UK Retail Sales surge in June

The Covid-19 pandemic has brought about all sorts of economic events. Yesterday evening I went for a stroll in Battersea Park and it was quite noticeable how the number of people going for a picnic there has increased. We do not know how permanent that will be but I suspect at least some of it will be as people discover that the same bottle of wine is so much cheaper than at a wine bar or pub. Oh yes and some seem to forget the food part of the picnic! I can see that BBC Breakfast have put their own spin on it.

9-year-old Sky had this message on #BBCBreakfast for people dropping litter in parks and open spaces

Yes more people have created more litter. Kudos to @PolemicPaine who pointed out ahead of a flurry of such media reports that it would happen. Some people’s behaviour is bad but in recent years the cleanliness of Battersea Park has improved a lot and thank you to the workers there.

Retail Sales

These are the numbers which were likely to be harbingers of change in the trajectory of the UK economy. So this morning’s news was rather welcome.

In June 2020, the volume of retail sales increased by 13.9% when compared with May 2020 as non-food and fuel stores continue their recovery from the sharp falls experienced since the start of the coronavirus (COVID-19) pandemic.

That was quite a surge and means this.

The two monthly increases in the volume of retail sales in May and June 2020 have brought total sales to a similar level as before the coronavirus pandemic; however, there is a mixed picture in different store types.

There is another way of looking at this.

In June, total retail sales continued to increase to reach similar levels as before the pandemic, with a fall of just 0.6% when compared with February.

So is it in modern language, like well over? Not quite as the text is a little reticent in pointing this out but volumes were some 1.6% lower than last June. Whilst growth had been slowing we usually have some so perhaps 3% lower than we might usually expect. However these are strong numbers in the circumstances and will have come as an especial shock to readers of the Financial Times with the economics editor reporting this. I have highlighted the bit which applies to June.

The latest numbers on card payments and bank account transactions from Fable Data show that in the week to July 19, total spending in the UK was 25 per cent down on the same week in 2019, a deterioration from a 13 per cent decline four weeks earlier.

As you can see whilst consumption is a larger category than Retail Sales there is quite a difference in the numbers here. According to the report by the economics editor of the FT a bad June was followed by a woeful July.

The latest indications from unofficial data on spending patterns in the UK suggests the economic recovery that began in late April has stalled — and possibly even moved backwards in July. Separate figures from the Bank of England’s payment system and from card payments collected by Fable Data show a worse picture for spending in mid-July than at the start of the month.

More on this later.

The Breakdown

Whilst the overall picture is pretty much back to February there have been some ch-ch-changes in the pattern.

In June, while non-food stores and fuel sales show strong monthly growths in the volume of sales at 45.5% and 21.5% respectively, levels have still not recovered from the sharp falls experienced in March and April.

My personal fuel sales shot up as I bought some diesel and went to visit an aunt and my mother;s house at the end of June but on a more serious level traffic in Battersea picked up noticeably. This is in spite of the official effort to discourage driving just after telling people to drive! Anyway switching sectors this is interesting.

Following this peak, sales returned to a level higher than before the pandemic. In June 2020, despite a small monthly decline of 0.1% in volume sales, food stores remained 5.3% higher than in February 2020.

I say that because of this.

Feedback from food retailers had suggested that consumers were panic buying in preparation for the impending lockdown.

If they were we would expect a dip going ahead. On a personal level I did put some extra stuff in my freezer in case I had to quarantine ( it was 7 days then) and bought some more tinned food. But collectively the other side of that has not been seen so far. Maybe it is because the June numbers do not see the opening of restaurants and the like which began on July 4th.

I doubt anyone is going to be surprised by this.

Non-store retailing has reached a new high level in June 2020, with continued growth during the pandemic and a 53.6% increase in volume sales when compared with February 2020.

Let me now give you the two polar opposites starting with the bad.

Textile, clothing and footwear stores show the sharpest decline in total sales at negative 34.9%. This was because of a combination of a large fall within stores at negative 50.8% along with a slower uptake in online sales, with a 26.8% increase from February.

Now the up,up and away.

Household goods stores, as the only store type to show an increase since the start of the pandemic, has a large uptake in online sales, increasing by 103.2%. In addition, household goods stores saw the smallest decline in store sales when compared with other non-food stores, at negative 15.2%.

I am glad to see my friend who has been painting his garage door and some windows pop up in the figures.

In June, electrical household appliances, hardware, paints and glass, and furniture stores all returned to similar levels as before the pandemic.


This is welcome news for the UK economy and it provides another piece of evidence for one of my themes. For newer readers I argued back in January 2015 that lower prices boost the economy ( the opposite of the Bank of England view) and we see that lower prices in retail have led us to getting right back to where we started from. I am sure that some PhD’s at the Bank of England are being instructed to sufficiently torture the numbers to disprove this already.

Actually the Bank of England is in disarray as in response to the FT data above one of its members seems to have switched to analysing health.

Jonathan Haskel, an external member of the BoE’s Monetary Policy Committee, said the evidence was beginning to show that household concerns about health were more likely to drive spending than government lockdown rules.

Oh well. Also this made me laugh, after all who provided all the liquidity?

“The need for more equity finance creates a case for authorities to be ambitious in reforming the financial system to remove any biases against the patience that’s needed for many equity investments,” he said.

“Even investors who should have the longest horizons seem to have a fetish for liquidity and an aversion to really illiquid growth capital assets.” he said. ( Reuters)

I do hope somebody pointed out to Alex Brazier, the BoE’s Executive Director for Financial Stability Strategy and Risk that the speech should be given to his own colleagues who have been singing along to Elvis Costello.

Pump it up, until you can feel it
Pump it up, when you don’t really need it

Let me finish by pointing out that these retail numbers are imprecise in normal times and will be worse now. So we have seen quite an upwards shift of say around 10%. Moving onto numbers which are even more unreliable there was more good news but regular readers will know to splash some salt around these.

At 57.1 in July, up from 47.7 in June, the headline seasonally
adjusted IHS Markit / CIPS Flash UK Composite Output Index – which is based on approximately 85% of usual monthly replies – registered above the 50.0 no-change value for the first time since February.

Good News for UK GDP, Productivity and Inflation

Yesterday brought some news which was both intriguing and welcome. It brings into play several of my themes. We have people being both inventive and innovative. Proper research into the consequences of this. Next we have something which I have to confess raises a smile which is economic growth being provided by lower prices. Yes the “DEFLATION” which regularly screams from the pages of the mainstream media as some sort of horror story. Last and definitely least is the way that the UK statistics establishment initially reviewed the work and decided as we often see with Imputed Rent that however the facts change we end up with the same answer as before.

The Telecoms Sector

There had been a longstanding problem here which is summarised below by Diane Coyle.

In the 2017 ESCoE Discussion Paper ‘A Comparison of Approaches to Deflating Telecoms Services Output‘ we explored why the official price index for telecoms had been almost flat during a period when the industry had experienced significant technological change including the advent of broadband data services, and business models, pricing and consumer behaviour also changing substantially.

