Good news for UK inflation comes with another attempt to mislead us

Yesterday saw quite a development in the UK inflation measurement saga as the Treasury Select Committee joined the fray by writing to the UK National Statistician John Pullinger.

As the Economic Affairs Committee presented in their report, the error caused the RPI to be artificially inflated by 0.3 percentage points in 2010……There was general agreement amongst the witnesses spoken to that the 0.3 percentage point increase was an error, and of course you yourself admitted this. Instead of fixing this however, you have designated RPI a “legacy measure”, making no further  improvements to the index. This is not a tenable position when the index remains in widespread use. The past RPI index-linked Gilt matures in 2068.

As I have already replied to the Financial Times on the subject there are some good parts to this but also problems.

Fair enough, except we have an immediate problem as the very bodies which have so failed us over the past 7 years such as the UK Statistics Authority are now supposed to fix a problem they are not only part of they have contributed to. When I gave evidence to it I felt it was simply going through the motions.

The National Statistician and the UK Statistics Authority have failed so comprehensively they cannot be part of the solution. Also as I have reflected on this there are two other problems. Firstly the approach above seems to want to turn the clock back to before 2010 when the RPI was affected by a change in the method of collecting prices for clothing which has turned out to especially impact fashion clothing. Whereas we need to go forwards with an improved model. Also they have come out with a 0.3% number out of thin air as I recall the evidence of Simon Briscoe who gave the most evidence in this area and he wanted further research to get a number rather than stating one, So this from the Treasury Select Committee is both unfounded and potentially misleading.

This has led to a £1 billion yearly windfall for index-linked gilt holders, at the expense of consumers, like students who have seen interest on their loans rise, or rail passengers affected by increasing fares.

You see students,consumers and rail passengers have been affected by a political choice which was to use the higher RPI for when we pay for things and the invariably lower CPI when the government pays for things. Former Chancellor George Osborne was responsible for this swerve which boosted the government;s finances via a type of stealth tax. So I can see why government MPs are keen to push this view but more surprised that opposition MPs have joined in, perhaps they were so busy looking good for the crowd they did not stop to think.

There is also another serious problem as I wrote to the FT.

Next we have the issue that official communiques seem to forget that there are problems with other inflation measures too. For example the House of Lords was very critical of a major part of the measure the UK Office for National Statistics has pushed hard.

 

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

 

Can anybody spot the mention of the flawed CPIH above? Those of a fair mind looking for balance would think it deserves it. You see it is always like that……

As you can see there are familiar issues here where the establishment takes evidence but then cherry picks it to come to an answer it wanted all along! A balanced report would recommend changes to both RPI and CPIH. After all the latter is supposed to be the new main inflation measure. Also the use of 0.3% seems to be answering a question before it has been properly asked! We were supposed to go forwards and measure the impact of the changes made in 2010 so if the MPs via their own expertise have calculated the answer at 0.3% they should explain their calculations and reasoning.

I will be writing to them challenging them on these issues. They seem to be unduly influenced by the work of the economics editor of the Financial Times Chris Giles who keeps claiming that index-linked Gilt holders who he called “the gnomes of Zurich” at the Royal Statistical Society. I have challenged him on that statement as after spending many years in that market I do not recall ever dealing with one of these creatures and we know that many UK pension funds including the Bank of England one invest in it instead. Until we do the proper research we cannot know if there has been a windfall let alone the size of it. Chris is much quieter these days past about his vigorous support of CPIH and rental equivalence.

Today’s Data

This brought some welcome good news.

The all items CPI annual rate is 1.8%, down from 2.1% in December.

This has various consequences as for example it has been quite a while since the Bank of England has been below its inflation target. Although as it was partly to do with the Ofgem price cap some of it will not last as it reversed it a few days ago.

The largest downward contribution to the change in the 12-month rate came from electricity, gas and other fuels, with prices overall falling between December 2018 and January 2019 compared with price rises the same time a year ago.

Actually just as I am typing this I see this on Sky News.

Energy supplier Npower says it will raise its standard gas and electricity prices by 10% from 1 April.

If we look further upstream for price trends we see that the pressure continues to be downwards.

The headline rate of output inflation for goods leaving the factory gate was 2.1% on the year to January 2019, down from 2.4% in December 2018…..The growth rate of prices for materials and fuels used in the manufacturing process slowed to 2.9% on the year to January 2019, down from 3.2% in December 2018.

If we move to the RPI we see that it fell as well and also would have been on target in annual terms.

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

Comment

It is a welcome development that I can point out that UK real wages are now increasing against all our inflation measures. After a credit crunch that has been something of a nuclear winter for real wage growth it is nice to see and report on, but sadly we have a long way to go to get back to where we were. Some good news in what looks like an economic downturn.

Let me translate my views on inflation measurement above to a real life example. You see if you follow the establishment mantra you tell people they are better off than they are as the Resolution Foundation has done here.

 

Using the CPIH inflation measure understates the fall in real wages we have seen via its use of rents that are never paid ( Imputed Rent) as a measure of owner occupied housing costs. For newer readers CPIH assumes that people who own a house pay themselves rent and even worse these “estimates” are based on rental data which is dubious and suggested by some to be 1% too low via the wrong balance between new and old rents. In a nutshell this is why I have persisted in my long campaign about inflation measurement because the establishment is happy to produce numbers which to be polite are economical with the truth. I am not.

 

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Victory on the Retail Prices Index! And it feels good!

