UK Retail Sales suggest inflation of 3.1% as the Bank of England remains vigilant

Today the focus switches back to the UK at the end of what has been a long hot week if not the long hot summer that The Style Council sang about. The official release brought some good news.

Retail sales volumes increased by 0.5% between May and June 2021, and were up 9.5% when compared with their pre-coronavirus (COVID-19) pandemic February 2020 levels.

I am not sure that such an erratic series can be described as a type of old reliable but it has been the area that has demonstrated a V-shaped recovery. Remember those who told us the whole economy would do that? Well they are hoping you have forgotten.

The shape got damaged by later lockdowns but whenever they had the chance the UK consumer came out to play. This is an example of some of the savings that were built up being spent.

Breaking it Down

The driver was food sales which swung heavily between May and June.

Food store sales volumes increased by 4.2% in June 2021, following a decline of 5.5% in the previous month, when consumers had switched some food spending to hospitality as some restrictions in that sector were relaxed. Feedback from some retailers suggested that sales were positively boosted in June by the start of the Euro 2020 football championship.

If the area around me was any guide plenty of alcohol was sold too. Outside of that area we saw a different picture.

Non-food stores as a whole saw monthly sales volumes fall by 1.7% in June 2021, following strong growth in previous months.

In fact we seem to have by-passed this year’s summer sales or perhaps they have been postponed if we stay with football analogies.

Household goods stores reported a monthly fall in sales volumes of 10.9% in June 2021, driven by falls in furniture stores and electrical household appliance stores. The Bank of England Agents’ summary of business conditions for Quarter 2 (April to June 2021) notes that transportation delays have resulted in shortages of some items, such as furniture and electrical goods……..Clothing and department stores also reported monthly declines, of 4.7% and 3.6% respectively.

The catch-all category showed very strong growth but as you can see there is a lack of detail.

Other non-food stores (such as chemists, toy stores and sports equipment stores) reported monthly growth of 8.6% driven by strong growth in second-hand goods stores.

Online

With more places open this was inevitable.

Online spending values fell in June 2021 by 4.7% when compared with May 2021, with all sectors except clothing stores reporting monthly falls in their online sales…….This resulted in a decline in the proportion of online retail spending values, which fell to 26.7% from 28.4% in May 2021.

But it remains much higher than before with all that implies for physical stores and the high street.

However, this is higher than the proportion of online retail spending in February 2020 (pre-coronavirus (COVID-19) pandemic) of 19.9%.

Inflation

We do get a reading on this from the numbers because the amount spent in June was up 113.1 on last year but the volume increase was 109.7. This leaves us with an inflation rate of the order of 3.1% which gives us another warning as well as another problem for the official inflation numbers.

Markit PMI

These suggested that UK economic growth continued into July but was affected by what has become called the pingdemic where the NHS app has pinged so many for self-isolation it has left some businesses short of staff.

At 57.7 in July, the headline seasonally adjusted IHS Markit  / CIPS Flash UK Composite Output Index registered above the 50.0 nochange value for the fifth consecutive month…….. However, the latest reading was down from 62.2 in June and the lowest since the easing of lockdown restrictions began during March.

As an absolute measure they have been a poor guide and in manufacturing actually misleading so make of that what you will. One area they should be able to get right is inflation pressures.

Average cost burdens increased at the fastest pace since the survey began in January 1998, fuelled by a steeper rise in the service sector. This was linked to wage inflation, higher transport bills and price hikes by suppliers. Manufacturers also recorded another rapid upturn in purchasing prices, but the rate of inflation eased from June’s all-time high.

 

Bank of England

Yesterday we heard from Deputy Governor Ben Broadbent and there is a link to the above as well as my description of him as the absent-minded professor.

So with numbers like these perhaps it’s not surprising to see inflation going up, here and in other countries. In the UK, annual CPI inflation has risen from ½% to 2½% in the past four months.

Actually it has been a surprise to him as the Bank of England did not predict it.This is what we were told as recently as February.

As temporary effects fade and the impact of spare capacity diminishes over 2021, inflation rises towards the target.

Also after Brexit he told us he follows PMIs which led him in the wrong direction back then and this time he seems to have missed their inflation warning.

He deploys the usual central banking response which is to move the goal posts, Usually that involves looking a different measures but that cannot have worked so his staff will have been dispatched to change the time frame.

Over the past year and a half as a whole, so including that initial drop, headline and core CPI
have both risen at an average (annualised) rate of 1½-1¾%, a little weaker than pre-pandemic rates.

Ben has a go at claiming he has been right.

And shifts in spending of this sort, at least until (and unless) they’re met by matching shifts in supply, tend to push up
average prices.

But then no he didn’t

In January, I felt that these mismatches would probably get ironed out over time.

After all this he concludes that one day it will end although he does not know when.

And in many of these markets supply looks to be reasonably
“elastic”, at least over the medium and longer term: it responds positively to higher prices, ensuring a degree
of self-correction.

We are already being warmed up for his conclusion.

Along the way we see confirmed a point that many of you have made.

One important place to look will be wage growth. That’s also the place where any “second-round” effects of
the current inflation, via higher expectations for the future, would both appear and most matter.

I do hope Ben raised the issue below with his former colleague Dr. Martin Weale who botched a review of the average earnings figures and left us as described.

Unfortunately, the headline wage numbers are currently beset by a host of distortionary effects.

Ben misses out the fact that the self-employed are excluded as are those at smaller businesses. Still I suppose having been involved in the botching of the RPI Review I guess he feels he would be throwing stones in a glass house.

What is he going to do about it?

And if this was only a story about global goods
prices – and depending how confident you were in its transitory nature – I think the answer could well be
“nothing”.

Comment

There is much that is familiar about the speech from Ben Broadbent. The first is that he has been wrong again but expects us to take his view on the same subject seriously. Next is the effort to pick out an individual area.

Most of the overshoot relative to target in the latest CPI numbers – more than all of it, on some measures –
reflects unusually strong inflation in goods prices.

At some point that will probably fade but he ignores the fact that other areas may take its place. No doubt when they do we will be told they are unusually strong. Rince and repeat. Next is the shift in timing that I regularly report on. When the pandemic hit the response was immediate but when we have inflation now it switches to.

I’m not convinced that the current inflation in retail goods prices should in and of itself mean
higher inflation 18-24 months ahead, the horizon more relevant for monetary policy.

As a final point as an external and thereby supposedly independent member he should never have been promoted to Deputy-Governor. It sets us all the wrong motivations as those appointed to bring diversity find that being a good boy or girl can be very remunerative. No wonder we get so many unanimous votes.

President Biden denies there is an inflation problem

The inflation issue is one that has been heating up on 2021. One way of looking at it is to simply note the rising numbers we see be it for consumer or producer inflation. To that we need to add house prices because they are usually omitted from consumer inflation measures. There is an issue with annual comparisons due to the pandemic but the monthly rises have reinforced the theme. Next we can look at it via the official response and also by who makes it. One effort has come from the US Federal Reserve and here is Mary Daly of the San Francisco Fed from the 17th of February.

Fed’s Daly: – “Too-high inflation” not a risk to think about at the moment

– Don’t see “unwanted inflation” around the corner

– Pressures on inflation are downward.

