Today brings us the full panoply of official UK inflation data. But before we look domestically an international perspective has again emerged overnight. This has come from Governor Kuroda of the Bank of Japan.
JPY BoJ Kuroda: BOJ still wants to achieve 2% inflation target as soon as possible ( @DailyFXTeam )
*DJ BOJ GOV. KURODA: EXPECT PRICES TO GRADUALLY MOVE TOWARD 2% ( @DeltaOne)
In spite of an enormous monetary effort involving negative interest-rates and a bulging balance sheer Abenomics continues to fail to get consumer inflation to its target of 2% per annum. Whereas we in the UK pass it regularly and will today discover we are above 2% on the official measure and 3% on others. Abenomics has driven asset prices higher but not consumer inflation giving us a reminder that whilst there are similarities between Japan and ourselves there are also differences.
The Inflation Outlook
A factor providing some upwards pressure in 2018 has been the price of crude oil. The current price of US $79 for a barrel of Brent Crude replaces the US $56 of a year ago. The Russian energy minister has via Platts updated us on why this has happened.
“According to estimates by experts and companies, oil price will be at around $50/b in the long-term. That means that the current situation, when oil prices have risen to $70-80/b, is linked to the temporary situation on the market and includes a premium to the price linked to various risks associated with the introduction of sanctions and oil supply cuts,” Novak said, as reported by Russia’s Prime news agency.
The higher oil price has fed into the cost of petrol and diesel.
Fuel prices have risen for a 10th successive week. The average cost of a litre of unleaded stands at more than £1.30 at UK forecourts, with diesel exceeding £1.34, Government figures show. Fuel has not been more expensive than current levels since July 2014. Since April, the cost of filling up a typical 55-litre family car that runs on unleaded or diesel has risen by around £6. ( I News)
That trend continued in the latest data so it is now eleven weeks and the annual comparison is shown below.
The price of ULSP is 11.7p/litre higher and the price of ULSD is 14.0p/litre higher than the equivalent week in 2017.
It has also had an effect on domestic heating and lighting costs with this change included in this months numbers.
E.ON has announced that it is increasing its standard variable electricity and gas prices. On 16 August, the unit price of E.ON’s standard variable tariff will increase by an average of 4.8% or £55 for customers taking both fuels, 6.2% or £36 for electricity only customers and 3.3% or £19 for gas only customers
There are others already announced from EDF Energy which will be in the September numbers and British Gas which will be in October.
The UK Pound £
The recent performance has been quite good as shown below.
So far this month, GBP has been the best performing major vs. USD with +3.20% total-returns while JPY has been the worst with -1.66% ( @DailyFXTeam)
Sadly for the August numbers the turn came just about when the survey is made but it should help the September numbers. Looking backwards we were around 2.5% higher a year ago but the differences are now much smaller than the period after the EU Leave vote. I note that the recent Brexit report suggested that raised inflation by 1.7% which is slightly higher than my calculations (1.5%).
Another way of looking at the state of play here is to compare our inflation number with the Euro area one for August which was 2%.
We got confirmation that the rally in the Pound £ came too late for the August data from this.
The Consumer Prices Index (CPI) 12-month rate was 2.7% in August 2018, up from 2.5% in July 2018.
Some of that was confirmed by the detail as the number below was influenced by the price of package holidays.
Prices for recreation and culture rose by 3.6% between August 2017 and August 2018, the highest 12-month rate since January 2010.
Also there was this.
Transport continues to make the largest upward contribution to the rate, with prices rising by 6.0% in the year to August 2018, the highest 12-month rate since April 2017. The largest contribution within the transport group continues to come from motor fuels.
What is on the horizon?
There was some better news here which started with this.
The headline rate of output inflation for goods leaving the factory gate was 2.9% on the year to August 2018, down from 3.1% in July 2018.
So a weakening of pressure around the corner which was accompanied by a weakening further up the road.
The growth rate of prices for materials and fuels for manufacturing (input prices) slowed to 8.7% on the year to August 2018, down from 10.3% in July 2018.
So much of this is driven by a factor we looked at earlier which is the price of crude oil.
The annual rate was driven by crude oil prices, which fell to 39.4% in August 2018 from 49.6% in July 2018, but maintains 26 months of positive annual inflation.
What about house prices?
Average house prices in the UK have increased by 3.1% in the year to July 2018 (down slightly from 3.2% in June 2018). This is the lowest UK annual rate since August 2013 when it was 3.0%. The annual growth rate has slowed since mid-2016 and has remained under 5%, with the exception of October 2017, throughout 2017 and into 2018.
The second sentence will echo around the corridors of the Bank of England as that is when the Funding for Lending Scheme began to push house prices higher. First-time buyers will be pleased to note that prices may still be increasing but are not doing so at past rates.
How is this reflected in the headline inflation data?
We get plenty of rhetoric from the Office for National Statistics.
The CPIH is the most comprehensive measure of inflation. It extends the CPI to include a measure of the costs associated with owning, maintaining and living in one’s own home, known as owner occupiers’ housing costs (OOH), along with Council Tax.
Sounds good doesn’t it? But really it is a heffalump trap which is a national embarrassment. The catch is that the measure used does not exist and is never paid. What happens is that it is assumed that if you own your own home you pay rent to yourself and it is that “rent” which is used. Why? Well if you take a look at the number you will get a powerful clue.
Private rental prices paid by tenants in Great Britain rose by 0.9% in the 12 months to August 2018, unchanged from the 12 months to July 2018.
As the owner occupied housing sector is around 17% of the CPIH measure you can see why it has consistently been below the other inflation measures. Even worse there are more than a few statisticians who think that via a poor balance between new and old rents the official rents data is too low anyway. That is to some extent backed up by the way the official rents series has weakened when we are told wage growth is rising.
So a series which is under serious question ( rents) is then used to measure inflation for those who by definition do not pay rent.
The establishment view was that inflation was in modern language, like so over. For example the NIESR published some new analysis last month suggesting it was heading straight back to its target. Yet today reminds us that unlike Japan we are an inflation nation as we are prone to it. To my mind that is one of the reasons why there has been such a campaign against the RPI because it produces numbers like this.
The all items RPI annual rate is 3.5%, up from 3.2% last month
Rather than engaging with people like me who support the RPI we have got rhetoric and propaganda. Just because I support it does not mean I think it is perfect but it is better than the woeful CPIH which the UK establishment has lined up behind.
Another example of establishment’s being economical with the truth has been provided today by Andy Haldane of the Bank of England in Estonia.
The first is so-called “forward guidance” about monetary policy………. By contrast, if you are a company or household considering whether to spend, a general idea
of the direction and destination of interest rates is likely to be sufficient.
The problem though is what he omits from the bit below.
The MPC first used the words “limited and gradual” in 2014 when describing the likely future course of
interest rates rises……….When the MPC did come to raise interest rates, in November 2017 and again in August 2018, it is interesting to see how well these were understood by companies and households.
This view presents matters as being well handled via the omission of the interest-rate cut and QE of August 2016 which punished those who acted on the original forward guidance. But apparently it is all part of this.
Central banks were put on earth to serve the public