Pretty much everyone will have seen extraordinary changes and innovation in the telecoms sector over recent years and indeed decades. As someone who paid for AOL Silver with its speed of 125k and then 256k if I remember rightly and now can do Zoom classes in the back garden from the Wi-Fi there has been extraordinary change. The price is about £10 per month more but that is dwarfed enormously by the quantity change. Recording that as unchanged is really rather extraordinary but sadly not unique as for example the way prices are used in the government sector are also often reality free.

Here is the problem.

While data services now represent the primary output of the telecommunications services sector, the existing output deflator used in the UK and elsewhere gives higher weight to traditional voice and text (SMS) services.

Next comes the consequence of the mistake.

Because the price of these traditional services is higher and demonstrated less change, using a deflator weighted towards these items implies slower growth in the real-terms output and productivity of the sector, which seems at odds with the considerable usage growth and experience of service improvements and motivated the consideration of alternatives.

This is an important conceptual issue so let me explain it. Our statisticians get data but it needs a Deflator to allow for any inflation so that we get a real number. When you enquire as to how this works they are often rather evasive. The issue here is that as David Bowie would put it there have been ch-ch-changes but these have not been allowed for. As you can see it is a big deal.

Because, although the component services from text messages and voice calls to WhatsApp messages and video all involve different charges (higher per byte for the ‘traditional’ services), they all use bytes of data carried over the same networks. These two options suggested a price decline of between 37% and 97% over the years 2010 to 2017, rather than the roughly zero change in the published index.

Moving On

One area of the newer work strikes home with me as someone who chooses the internet provider I have because they offered another attractive deal ( Sky Sports). Others might get a mobile deal but the point is as below.

For instance, fixed line services involve an access charge, currently treated as a separate charge when it would be more reasonable to allocate it across the services provided, as no-one just buys ‘access’. Bundling services has become common: Ofcom has estimated that nearly four fifths of services in the UK are ‘bundles’ of different components.

Many of you will be pleased to read that conventional hedonics have been rejected here.

For instance, many hedonic regressions for broadband use download and upload speeds as the main quality characteristics. However, these regressions rely on the high level tariff, rather than individual contract level data. This means using advertised, rather than actual, speeds since actual speeds can only be observed at the individual contract level.

I am sure I am not the only one who has contacted his provider over internet speeds during this pandemic. Also other factors matter and and led me add reliability which seems to have been missed.

other factors are also important such as coverage and latency (the time-lag between sending and receiving, of little importance on a text or local call, potentially awkward on an international call, potentially catastrophic for a high frequency traders).

In terms of the effect the results have been refined down to this.

Using our preferred option, which may still be characterised by some upward
bias, the price of telecommunication services in the UK declined by 64% from 2010-2017, rather than
remaining broadly flat as suggested by the current deflator. …….. Our new options deliver declines in the deflator series of between 58% and 84% between 2010 and 2017.


There has been a lot discussed here but many of you will be familiar as I covered this when it first appeared.

The analysis in the paper referred too highlights this in one simple section which shows that in the period in question telecoms revenues fell by 10% which in essence led to the falling output and productivity conclusion in UK GDP. But data transmission rose by a factor of ten strongly challenging the falling output conclusion. Another way of looking at that is the existence of a wide range of business and services such as WhatsApp or Kik. ( January 18th 2018)

Let me ram home the productivity point.

Telecoms accounts for only 1.8 per cent of the economy but official data suggest it is responsible for nearly a fifth of the economy-wide productivity slowdown. ( Financial Times)

Both the Financial Times and the Bank of England have been hot on the case of the UK Productivity Gap whereas regular readers will know that I have been more optimistic. The numbers are heading my way. Also both are inflation nutters who will be trying to avoid the intellectual disaster of economic growth coming from lower prices as I regularly argue.Where’s your 2% inflation target now?

Another reason I welcome this is that some of these matters are genuinely difficult as Diane Coyle points out.

The question is how to adequately control for quality change when there is a new or higher quality product, rapid volume growth and declining price substitute for an existing good or service.

It has applied to telecoms but goes much wider.

However, the key point is to be aware of the sensitivity of the price index to the assumptions made about weights.

It applies to fashion clothing and computer games as followers of my work will be aware. These factors have been drivers in the official propaganda campaign against the Retail Price Index yet could be reformed. Somehow that gets “forgotten” as I remind your that owner-occupied housing has a weight of 17% using rents but more like 7% using house prices. I am not sure manipulation could be more transparent.

As a matter of opinion whilst I welcome this work I would apply the lower gains as there are challenges to it. For example I recall the statistician Simon Briscoe pointing out that each I-Pad he buys is much better than the previous one but he only uses some of the gains. But we will be left with higher GDP and productivity and lower inflation. The latter is awkward as it  is not revised so we should calculate a new series so the difference can be known,

Finally let me return to the establishment initially rejecting this as some of you may follow social media and note this seemed to be officially denied. Perhaps they have “forgotten” this official letter from January 2018.

As the piece notes, while this improvement may change the relative size of the telecoms industry within our statistics, it will likely have little or no impact on our overall estimate of GDP.

In addition, there is also no direct read across to consumer price indices such as CPI or CPIH, as these indices are produced separately from national accounts deflators of ‘factory gate prices’.

Whereas yesterday we were told.

The effect of the new deflator would increase the volume of output of the telecommunications sector and will likely increase the headline volume measure of GDP.


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.


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 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.


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.




UK Retail Sales are booming again and are being driven by lower inflation

The beat of UK economic data goes on as our official statisticians do their best to flood us with it on certain days which sadly has the effect that some matters get missed. It is sadly to report that those at the top of the Office for National Statistics have rather lost the plot and if the evidence they gave to the recent parliamentary enquiry is any guide are prioritising chasing clicks rather than providing information. The labour market release which used to be fairly clear is now something of a shambles of separate releases.

Let us however buck the trend by looking at the numbers which give us an international comparison for our national debt and deficit. Regular readers will be aware that the UK ONS has its own methodology which is neither international nor understood much as I recall Stephanie Flanders when she was BBC economics editor suddenly realising some of the reality. Let me illustrate with the numbers.

At the end of December 2018, UK general government gross debt was £1,837.5 billion, equivalent to 86.7% of gross domestic product (GDP) . This represents an increase of £51.4 billion since the end of December 2017, although debt as a percentage of GDP fell by 0.4 percentage points from 87.1% over the same period. This fall in the ratio of debt to GDP implies that GDP is currently growing at a greater rate than government debt.

That quote does a fair job of explaining how the debt is now rising at a slower rate than economic output meaning it is rising in absolute terms but falling in real ones.

If we move to the annual deficit we see this.