She has been proven to be spectacularly wrong on her third point and wrong on her third. Unless she wanted CPI inflation over 5% she was wrong on that too. Whereas in reality there were clear risks.

The problem for Mary Daly is that having expanded the Federal Reserve balance sheet to US $7.44 trillion there were always going to be consequences.

Another step was the deployment of Treasury Secretary Yellen and he she is from February 8th.

Addressing Summers’ fears that the package would cause inflation, Yellen conceded that it was “a risk that we have to consider”. But Yellen, who as former Fed chair oversaw US monetary policy, added: “I’ve spent many years studying inflation and worrying about inflation. And I can tell you we have the tools to deal with that risk if it materialises.”

So far no such tools have materialised and the Federal Reserve has done nothing apart from claim that the inflation it denied would happen will be short-lived. It has changed its view of transitory though which has gone from 2-3 months to 6-9.

President Biden

The President joined the debate on Monday.

President Joe Biden addressed voters who are worried about inflation on Monday, arguing that his domestic spending plans would help keep prices low over the next decade. ( CNBC)

You may note the shift from now to an unspecified future. Also it was pretty extraordinary stuff.

“My ‘Build Back Better’ plan will be a force for achieving lower prices for Americans looking ahead,” Biden said in a speech Monday at the White House.

Biden argued the infrastructure and family support investments contained in his $4.5 trillion domestic spending plan will fund decades of economic growth, increase the workforce and keep prices low.

“If your primary concern right now is inflation, you should be even more enthusiastic about this plan,” said the president.

These are classic political moves as he again makes claims about the future and implies they will deal with inflation now. His Treasury Secretary is mining a similar vein.

“We will have several more months of rapid inflation, so I’m not saying that this is a one-month phenomenon,” Treasury Secretary Janet Yellen told CNBC in an interview that aired Thursday.

“But I think over the medium-term, we’ll see inflation decline back toward normal levels,” she added.

If we switch to the Washington Post we see two other tactics in play.

Speaking at the White House on Monday, the president said “no serious economist” believes “unchecked inflation” is likely. He blamed the rising cost of living on the strains of economic reopening.

“You can’t flip the global economic light back on and not expect this to happen,” Biden said.

As I have already pointed out the Federal Reserve did not expect this to happen and throwing insults such as “no serious economist” only reveals the pressure they are feeling.

The Problem

Part of it was highlighted in the Washington Post.

Only once in six years had Mark Maguire raised prices at his North Dallas restaurant.

Then, some of his employees, no doubt noticing the banners touting $1,000 signing bonuses at other eateries, demanded higher wages. And his suppliers hiked the cost of chicken, beef and cooking oil.

Maguire’s costs rose so much so fast that he has had to rewrite his menu prices twice since March. Whether additional increases will follow depends upon a complex interaction of food supplies, labor availability and a shape-shifting virus.

Although there is for those who prefer theory over practice the analysis of Mark Zandi of Moodys which has been quoted by President Biden.

Worries that the plan will ignite undesirably high inflation and an overheating economy are overdone.

In a way that is true because you cannot ignite something which is already burning. Then we get his demand pull style theory.

The fiscal support it provides is only sufficient to push the economy back to full employment from the recession caused by the COVID-19 pandemic.

Yet only a sentence later the he seems to be not so sure.

Because the package includes a myriad of spending and tax initiatives, some of which are new and uncertain,

Renewable Energy

This is an associated problem for the inflation debate. President Biden plans a big increase in renewable energy but the UK which has already invested heavily in this is today highlighting what always was the obvious flaw.

GB Grid: #Wind is generating 0.11GW (0.33%) out of 33.61GW

So much for the UK being the “Saudi Arabia of wind power” as Prime Minister Johnson has claimed. Also something which we were supposed to be consigning to the past is seeing a surge.

COAL MARKET: Asian benchmark coal (Newcastle 6,000kc/kg) spikes to a fresh 13-year high of $163 per tonne. For a commodity that was left for dead, Australian (and other) coal miners are making this year an absolute killing ( Javier Bias Bloomberg )

We keep being promised electricity will get cheaper and yet the same source reports.

Spanish wholesale electricity prices have now surged to a record high of €106.57 per MWh, surpassing the previous peak set in 2002. Power prices are turning into a hot political potato in some European countries this summer.

Curious because we kept being told Spain’s solar power was booming and the price dropping. One factor I have spotted from the UK data is that solar takes time to build within the day. For example at 10 am UK production was 3.5 gigawatts out of a maximum of about 8. So even on a hot July day it takes its time.

Thus unlike Moodys I am expecting longer-term inflation from this source. Hopefully there will be advances but with the plan to switch to electric vehicles we look to be creating a problem.

Comment

We have learnt over time that an official denial is tantamount to a confession. But as we survey the scene I see much that is familiar. One example of this is from Dylan Patel os semi-analysis.

Semiconductor shortage alone is causing nearly 2% of inflation! People often say inflation is going nuts, but most of CPI inflation is due to used car prices, vacation travel boom, and energy prices. Once you remove these, inflation is manageable.

We always see claims that there is little inflation via excluding the things which are going up! I note his chart uses only the lower core CPI. But if you are going to take things out surely you should put in things which are omitted like house prices. I am sure you have already figured why he has not done that.

Some elements will change and fade but others will emerge. For example whilst Imputed Rents are a fantasy  they will presumably pick up in response to higher hour prices. They will remain a poor guide but at 24% of the index even a small move will have an impact.

Returning to President Biden the idea that US $4 trillion of spending will not create inflation is an extraordinary effort. But in one area I do have sympathy because much of what is happening now relates to the decisions made before his term.

 

 

 

 

How does Japan avoid inflation?

It is time again to look across to Nihon or the land of the rising sun. On the one hand it is getting ready to stage the Olympics and on the other there are a rising number of Covid-19 cases. Switching to the economics Japan must be having a wry smile at the various “tapering” debates as it has been there so many times. I stopped counting on the 19th version of QE and that was a while ago now.  They must also be a little bemused if they look south to New Zealand which looks to be planning some interest-rate rises.

Meanwhile the Bank of Japan continues on the same path. On Friday we got its latest announcement and as well as keeping the -0.1% interest-rate we were told this.

The long-term interest rate:
The Bank will purchase a necessary amount of Japanese government bonds (JGBs) without setting an upper limit so that 10-year JGB yields will remain at around zero percent.

The reason I pint this out is that it has turned into an interest-rate rise of sorts, or to be more specific that 0% target stops Japanese Government Bonds from rallying past that point. This morning it was at 0.01%. This means that it has missed out on the yield falls we have seen elsewhere with the US ten-year falling by around half a point. If we switch to Germany it looked back in late May that its benchmark yield might be on its way to positive territory again is now -0.36% as I type this. This is awkward because you are doing QE because you believe lower yields give the economy a boost but then you stop the yields from falling further. Meanwhile you continue to buy JGBs on a grand scale.

In terms of the money supply the Bank of Japan has been pumping things up.

The year-on-year rate of change in the monetary
base has been positive at around 20 percent, and
its amount outstanding as of end-June was 660
trillion yen, of which the ratio to nominal GDP was
121 percent.21 The year-on-year rate of increase
in the money stock (M2) has been at around 6
percent, mainly reflecting an increase in fiscal
spending and a past rise in bank lending.

