.06 percentage points between November and December 2019. The effect came mainly from house depreciation.

As you can see our official statisticians are desperate to make everyone look at their widely ignored favourite measure called CPIH which I will cover in a moment. But for now we see that past house prices via depreciation are exerting an upwards pull on the RPI and November’s number suggests this may continue. Most will understand that for many house prices are a big deal but the fact that they usually pull inflation higher means the establishment has launched an increasingly desperate campaign to ignore them.

If we now cover the official CPIH measure it indulges in a fleet of fantasy by assuming that owners pay themselves rent and then includes this fantasy in its inflation reading. Even worse there have been problems in measuring rents so it may well be a fantasy squared should such a thing exist. Anyway the effort to reduce the inflation reading has backfired this month as CPIH is above CPI due to this.

In December 2019, the largest upward contribution to the CPIH 12-month inflation rate came from housing and household services. The division has provided the largest upward contribution since November 2018.

Oh well…..

Good to see UK wage growth well above house price growth

Today brings the UK inflation picture into focus and for a while now it has been an improved one as the annual rates of consumer, producer and house price inflation have fallen. Some of this has been due to the fact that the UK Pound £ has been rising since early August which means that our consumer inflation reading should head towards that of the Euro area. As ever currency markets can be volatile as yesterdays drop of around 2 cents versus the US Dollar showed but we are around 12 cents higher than the lows of early August. The latter perspective was rather missing from the media reporting of this as “tanks” ( Reuters) and “tanking” ( Robin Wigglesworth of the FT) but for our purposes today the impact of the currency has and will be to push inflation lower.

The Oil Price

This is not as good for inflation prospects as it has been edging higher. Although it has lost a few cents today the price of a barrel of Brent Crude Oil is at just below US $66 has been rising since it was US $58 in early October. Whilst the US $70+ of the post Aramco attack soon subsided we then saw a gradual climb in the oil price. So it is around US $8 higher than this time last year.

If we look wider then other commodity prices have been rising too. For example the Thomson Reuters core commodity index was 167 in August but is 185 now. Switching to something which is getting a lot of media attention which is the impact of the swine fever epidemic in China ( and now elsewhere ) on pork prices it is not as clear cut as you might think. Yes the Thomson Reuters Lean Hogs index is 10% higher than a year ago but at 1.92 it is well below the year’a high of 2.31 seen in early April

Consumer Inflation

It was a case of steady as she goes this month.

The Consumer Prices Index (CPI) 12-month rate was 1.5% in November 2019, unchanged from October 2019.

This does not mean that there were no changes within it which included some bad news for chocoholics.

Food and non-alcoholic beverages, where prices overall rose by 0.8% between October and November 2019 compared with a smaller rise of 0.1% a year ago, especially for sugar, jam, syrups, chocolate and confectionery (which rose by 1.8% this year, compared with a rise of 0.1% last year). Within this group, boxes and cartons of chocolates, and chocolate covered ice cream bars drove the upward movement; and • Recreation and culture, where prices overall rose between October and November 2019 by more than between the same two months a year ago.

On the other side of the coin there was a downwards push from restaurants and hotels as well as from alcoholic beverages and tobacco due to this.

The 3.4% average price rise from October to November 2018 for tobacco products reflected an increase in duty on such products announced in the Budget last year.

Tucked away in the detail was something which confirms the current pattern I think.

The CPI all goods index annual rate is 0.6%, up from 0.5% last month……..The CPI all services index annual rate is 2.5%, down from 2.6% last month.

The higher Pound £ has helped pull good inflation lower but the “inflation nation” problem remains with services.

The pattern for the Retail Prices Index was slightly worse this month.

The all items RPI annual rate is 2.2%, up from 2.1% last month.

The goods/services inflation dichotomy is not as pronounced but is there too.

Housing Inflation ( Owner- Occupiers)

This is a story of many facets so let me open with some good news.

UK average house prices increased by 0.7% over the year to October 2019 to £233,000; this is the lowest growth since September 2012.

This is good because with UK wages rising at over 3% per annum we are finally seeing house prices become more affordable via wages growth. Also you night think that it would be pulling consumer inflation lower but the answer to that is yes for the RPI ( via the arcane method of using depreciation but it is there) but no and no for the measure the Bank of England targets ( CPI) and the one that our statistical office and regulators describes as shown below.

The Consumer Prices Index including owner occupiers’ housing costs (CPIH).

Those are weasel words because they use the concept of Rental Equivalence to claim that homeowners pay themselves rent when they do not. Even worse they have trouble measuring rents in the first place. Let me illustrate that by starting with the official numbers.

Private rental prices paid by tenants in the UK rose by 1.4% in the 12 months to November 2019, up from 1.3% in October 2019.