In 2018, UK general government deficit was £32.3 billion, equivalent to 1.5% of gross domestic product (GDP) ; the lowest annual deficit since 2001. This represents a decrease of £5.8 billion compared with borrowing in 2017.

In the financial year ending March 2018, the UK government deficit was £43.3 billion (or 2.1% of GDP), a decrease of £3.0 billion compared with the previous financial year.

As you can see the pattern is familiar of a falling deficit and if we start with the deficit there is something of an irony as we note this.

This is the second consecutive year in which government deficit has been below the 3.0% Maastricht reference value.

Although in debt terms we are way over.

General government gross debt first exceeded the 60% Maastricht reference value at the end of 2009, when it was 63.7% of GDP.

Rather confusingly the ONS points us towards the January so let us look at the deficit in tax year terms.

Borrowing in the financial year ending (FYE) March 2018 was £41.9 billion, £3.0 billion less than in FYE March 2017; the lowest financial year for 11 years (since FYE 2007).

So only a small difference here but the debt figures show a much wider one in absolute terms.

Debt (public sector net debt excluding public sector banks) at the end of January 2019 was £1,782.1 billion (or 82.6% of gross domestic product (GDP))

The two main differences are the switch from net to gross debt and the switch from public finances to central government which means a difference of around 4% of GDP.

But we see that the numbers still show a considerable improvement.

Retail Sales

The present upbeat springlike mood got an extra boost this morning from this.

The monthly growth rate in the quantity bought in March 2019 increased by 1.1%, with food stores and non-store retailing providing the largest contributions to this growth. Year-on-year growth in the quantity bought increased by 6.7% in March 2019, the highest since October 2016, with a range of stores noting that the milder weather this year helped boost sales in comparison with the “Beast from the East” impacting sales in March 2018.

The weather probably helped as noted and in case you were wondering the numbers are seasonally adjusted for Easter. But as I noted value growth of 7.3% that meant that a rough guide to inflation is 0.6% or my January 2015 theme has worked one more time.

 However if we look at the retail-sectors in the UK,Spain and Ireland we see that price falls are so far being accompanied by volume gains and as it happens by strong volume gains. This could not contradict conventional economic theory much more clearly. If the history of the credit crunch is any guide many will try to ignore reality and instead cling to their prized and pet theories but I prefer reality ever time. ( January 29th 2015)

This poses quite a problem for central bankers as they want to push inflation back to and in some cases ( as we have recently analysed) above 2% per annum. This would weaken retail sales and other measures as the reduce real wages by doing so. Or if you prefer they would be ignoring the reality of “sticky wages” and preferring Ivory Tower theory. Maybe that is why they seem keener on targeting climate change than inflation these days as we are deflected away from their main job.

As this series is erratic on a monthly basis we need to run a check looking further back but when we do so the answer changes little.

In the three months to March 2019 (Quarter 1), the quantity bought in retail sales increased by 1.6% when compared with Quarter 4 (Oct to Dec) 2018, following sustained growth throughout the first three months of the year. All store types except department stores and household goods stores increased in the quantity bought in the three months to March 2019, when compared with the previous three months.

It seems that the UK consumer has not waited to spend the benefits of higher real wages. At least for once we may not be observing a debt financed splurge although this does on the downside pose a worry about the trade figures, especially if this morning’s PMI survey suggesting economic growth has slowed again in the Euro area is accurate.

Putting this into song it is time for the Spencer Davis Group.

So keep on running
Keep on running,


As we approach Easter on Maundy Thursday we see that much of the UK economic data is in tune with the spring and the warm sunny weather that has arrived in London. This week has seen mostly steady inflation with continuing wage and employment growth and now has retail sales on a bit of an apparent tear. This is reinforced by the delayed debt and deficit data that matches international standards. Of course the economic output or GDP data is much more sanguine as we wait to see which will be right.

All of these numbers have their flaws. If we take an even-handed view we see that the omission of the self-employed from the wages numbers is a handicap but on the other side the omission of frankly a fair bit of modern life with things like Whatsapp being free and not being in GDP is a rising problem there.

Let me wish you a happy Easter as the UK takes a long weekend and add something else. Next month Japan will take a long break due to the accession of a new Emperor as what is called Golden Week becomes more like a Golden Fortnight. Some seem to approach this with trepidation, has the control freakery become so high, it has come to this?

Taken to dizzy new heights
Blinding with the lights, blinding with the lights
Dizzy new heights
Has it come to this?
Original pirate material
Your listening to the streets  ( The Streets)

Me on The Investing Channel

Why are we told some inflation is good for us?

A major topic in the world of economics is the subject of inflation which has been brought into focus by the events of the past 2/3 years or so. First we had the phase where a fall in the price of crude oil filtered through the system such that official consumer inflation across many countries fell to zero per cent on an annual basis and in some cases below that. If you recall that led to the deflation scare or it you will excuse the capitals what much of the media presented as a DEFLATION scare. We were presented with a four horsemen of the apocalypse style scenario where lower and especially negative inflation would take us to a downwards spiral where wages and economic activity fell as well along the line of this from R.E.M.

It’s the end of the world as we know it.
It’s the end of the world as we know it.

I coined the phrase “deflation nutter” to cover this because as I pointed out, Greece the subject of yesterday suffered from quite a few policy errors pushing it into depression and that on the other side of the coin for all its problems Japan had survived years and indeed decades of 0% inflation. Indeed on the 29th of January 2015 I wrote an article on here explaining how lower consumer inflation was boosting consumption across a range of countries via the positive effect it was having on real wages.

 if we look at the retail-sectors in the UK,Spain and Ireland we see that price falls are so far being accompanied by volume gains and as it happens by strong volume gains. This could not contradict conventional economic theory much more clearly. If the history of the credit crunch is any guide many will try to ignore reality and instead cling to their prized and pet theories but I prefer reality ever time.


Relative prices

The comfortable cosy world of central bankers and theoretical economists told us and indeed continues to tell us that we need positive inflation so that relative prices can change. That leads us to the era of inflation targets which are mostly set at 2% per annum although of course there is a regular cry for inflation targets to be raised. However 2015/16 torpedoed their ship as if we just look at the basic change we saw a large relative price adjustment for crude oil leading to adjustments directly to other energy costs and a lot of other changes. Ooops! Even worse for the theory we saw two large sectors of the economy respond in opposite fashion. A clear example of this was provided by my own country the UK where services inflation barely changed and ironically for a period of deflation paranoia was quite often above the inflation target. But the goods sector saw substantial disinflation as it was it that pulled the overall measure down to around 0%.

We can bring this up to date by looking at the latest data from the Statistics Bureau in Japan.

  The consumer price index for Ku-area of Tokyo in October 2017 (preliminary) was 100.1 (2015=100), down 0.2% over the year before seasonal adjustment, and down 0.1% from the previous month on a seasonally adjusted basis.