But as you can see the impulse fades considerably even before it hits measures which are influenced by the real economy.

Inflation

Many countries are facing an inflation scare with the debate being how long it will last? Not Japan.

The year-on-year rate of change in the CPI (all
items less fresh food) has been at around 0
percent recently due to a rise in energy prices,

You may note that it has taken a rise in energy prices to get things to zero and zero is essentially what we have observed throughout the “lost decade” period. As someone who has a mobile phone contract which rises every year this seems typically Japanese.

a reduction in mobile phone charges.

If we drill deeper into the situation we see something else which is Japanese and here is the Bank of Japan explanation.

In the cases of the United States
and Europe, the output prices indices have
exhibited remarkable increases in tandem with
the escalation of the delivery delay indices.

As we have observed costs have risen and we tend to respond by raising prices but behaviour in Japan is different.

On the other hand, in the case of Japan, although
both the delivery delay index and the output
prices index have increased, the recent degree of
increase for both indices has been limited
compared with that in the United States and
Europe

Why is that?

The relatively small degree of rise in Japan’s
output prices index may be partly attributable to
Japanese firms’ strong tendency, at least in the
short run, to ration their products without raising
their selling prices when faced with excess
demand.

So Japan places the quantity rather than the quality ( I take price as a quality measure) game. Thus they avoid at least some of the second and third order effects of higher prices. Even when things came under what they considered to be real pressure they only saw the sort of level the UK is at now.

In this regard, in the final phase of the rise in
commodity prices in the 2000s, the year-on-year
rate of change in the CPI excluding fresh food
temporarily increased to around 2.5 percent,

Could you imagine the Bank of England ever writing this?

That said, the price change distribution at
that time shows that the rates of increase for a
majority of CPI items stayed at around 0 percent,

So even when you get the below it gets heavily watered down.

and only those for a limited number of items, for
which the raw material ratio is large, saw high
price rises of around 4-6 percent

Or as they put it.

Considering these past experiences, it seems
highly likely that the CPI inflation that merely
reflects upstream cost increases will spread to
other items to only a limited extent, and thus will
be only transitory.

So if anywhere is going to see transitory inflation then as Talking Heads put it.

I Guess that this must be the place

Wage Inflation

This used to be mostly ignored as an issue in economics because wages were assumed to rise faster than prices. That changes years and in this case decades ago as it is a feature of what we call the lost decade. Although the news has yet to reach some of the Ivory Towers.

The year-on-year rate of change in scheduled
cash earnings has been positive to a relatively
large extent on the back of (1) a rebound from the
decline seen last year, (2) rising wages of full-time
employees in the medical, healthcare, and
welfare services industry, which faces a severe
labor shortage, and (3) a fall in the share of part-time employees, mainly due to the adoption
of equal pay for equal work.

We actually have some wages growth at 2% and at first it looks good because with no inflation that is a real wages rise. Except when we look back to May last year we see that real wages fell by 2.3% so in fact we are worse off. We will find out more soon as June and July are months which are significant in bonus terms but as we stand we see that wages have continued to stagnate overall.

I do like the “sooner or later” bit below.

Special cash earnings
(bonuses), which lag behind corporate profits by
about half a year, are likely to stop declining
sooner or later, reflecting improvement in
corporate profits, and continue increasing steadily
thereafter.

Comment

The Japanese experience is really rather different but in a curious development often ends up in the same place as us. They have a system where many of the numbers are 0 as we look at interest-rates and yields, inflation and wages growth. If we look at the overall pattern we see that national GDP has followed not that different a path, although the individual number is better. But they have taken ZIRP and end up with it in other areas.

But the lesson here is that at least part of the inflation issue is behavioural. Care is needed as other parts of the Bank of Japan report look at the impact of the higher price for crude oil. But that is in play and Japan has seem 0% CPI and lower producer price inflation than us. In spite of this.

In foreign exchange markets, the yen has
depreciated somewhat against the U.S. dollar
amid a weaker yen against a wide range of
currencies.

Podcast

Inflation is back on the march

Yesterday brought troubling news on the inflation front as the US CPI measure of inflation rose to 5.4%. Personally I was more bothered by the annual rise of 0.9% due to the problems at the moment with annual comparisons created by the Covid pandemic. That set something of an underlying theme for the UK release this morning so to any logical person it is rather curious to find this being reported by in this instance Ed Conway of Sky News.

UK CPI inflation rises above expectations again. Up to 2.5% in June.

If you had not be following the producer prices data we check each month you did get a clue from the US yesterday. It has different specific circumstances but broad trends for oil.food and other commodities will be in play.

Thus this was not really a surprise at all.

The Consumer Prices Index (CPI) rose by 2.5% in the 12 months to June 2021, up from 2.1% to May; on a monthly basis, CPI rose by 0.5% in June 2021, compared with a rise of 0.1% in June 2020.

We can break it down but the initial one helps a bit but as you can see whilst goods inflation is higher by the standards of this the gap is not large. However goods prices have seen a particular acceleration.

The CPI all goods index annual rate is 2.8%, up from 2.3% last month……The CPI all services index annual rate is 2.1%, up from 1.9% last month.

We can take that further although the official analysis is only for the similar CPIH as they try to force people to use their widely ignored favourite.

There were upward contributions to the change in the CPIH 12-month inflation rate from 9 of the 12 divisions, partially offset by a downward contribution from health.

So the move was fairly broad and we can specify it more.

The largest upward contribution (of 0.08 percentage points) to the change in the CPIH 12-month inflation rate came from transport, where prices rose by 1.3% between May and June 2021, compared with a rise of 0.5% between the same two months of 2020. The effect was principally from second-hand cars and motor fuels.

The second-hand car effect was something seen in the US where the unadjusted annual number was 45.2%. A lot of reliance was placed on the seasonal adjustment which reduced it to 10.5% as you can see by the difference in the numbers. The UK situation is not so different with second-hand cars seeing a monthly price rise of 4.4%. In terms of the technicalities they have reduced the weight by 20% which has proved convenient in keeping recorded inflation low but looks a clear mistake in hindsight.

Due to second-hand cars, where prices overall rose this year but fell a year ago. There are reports of prices rising as a result of increasing demand. This follows the end of the latest national lockdown and with some buyers turning to the used car market as a result of delays in the supply of new cars caused by the shortage of semiconductor chips used in their production.

That category was also impacted by rises in fuel prices of the order of 2.4 pence per litre which meant a 2% rise on the month for fuels.

Next come something rather troubling for those relying on seasonal adjustment.

A final, large, upward contribution (of 0.05 percentage points) came from clothing and footwear. Prices, overall, rose by 0.8% between May and June this year, compared with a fall of 0.1% between the same two months a year ago. Normally, prices fall between May and June as the summer sales season begins  but the seasonal patterns have been influenced by the timing of lockdowns since the onset of the coronavirus pandemic.

The US Bureau of Labor Statistics which adjusted US used car prices so heavily may have an itchy collar when reading that.

The ongoing issue of how to treat prices in area’s which see heavy discounting or the same from going in and out of best-seller charts swung the other way this month.

The largest downward contribution of 0.06 percentage points came from games, toys and hobbies, where prices fell this year but rose a year ago, with the main effects coming from computer games and games consoles.