This morning I have some good news to report which is the result of the around 7 year campaign I have conducted in support of the Retail Price Index or RPI. I have given regular readers a sense of deja vu with the headline and let me add to that with something I wrote for Mindful Money back on the 10th of January 2013.

I am pleased to report that today’s update will be very upbeat and will contain sections which I hoped to be able to write but felt were certainly far from favourite to take place. Regular readers will be aware that the subject of inflation is a specialist subject for me and a sub-section is the official attempts to “improve” ( in my financial lexicon such an “improvement” equals a lower number). Accordingly when the National Statistician decided to have a consultation to “improve” the UK Retail Price Index I feared the worst. However I hoped and worked for the best as I not only attended the public meeting and explained my view but responded to the consultation both in my own name and as part of the RPI CPI User Group at the Royal Statistical Society.

Those who have followed the saga will recall that last summer I noted a new review of the Retail Prices Index this time by the House of Lords Economic Affairs Committee ( EAC). I feared another establishment stitch-up so I invited the EAC to a meeting on the subject at the Royal Statistical Society to expose them to other points of view, including mine as I was one of the speakers.

In case you are wondering what this is about I will go through the technical points below but it can be summarised in the theme that the establishment invariably finds reasons to object to inflation measures which give higher numbers and favour ones with lower numbers. In terms of UK inflation that means attacking the RPI (2.7%) and proposing the measure called CPIH (2%). From the point of view of HM Treasury such a gap if compounded over time on matters such as pensions and benefits saves it a lot of money, and the gap has usually been larger than that recently. Thus whilst I have battled the Office for National Statistics, the Office for Statistics Regulation and for long periods the economic editor of the Financial Times Chris Giles the main opponent in my opinion has been HM Treasury.

What has happened here?

The official campaign was publicly pushed as being due to what has been called the “Formula Effect” which is much of the gap between RPI and the various CPI variants. I have long thought that much of the force behind the argument came from the fact that the RPI has house prices in it as well, leading to usually higher readings. But there was a way of investigating and then (hopefully) fixing this Formula Effect.

We heard evidence that the Carli formula, as used in the RPI, produces an upward bias. But expert opinion on the shortcomings of the RPI differs……. There is however broad agreement that the widening of the range of clothing for which prices were collected has produced price data which, when combined with the Carli formula, have led to a substantial increase in the annual rate of growth of RPI.

The Formula Effect has been driven by a problem in the clothing sector and particularly fashion clothing triggered by a change made in 2010. My argument all along has been let’s fix that as the Formula Effect would then be much smaller. The estimates are that the Formula Effect would be halved and maybe a bit more. We do not of course absolutely know this although there was some official research ( which was rather suspiciously abandoned) back in 2012 which gives some clues. If we get the Formula Effect more than halved then this can return to one for statistical purists rather than being at the forefront of the UK inflation debate.

given the properties of the Carli formula that may lead to upward bias have long been evident, yet expert opinion still differs, it may be a perpetual debate.

Putting it another way a major influence in this has been price collection on women’s strappy tops. The statistician Simon Briscoe was very powerful on this point.

We have to bear in mind that strappy tops are one-thirtieth of one per cent of the RPI. I can think of no other area of life or public policy where if one three-thousandth of something was wrong, we would discard the whole lot. We would simply mend it.

Housing Costs

Those who have followed my work on this subject will know that I can only type, yes yes yes! To this next bit.

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

This has been a long battle against the UK establishment and for most of this period against the Financial Times as well. For example the Paul Johnson Inflation Review of 2015 supported the use of the inflation measure CPIH which uses rental equivalence or imputed rents. These do not exist in real life and are an entirely fictional concept as opposed to the house prices ( via a depreciation component) and mortgage interest-rates which not only exist but are widely understood that the RPI uses.

If it was left to me I would improve the RPI by having an explicit house price component rather than the implicit depreciation one. Maybe the EAC will get around to that.

Comment

There is much to welcome here from the EAC as if its recommendations are implemented two major problems with UK inflation measurement will be improved at worst and fixed at best.However the statistics establishment comprising the Office for National Statistics and the Office for Statistics Regulation have seen their reputation badly damaged by the frankly spiteful decision to do this and then for the latter to rubber stamp it.

given its widespread use, it is surprising that the UK Statistics Authority is treating RPI as a ‘legacy measure’. The programme of periodic methodological improvements should be resumed.

I gave evidence to the OSR and frankly I was left with the view that it is the equivalent of a chocolate teapot and should be scrapped. Just to be clear the EAC does not go that far.

Also it is welcome that other areas have come round to more like my point of view as I see that the Financial Times and Paul Johnson have been willing to look to correct past mistakes. It is never easy to do that so we should welcome it.

On the downside I see two main problems with the Review.

In future there should be one measure of general inflation that is used by the government for all purposes. This would be simpler and easier for the public to understand.

I see the point of trying to stop the government from “inflation shopping” but the truth is that we need different measures for different purposes. For example a cost of living index for wage negotiations is not the same as one for the national accounts.

The idea that we should use CPI for now and then later use a new number that includes owner occupied housing later has various problems.

The government should begin to issue CPI-linked gilts and stop issuing RPI-linked gilts. We heard evidence to suggest there was sufficient demand to make a viable market

That seems silly as we would end up with 3 types of index-linked Gilts ( RPI, CPI, and the new measure likely to be the improved RPI). Also we were supposed to put owner occupied housing in CPI back in 2003 but somehow it got “forgotten” for over a decade.