So not only is there no inflation here there has not been any for some time. Yet the latest monthly update tells us that food prices fell by 2.4% on an annual basis and the sector including energy fuel and lighting rose by 7.1%. Please remember that the next time the Ivory Towers start to chant their “we need inflation so relative prices can adjust” mantra.


This is that central banks are in the main failing to reach their inflation targets. For example if we look at the US economy the Federal Reserve targets the PCE ( Personal Consumption Expenditure) inflation measure which was running at an annual rate of 1.6% in September and even that level required an 11.1% increase in energy prices.

So we see central banks and establishments responding to this of which the extreme is often to be found in Japan. From @lemasabachthani yesterday.


Poor old Governor Kuroda whose turning of the Bank of Japan into the Tokyo Whale was proving in his terms at least to be quite a success. From the Financial Times.

Trading was at its most eye-catching in Japan. Tokyo’s Topix index touched its highest level since November 1991, only to end down on the day after a volatile session. At its peak, the index reached the fresh high of 1,844.05 with gains across almost all major segments, taking it more than 20 per cent higher for the year to date. But it faded back in late trade to close at 1,817.75.

It makes me wonder what any proposed new Governor would be expected to do?! QE for what else?

Whereas in this morning’s monthly bulletin the ECB ( European Central Bank) has told us this.

Following the decision made on 26 October 2017 the monthly pace will be further reduced to €30 billion from January 2018 and net purchases will be carried out until September 2018. The recalibration of the APP reflects growing confidence in the gradual convergence of inflation rates towards the ECB’s inflation aim, on account of
the increasingly robust and broad-based economic expansion, an uptick in measures of underlying inflation and the continued effective pass-through of the Governing
Council’s policy measures to the financing conditions of the real economy.

So we see proposals for central banking policy lost in  a land of confusion as the US tightens, the Euro area eases a little less and yet again the establishment in Japan cries for more, more, more.


There is a lot to consider here as we mull a world of easy and in some cases extraordinarily easy monetary policy with what is in general below target inflation. Of course there are exceptions like Venezuela which as far as you can measure it seems to have an inflation rate of the order of 2000% + . But in general such places are importing inflation via a lower currency exchange rate which means that someone else’s is reduced. Also we need to note that 2017 is looking like a good year for economic growth as this morning’s forecasts from the European Commission indicate.

The euro area economy is on track to grow at its fastest pace in a decade this year, with real GDP growth forecast at 2.2%. This is substantially higher than expected in spring (1.7%)…… 2.1% in 2018 and at 1.9% in 2019.

So then of course you need an excuse for easy monetary policy which is below target inflation! Of course this ignores two technical problems. The first is that at the moment if we get inflation it is mostly from a higher oil price as we mull the likely effects of Brent Crude Oil which has moved into the US $60s. The second is that there is inflation to be found if you look at asset prices as whilst some of the equity market highs we keep seeing is genuine some of it is simply where all the QE has gone. Also there is the issue of house prices where even in the Euro area they are growing at an annual rate of 3.8% so if they were in an inflation index even more questions would be asked about monetary policy.

In a world where wages growth is not only subdued but has clearly shifted onto a lower plane the obsession with raising inflation will simply make the ordinary person worse off via its effect on real wages. Sadly this impact is usually hardest on the poorest.

Me on Core Finance TV




Fears of deflation turn to fears of inflation

The world inflation picture has changed in 2016. It is hard to note that without a wry smile as there was no shortage of so-called expert opinion that when inflation headed towards zero and in some cases to below it that sang along with REM.

It’s the end of the world as we know it.
It’s the end of the world as we know it.

If we think back all sorts of downwards spirals were predicted from the lower inflation but in fact as I pointed out there were benefits such as improvements in real wages leading me to sing along with the next line of the song.

It’s the end of the world as we know it, and I feel fine.

Many workers and consumers will have been singing along with that too. Also the truth was that we were mostly seeing a relative price shift as commodity prices and in particular the oil price fell and reduced overall inflation. This was something which the Ivory Towers had told us could not happen as we apparently needed some inflation for relative price shifts to happen! Another fail for them. So let us take a look at where we are now.

The inflation base provided by services

There always was some inflation beneath the surface which was swamped by the effects of the oil and commodity price fall. Mostly it was to be found in the service sector. For example if we go back to September 2015 in the UK we see that whilst headline official CPI inflation dipped to -0.1% this was also true.

The CPI all services index annual rate is 2.5%, up from 2.3% last month.

Twelves months on in our latest reading it is in fact pretty more ignoring what has gone on elsewhere.

The CPI all services index annual rate is 2.6%, down from 2.8% last month.

A not dissimilar pattern has been found in the Euro area where is we go back to the preliminary forecast for March inflation an overall rise from -0.2% to -0.1% was accompanied by this.

services is expected to have the highest annual rate in March (1.3%, compared with 0.9% in February),

In essence services inflation has been running at an annual rate of around 1% in the euro area for a while.

If we move to the United States then last September this was reported.

The Consumer Price Index for All Urban Consumers (CPI-U) decreased 0.2 percent in September on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today

However services inflation was running at an annual rate of 2.3%. A year later when headline inflation has risen services inflation is 3% and there is now focus on it although mostly because of this issue.

The index for prescription drugs increased 0.8 percent (on the month).

So as you can see in the UK and US in particular services inflation never went away and if we move from consumer measures to the wider economy that sector is of course the largest. The Euro area had the same experience but of a milder level.

Asset Prices

The whole deflation mythology rather ignored the fact that in more than a few places asset prices were rising. In the UK that was particularly noticeable in the rise of house prices which have become increasingly unaffordable whilst the official CPI measure ignores owner-occupied inflation. But there have also been concerns about house price rises in some of Europe, China,Canada, Australia and the US.

What about the oil price?

This was the main game changer for inflation and recently we have seen it rise. Indeed from the lows of below US $30 in January we have seen the price of Brent Crude Oil rise to US $51.73 as I type this. This puts it just under 8% up on a year ago which means that as this feeds into producer prices and then consumer prices the downwards influence from it will fade and then end. We are already seeing some of this effect as for example the energy price component of consumer inflation has seen its annual rate rise from just under -9% to -3% in the Euro area.

Some care is needed here as the oil price has established something of a habit of falling in the latter part of the year. OPEC seems to be doing its best to stop that at the moment but we do not know how that will play out. Should the oil price merely remain around here then we will see the annual rate of price inflation from it rise.

Commodity Prices

These are less clear-cut because a rally in the first half of 2016 has been followed by a decline since. If we look at the CRB ( Commodity Research Bureau) Index it opened 2016 at 373 rose to a peak just below 421 and is now just below 400.  There have been two quite contrary trends at play here where firstly the price of metals surged ( from 540 to 720) whilst foodstuffs at first followed this but then fell over the summer and are now lower than when they started 2016.

The US Dollar

This matters to everyone who does not have the US Dollar as their currency because the vast majority of commodity prices are in US Dollars. So this from does echo on the inflation front.