Also the rate of increase of prices for pills,lotions and potions has faded.

A partially offsetting, small downward contribution (of 0.03 percentage points) to the change in the CPIH 12-month inflation rate came from health. Prices of pharmaceutical products, other medical and therapeutic equipment rose by 0.8% between May and June 2021, compared with a larger rise of 3.1% between the same two months a year ago.

Tax Cuts

There have been some indirect tax cuts of which the largest has been the cuts to VAT. If you fully factor them in then the inflation episode is a fair bit larger.

The annual rate for CPI excluding indirect taxes, CPIY, is 4.2%, up from 3.8% last month.

 

 

No perhaps it will not all be passed through but even if you halve the impact you end up at 3.4%

Housing Costs

This has been a contentious issue for some time and the heat is not only on it is getting hotter all the time. Why? Well the official view is this.

The OOH component annual rate is 1.6%, up from 1.5% last month. ( OOH = Owner Occupiers Housing Costs)

I had to look that up because they quote all sorts of numbers to try to hide what is so obviously embarrassing. Even the man from Mars that Blondie sang about is probably aware that house prices are soaring and will be wondering how costs are only rising .

by that little? Especially when only 2 and and half hours later we are told this.

UK average house prices increased by 10.0% over the year to May 2021, up from 9.6% in April 2021.

So prices are up 10% but costs only by 1.6%! So what fell? Well mortgages are doing little so our official statisticians have to explain how their smoothed ( it is up to 16 months out of date) number for rents which do not exist impacts with reality.

After all how can you add soaring housing costs to the CPI at 2.5% and manage to then get 2.4% as CPIH does…..

I have regularly pointed out that this is an area of strength for the Retail Prices index or RPI and the reason why is shown below.

Annual rate +4.3%, up from +3.8% last month

It is picking up the rises that everyone can see much more accurately and let me specify that. It uses house prices via depreciation which is good but even it is handicapped by the smoothing process I described earlier and would change given the chance. If so it would give a higher reading right now and be a better measure.

Comment

I thought you might enjoy my perspective on the official inflation view..

The official inflation story
1. There wont be any
2. It will be transitory
3. It was above expectations
4. It is too late to do anything about it now.

Next there is the house price issue which if we put into the CPI measure at current weights would put it at 4%. Regular readers will have noted Andrew Baldwin commenting on this and so let me refine it. In reality if they let house prices in they will have the weights even though no brick is moved,window opened or door closed. But even if we so that we get to 3.2% and the Governor of the Bank of England is in the zone where he has to write an explanatory letter. That would be awkward as this afternoon the Bank of England will buy another £1.15 billion of UK bonds in an attempt to raise the inflation rate.

Looking ahead we see that whilst the shove is not as large as last month there still is a large one.

The headline rate of output prices showed positive growth of 4.3% on the year to June 2021, down from 4.4% in May 2021.

The headline rate of input prices showed positive growth of 9.1% on the year to June 2021, down from 10.4% in May 2021.

The monthly rise for output prices was 0.4% so the beat goes on. In terms of the input ones there was a 0.1% dip but this was mostly driven by the swings in oil so we need to check again next month.

Meanwhile is some action building in services inflation?

The annual rate of growth for the Services Producer Price Index (SPPI) showed positive growth of 2.0% in Quarter 2 (Apr to Jun) 2021, up from 1.3% in Quarter 1 (Jan to Mar) 2021.

The Reserve Bank of Australia decides to look away from surging house prices

We have an opportunity to take a look at a land which is both down under and a place where beds are burning, at least according to Midnight Oil. This is because the latest central bank to emerge blinking into the spotlight is the Reserve Bank of Australia or RBA. Here is its announcement.

  • retain the April 2024 bond as the bond for the yield target and retain the target of 10 basis points
  • continue purchasing government bonds after the completion of the current bond purchase program in early September. These purchases will be at the rate of $4 billion a week until at least mid November
  • maintain the cash rate target at 10 basis points and the interest rate on Exchange Settlement balances of zero per cent.

Perhaps they thought that announcing the interest-rate decision last would take the focus off it. A curious development in that who expects a change anyway? A sort of equivalent of an itchy collar or guilty conscience I think. Along the way they have reminded us that they also have a 0% interest-rate and I guess most of you have already figured that it of course applies to The Precious.

Exchange Settlement Accounts (ESAs) are the means by which providers of payments services settle obligations that have accrued in the clearing process.

As someone who has spent much of his career in bond markets I rather approve of starting with a bond maturity but what is taking place here is a little odd. This is because as time passes their benchmark of April 2024 is shortening as for example it is now 2 years and 9 months. For example that is below the minimum term that the Bank of England will buy ( 3 years) and also central banks have in general been lengthening the terms of their QE buying arguing that such a move increases the impact.

If you think the above is an implicit way of cutting QE there is then the issue that it has been extended until November although with around a 20% reduction in the rate of purchases. That is similar to the Bank of England.

As ever they think they can get away with contradicting themselves because the economy needs help apparently.

These measures will provide the continuing monetary support that the economy needs as it transitions from the recovery phase to the expansion phase.

But only a couple of sentences later it is apparently going great guns.

The economic recovery in Australia is stronger than earlier expected and is forecast to continue. The outlook for investment has improved and household and business balance sheets are generally in good shape.

So do all states of the economy require support these days?

The Economy

The latter vibe continues as we note this.

National income is also being supported by the high prices for commodity exports.

That boost may well carry on if the analysis in The Conversation turns out to be accurate.

The panel expects actual living standards to be higher than the bald economic growth figures suggest.

This is because high iron ore prices boost Australians’ buying power (by boosting the Australian dollar) and boost company profits in a way that isn’t fully reflected in gross domestic product.

In recent months, the spot iron ore price has been at a record US$200 a tonne, a high the budget assumes will collapse to near US$63 by April next year as supply held up in Brazil comes back online.

The panel is expecting the iron ore price to stay high for longer than the Treasury — for at least 18 months, ending this year near a still-high US$158 a tonne.

So a windfall for Australia although they have omitted the “Dutch Disease” issue where the higher Aussie Dollar they mention deters other sectors of the economy such as manufacturing.

Another signal is going well according to the RBA.

The labour market has continued to recover faster than expected. The unemployment rate declined further to 5.1 per cent in May and more Australians have jobs than before the pandemic.

There may even be hope for some wages growth.

Job vacancies are high and more firms are reporting shortages of labour, particularly in areas affected by the closure of Australia’s international borders.

Although later it appears to think it will take quite some time.

The Bank’s central scenario for the economy is that this condition will not be met before 2024. Meeting it will require the labour market to be tight enough to generate wages growth that is materially higher than it is currently.

House Prices

The situation is in rude health from a central banking perspective.

Housing markets have continued to strengthen, with prices rising in all major markets. Housing credit growth has picked up, with strong demand from owner-occupiers, including first-home buyers. There has also been increased borrowing by investors.

Well if you will pump it up as we note that “investors” are on the case.

The final draw-downs under the Term Funding Facility were made in late June. In total, $188 billion has been drawn down under this facility, which has contributed to the Australian banking system being highly liquid. Given that the facility is providing low-cost fixed-rate funding for 3 years, it will continue to support low borrowing costs until mid 2024.