Those who believe that rents respond to wage growth and mostly real wages will already be wondering about how as wage growth has improved rental inflation has fallen? Well not everyone things that as this from HomeLet this morning suggests.

Newly agreed rents have continued to fall across most of the UK on a monthly basis despite above-inflation annual rises, HomeLet reveals.

Figures from the tenancy referencing firm show that average rents on new tenancies fell 0.6% on a monthly basis between October and November, with just Wales and the north-east of England registering a 1.1% and 0.4% increase respectively.

Both the north-west and east of England registered the biggest monthly falls at 0.8%.

Rents were, however, up 3.2% annually to £947 per month.

This is at more than double the 1.5% inflation rate for November.

As you can see in spite of a weak November they have annual rental inflation at more than double the official rate. This adds to the Zoopla numbers I noted on October 16th which had rental inflation 0.7% higher than the official reading at the time.

So there is doubt about the official numbers and part of it relates to an issue I have raised again with the Economic Affairs Committee of the House of Lords. This is that the rental index is not really November’s.

“The short answer is that the rental index is lagged and that lag may not be stable.I have asked ONS for the detail on the lag some while ago and they have yet to respond.”

Those are the words of the former Government statistician Arthur Barnett. As you can see we may well be getting the inflation data for 2018 rather than 2019.

The Outlook

We get a guide to this from the producer price data.

The headline rate of output inflation for goods leaving the factory gate was 0.5% on the year to November 2019, down from 0.8% in October 2019……..The growth rate of prices for materials and fuels used in the manufacturing process was negative 2.7% on the year to November 2019, up from negative 5.0% in October 2019.

So the outlook for the new few months is good but not as good as it was as we see that input price inflation is less negative now. We also see the driving force behind goods price inflation being so low via the low level of output price inflation.

Comment

In many respects the UK inflation position is pretty good. The fact that consumer inflation is now lower helps real wage growth to be positive. Also the fall in house price inflation means we have improved affordability. These will both be boosting the economy in what are difficult times. The overall trajectory looks lower too if we add in these elements described by the Bank of England.

CPI inflation remained at 1.7% in September and is expected to decline to around 1¼% by the spring, owing to the temporary effect of falls in regulated energy and water prices.

However as I have described above these are bad times for the Office for National Statistics and the UK Statistics Authority. Not only are they using imaginary numbers for 17% of their headline index ( CPIH) the claims that these are based on some sort of reality ( actual rental inflation) is not only dubious it may well be based on last year data.

The Investing Channel

 

Good News on UK inflation but not on house prices or for those predicting Cauliflower inflation

This morning has opened with some bad news for the Office for National Statistics and the UK Statistics Authority. They have placed what little credibility they have left on what is called the Rental Equivalence method where you use fantasy imputed rents as a way of measuring owner-occupied inflation. Apart from the obvious theoretical flaws there have been all sorts of issues with actually measuring rents in the first place which led to one of the worst things you can have in statistics which is a “discontinuity” leading to a new method being required. It tells us that rental inflation is of the order of 1% per annum. So let me hand you over to a new report from Zoopla released today.

Average rents increased by 2% to stand at £876 in the 12 months to the end of September……..But despite the overall improvement in affordability, the rate at which rents are rising has accelerated from 1.3% a year earlier to reach a three-year high of 2%, although it still remains below the 10-year average of annual growth of 2.3%

Regular readers will be aware that I have posted research from the Royal Statistical Society website which argued that the official measure of rental inflation is around 1% per annum too low. The reason for this is an incorrect balance between new and old rents. Zoopla with their measure suggests that a rise in rental inflation has been missed by the official data. There is a logic to this for those of us who think that rents are influenced by wages growth as we have seen a rise in wages growth over this period.

Affordability

Whilst the official measure of rental inflation is in yet more disarray we should tale time to welcome this.

Our director of research and insights, Richard Donnell, said: “Renting is more affordable today than the 10-year average. This follows weak rental growth over the last three years, and an acceleration in the growth of average earnings.”………..As a result, the typical renter now spends 31.8% of their earnings on rent, down from a peak of 33.3% in 2016, according to our inaugural Rental Market Report, which records trends in the often-neglected private rented sector.

Propaganda

In a rather ironic twist the establishment has been trying to bolster its case. Here is Mike Hardie of the ONS in Prospect Magazine from earlier this month.

A recent House of Lords Economic Affairs Committee inquiry highlighted that the strategy was not working, with RPI use remaining widespread. In March, David Norgrove, chair of the UK Statistics Authority, wrote to the then chancellor of the exchequer requesting his consent to bring the methods of RPI into line with CPIH.