The dollar index was up 0.10% at 98.74 at 02:45 E, off a high of 98.81, its highest level since early February.

The interest-rate rise that is supposed to be driving this has been supposedly around the corner for all of 2016 but after a dip in April towards 93 the US Dollar Index has been rising since. It has even pushed the strong Japanese Yen back above 104 more recently.

Some of this is individual moves such as the post EU leave fall for the UK Pound but more generally we have seen the Euro decline a little recently and the Chinese continue to fix the Renminbi lower (6.77 today).


The winds of change are blowing through the inflation landscape as we wait to see what the main mover the crude oil price does. Whilst technically it is a relative price shift it is picked up as inflation (or disinflation), and to be fair it does trigger price changes elsewhere. How much inflation will now rise depends on what it does but as I have explained there are factors in the background where the band never stopped playing as we were supposed to be hitting an iceberg. Oh and it means I would far rather be the Austrian government and taxpayer than an investor in this. From Bloomberg.

Austria’s 30-year bund yields were little changed at 1.01 percent as of 10:32 a.m. London time…….The initial price talk for the 70-year bond sale was 60 basis points more than the yield on the February 2047 security, the person said.

So 1.6% for 70 years? No thanks after all we are living in an era of this.

Meanwhile I note that according to FT Alphaville this has been the state of play on the inflation front.

inflation predictions are back in a big way and after more than eight years of being proved wrong time and time again, the inflationistas may finally get to have their day in the sun.

Actually if we look back I was right to suggest that UK inflation would rise back in 2010 as it then on both measures ( CPI & RPI) rose to above 5%. That is an extraordinary thing to have amnesia about as via its disastrous impact on real wages it is one of the most significant phases in post credit crunch UK.

Oh and you may note that for all the hot air (Open Mouth Operations) of central bankers and indeed their QE their efforts have had very little impact here. Of course that is partly to do with the fact that they impact on asset prices which are kept out of most official measures of consumer inflation. It is also partly to do with the fact that devaluing your currency is overall a zero sum game which may give to some but also takes away from others. However this paragraph needs to come with a so far…….


Falling prices have provided quite an economic boost for the UK,Spain, Ireland and now France

Today as we observe in particular the consumer inflation numbers from the Euro area gives an opportunity to look again at one of the main themes of this website. That is my argument that low/no inflation provides an economic boost via higher real wages and hence domestic consumption and demand. Back on the 29th of January 2015 I pointed out this.

However if we look at the retail-sectors in the UK,Spain and Ireland we see that price falls are so far being accompanied by volume gains and as it happens by strong volume gains. This could not contradict conventional economic theory much more clearly.

I also pointed out that those in love with inflation and who claim that against all the evidence that it provides an economic boost – in spite of all the evidence to the contrary – would look away now.

If the history of the credit crunch is any guide many will try to ignore reality and instead cling to their prized and pet theories but I prefer reality ever time.

There are more than a few people around in the UK establishment for example who would like the consumer inflation target to be raised to 3% or 4% from the current 2% per annum.

The orthodoxy challenged

This has been provided by that bastion of orthodoxy the Financial Times already today.

Deflationary pressure persists in France

This gives the impression that something bad is happening there. It is based on this morning’s data release.

Year-on-year, consumer prices should decline by 0.1% in May 2016……..On all markets (French market and foreign markets), producer prices fell back in April 2016 (-0.3% following +0.2%). Year over year, they decreased by 3.9%, mainly due to plummeting prices for refined petroleum products (-30.9%)

The “end of the world as we know it” impression however was contradicted by the data released yesterday.

In Q1 2016, GDP in volume terms* increased by 0.6%, thereby revising the first estimate slightly upwards (+0.5%).

So the best quarter for economic growth driven by “consumption and investment”. Indeed we see this.

Household consumption expenditure recovered sharply (+1.0% after +0.0%).

This rather challenges the way the FT uses “headwinds remain” to describe something that I see as a benefit. Oh and they have used the wrong inflation number as regular readers will be aware of the way it rejects RPI and pushes to CPI in the UK. Well what we call CPI did this.

Year-on-year, it should be stable after a slight decrease during the three previous months (-0.1%).

Oh dear.


The Emerald Isle was one of the countries I expected to do well in response to lower inflation so let us take a look again. From the Central Statistics Office.

The  volume of retail sales (i.e. excluding price effects) increased by 0.8% in April 2016 when compared with March 2016 and there was an increase of 5.1% in the annual figure.

This happened when we note that there was a fall in consumer inflation of 0.2% according to the Euro area standard and heavy price falls in the retail sector.

There was an increase of 0.4% in the value of retail sales in April 2016 when compared with March 2016 and there was an annual increase of 2.5% when compared with April 2015.

So volume up 5.1% but value up 2.5% shows there was both “deflationary pressure” and “headwinds remain” in fact are very strong. So a bit awkward to say the least to explain why volume growth was 5.1%. Actually the figures are very similar to what they were in January 2015 showing that retail sales have done their bit for the Irish economic recovery of the last couple of years.


Here too we have seen an economic recovery so let us look at the retail sales data.

In April, the General Retail Trade Index registered a variation of 4.1% as compared to the same month of 2015, after adjusting for seasonal and calendar effects. This annual rate was three tenths lower than that registered in March. The original series of the RTI at constant prices registered a 6.4% variation as compared to April 2015, standing 2.2 points above the rate of the previous month.

So with a 0.6% rise in the month itself we see that yes this has been a powerful player in the Spanish economic recovery. If we look back we see that the overall pattern does fit the theory whilst retail sales numbers individually can be erratic the overall series began a more positive theme in the autumn of 2014 which fits with the beginning of disinflationary pressure.

Also this is helping with the elevated level of unemployment in Spain.

In April, the employment index in the retail trade sector registered a variation of 1.5%, as compared to the same month of 2015.

Of course there are regional effects as we note one of the strongest growing regions was Comunidad de Madrid (8.3%). Real and Atletico will not be the Champions League finalists every year although they are both in strong patches. I guess for June there will be stronger growth in areas which support Real Madrid.

Again we see evidence of disinflation in the retail sector being much stronger than in the wider economy.

The annual change of the HICP flash estimate is –1.1%

We have to look fairly deeply for disinflation in the retail sector in Spain but when we do we see that volume gains of 5.1% in April are combined with turnover or value gains of 1% so disinflation was of the order of 4%. According to conventional economic theory the Spanish retail sector should be collapsing rather than booming. Will they tell us next that the Madrid clubs cannot play football?

This improved phase for Spanish retail sales is very welcome after a long winter and in spite of this better phase it is below that levels of 2010 by just over 5%.

The UK

We have long learned that the UK consumer needs very little excuse to splash the cash.

Continuing a sustained period of year-on-year growth, the volume of retail sales in March 2016 is estimated to have increased by 2.7% compared with March 2015. This was the 35th consecutive month of year-on-year growth.