This is a type of copy cat central banking where the RBA has copied the policy which has juiced the UK housing market. Looking at the credit data there is a lot of investor activity as total mortgage credit for that category was 669 billion Dollars at the end of May as opposed to 1.258 trillion for owner-occupiers.

Anyway here is the consequence.

CoreLogic’s monthly home price index rose 1.9 per cent in June, led by 3 per cent growth in Hobart and 2.6 per cent in Sydney.

The index rose 13.5 per cent over the past financial year just ended, with Darwin (+21pc), Hobart (+19.6pc), Canberra (+18.1pc) and regional markets (+17.7pc) leading the way.

That is the strongest annual rate of growth recorded by CoreLogic nationally since April 2004.

Inflation

Switching to the supposed target then things are in hand as long as you ignore the above.

In the central scenario, inflation in underlying terms is expected to be 1½ per cent over 2021 and 2 per cent by mid 2023. In the short term, CPI inflation is expected to rise temporarily to about 3½ per cent over the year to the June quarter because of the reversal of some COVID-19-related price reductions a year ago.

Comment

There are quite a few familar themes here as we note that even recoveries these days need support rather than the old standard of taking away the punch bowl just before the party gets really started. I think we can safely say that the housing  market has the volume turned up if not to 11 very high. This means that for central bank action we return to the prophetic words of Glenn Frey and Don Henley of The Eagles.

“Relax, ” said the night man,
“We are programmed to receive.
You can check-out any time you like,
But you can never leave! “

There is an Australian spin in the way that all roads here seem to lead to 2024. Is that a type of release valve? It looks like that at first but there is a catch. We have seen that central banks may reduce the rate at which they buy bonds under QE but they never reverse it. The one main effort by the US Federal Reserve was followed by it buying ever more. In the end central banking roads have so far ended at this destination.

Come on let’s twist again,
Like we did last summer!
Yeaaah, let’s twist again,
Like we did last year! ( Chubby Checker )

Where next for the economy of France?

Sometimes we find that one segment of news does fit more than one piece of the economic puzzle. This morning that has come from La Belle France.

In May 2021, output decreased in the manufacturing industry (–0.5%, after –0.1%), as well as in the whole industry (–0.3%, after +0.1%). Compared to February 2020 (the last month before the first general lockdown), output remained in sharp decline in the manufacturing industry (–6.9%), as well as in the whole industry (–5.6%). ( INSEE )

Late spring saw a couple of declines in manufacturing which caught out the forecasters mostly I would imagine because of this.

The easing of COVID-19 lockdown restrictions contributed
to a further strong improvement in business conditions in
the French manufacturing sector during May. Output and
new orders both increased at accelerated rates. ( Markit IHS PMI)

In fact they went further.

The seasonally adjusted IHS Markit France Manufacturing
Purchasing Managers’ Index® (PMI®) – a single-figure
measure of developments in overall business conditions –ticked up to 59.4 in May from 58.9 in April, signalling a further substantial improvement in business conditions in the French manufacturing sector, and one that was the most marked since September 2000.

A reading of the order of 60 is supposed to be up,up and away growth not the contraction that was seen. Just in case it was some sort of quirk they rammed the output point home.

The trend in new orders was matched by that for output, with production increasing at the sharpest pace since January 2018.

Car Production

There was no magic bullet here as the main issue came from an area one should have been expecting after all the reports about chip shortages causing problems for modern vehicles, which use so many of them.

In May, output fell back sharply in the manufacture of transport equipment (–5.4% after –0.8%) due to shortages of raw materials in the automotive industry.

Manufacturing for the transport sector in France peaked in December of last year when it made 94.1 where 2015 equals 100. Since then it has been downhill with a very sharp fall of the order of 10 points in February and now we are at 76.2.

In terms of a breakdown we have this which compares to pre pandemic levels.

It slumped in the manufacture of transport equipment (−29.7%), both in the manufacture of other transport equipment (−30.0%) and in the manufacture of motor vehicles, trailers and semi-trailers (−29.2%).

So it is this sector with a little help from a 13.3% fall in the fuel sector that fas dragged things down. The other areas have done much better with some even managing a little growth.

Compared to February 2020, output declined more moderately in “other manufacturing” (−4.0%) and in the manufacture of machinery and equipment goods (−4.4%). Output was above its February 2020 level in mining and quarrying, energy, water supply (+1.9%) and in the manufacture of food products and beverages (+0.9%).

There have been some wild swings with of course the annual figures looking quite a triumph until you see what they are being compared with.

Over this one-year period, output bounced back sharply in the manufacture of transport equipment (+46.1%), in the manufacture of machinery and equipment goods (+35.4%) and in “other manufacturing” (+30.4%).

Overall Economy

After the above you might like to take the next bit with a pinch of salt as we see what Markit IHS tell us from their latest survey on the French economy.

We’ve witnessed a complete quarter of growth for the first
time since the pandemic began, and the growth
momentum needed to drive a sustained recovery is
likely to build as pent-up demand is released and operating capacities expand.

Bank of France

Its projections are upbeat and tell us this.

After dropping markedly in 2020, French economic activity is experiencing a strong rebound in 2021. Following a start to the year marked by ongoing public health restrictions, the phased lifting of the lockdown and acceleration of the vaccination campaign should allow the economy to recover in earnest in the second half. According to our economic surveys, economic activity started to recoup lost ground in the second quarter, despite the emergence of supply difficulties in certain sectors. It should rebound particularly strongly in the third and fourth quarters, as the gradual easing of the public health restrictions leads to strong household consumption growth.

In terms of specific numbers we get this.

In 2021, GDP is projected to expand by 5¾% in annual average terms (which is higher than the euro area average of 4.6%). It should then grow by 4% in 2022 and by 2% in 2023

Which means this.

Activity should start to exceed pre-Covid levels as of the first quarter of 2022, which is one quarter earlier than foreseen in our March projections.

A lot of this is  the by now familiar idea of the savings that have been built up mostly involuntarily will be spent.

The strong GDP growth should essentially be driven by domestic demand in 2021 and 2022, both from consumption and investment. Household purchasing power was on the whole preserved in 2020, and should start to rise again in 2021 and 2022. Household consumption and investment spending are expected to accelerate further in 2022 thanks to the excess savings accumulated previously.

They are a little more specific here and as they do not say the savings ratio was previously 4-5%.

and the household saving ratio should decline from 22% in the second quarter of 2021 to 17% in the final quarter of the year, and then to below its 2019 level in 2022 and 2023

We can also put this “wave” in terms of Euros.

After reaching EUR 115 billion at the end of 2020, the financial savings excess is expected to rise at a more moderate pace in 2021, thanks to the fall in the household saving ratio , and should peak at up to EUR 180 billion at end-2021.

Inflation

If we remain in the territory of the Bank of France there are various different stories in play. It tells us this.

Inflation as measured by the Harmonised Index of Consumer Prices (HICP) has risen significantly in recent months, climbing from 0.8% in February 2021 to 1.6% in April 2021.

We can update that to 1.8% in May continuing the upwards move which Isabel Schnabel of the ECB wants more of.

higher inflation prospects need to visibly migrate into the baseline scenario, and be reflected in actual underlying inflation dynamics,

Well it can be found in the Markit survey.