So my suggestion is to get on with improving the RPI and give the work a twelve month deadline. Then in a year’s time we could issue index-linked Gilts based on the new measure. We might be able to update some of the existing Gilts on the new basis as well but that is a matter for the Bank of England but some we would not as there were explicit rules in their documentation.

Me on The Investing Channel

 

UK Inflation starts to head lower and help real wage growth

Today brings the latest UK official inflation data into focus. However the last 24 hours have brought another shift in the environment because the crude oil price had another of those days when it took something of a dive. Here is Oilprice.com on the subject.

Crude prices fell 4 percent on Monday and about 7 percent on Tuesday. WTI dropped below $47 per barrel and Brent fell to the $56 handle.

Moving onto the likely causes they tell us this.

Oil prices crashed to new one-year lows on Tuesday, dragged down by a deepening sense of global economic gloom as well as fears of oversupply in the oil market itself.

The reasons for the sudden meltdown were multiple. Rising crude oil inventories and expected increases in shale production weighed on oil prices, but the price crash was accentuated by the broader selloff in financials.

Genscape said that inventories are rising, which has raised fears of tepid demand amid soaring supply growth.

We are back to mulling an increase in shale oil production at a time when demand is weakening. As ever there is an undercut as we wonder if the shale oil producers will be so enthusiastic if the oil price remains at these new lower levels. If we switch to the impact on the inflation outlook then we now have an oil price that is around 10% lower than a year ago if we use the Brent Crude benchmark and more than that using West Texas Intermediate as the gap between the two has approached US $10.

The impact of this should be felt to some extent in the input version of the producer price data for November and maybe via fuel prices at the pump in a much more minor way on the consumer price inflation number. By the time we get the December data there will be a stronger influence and this will be accompanied by other commodity prices falls. For example Dr. Copper is at US $2.68 as I type this or 14% lower than a year ago. The CRB Commodity Index has not fallen as much but is still some 6% lower than a year ago.

Central Banks

The news above will be debated at the US Federal Reserve as it decides US interest-rates and the subject of QT today. Of course central bankers ignore what they call non-core factors such as energy and food in their favourite inflation measures but the ordinary person cannot and the picture has changed. Also as @fwred reminds us central banks are no longer using their balance sheets to raise inflation.

From an economic perspective, we’ll be debating the impact of QE for years looking at the counterfactual and the complementary effects of other policy tools, including negative rates. ECB’s estimate: ~2% boost both to real GDP and inflation, or +40bp per year.

Well apart from the Bank of Japan anyway, but it has failed to do much about inflation at all in spite of the size of its actions which now exceed annual economic output or GDP.

Today’s data

Having emphasised the impact of lower oil prices let us get straight to the impact.

The annual rate of inflation for materials and fuels purchased by manufacturers (input prices) slowed to 5.6% in November 2018, down 4.7 percentage points from October 2018 . The 12-month rate of input inflation has been positive since July 2016. The annual rate was driven predominantly by crude oil prices, which showed growth of 15.5% in November 2018, although this was down from 40.4% in October 2018. The one-month rate for materials and fuels fell 3.1 percentage points to a negative 2.3% in November 2018.

As you can see there was quite a change in the trajectory in November and as the annual rate remained positive there is more to come. There was also the beginning of an effect on the output number.

The annual rate of inflation for goods leaving the factory gate (output prices) fell by 0.2 percentage points to 3.1% in November 2018 . The 12-month rate of output inflation has remained positive since July 2016. On the month, output inflation also slowed, falling 0.1 percentage points to 0.2%.

Actually there was a larger impact from the lower oil price than this but it got offset by this.

This increase reflects the rise in Tobacco Duty introduced in November 2018 and is the highest the rate has been since March 2014.

So not the best of months for Oasis fans.

But all I need are cigarettes and alcohol!

Consumer Inflation

Here we also saw a marginal nudge lower in the main two measures.

The all items CPI annual rate is 2.3%, down from 2.4% in October…….The all items RPI annual rate is 3.2%, down from 3.3% last month

This was driven by lower rates of inflation for recreation and culture and this.

Petrol prices fell by 2.6 pence per litre between October and November 2018, compared with a rise of 1.8 pence per litre between October and November 2017.

Actually I noted this mention about recreation and culture.

Price movements for both
computer games and live music events can often be relatively large depending on the composition of
bestseller charts and the bands that are touring at the time of price collection.

This was on my mind due to the fact that Ringo Starr and Ronnie Wood joined Paul McCartney on stage at the O2 in London on Sunday night. My point is that you can measure the ticket price but what is your quality measure? From the excitement on social media that changed by Ringo’s presence in the crowd before we get to having the only surviving Beatles playing on stage and to top it off being joined by a Rolling Stone.

How to measure inflation

We can move onto the widely ignored official measure called CPIH.

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

It is widely ignored because of the way it uses Imputed Rents to get to this.

The OOH component annual rate is 1.1%, unchanged from last month ( OOH = Owner Occupied Housing).

House Prices

A couple of weekends ago when the economics editor of the Financial Times was presumably otherwise engaged I noted this.

The original consumer price index included house prices. But they were removed in 1983 and replaced with “non-market rents” — an estimate of how much owners could charge to let their homes…….
Including house prices in the new index would not guarantee a higher rate of inflation as high house price inflation might be offset by smaller increases, if not a decline, in rents or offset by price changes in other components. But large and persistent acceleration in this new economy-wide index would be a sign of more general inflation.