Indeed I note that the Office for National Statistics now agrees with and backs up my theme. The emphasis is mine.

Figure 1 shows that the quantity bought remained fairly constant until late 2013, but began to increase steadily as average prices in store started to fall. The amount spent increased steadily during the period, however, as prices in store decreased the amount spent remained steady, implying that as prices fell, consumers bought more goods.

The inflation measure here or implied deflator is at 95.1 where 2012=100 so we see that yet again conventional theory was wrong. Looking forwards it is the return of inflation which troubles me as I fear it will reduce and possibly end retail sales growth via its impact on real wages. Whereas inflationistas will be left yet again scrabbling for excuses and refusing to play Men At Work.

Saying it’s a mistake
It’s a mistake
It’s a mistake
It’s a mistake



There is much to consider in the burst of disinflation which has hit many of the world’s economies. It has mostly been driven by the lower oil price as I note that energy costs in the year to April fell by 8.1% in the Euro area. This is something that Mario Draghi and the ECB (European Central Bank) is trying to end with negative interest-rates and 80 billion Euros a month of QE bond purchases. Yet in Ireland and Spain we have seen a strong rise in retail sales in response to this as purchasing power and real wages rise. What is not to like about that? The central planners and their media acolytes should be quizzed a  lot more on this in my view.

Of course lower prices are not the only thing going on but in economics there is no equivalent of a test-tube experiment. It is also true that the economies which seem to be more in tune with the UK are seeing a stronger effect. But lower prices have led to higher retail sales via higher real wage growth which will presumably reverse when the central bankers get back the inflation they love so much.




How the UK establishment tries its best to mis-measure inflation

Today I wish to cover two areas. The first is something which I discussed on TipTV yesterday which is the power of the establishment where my message was that they can be thwarted if you are able to be both intelligent and persistent. The particular subject was inflation and this area was subject to an intervention on the subject of housing inflation by the UK National Statistician John Pullinger later in the day.

Firstly let me set out why this is an important issue. A feature of the credit crunch era was booming asset prices which the inflation targeting regime of the Bank of England missed entirely. It targets a measure called the Consumer Price Index which ignores owner-occupied housing costs. My contention is that with a better measure which includes that hardy perennial of the UK economic environment which is house prices we would have had a least a fighting chance of signalling any future burst of inflation in that area. Also we are in a period of disinflation where some including central bankers have spread a type of deflation paranoia. This would have been very different if we measured consumer inflation properly as the dips into negative inflation would have been avoided.


Back in 2013 the UK establishment was in a rush to discredit the Retail Price Index or RPI. As part of this it introduced a new variant which as a result of methodological changes would give a lower reading or ” prompted by the need to address the gap between the estimates produced by the RPI and the Consumer Prices Index (CPI)”.

Therefore, an improved variant of the RPI will be published from March 2013 using a geometric formulation (Jevons), known as RPIJ.

It was hoped that it would take over from the RPI but yesterday’s announcement told us this.

For the avoidance of doubt, RPIJ would no longer be published.

Is that the shortest lived “improvement” in the history of mankind? This poses all sorts of questions as you see what if they had overrun my protests and succeeded in replacing RPI with RPIJ? There is some 22% of the UK National Debt of the RPI Index Linked variety and many organisations such as National Rail have issued such debt. Also many wage deals are expressed in its terms as well as are many mobile contracts. In addition how are ex Governors and Deputy Governors of the Bank of England going to have a comfortable retirement? You get my point that for what in some cases are ultra long-term issues you cannot bob and weave on a 3 year timescale.

Andrew Baldwin has pointed out at the Royal Statistical Society that RPIJ could easily have been improved and I mean the normal persons definition of improved here not the official one.

Strip the RPIJ of its house depreciation component and replace it with a component for equity payments on mortgages and it has a payments approach to owner-occupied housing.

The issue of Europe

This is a simple one where the UK establishment decided to align inflation measurement with Europe and that led to the introduction of the CPI as an inflation target just over a decade ago. Dr Mark Courtney puts it thus.

All European Union countries have been obliged to publish a national HICP since March 1997.

So a harmonisation with Europe and in this instance Eurostat and in itself there is plainly logic in a consistent measure which can be compared internationally. However in a move of which Mark Carney would be proud the National Statistician John Pullinger has performed a hand brake U-Turn.

I also consider that it is important that we focus on a measure that can continue to be developed to meet the needs of UK users without being constrained by international regulations

Paul Johnson of the Institute of Fiscal Studies got rather upset when I pointed out this inconsistency at his public meeting a year ago. We got this measure to align with Europe and now it is a good idea that we don’t!

Housing Inflation

This is the nub of the issue because you see Europe via Eurostat is introducing a measure of consumer inflation that includes house prices. However the UK establishment wants us to use CPIH which includes rents. Just to be clear using rents for those who rent is correct but using them for owner-occupiers is not and of course gets us in the zone of imputed rents.

Even the UK Statistics Authority warned only last week about the problems of what is called rental equivalence.

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

You might think that not having a reliable rental series was a barrier to using them, well not for our intrepid National Statistician. This will surprise even supporters of the series such as the economics editor of the Financial Times Chris Giles who told me this on Twitter last week.

True, but only once data probs sorted. And they’ve not been.

Perhaps even more damning for Paul Johnson and John Pullinger who both want CPIH to be the main UK inflation measure was this bit.

CPIH is used by almost no one

The UK Statistics Authority put it another way.

There is some disagreement among users about the concepts and methods that ONS uses to measure Owner Occupiers’ Housing costs within the CPIH. ONS needs to do more to explain and articulate its own judgements about the concepts and methods that it uses,

To explain that I have seen statisticians query the numbers used for example in the arena of weighting and get what they and I consider to be unsatisfactory replies. I do not wish to get too bogged own in the detail today but below is a link to my post from the 4th of September 2015 when I explained the flaws in the system.

If we return to the issue of Imputed Rents then the numbers have been “aligned” in recent times. So we have trouble with the rental price series for both inflation and GDP or Gross Domestic Product.

A New Hope

There was some good news in the release and it relates to something which Jill Leyland of the Royal Statistical Society and John Astin have produced in response to the arguments made there by me amongst others.

Second, I have listened to calls for a measure showing the effect of changes in payments for goods and services, which has been referred to as a ‘Household Inflation Index (HII)’. The HII – as a ‘payments index’ – presents an idea that is fundamentally different in a number of important aspects to the traditional measurement of consumer inflation. These include the potential inclusion of asset prices and interest payments, plus giving each household’s expenditure equal weight.

By asset prices they mean house prices in the main and they are looking to cover what is an ordinary household’s experience of inflation. Accordingly they include mortgage payments and thereby other interest payments to be consistent. Personally I am not too sure about the latter bit and have argued against it but you see no inflation measure is perfect and this in my opinion is the best proposal we have.