Finally, survey data revealed intensifying price pressures
during June. Cost inflation reached a 17-month high,
linked to greater supplier fees and shortages of inputs. The
combination of strong demand and rising expenses led firms to hike their selling charges in June. Furthermore, the rate of output price inflation was the steepest in almost a decade.

Or if they take a look at the cost of buying a house.

In Q1 2021, the house prices in metropolitan France continued to rise, but slowed down a bit: +1.3% compared to the previous quarter with seasonnally adjusted (s.a.) data, after +2.3% in Q4 2020. Year on year, house prices increased this quarter (+5.5% after +5.8%).

Comment

The situation is officially positive backed up by today’s PMI survey. But the official manufacturing data driven by the problems in the transport sector suggest a doubt. To that we can add this.

PARIS, July 4 (Reuters) – Health Minister Olivier Veran on Sunday urged as many French people as possible to get a COVID-19 vaccine, warning that France could be heading for a fourth wave of the epidemic by the end of the month due to the highly transmissible Delta variant.

That would be awkward just after this.

France lifted the last of its major restrictions on Wednesday, allowing unlimited numbers in restaurants, at weddings and most cultural events, despite fast-rising cases of the Delta variant. ( the national news)

So we wait and see what happens next especially in these areas.

and the start of a return to normal in tourism and aeronautics, France’s stronghold export sectors ( Bank of France)

Podcast

Will UK inflation exceed 5%?

The last 24 hours have seen the inflation debate move on in the UK and some of that has happened in the last ten minutes as the speech by Governor Andrew Bailey has been released. Many of the issues are international ones and trends so let me open by taking a look at what the Riksbank of Sweden has announced today.

Both in Sweden and abroad, the recovery is proceeding slightly faster than expected and the Riksbank’s forecasts have been revised up somewhat.

So like the Bank of England it has been caught out but its view attracted my attention because it is somewhat different.

Inflation has varied to an unusually large degree during the pandemic. This is partly due to energy prices but also to measurement problems and people’s changed consumption patterns during the pandemic. Inflationary pressures are still deemed moderate and it is expected to take until next year before inflation rises more persistently.

Not the inflation technicalities which are a generic but the fact they expect it next year which is different to the US view for example of “transitory” from now. We already ready know from one Fed member that “transitory” has gone from 2/3 months to 6/9 but more next year is a different view. Also “persistently” is the sort of language that will get you banned from central banking shindigs.

Andy Haldane

The Bank of England’s chief economist gave us his view on inflation trend yesterday which started with philosophy.

The first, nearer-term, is discomfort at whether continuing monetary stimulus is consistent with central banks hitting their inflation targets on a sustainable basis.

The fact he is publicly asking the question means he thinks it isn’t. But then we get the gist of his views for 2021.

With public and private financial fuel being injected into a macro-economic engine already running hot, the result could well be macro-economic overheating. When resurgent, and probably persistent, demand bumps up against slowly-emerging, and possibly static, supply, the laws of economic gravity mean the prices of goods, services and assets tend to rise, at first in a localised and seemingly temporary fashion, but increasingly in a generalised and persistent fashion.

As you can see he too uses the word “persistent” and does so twice, which is about a revolutionary as a 32 year bank insider can get I think. Then we see significantly added into the mix.

This we are now seeing, with price surges across a widening array of goods, services and asset markets. At present, this is showing itself as pockets of excess demand. But as aggregate excess demand emerges in the second half of the year, I would expect inflation to rise, significantly and persistently.

Actually aggregate excess demand is not what it was. What I mean by that is the change to us predominantly being a service economy means that there is a much wider range of responses to demand now.

For instance, hairdressing and personal grooming inflation was strong in particular, at an annual rate of 8%, and saw a 29 year high.

This is one example ironically in a way from Governor Bailey’s speech where there is a clear limit as hairdressers can work harder but only so much. Whereas other areas in the services sector may not be far off no limits at all. Oh and after him being on TV during the England game versus Germany I suspect we are onto the 2021 look now.

Pent-up demand, essential need, or recreating the early 1990s David Beckham look, I leave that to others to judge.

Returning to Andy Haldane his musings lead him to conclude this.

By the end of this year, I expect UK inflation to be nearer 4% than 3%. This increases the chances of a high inflation narrative becoming the dominant one, a central expectation rather than a risk. If that happened, inflation expectations at all maturities would shift upwards, not only in financial markets but among households and businesses too.

That has been reported as 4% which is not quite what he said but by the time one converts it from CPI to Retail Prices Index ( a 1%+ rise as for example it was 1.2% in May) we arrive at the 5% of my headline.

What does Governor Bailey think?

The opening part of the section on the economic recovery illustrates something of a closed mind on the subject.

what conclusions can we draw on the temporary nature of the causes of higher inflation

The next bit is a type of PR after thought.

and what should we look out for to judge if those causes might be more sustained?

Under his plan we look set to go to stage four of the Yes Minister response which is “It’s too late now”. One area where there is plenty of inflation is in the use of the word temporary.

There are plenty of stories of supply chain constraints on commodities and transport bottlenecks, much of which ought to be temporary.

Those dealing in shipping costs seem much less clear about that.

International #container #freight rates cont. their almost vertical ascent with the Drewry global composite rising to $8k some 6X the normal rate. Routes out of China surging on #SupplyChains disruptions, some temporarily triggered by Covid-19 outbreaks reducing loadings ( @Ole_S_Hansen)

Another problem is that the Bank of England has under estimated both the UK economy recovery and consequent inflation.

CPI inflation rose to 2.1% in May, just above the MPC’s target and above where we thought it would be in the MPC’s May forecast.

In the May forecast they said it would be below 2% in both the second and third quarters. I do not know about you but I would not be assuring people inflation will be temporary when these are in play.

 Further up the supply chain, food input prices were up, and producer input inflation was around a 10-year high.

Also if we look at the absolute disaster area the concept of rebalancing was for his predecessor it is brave and perhaps courageous to deploy it again.

Over time, this should lead to an easing of inflation as spending is redirected towards sectors with more spare capacity. But, initially, that rebalancing may be uneven.

I note that he is already tilling the ground should he be wrong.

His first point is no more than stating he might be wrong ( rather likely on his track record). Next up we get this.

Second, we could see demand pressures on either side of the most likely outcome.

Then.

Third, we could also see wage pressures arising if the number of people in work or seeking work does not return to pre-Covid levels, and inactivity remains at a higher level. A return of labour supply is therefore important.

The last sentence is rather curious in the circumstances. And finally.

Fourth, a further challenge would arise if these temporary price pressures have a more persistent impact on medium-term inflation expectations, which shift to a higher level inconsistent with the target.

That is a type of psychobabble as it is based on what exactly?

Comment

We have here the two main courses of the inflation debate with a side order from the Riksbank. The main debate has been about this year and it is the first to break ranks about 2022.  If we start with the Governor’s view we see the asymmetry problem repeated yet again.

It is important not to over-react to temporarily strong growth and inflation, to ensure that the recovery is not undermined by a premature tightening in monetary conditions.

So if things go well you wait and if they are not going well you wait too, oh hang on.

Over the last sixteen months we have used monetary policy decisively to respond to an unprecedented crisis which was disinflationary.