This was about the US and written by Joseph Carson but it applies to the UK as well. I note it got widespread support in the comments, although we cannot make a comparison to the pro Imputed Rent articles as they seem to have suspended the comments system for those.

The rate of UK house price inflation has slowed and I welcome that but it remains a much better guide to inflation than any rental fantasies.

Average house prices in the UK increased by 2.7% in the year to October 2018, down from 3.0% in September 2018. This is the lowest annual rate since July 2013 when it was 2.3%. Over the past two years, there has been a slowdown in UK house price growth, driven mainly by a slowdown in the south and east of England.

Comment

There is some pre-Christmas cheer in the UK inflation data today as we see the new lower oil price start to have an impact on the numbers. If it is true that the New Year Sales have started early then that too may impact on the December data although of course it will wash out to some extent in January.

But for the moment the trend for consumer and indeed asset inflation is down and we should welcome the way that will benefit real wages and indeed first time buyers in the property market. Also as someone who has spent the last 6 years or so arguing about inflation measurement with official bodies being operated like puppets by HM Treasury I had a wry smile at this tweet which ignores the measure it has pressed for.

The fall in the price of crude oil is a welcome development for UK inflation

One of the problems of official statistics is that we have to wait to get them. Of course numbers have to be collected, collated and checked and in the case of inflation data it does not take that long. After all we receive October’s data today. But yesterday saw some ch-ch-changes which will impact heavily on future producer price trends as you can see below.

Oil traders’ worries over record supplies arriving in Asia just as the outlook for its key growth economies weakens have pulled down global crude benchmarks by a quarter since early October. Ship-tracking data shows a record of more than 22 million barrels per day (bpd) of crude oil hitting Asia’s main markets in November, up around 15 percent since January 2017, and an increase of nearly 5 percent since the start of this year.

Not only is supply higher but there are issues over likely demand.

China, Asia’s biggest economy, may see its first fall in car sales on record in 2018 as consumption is stifled amid a trade war between Washington and Beijing.

In Japan, the economy contracted in the third quarter, hit by natural disasters but also by a decline in exports amid the rising protectionism that is starting to take its toll on global trade.

And in India, a plunging rupee has resulted in surging import costs, including for oil, stifling purchases in one of Asia’s biggest emerging markets. India’s car sales are also set to register a fall this year.

You may note along the way that this is a bad year for the car industry as we add India to the list of countries with lower demand. But as we now look forwards supply seems to be higher partly because the restrictions on Iran are nor as severe as expected and demand lower. Does that add up to the around 7% fall in crude oil benchmarks yesterday? Well it does if we allow for the fact that it seems the market has been manipulated again.

Hedge funds and other speculative money have swiftly changed from the long to the short side.

When the bank trading desks mostly withdrew from punting this market it would seem all they did was replace others. Of course OPEC is the official rigger of this market but its effort last weekend did not cut any mustard. So we advance with Brent Crude Oil around US $66 per barrel and before we move on let us take a moment for some humour.

As recently as September and October, leading oil traders and analysts were forecasting oil prices of $90 or even $100 a barrel by year-end.

Leading or lagging?

The UK Pound £

This can be and indeed often is a powerful influence except right now as the film Snatch put it, “All bets are off!” This is because it will be bounced around in the short-term ( and who knows about the long-term) by what we might call Brexit Bingo Bongo. Personally I think the deal was done weeks and maybe months ago and that in Yes Prime Minister style the Armistice celebrations gave a perfect opportunity to settle how it would be presented to us plebs. For those who have not seen Yes Prime Minister its point was such meetings are perfect because everybody thinks you are doing something else. The issue was whether it could be got through Parliament which for now is unknown hence the likely volatility.

Producer Prices

These are the official guide to what is coming down the inflation pipeline.

The headline rate of output inflation for goods leaving the factory gate was 3.3% on the year to October 2018, up from 3.1% in September 2018. The growth rate of prices for materials and fuels used in the manufacturing process slowed to 10.0% on the year to October 2018, from 10.5% in September 2018.

Except if we now bring in what we discussed above you can see the issue at play.

Petroleum and crude oil provided the largest contribution to both the annual and monthly rates of inflation for output and input inflation respectively.

They bounce the input number around and also impact on the output series.

The monthly rate of output inflation was 0.3%, with the largest upward contribution from petroleum products (0.14 percentage points). The monthly growth for petroleum products rose by 0.5 percentage points to 2.0% in October 2018.

Actually the impact is higher than that because if we look at another influence which is chemical and pharmaceutical products they too are influenced by energy costs and the price of oil. So next month will see quite a swing the other way if oil price remain where they are. We have had a 2018 where oil prices have been well above their 2017 equivalent whereas now they are not far from level ( ~3% higher).

Inflation now

We saw a series of the same old song.

The all items CPI annual rate is 2.4%, unchanged from last month……..The all items RPI annual rate is 3.3%, unchanged from last month.

This was helped by something especially welcome to all but central bankers who of course do not partake in any non-core activities.

Food prices remain little changed since the start of 2018 and fell by 0.1% between September and October 2018 compared with a rise of 0.5% between the same
two months a year ago.

Happy days in particular if you are a fan of yoghurt and cheese. The other factor was something which an inflation geek like me will be zeroing in on.

Clothing and footwear, where prices fell between September and October 2018 but rose between
the same two months a year ago.