Meanwhile back in reality here is the actual point the EAC made.

We disagree with the UK Statistics Authority that RPI does not have the potential to become a good measure of inflation.

The truth is that out official statisticians have deliberately not updated the RPI and then blamed it. Next from the EAC came something that was incredibly damning for the official approach.

We are not convinced by the use of rental equivalence in CPIH to impute owner-occupier housing costs.

Returning to the official view in Prospect Magazine there seems to have been an outbreak of amnesia on this subject.

Our headline consumer prices measures, which include the Consumer Prices Index (CPI) and CPI plus owner occupiers’ housing costs (CPIH), for the most part reflect the change in price of acquiring goods and services—in other words, we record the advertised price for an apple or a new car.

Also that explanation is exactly what they do not do with owner occupied housing costs! In a further twist you may note that even their example backfires. Because of the proliferation of rental and leasing deals in the car market it is one area where you probably should now use a rental model and even a small imputed bit.

Regular readers will know I have been a fan of the new Household Cost Indices suggested by John Astin and Jill Leyland. However I note from the Prospect Magazine article that the development process that is taking ages is neutering them.

we also capture mortgage interest costs, which are excluded from other measures of inflation, such as CPI and CPIH.

No mention of house prices which were in the original prospectus and were one of the strengths of the measure? Also take a guess as to which inflation measure right now does have mortgage costs? It is the officially villified RPI.

I am afraid this could not be much more transparent. I have contacted both Prospect Magazine and its editor on Twitter to request a right of reply but so far nether have responded.

Today’s Data

There was some good news as inflation did not rise.

The all items CPI annual rate is 1.7%, unchanged from last month.

As it happens the CPIH measure comes to the same answer in spite of 17% representing a lot lower number that does not exist in CPI.

The OOH component annual rate is 1.1%, unchanged from last month…..Private rental prices paid by tenants in the UK rose by 1.3% in the 12 months to September 2019, unchanged since May 2019.

I will leave explaining that to the official number-crunchers but we have returned to my original point that as well as the theoretical problems in using fantasy imputed rents they do not seem able to measure rents properly. If they had the data they could delve into it but in another error they do not.

An especially welcome development was this.

The all items RPI annual rate is 2.4%, down from 2.6% last month.

Especially as on the month prices actually fell.

The all items RPI is 291.0, down from 291.7 in August.

It might be best to keep that quiet or the deflationistas will be back spinning along with Kylie.

I’m spinning around
Move outta my way
I know you’re feeling me
‘Cause you like it like this
I’m breaking it down
I’m not the same
I know you’re feeling me
‘Cause you like it like this

The Trend Is Your Friend

If we look at the producer price output data the future is bright.

The headline rate of output inflation for goods leaving the factory gate was 1.2% on the year to September 2019, down from 1.7% in August 2019.

Even better news comes further up the chain.

The growth rate of prices for materials and fuels used in the manufacturing process was negative 2.8% on the year to September 2019, down from negative 0.9% in August 2019.

Here is the main factor at play.

Crude oil provided the largest downward contribution to the annual rate of input inflation.

Comment

If we start with today’s figures we have received some welcome news as inflation was expected to rise. Indeed those who follow the RPI have just seen a fall which changes the real wages picture positively although of course we await the wages data for September. Should the UK Pound £ remain in a stronger phase ( it is over US $1.27 as I type this) then it and the lower oil price we looked at above will give UK inflation a welcome downwards push. Mind you as we observe those factors it is hard to avoid wondering how the economists surveyed thought inflation would be higher!

As we step back we are reminded of the utter shambles created by the use of rental equivalence and today it has come from an unusual source. If we look into the detail of the RPI we see this.

Mortgage interest payments, where average charges rose this year but fell a year ago; and  House depreciation, with the smoothed house price index used to calculate this
component rising this year by more than a year ago.

As it happens not much difference to the rental measure but to get imputed rents into CPIH at a weight of 17% other things had to be reduced and RPI fell because it does not have this effect amongst other things.

Other differences including weights, which decreased the RPI 12-month rate relative to the CPIH 12-month rate by 0.28 percentage points between August and September 2019. The effect came mainly from air fares; sea fares; second-hand cars; games, toys and hobbies and equipment for sport and open-air recreation; food and non-alcoholic
beverages; and fuels and lubricants. This was partially offset by a widening effect from furniture and furnishings, carpets and household textiles.

You see another flaw in the CPI style methodology is that via the way better off people spend more it represents people about two-thirds of the way up the income stream as opposed to the median.

Cauliflower

Remember when the lack of UK Cauliflowers was going to make us have to pay much more for ropey ones? Below is the one I bought for 59 pence last week.