Decisively on one side and on the other “we watch” is the new “vigilant”.

But it is also important that we watch the outlook for inflation very carefully, which of course we do at all times, particularly for signs of more persistent pressure and for a move of medium term inflation expectations to a higher level.

There is also an elephant in the room that everyone seems to be ignoring in the same manner as the UK inflation target does. So let us remind ourselves of how we started Tuesday.

Annual house price growth accelerated to 13.4% in June,
the highest outturn since November 2004. While the
strength is partly due to base effects, with June last year
unusually weak due to the first lockdown, the market
continues to show significant momentum. Indeed, June saw
the third consecutive month-on-month rise (0.7%), after
taking account of seasonal effects. Prices in June were almost 5% higher than in March. ( Nationwide).

Also remember inflation will be higher when the tax cuts ( VAT and Stamp Duty) expire.

Let me end with some good economic news via Sky but with the kicker that it is in an area that has proved highly inflationary.

Nissan announces £1bn ‘gigafactory’ boosting electric car production and creating thousands of jobs.

The Covid Pandemic poses new challenges for the use of GDP

This week has brought rather a flurry of news about UK GDP as we have changed this century and today the last quarter. Let us start with this morning’s headline.

UK gross domestic product (GDP) is estimated to have decreased by 1.6% in Quarter 1 (Jan to Mar) 2021, revised from the first estimate of a 1.5% decline.

The level of GDP is now 8.8% below where it was pre-pandemic at Quarter 4 (Oct to Dec) 2019, revised from a first estimate of 8.7% below.

So a marginal downgrade but not much in the scheme of things. However there is a fair bit going on below the surface including something which I was the first to point out last summer.

Nominal GDP fell by a revised 0.2% in Quarter 1 2021, while the implied deflator increased by 1.4%. Compared with the same quarter a year ago, the implied GDP deflator increased by 4.8%, mainly reflecting an increase in the implied price change of government consumption.

The nominal GDP issue is a consequence so let us zero in on a cause which is the way that the widest inflation measure in the economy has been bounced around by the way we measure real government consumption. Compared to other inflation measures a quarterly rise of 1.4% and an annual one of 4.8% is a lot. For example we were being told back then there was very little consumer inflation.

The Consumer Prices Index (CPI) rose by 0.7% in the 12 months to March 2021, up from 0.4% to February.

Education Education Education

The famous phrase from former Prime Minister Tony Blair has echoed in the GDP numbers.

The downward revision in education output reflects a monthly reprofiling of education output across the first quarter of 2021 because of updated attendance data, and estimates reflecting the effect of remote learners.

We end up with an Alice Through The Looking-Glass situation caused by this.

In volume terms, the measurement of education output is based on cost-weighted activity indices.

In theory a good idea but in practice this has happened.

have required us to keep innovating…….we have reviewed and aligned our measurement approaches …….We have also adapted our measurement for the further school closures and change in policy regime in the first few months of 2021,

Whilst these are worthy efforts you get big swings as for example the initial impact of the changes was to reduce the numbers by £2.3 billion or to reduce that quarters GDP by 0.5%. This time around the change had a smaller impact but it was still this.

The move to remote learning for the majority of pupils was the largest contributor to the 2.1% fall in services output in Quarter 1 2021

Education went from -0.86% to -1.06% in the services numbers via the latest revision.

Nominal GDP

There is a bit of a defeat here for the methodology as we are guided towards ones with no inflation measure or deflator at all.

Nominal GDP estimates – which may be more comparable –show that Canada and the United States are now above their Quarter 4 2019 levels.

There are two sides to this as for example it makes no difference ( okay 0.1%) for Japan as you might expect, But if you compare the UK with Spain it makes an enormous difference. Using the real GDP numbers we have both seen falls of around 9% but using nominal GDP the UK has seen a fall of 3% and Spain 8.7%.

Trade

These numbers regularly see significant revisions and we have both the pandemic and the final Brexit move to add to the issues. So we are about as uncertain as we ever are about the latest numbers so let me switch to another issue highlighted in the deeper series.

The UK’s net international investment position liability position narrowed by £56.4 billion to £582.9 billion as the revaluation impact on UK debt securities decreased the value of UK liabilities more than the fall in the value of UK assets.

They do their best but they simply do not know this as it gets worse as you delve deeper.

In Quarter 1 2021, the gross asset and liability positions decreased by £446.5 billion and £502.8 billion respectively. This was mostly because of a large decrease in financial derivative activity as market volatility continued to recede from the height of the coronavirus (COVID-19) pandemic.

So I suggest you take any investment position data with the whole salt cellar. The numbers depend entirely on assumptions which frankly have a tenuous grip on reality and sometimes not even that.

Telecommunications

There has been a deeper review of things and it has led to this which does feed into one of my themes. That is that things were not as good pre credit crunch as was recorded at the time.

average annual volume GDP growth over the period 1998 to 2007 is now 2.7%, revised down from 2.9%; average annual volume GDP growth stands at 2.0% from 2010 to 2019, revised up from 1.9%.

A factor in play here has been something I have mentioned before which has been the work of Diane Coyle on inflation in the telecoms sector.

In addition, we have introduced new ways of removing the effects of price changes in both the telecoms and clothing industries. These mean ‘real’ GDP (where we’ve removed the impact of price changes) grew a little less than we previously estimated in the years before the financial crisis and a little more in the years after it.

They hope this will allow them to allow for inflation more accurately.

To give an example, when previously estimating the value of goods produced from a furniture maker over time we would measure the value of the tables being sold, remove the cost of the wood, then adjust for inflation by removing the changing cost of the tables only. Under the new system we will separately be removingthe impact of inflation from the changing cost of the wood and the changing cost of the tables, giving an improved and more detailed estimate of changes in the economy.

That will be interesting to follow but sadly will not help with the education issue because the problem there is that there is no price in the first place.

Also  this change should help with the issue I reported to the Bean Review which was over the lack of detail in services data and trade especially.

we will also introducea new Financial Services Survey, which will give much more detailed information about the activities and outputs of the financial sector, which makes up around 7% of GDP.

Comment

As you can see there is much more doubt than we are usually told and we can take a sideways look at another issue. Remember my official complaint about the claimed surge in wages? Well it would appear that the GDP numbers agree with me.

Wages and salaries increased by 0.4% in Quarter 1 2021,

Looking at this series wages growth over the past year is 3% in nominal terms as opposed to the 4.5% in the average earnings series.

Let me switch now to a subject in the news if you follow military matters which in my opinion is an issue for GDP.

New light tanks that have so far cost the army £3.2 billion have been withdrawn for a second time after more troops reported suffering hearing loss during trials,has learnt.All trials involving the Ajax armoured vehicle were paused in mid-June on “health and safety grounds” amid concerns that mitigation measures put in place to protect soldiers — including ear defenders — were not sufficient. ( The Times)

This may end up being a debacle like the Nimrod programme. But how do you measure it in GDP terms? For the income version it is easy as people have been paid so you count it. But for the output version we face the prospect that there will not be any. If you are feeling generous you might make an R&D allowance but of what 10% of what has been spent…. It seems some aspects of military procurement love their Arcade Fire.