There is an issue of timing as we are in the Taylor Swift zone of “trouble,trouble,trouble” on that front but this area is a big issue in the inflation measurement debate. Let me look at this from a new perspective presented by Sarah O’Connor of the FT.

Online fast-fashion brands have enjoyed success catering to what Boohoo calls the “aspirational thrift” of young millennials. They sell clothes that are often made close to home so that they can be produced more quickly in response to customer trends. “Our recent evidence hearing raised alarm bells about the fast-growing online-only retail sector,” said Mary Creagh, the committee’s chair. “Low-quality £5 dresses aimed at young people are said to be made by workers on illegally low wages and are discarded almost instantly, causing mountains of non-recycled waste to pile up.”

This is a direct view on the area of fast and often disposable fashion which is one of the problem areas of UK inflation measurement. There are issues here of poverty wages and recycling. But the inability of our official statisticians to keep up with this area is a large component of the gap between CPI and RPI, otherwise known as the “formula effect”.

Comment

The fall in the price of crude oil is a very welcome development for the trajectory of UK inflation. Should it be sustained then we may yet see UK inflation fall back to its target of 2% per annum. For example the price of fuel at the pump is some 10 pence per litre higher than a year ago for petrol and 14 pence per litre higher than a year ago for diesel, so the drop is not in the price yet. That may rule out an influence for November’s figures but we could see an impact in December. Other prices will be influenced too although probably not domestic energy costs which for other reasons only seem to go up. But as we looked at yesterday the development would be good for real wages where we scrabble for every decimal point.

Meanwhile I have left the “most comprehensive” measure of inflation to last which is what it deserves. This is because the CPIH measure ignores a well understood and real price – what you pay for a house – which is rising at an annual rate of 3.5% and replaces it with Imputed Rents which are never paid to get this.

The OOH component annual rate is 1.1%, up from 1.0% last month.

But I do not need to go on because the body that has pushed for this which is Her Majesty’s Treasury which plans to save a fortune by using it may be having second thoughts if it’s media output is any guide.

 

Inflation reality is increasingly different to the “preferred” measure of the UK

Today brings us a raft of UK data on inflation as we get the consumer, producer and house price numbers. After dipping my toe a little into the energy issue yesterday it is clear that plenty of inflation is on its way from that sector over time. I have a particular fear for still days in winter should the establishment succeed in persuading everyone to have a Smart Meter. Let us face it – and in a refreshing change even the official adverts now do – the only real benefit they offer is for power companies who wish to charge more at certain times. The “something wonderful” from the film 2001 would be an ability to store energy on a large scale or a green consistent source of it. The confirmation that it will be more expensive came here. From the BBC quoting Scottish Power.

We are leaving carbon generation behind for a renewable future powered by cheaper green energy.

We will likely find that it is only cheaper if you use Hinkley B as your benchmark.

Inflation Trends

We find that of our two indicators one has gone rather quiet and the other has been active. The quiet one has been the level of the UK Pound £ against the US Dollar as this influences the price we pay for oil and commodities. It has changed by a mere 0.5% (lower) over the past year after spells where we have seen much larger moves. This has been followed by another development which is that UK inflation has largely converged with inflation trends elsewhere. For example Euro area inflation is expected to be announced at 2.1% later and using a slightly different measure the US declared this around a week ago.

The all items index rose 2.3 percent for the 12 months ending September, a smaller increase than the 2.7-percent increase for the 12 months ending August.

There has been a familiar consequence of this as the Congressional Budget Office explains.

To account for inflation, the Treasury Department
adjusts the principal of its inflation-protected securities each month by using the change in the consumer price index for all urban consumers that was recorded two months earlier. That adjustment was $33 billion in fiscal year 2017 but $60 billion in the current fiscal
year.

The UK was hit by this last year and if there is much more of this worldwide perhaps we can expect central banks to indulge in QE for inflation linked bonds. Also in terms of inflation measurement whilst I still have reservations about the use of imputed rents the US handles it better than the UK.

The shelter index continued to rise and accounted for over half of the seasonally adjusted monthly increase in the all items index.

As you can see it does to some extent work by sometimes adding to inflation whereas in the UK it is a pretty consistent brake on it, even in housing booms.

Crude Oil

The pattern here is rather different as the price of a barrel of Brent Crude Oil has risen by 41% over the past year meaning it has been a major factor in pushing inflation higher. Some this is recent as a push higher started in the middle of August which as we stand added about ten dollars. Although in a startling development OPEC will now be avoiding mentioning it. From Reuters.

OPEC has urged its members not to mention oil prices when discussing policy in a break from the past, as the oil producing group seeks to avoid the risk of U.S. legal action for manipulating the market, sources close to OPEC said.

Seeing as the whole purpose of OPEC is to manipulate the oil price I wonder what they will discuss?

Today’s data

After the copy and pasting of the establishment line yesterday on the subject of wages let us open with the official preferred measure.

The Consumer Prices Index including owner occupiers’ housing costs (CPIH) 12-month inflation rate was 2.2% in September 2018, down from 2.4% in August 2018.

For newer readers the reason why it is the preferred measure can be expressed in a short version or a ore complete one. The short version is that it gives a lower number the longer version is because it includes Imputed Rents where homeowners are assumed to pay rent to themselves which of course they do not.

The OOH component annual rate is 1.0%, unchanged from last month.

As you can see these fantasy rents which comprise around 17% of the index pull it lower and we can see the impact by looking at our previous preferred measure.

The Consumer Prices Index (CPI) 12-month rate was 2.4% in September 2018, down from 2.7% in August 2018.

