The UK government plans to rip us all off

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

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

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

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

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

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

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

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

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

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

The Rip-Off

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

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

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

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

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

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

Gold

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

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

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

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

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

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

So we will wait and see.

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

 

Comment

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

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

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

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

Oil  44.9 pence

Duty 58 pence

VAT 20.5 pence

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

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

No measure of consumer prices is perfect.

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

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

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

On the consumption road the owner-occupier does this.

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

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

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

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

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

RPI

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

RPI suffers from this problem.

Which is?

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

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

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

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

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

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

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

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

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

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

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

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

Comment

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

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

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

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

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

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

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

Welcome to the UK Household Cost Index bringing hope for a better inflation measure

Today I wish to change tack after yesterday’s critique of GDP methodology using the situation of Ireland as an example. There the combination of a relatively small economy and large multinational companies looking for tax advantages means that there is a divorce between the large flows of money and genuine economic activity in Ireland itself. As pointed out in the comments yesterday even the official bodies are coming round to my point of view.

EU legislation requires the production of statistics that meet the ESA 2010 and BPM6 standards and the CSO will continue to produce GDP, GNI and related measures. Nevertheless, supplementary statistics that are more appropriate to the measurement of domestic economic
activity are needed that will be comprehensible and stable over time.

Required to provide numbers which are not only wrong but misleading? This does link to today’s subject of inflation measurement where I have also seen dissatisfaction on the issue of Ireland. I have come across claims that life has got more expensive in Ireland which contrasts wildly with the official data that there has been in broad terms no inflation in Ireland for a while. If we use their Consumer Price Index we see that if it was 100 in December 2011 it is 101.7 just under 6 years later. Yet in a familiar twist I can see support for the view that individuals are experiencing inflation and regular readers may be guessing where.

In the year to October, residential property prices at national level increased by 12.1%. This compares with an increase of 12.2% in the year to September and an increase of 7.5% in the twelve months to October 2016.

Even rents were rising at an annual rate of 5.7% in the year to November. So in this instance the Irish are like the British where inflation can be found in an area where the main consumer inflation measure looks the other way.

A new approach

Back in 2015 John Astin and Jill Leyland proposed a new way of measuring inflation  for people who own their own homes and they concluded that the best road was to try to count everything.

We propose that all elements of owner-occupier expenditures – deposits and outright payments, mortgage payments (both interest and capital), mortgage protection premiums, spending on renovations and extensions, repairs and maintenance, stamp duty land tax, legal, surveyor and estate agents’ fees, insurance of dwellings – should potentially be considered in scope. While one or two of these items (for example minor repairs and maintenance and insurance) are normally included in a consumer price index, many of the others are not. The RPI, in addition to MIPs, includes depreciation as a proxy for the more
major repairs needed to maintain a dwelling at its current value but does not include capital payments per se.

The argument for putting house prices ( capital costs ) is powerful I think.

The main argument for including these items is quite simply that such housing costs are a major item in many households’ budgets. We are constructing an index that is defensible to the man or woman in the street, an index that they can see bears a good relationship to
their actual outgoings. And shelter, however it is acquired, is an essential.

The excuse that house prices are an investment and thereby not included is swept aside as is the imputed rent fantasy.

Rental equivalence is too far removed
from reality to be acceptable.

As ever the devil will to some extent be in the detail as whilst measuring what people actually pay has to be an improvement on an imputed or fantasy number there are dangers. For example there has been a major influence on this in recent years from the Bank of England as it has actively driven mortgage rates and hence payments lower. This happened explicitly via its Bank Rate cuts to the current 0.5% and more implicitly by its provision of cheap funds to the banks via the Funding for Lending Scheme and more recently the Term Funding Scheme. The latter has now passed £100 billion.

Fairness and equality

A problem with the Consumer Price Index methodology is that it uses expenditure as its benchmark which means that because they spend more the better off are over represented in it. This means that if we switch to income it is around two-thirds of the way up the spectrum rather than at the 50% one might assume. Ironically in a way the much reviled Retail Price Index or RPI does better in this regard as it excludes the top 4%. The new HCI sets out to return the benchmark to 50% or if you prefer the average.

Method (b) gives equal importance to all households by averaging consumption value proportions over the whole reference population instead of summing consumption values.In other words, each household has the same weight and makes an equal contribution to the index. This type of weighting has been named “democratic”, for obvious reasons. Method (b), unlike method (a), aims to measure the inflation rate experienced by average
households.

You may be wondering about the impact of this and the analysis presented by the ONS suggests that inflation tends to be (up to 0.5% higher) but can also be lower (  interestingly the main episode was driven by the credit crunch impact on inflation).

What this change does represent in my view is an attempt to recognise the fact that inflation is not the same for everyone. We all buy different things and thereby experience different inflation rates but we can do better than we do now at measuring this.This is shown by today’s results.

Low-income households observe stronger rises in their prices and costs than high-income households, with poorer households (represented by the second income decile) seeing average annual price rises of 2.6%, while richer households (represented by the ninth income decile) saw annual average price rises of 2.2%

0.4% may not seem much but as it is each year over the period 2005 to 2017 it mounts up and compounds.

Interest is in

This is a different approach but comes from the fact that the HCI covers all items of expenditure and thereby includes factors such as this.

 People incur loans for a wide variety of purposes: the purchase of cars and other household durables such as televisions and washing machines; for the
financing of expensive holidays, and – not least – for educational purposes, notably socalled
“student loans”. More recently a new type of general purpose loan has achieved importance, if not notoriety, namely the so-called “payday loans” – which are often
relatively small but carrying high rates of interest.

Not easy to measure but worth a go as for some these are a big deal. Also I have pointed out to the authors that there should be an offsetting amount for savings interest-rates. They may not be much now but however unlikely it may seem at thetime things can change.

Quality

There is a welcome admission that there has been trouble here and that the past approach has backfired.

Perhaps more importantly the Johnson review raised a number of questions about the current quality adjustment procedures used and the possibility that
in some cases there is over-adjustment so that price increases that occur on the introduction of a new model are treated as quality improvements and stripped out, thus
resulting in inflation being underestimated.

In other words it is not just a one way street and a approach which may help with the “I cannot eat an I-Pad” issue.

Comment

Essentially this new approach is designed to take us back to the original concept of the RPI which was to have a measure of the cost of living as opposed to macroeconomic concepts like CPI. This is why I support the concept as it brings it back to the experience of the (wo)man in the street and avoids “pie in the sky” issues such as rents which are never actually paid. A major factor in this will be the way that all payments for owner occupied housing will be represented. No method is perfect as for example the Bank of England has reduced the inflation recorded under this measure via its various policies to reduce mortgage interest-rates. In addition the recent Stamp Duty change would reduce recorded inflation too,

You may be wondering at the difference this all makes so here it is.

On average, over the period 2006 to 2016, the all-households HCI has grown at an annual rate 0.2 percentage points faster than the all-households CPIH

So far not much but you see two influences are missing. Firstly they have not yet put in capital costs otherwise known as house prices which will be an influence and at times a big one. Also student loans are not yet included and we know that they have both grown in size and indeed cost. Odd isn’t it how the upwards influences seem to be more problematic?