There are quite a few issues here but I wish to return everyone to the fundamental points which are that the last boom and hence the credit crunch and the current deflation paranoia have as factors the way we measure inflation. The UK establishment has consistently headed in the direction of lower numbers or “improvements” and I feel that this is a major reason why people are unhappy with what they are being told. For example the switch from RPI to CPI in 2011 raises economic growth on average by some 0.5% per annum according to Dr.Mark Courtney.

The establishment will always find those willing to do its bidding and I am reminded of Us and Them by Pink Floyd.

Us and Them
And after all we’re only ordinary men
Me, and you
God only knows it’s not what we would choose to do
Forward he cried from the rear
and the front rank died
And the General sat, as the lines on the map
moved from side to side


Here is my interview from yesterday.


The inflation tectonic plates are showing signs of a shift

The last 18 months or so has seen a proliferation of countries reporting first falling rates of inflation and then negative annual rates. The commentariat got themselves into something of a mess on this front invoking “its the end of the world as we know it” before having to U-Turn like they are Mark Carney. We knew better here but I note that for the argument I have satirised as being for the “deflation nutters” there has been some interesting developments this week. This morning produced one from the British Retail Consortium.

Another fall in shop prices was seen in February, down 2.0 per cent compared with a year ago and a further fall on the numbers we saw in January as competition in the industry continues apace. This now marks the 34th consecutive month of price drops and 35th for non-food prices.

So the beat goes on and it was joined by a small drop in food prices. Actually for once the word deflation may be appropriate if we look at their longer-term view of the retail climate.

These effects could mean there are as many as 900,000 fewer jobs in retail by 2025 but those that remain will be more productive and higher earning.

However some care is needed here as a fair bit of this is the shift to the online/digital world and wages will be pushed higher by the National Living Wage. If we return to prices then petrol and diesel prices are at their cheapest for 6 years according to official data. here let me particularly welcome the end of a feature of rip-off Britain where diesel car drivers pay more for fuel as both fuels now cost £1.014 per litre.

The Euro area

We were told this only on Monday.

Euro area annual inflation is expected to be -0.2% in February 2016, down from 0.3% in January, according to a flash estimate from Eurostat, the statistical office of the European Union.

Again we saw a barrage of knee-jerk responses to this which for its own reasons – to justify its planned easing next week – the European Central Bank (ECB) has joined in with this morning. From @livesquawk

Villeroy: Sees Negative Inflation For ‘Several Months’

As you can see this feeds right into the “deflation nutter” zone although of course we are dealing with past trends as the data and the forecast are on the back of what has happened whereas we want to know what happens next and I am increasingly thinking that Florence may be right.

It’s always darkest before the dawn

It is always nice to support someone else who grew up in Camberwell and here lyrics also provide something of a critique for central bankers.

And I’ve been a fool and I’ve been blind
I can never leave the past behind
I can see no way, I can see no way
I’m always dragging that horse around

The oil price

There are various levels here and the superficial level is simply note that even at US $37 or so per barrel it is down 38% on a year ago. Now I do not know whether the forecasts of a fall to US $16 per barrel will happen but they do sound a bit like the ones projecting a rise to US $200 when the price was above US $100. Or “The only way is up” has been replaced by “down down” on the airwaves.

But whatever happens we are now unlikely to see a continuation of this reported by Eurostat in its consumer prices release.

energy (annual rate) -8.0%, compared with -5.4% in January.

We may see monthly flickers of this because this time last year the oil price saw a bounce which saw it rise to nearly US $70 on the Brent Crude benchmark in early May 2015 but as we move through summer we will be comparing to lower levels. Once the oil price impact begins to fade we will be concentrating on other aspects of inflation.

services is expected to have the highest annual rate in February (1.0%, compared with 1.2% in January),

This would hardly be a surge but it would change the emphasis as we see Euro area inflation rise towards its target.

If we move to the United States then they have an inflation linked bond market called TIPS. The St.Louis Federal Reserve has done some calculations about what oil prices would have to do to justify the current pricing structure. Thank you to Macro Man for the heads up and the emphasis is mine.

According to our calculations, oil prices would need to fall to $0 per barrel by mid-2019 in order to validate current inflation expectations. After that, there is no oil price that would allow our model to predict a CPI path consistent with December 2015 breakeven inflation expectations. This implied path of oil prices is very different from the path of oil prices implied by futures contracts, which rises to more than $50 per barrel by mid-2019.

There are issues with their assumptions but I think you get the gist of their argument in that quote.

Oil and commodity prices

These have been rising recently. Since the 20th of January the price of a barrel of Brent Crude has risen by US $10 per barrel.  As you can see from the chart below then Dr.Copper has for now stopped falling.

The UK

There are other issues here of which one relates to tax. As there are problems with the public finances the temptation to apply something like the old fuel price escalator may prove irresistible. It can ever be presented as helping the Bank of England with its mandate! Although of course it would be punishment for the UK worker and consumer via a reduction in real wages. Whilst a tendency to institutionalised inflation has a British theme a need for tax revenue appears elsewhere so it may not be alone in having such taxing thoughts.

There is also the issue of the UK Pound £ which has been falling in 2016 against the US Dollar which is the currency the majority of commodities are priced in. It is down just over 9% on a year ago with the fall beginning in the late summer of 2015 and picking up speed in 2016.

Also UK services inflation has been more persistent than in the Euro area and currently it matters little which measure you use. Sadly the new ONS website is telling us that the new data will be released on the 16th of February so it is good news that I recall the numbers being 2.3% (CPI) and 2.4% (RPI). So as the oil price effect wears off we will see the UK return to a more normal inflation position.

Also the UK methodology looks in need of a rethink to me. After all services are an ever bigger part of the economy as we have “rebalanced” towards them and I wonder if thus has been fully picked up. The inflation numbers should be better than the 2012 78.6% of GDP that is used for economic growth but may still be inaccurate.

RPI versus CPI

On this subject which many will tell you is a simple issue let me add something from the Royal Statistical Society website where Gareth Jones has posted this.

From 2011 to 2014,  the figures based on CPI indices are quite different to those based on RPI indices.  The CPI based volume shares continue to rise, while the RPI based figures fall.

Given that this period was one of falling real incomes, One would expect a fall in volume share for clothing, as it is to a large extent a form of deferrable capital expenditure.  On this basis, the RPI based figures are more plausible than the CPI based ones.  This adds support to the RPI price indices rather than the CPI price indices.

There are caveats but my argument has been that the debate is one where there are issues on both sides and not just the lazy RPI is bad produced by organisations such as the Financial Times. It was a change to clothing which produced a lot of the debate on UK inflation measurement and the establishment push for a lower number. The more of a case for RPI of whatever variant the more we move away from negative inflation.