This trend seems likely to continue as Generation Rent explains.

The experience of the past 14 years suggests rents are most closely linked to wages – i.e. what renters can afford to pay.

With wage growth weak in historical terms then rent growth is likely to be so also and thus from an establishment point of view this is perfect for an inflation measure. This certainly proved to be the case after the credit crunch hit as Generation Rent explains.

As the credit crunch hit in 2008, mortgage lenders tightened lending criteria and the number of first-time buyers halved, boosting demand for private renting – the sector grew by an extra 135,000 per year between 2007 and 2010 compared with 2005-07.  According to the property industry’s logic, the sharp increase in demand should have caused rents to rise – yet inflation-adjusted (real) rent fell by 6.7% in the three years to January 2011.

Meanwhile if we switch to house prices which just as a reminder are actually paid by home owners we see this.

UK average house prices increased by 3.2% in the year to August 2018, with strong growth in the East Midlands and West Midlands.

As you can see 3.2% which is actually paid finds itself replaced with 1% which is not paid by home owners and the recorded inflation rate drops. This is one of the reasons why such a campaign has been launched against the RPI which includes house prices via the use of depreciation.

The all items RPI annual rate is 3.3%, down from 3.5% last month.

There you have it as we go 3.3% as a measure which was replaced by a measure showing 2.4% which was replaced by one showing 2.2%. Thus at the current rate of “improvements” the inflation rate right now will be recorded as 0% somewhere around 2050.

The Trend

This is pretty much a reflection of the oil price we looked at above as its bounce has led to this.

The headline rate of output inflation for goods leaving the factory gate was 3.1% on the year to September 2018, up from 2.9% in August 2018….The growth rate of prices for materials and fuels used in the manufacturing process rose to 10.3% on the year to September 2018, up from 9.4% in August 2018.

So we have an upwards shift in the trend but it is back to energy and oil again.

The largest contribution to both the annual and monthly rate for output inflation came from petroleum products.

Comment

It is indeed welcome to see an inflation dip across all of our measures. It was driven by these factors.

The largest downward contribution came from food and non-alcoholic beverages where prices fell between August and September 2018 but rose between the same two months a year ago…..Other large downward contributions came from transport, recreation and culture, and clothing.

Although on the other side of the coin came a familiar factor.

Partially offsetting upward contributions came from increases to electricity and gas prices.

Are those the cheaper prices promised? I also note that the numbers are swinging around a bit ( bad last month, better this) which has as at least a partial driver, transport costs.

Returning to the issue of inflation measurement I am sorry to see places like the Resolution Foundation using the government’s preferred measures on inflation and wages as it otherwise does some good work. At the moment it is the difference between claiming real wages are rising and the much more likely reality that they are at best flatlining and perhaps still falling. Mind you even officialdom may not be keeping the faith as I note this announcement from the government just now.

Yes that is the same HM Treasury which via exerting its influence on the Office for National Statistics have driven the use of imputed rents in CPIH has apparently got cold feet and is tweeting CPI.

For many in the UK there is nothing going on but the rent

The words of Gwen Guthrie’s song are echoing this morning as the BBC seems to have discovered that renting in the UK has become very expensive. In particular it focuses on the impact on your people.

People in their 20s who want to rent a place for themselves face having to pay out an “unaffordable” amount in two-thirds of Britain, BBC research shows.

They face financial strain as average rents for a one-bedroom home eat up more than 30% of their typical salary in 65% of British postcode areas.

Many housing organisations regard spending more than a third of income on rent as unaffordable.

A salary of £51,200 is needed to “afford” to rent a one-bed London home.

How have we got here? There have been two main themes in the credit crunch era driving this of which the first has been the struggles of real wages. If we use the official data we see that setting the index at 100 in 2015 took them back to where they were in the summer of 2005 or a type of lost decade. In spite of the economy growing since then and employment numbers doing well we find that the latest number is a mere 101.7 showing so little growth. Even worse in an irony some of the growth is caused by the fact that our official statisticians use an inflation measure called CPIH which has consistently told us there is no inflation in rents.Oh Dear!

Added to this problem was a further impact on younger people from the credit crunch. We could do with an update but this from a paper by David Blanchflower and Stephen Manchin tells us what was true a few years ago.

The real wages of the typical (median) worker have fallen by around 8–10% – or around 2% a year behind inflation – since 2008. Such falls have occurred across the wage distribution, generating falls in living standards for most people, with the exception of those at the very top.

Some groups have been particularly hard hit, notably the young. Those aged 25 to 29 have seen real wage falls on the order of 12%; for those aged 18 to 24, there have been falls of over 15% (Gregg et al. 2014).

So younger people took a harder hit in real wage terms which will have made the rent squeeze worse. Hopefully recent rises in the minimum wage and looking ahead the planned rise from Amazon will help but overall we have gained little ground back since then.

Rents

Here is at least some of the state of play.

In London, a 20-something with a typical average income would spend 55% of their monthly earnings on a mid-range one-bedroom flat. Housing charity Shelter considers any more than 50% as “extremely unaffordable”.

That rises to 156%, so one-and-a-half times a typical salary, in one part of Westminster – the most expensive part of London – where an average one-bedroom home costs £3,500 a month to rent.

In contrast, a tenant aged 22-29 looking for a typical property of this kind in the Scottish district of Argyll and Bute would only have to spend 15% of their income.

Even to a Battersea boy like me that all seems rather London centric. Wasn’t the BBC supposed to have shifted on mass to Manchester? Perhaps it was only the sports section which has quite an obsession with United as otherwise no doubt we would have got an update on Manchester and its surrounds. Still Westminster is eye-watering and no doubt influenced by all MPs wanting somewhere close to Parliament. By contrast renting in Argyll and Bute is very cheap although the number of people there is not that great.

Mind you there is at least an oasis below for those who want a Manchester link.

This all comes at a time when young adults might look back in anger at previous generations

Still I guess they will have to roll with it or try to anesthetise any pain with cigarettes and alcohol.

Relativities

This provided some food for thought.

The BBC research shows that a private tenant in the UK typically spends more than 30% of their income on rent.

In 1980, UK private renters spent an average of 10% of their income on rent, or 14% in London.

So the amount spent has risen across the board and especially so in London. This however begs a question of our inflation measure which accentuates the use of rents by assuming and fantasising that owner-occupiers pay them. This is around 17% of that index. But contrary to the fact that rents are more expensive they seem to have got there without there being much inflation! As the fantasies are recent we sadly do not have a full data set but the response to a freedom of information enquiry tells us that the index has risen from 89.3 at the beginning of 2005 to 103.8 in early 2017. However they have apparently revised all this in the year or so since and now we are at 103.3 but 2005 is at 77.1. So measuring rents can go firmly in our “You don’t know what you’re doing” category and should be nowhere near any official inflation measure. What could go wrong with fantasies based on something you are unable to measure with any accuracy?

Size issues

This caught my eye as it goes against an assumption we have looked at on here which is that properties have been getting smaller ( as we get larger).

 In the last 10 years, when families have been increasingly likely to rent, owners have seen the average floor space of their homes increase by 7% compared with a 2% rise for tenants. That leaves owners with an average of 30 sq m extra floor space than tenants, which the charity suggests is the equivalent of a master bedroom and a kitchen.

I am not sure how they calculate this issue for renters as back in the day when I was saving up I rented in a shared house. This was pretty much the same house as all the others in what is called Little India in Battersea (because of the names of the streets).

It wasn’t me

This is the response of landlords who presumably need some fast PR. After all longer-term landlords have made extraordinary capital gains on their investments and now seem to have done pretty well out of the income via rent.

Landlords say they face costs, including their mortgages, insurance, maintenance and licensing, that need to be covered from rents.

“These costs are increasing as the government introduces new measures to discourage investment in property, such as the removal of mortgage interest relief and the changes to stamp duty,” said Chris Norris, director of policy at the National Landlords Association.

 

Comment

The underlying theme here is the march of the rentier society. This seems set to affect the younger generations disproportionately especially if the current trend and trajectory of real wages remains as it has been for the last/lost decade. This gives us a “back to the future” style theme as that was the life of my grandparents who owned little but rented a lot. My parents managed to escape that and started by buying a house in Dulwich in the 1970s for £9000 which seems hard to believe now. But were they and I a blip on the long-term chart? It is starting to feel like that and this line of thought is feed by this from the BBC.

The charity estimated that private tenants in England are spending £140 more in housing costs than people with a mortgage.

That has been driven by the extraordinary effort to reduce mortgage rates starting with the cutting of interest-rates to as low as 0.25%, £445 billion of QE and to top it off the credit easing via the Funding for Lending Scheme. No such help was given to renters who of course have not benefited from “Help To Buy” either. Thus renters have a genuine gripe with the Bank of England.

Let me finish on a more hopeful development which is the Amazon news.

1) This is a significant increase. Around 20% above the national living wage and 10% above the real living wage. It amounts to hundreds of £ per worker, and also raises the prospect of other warehouse operators following suit ( Benedict Dellot of the RSA )

Whilst their working conditions may still be a modern version of the dark satanic mills of William Blake at least the wages are a fair bit better.

 

 

 

 

UK Inflation is back on the rise

Today brings us the full panoply of official UK inflation data. But before we look domestically an international perspective has again emerged overnight. This has come from Governor Kuroda of the Bank of Japan.

JPY BoJ Kuroda: BOJ still wants to achieve 2% inflation target as soon as possible ( @DailyFXTeam )

*DJ BOJ GOV. KURODA: EXPECT PRICES TO GRADUALLY MOVE TOWARD 2% ( @DeltaOne)

In spite of an enormous monetary effort involving negative interest-rates and a bulging balance sheer Abenomics continues to fail to get consumer inflation to its target of 2% per annum. Whereas we in the UK pass it regularly and will today discover we are above 2% on the official measure and 3% on others. Abenomics has driven asset prices higher but not consumer inflation giving us a reminder that whilst there are similarities between Japan and ourselves there are also differences.

The Inflation Outlook

A factor providing some upwards pressure in 2018 has been the price of crude oil. The current price of US $79 for a barrel of Brent Crude replaces the US $56 of a year ago. The Russian energy minister has via Platts updated us on why this has happened.

“According to estimates by experts and companies, oil price will be at around $50/b in the long-term. That means that the current situation, when oil prices have risen to $70-80/b, is linked to the temporary situation on the market and includes a premium to the price linked to various risks associated with the introduction of sanctions and oil supply cuts,” Novak said, as reported by Russia’s Prime news agency.

The higher oil price has fed into the cost of petrol and diesel.