The disinflation picture is one which has carried on for longer than expected. The ECB in particular embarrassed itself by missing the trend and then ended up in hot pursuit without catching up a bit like the Sheriff in the Smokey and the Bandit films. However from now they need to look a year or two ahead and after a few months of continued oil price disinflationary pressure we see an increasing chance of inflation rising. As I pointed out back on the 3rd of December then central banks should be beginning to adjust policy in response. Except as we have seen from the ECB and Bank of Japan and expect from the ECB next week they have already eased again and more is expected. The Bank of England could easily join in.

Meanwhile if we added asset prices such as housing to consumer inflation measures we would see a different picture again. There is a Eurostat measure for this where the UK owner occupied housing sector would be registering inflation of 1.9%. It is dreadfully flawed but much better than nothing!

Meanwhile if you prefer to listen rather than read here are some of my thoughts in that format from Share Radio earlier.

trends in the UK – Shaun Richards after another month of shop price


As a last point once you start to think that inflation will stop falling and then rise well where does that leave both low and especially negative bond yields?

The UK wages situation is one of spring sunshine after a cold hard winter

Today I wish to look at something which has become a good news story for the UK economy but comes after something of a long nuclear winter. This is the situation regarding real wages or wages after allowance is made for consumer inflation. Right now the situation has brightened considerably as shown below.

Comparing the 3 months to September 2015 with the same period in 2014, real AWE (total pay) grew by 2.9 per cent, compared with 3.0 per cent in the 3 months to August. Nominal AWE (total pay) grew by 3.0 per cent in the three months to September, while the CPI decreased by 0.1 per cent in the year to September

We see that there has been quite a considerable pick-up in wage growth in the UK which has fed straight through into real wages because the official measure of consumer inflation has been pretty much zero in 2015 so far. If we look back to September 2014 we see that the 3 monthly average of wage growth had just crawled above 1% to 1.1% compared with the 3% this September. So we have had a period of much better wage growth combined with zero inflation as economics forecasting models do an imitation of HAL 9000 in the film 2001 A Space Odyssey yet again.

If there is an economics equivalent of “Open the pod doors please HAL?” I would suggest giving it a wide berth!

How did we get here?

This is a much less pleasant subject because the burst of sunlight has followed a long grim winter. So long in fact that it might find itself being called temporary in official circles! The Bank of England’s Chief Economist Andy Haldane put it this way last week.

Finally on wages, real wages have yet to return to their pre-crisis peak. Rather, they are still 6% below that level. Since the crisis, we have seen one of the largest and longest squeezes on wages since at least 1850.

He will have been using the Consumer Price Index and the numbers would be worse if you use any of the variations of the Retail Price Index. Troublingly we see that a structural change has taken place over this period.

Put differently, labour’s share of the national income pie has fallen since 2009, from around 58% to 53%

Also the average figures hide the fact that some have done much worse.

Declines in median real wages among the young have been roughly twice as large as among the old. And workers in sectors such as construction, health and social work have seen far-larger declines in their take-home pay.

So as well as average falls we have seen a shift as some have been hit much harder meaning that some have actually done fairly well. That group is understandably silent and is a theme of these times. However overall there does appear to have been a shift away from labour as shown below.

Had UK wages tracked productivity since 1990, the median worker today would be 20% better off.

Rather Marxian of course but we have discussed on here many times that there has been a shift between “capital” and “labour” which will take quite some time to reverse even if we started right now.

Today’s numbers

We have received the latest annual survey this morning which is called ASHE or Annual Survey of Hours and Earnings which has a larger sample size than the monthly estimates we receive. Sadly it still has the main flaw.

ASHE does not cover the self-employed

Such a glaring error that only seems to bother me. But as it is more comprehensive that what we normally get let us dive in. Firstly we get confirmation of what we already thought.

In April 2015 median gross weekly earnings for full-time employees were £528, up 1.8% from £518 in 2014. This follows an annual growth of 0.2% between 2013 and 2014.

Considering we were in an economic recovery the year to April 2014 was pretty poor for wages and interestingly the year to April 2015 was only a little better than the credit crunch average of 1.5%. But it did mean this welcome piece of news emerged.

Adjusted for inflation, weekly earnings increased by 1.9% compared to 2014. This is the first increase since 2008, and is due to a combination of growth in average earnings and a low-level of inflation.

It has been quite a wait for a real rise in wages has it not? The Fab Four got it right here I think.

Little darling, it’s been a long cold lonely winter
Little darling, it feels like years since it’s been here

Here comes the sun, here comes the sun
And I say it’s all right

Little darling, the smiles returning to the faces
Little darling, it seems like years since it’s been here

A Space Oddity

This caught my eye.

Median gross weekly earnings for full-time employees increased by 1.8% in the public sector, and by 1.6% in the private sector. Private sector earnings have remained consistently at around 85% of public sector earnings since 2009.

I thought that there was supposed to be a 1% cap on pay rises in the public-sector? It does not seem to be the NHS as the list sent me by Laurence Hopkins has 7 category rises but 5 falls and one unchanged. As he points out it was not Zebra Crossing Monitors either as they saw a fall of 7.6%.

Of course the public-sector has all sorts of issues as those observing the fun and games with the modernisation of the gym at the  Battersea Park Millennium Stadium will have seen. Still if you spend more for the same thing that is an increase in GDP right? Er……..

We have some more fun with public-sector number crunching later.

Private sector earnings have remained consistently at around 85% of public sector earnings since 2009…… Private sector earnings were £501 in April 2015, compared with £589 for the public sector.

Okay but it morphs into this.

Av public sector pay 3.5% less than private sector allowing for factors such as age, sex, occupation & org size.

There are so many things one could reply with to that but for now I will content myself with pointing out that there are a litany of issues with such quality judgements especially with numbers where the quantity is less certain than we might like to think.

Highs and Lows

There is no surprise in this bit.

In April 2015, London topped the regional list for median earnings for full-time employees, at £660 per week.

But as we narrow things down we switch from no surprise to wondering about the state of play in Derbyshire.

In April 2015 full-time employees working in the City of London had the highest median gross weekly earnings (£921) and those working in North East Derbyshire had the lowest (£389).

Also Wales had a rough year as median wages actually fell albeit by only 0.1%.


The latest wages data feeds into a speech given this morning by Ben Broadbent of the Bank of England. In it he confirmed something that has been argued on this blog for years but is relatively rare elsewhere.

 the MPC isn’t concerned solely with inflation.

They will be following the wages data closely. But we should take great care with taking too much notice of their Open Mouth Operations as Ben confirms.

If there is any value in listening to people like me…

However if we return to the numbers I will let readers choose whatever measure of house prices that they like to compare with this number.

For the year ending 5 April 2015 median gross annual earnings for full-time employees were £27,600, an increase of 1.6% from the previous year.

This fits in with the arguments I have made in today’s edition of City-AM.

Oh and here is a bit of international perspective which is my reply to being asked what the year to April 2015 represents in Euro terms.

UK weekly earnings rose by roughly 16% in terms in the year to April 2015 using numbers..