Fuel prices have risen for a 10th successive week. The average cost of a litre of unleaded stands at more than £1.30 at UK forecourts, with diesel exceeding £1.34, Government figures show. Fuel has not been more expensive than current levels since July 2014. Since April, the cost of filling up a typical 55-litre family car that runs on unleaded or diesel has risen by around £6. ( I News)

That trend continued in the latest data so it is now eleven weeks and the annual comparison is shown below.

The price of ULSP is 11.7p/litre higher and the price of ULSD is 14.0p/litre higher than the equivalent week in 2017.

It has also had an effect on domestic heating and lighting costs with this change included in this months numbers.

E.ON has announced that it is increasing its standard variable electricity and gas prices. On 16 August, the unit price of E.ON’s standard variable tariff will increase by an average of 4.8% or £55 for customers taking both fuels, 6.2% or £36 for electricity only customers and 3.3% or £19 for gas only customers

There are others already announced from EDF Energy which will be in the September numbers and British Gas which will be in October.

The UK Pound £

The recent performance has been quite good as shown below.

So far this month, GBP has been the best performing major vs. USD with +3.20% total-returns while JPY has been the worst with -1.66% ( @DailyFXTeam)

Sadly for the August numbers the turn came just about when the survey is made but it should help the September numbers. Looking backwards we were around 2.5% higher a year ago but the differences are now much smaller than the period after the EU Leave vote. I note that the recent Brexit report suggested that raised inflation by 1.7% which is slightly higher than my calculations (1.5%).

Another way of looking at the state of play here is to compare our inflation number with the Euro area one for August which was 2%.

Today’s data

We got confirmation that the rally in the Pound £ came too late for the August data from this.

The Consumer Prices Index (CPI) 12-month rate was 2.7% in August 2018, up from 2.5% in July 2018.

Some of that was confirmed by the detail as the number below was influenced by the price of package holidays.

Prices for recreation and culture rose by 3.6% between August 2017 and August 2018, the highest 12-month rate since January 2010.

Also there was this.

Transport continues to make the largest upward contribution to the rate, with prices rising by 6.0% in the year to August 2018, the highest 12-month rate since April 2017. The largest contribution within the transport group continues to come from motor fuels.

What is on the horizon?

There was some better news here which started with this.

The headline rate of output inflation for goods leaving the factory gate was 2.9% on the year to August 2018, down from 3.1% in July 2018.

So a weakening of pressure around the corner which was accompanied by a weakening further up the road.

The growth rate of prices for materials and fuels for manufacturing (input prices) slowed to 8.7% on the year to August 2018, down from 10.3% in July 2018.

So much of this is driven by a factor we looked at earlier which is the price of crude oil.

The annual rate was driven by crude oil prices, which fell to 39.4% in August 2018 from 49.6% in July 2018, but maintains 26 months of positive annual inflation.

What about house prices?

Average house prices in the UK have increased by 3.1% in the year to July 2018 (down slightly from 3.2% in June 2018). This is the lowest UK annual rate since August 2013 when it was 3.0%. The annual growth rate has slowed since mid-2016 and has remained under 5%, with the exception of October 2017, throughout 2017 and into 2018.

The second sentence will echo around the corridors of the Bank of England as that is when the Funding for Lending Scheme began to push house prices higher. First-time buyers will be pleased to note that prices may still be increasing but are not doing so at past rates.

How is this reflected in the headline inflation data?

We get plenty of rhetoric from the Office for National Statistics.

The CPIH is the most comprehensive measure of inflation. It extends the CPI to include a measure of the costs associated with owning, maintaining and living in one’s own home, known as owner occupiers’ housing costs (OOH), along with Council Tax.

Sounds good doesn’t it? But really it is a heffalump trap which is a national embarrassment. The catch is that the measure used does not exist and is never paid. What happens is that it is assumed that if you own your own home you pay rent to yourself and it is that “rent” which is used. Why? Well if you take a look at the number you will get a powerful clue.

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

As the owner occupied housing sector is around 17% of the CPIH measure you can see why it has consistently been below the other inflation measures. Even worse there are more than a few statisticians who think that via a poor balance between new and old rents the official rents data is too low anyway. That is to some extent backed up by the way the official rents series has weakened when we are told wage growth is rising.

So a series which is under serious question ( rents) is then used to measure inflation for those who by definition do not pay rent.

Comment

The establishment view was that inflation was in modern language, like so over. For example the NIESR published some new analysis last month suggesting it was heading straight back to its target. Yet today reminds us that unlike Japan we are an inflation nation as we are prone to it. To my mind that is one of the reasons why there has been such a campaign against the RPI because it produces numbers like this.

The all items RPI annual rate is 3.5%, up from 3.2% last month

Rather than engaging with people like me who support the RPI we have got rhetoric and propaganda. Just because I support it does not mean I think it is perfect but it is better than the woeful CPIH which the UK establishment has lined up behind.

Another example of establishment’s being economical with the truth has been provided today by Andy Haldane of the Bank of England in Estonia.

The first is so-called “forward guidance” about monetary policy………. By contrast, if you are a company or household considering whether to spend, a general idea
of the direction and destination of interest rates is likely to be sufficient.

The problem though is what he omits from the bit below.

The MPC first used the words “limited and gradual” in 2014 when describing the likely future course of
interest rates rises……….When the MPC did come to raise interest rates, in November 2017 and again in August 2018, it is interesting to see how well these were understood by companies and households.

This view presents matters as being well handled via the omission of the interest-rate cut and QE of August 2016 which punished those who acted on the original forward guidance. But apparently it is all part of this.

Central banks were put on earth to serve the public