If I could have it back
All the time that we wasted
I’d only waste it again
If I could have it back
You know I would love to waste it again
Waste it again and again and again

UK house prices surge again

One economic story of the Covid-19 pandemic has been the surge in house prices.Only yesterday we took a look at the way the US Federal Reserve is trying to manage public expectations.  Today we see a further challenge for the vigilant Bank of England.

Annual house price growth accelerated to 13.4% in June,
the highest outturn since November 2004. While the
strength is partly due to base effects, with June last year
unusually weak due to the first lockdown, the market
continues to show significant momentum. Indeed, June saw
the third consecutive month-on-month rise (0.7%), after
taking account of seasonal effects. Prices in June were almost 5% higher than in March. ( Nationwide)

As you can see they have had a go at doing the Bank of England’s job for it with the mention of what we prefer to call exit effects. But the final sentence rather torpedoes that effort as it points out prices are up nearly 5% since March.

The Nationwide has another go here.

Despite the increase in house prices to new all-time highs,
the typical mortgage payment is not high by historic
standards compared to take home pay, largely because
mortgage rates remain close to all-time lows.

The problem is that for the more thoughtful that is a reminder that mortgage rates and hence interest-rates cannot rise by much without causing what Taylor Swift would describe as “trouble,trouble,trouble”. Also it is kind of them to point out that mortgage payments are a third of take-home pay reinforcing the insanity of the targeted inflation measure ( CPI) ignoring this area. Also in spite of their efforts to tell us everything is fine they cannot avoid a consequence in terms of capital required.

However, house prices are close to a record high relative to
average incomes. This is important because it makes it even
harder for prospective first time buyers to raise a deposit. For example, a 10% deposit is over 50% of typical first time
buyer’s income.

Stamp Duty

We got a hint of what will happen when the holiday here is over from Scotland.

But conditions were more muted in Scotland, which saw a
modest increase in annual growth to 7.1% (from 6.9% last
quarter) and was also the weakest performing part of the UK.
This may reflect that the stamp duty (LBTT) holiday in
Scotland ended on 31 March.

So still growth but much slower reminding us that such holidays simply seem to add any tax gain to prices. So the real winners are in fact existing owners.

By contrast Northern Ireland at 14% and Wales at 13.4% led the rises and would presumably be higher now if we had June numbers rather than quarterly ones.

Mortgages

The Nationwide points out that there has been anther official effort to juice the mortgage market.

The improving availability of mortgages for those with a
small deposit (and the continued availability of the
government’s Help to Buy equity loan scheme) is helping
some people over the deposit hurdle, but it is still very
challenging for most.

Maybe that was in play at least in part in the latest mortgage data from the Bank of England.

Net mortgage borrowing bounced back to £6.6 billion in May. This followed variability in the previous couple of months in anticipation of the reduction in stamp duty ending, which has been extended to the end of June. Net borrowing was £3.0 billion in April, following a record £11.4 billion of net borrowing in March

So a bounce back from these numbers compared to April.

Net borrowing in May was slightly higher than the monthly average for the six months to April 2021 and above the average of £4.2 billion in the year to February 2020.

So a combination of the stamp duty extension and an attempt to make more low deposit mortgages available has pumped up the volume.

If we look further down the chain we see this.

Approvals for house purchases increased slightly in May to 87,500, from 86,900 in April. They have fallen from a recent peak of 103,200 in November, but remain above pre-February 2020 levels. Approvals for remortgage (which only capture remortgaging with a different lender) rose slightly to 34,800 in May, from 33,400 in April. This remains low compared to the months running up to February 2020.

So a small rise and Neal Hudson has looked back for some perspective on them.

Mortgage approvals for house purchase were still 32% higher than recent average (2014-19) in May.

Savings

These are another factor in the game because we have seen them soar in the pandemic era as some received furlough payments whilst having lower bills ( no commuting) and less ability to spend due to lockdown. In spite of the increased freedoms it still seems to be happening.

Households deposited an additional £7.0 billion with banks and building societies in May. The net flow has fallen in recent months, and compares to an average net flow of £16.5 billion in the six months to April 2021  and a series peak of £27.6 billion in May 2020. The flow is nevertheless relatively strong – in the year to February 2020, the average inflow was £4.7 billion. ( Bank of England)

So there is money potentially available for house purchase deposits from this source as prospective buyers boost savings or perhaps the bank of mum and dad is more flush with funds.

Whilst we are on the subject of saving we saw more from another source as people who could increased their rate of mortgage repayment.

Gross lending was a little higher at £24.2 billion, while gross repayments dropped to £18.9 billion.

That was of course another example of central bank policy misfiring as a type of precautionary saving acted in the opposite direction to the hoped for one. We see this a lot well except in central banking research.

Consumer Credit

If we look back to the heady pre credit crunch days we can recall that even this area was deployed to boost housing credit as people were able to sign their own income chits. More recently that has been unlikely as we have seen falls but of you hear feet hammering on the floor earlier it was probably at the Bank of England as staff rushed to be first to inform Governor Andrew Bailey about this.

However, for the first time since August 2020, consumers borrowed more than they paid off in May, with net borrowing of £0.3 billion.

We even got some detail from the numbers which is rare. Regular readers will know I have been keen to track car finance movements but we only get an occasional glimpse behind the curtains.

The increase in net consumer credit reflected an additional £0.4 billion of ‘other’ forms of consumer credit, such as car dealership finance and personal loans. Credit card lending remained weak compared to pre-February 2020 levels, with a net repayment of £0.1 billion.

Comment

The monetary push from the Bank of England goes on as we note the reason for the Nationwide being able to claim that mortgage repayments are affordable.

The rate on the outstanding stock of mortgages remained unchanged at a series low of 2.07%……..The ‘effective’ rate – the actual interest rate paid – on newly drawn mortgages rose 2 basis points to 1.90% in May.

It was no surprise we saw a nudge higher in May but since then not much has happened in terms of bond yields and hence fixed-rate mortgages. As to supply of mortgages we saw the Bank of England funnel cash to the banks only for the furlough schemes to mean they had plenty of new deposits too.

As ever Bank of England research is focused on this area and if you read between the lines you see that banks rip customers off if they can. Their way of explaining that is highlighted below.

What drives these patterns of customer choices and price dispersion? We show that customers facing large price dispersion are typically those borrowing large amounts relative to both their income and the value of their house. These tend to be younger customers, and are more likely to be buying a house for the first time. Lenders thus price discriminate, offering menus with greater price dispersion to customers who may be less able to identify and avoid expensive options, or have fewer options to go elsewhere.

 

What can we expect next from the Bank of England?

Welcome to Super Thursday as it is Bank of England day. Well of a sort anyway as they actually voted yesterday evening in one of former Governor Mark Carney’s changes where he preferred bureaucratic convenience( having the Minutes ready) over the risk of a market leak. The latter has in fact happened with if I recall correctly The Sun newspaper being in the van of providing an “early wire” into the last QE expansion.

There is a particular significance due to the change in the situation and this was highlighted yesterday by some news from the United States.

Now the one thing you said, which is something that we are looking at, is that when I talk to businesses, they are saying that it’s going to be temporary, but temporary is going to be a little longer than we had expected initially. So rather than it being a two- to three-month, it may be a six- to nine-month factor. And this is something that we’re going to have to pay attention to see if that changes how people approach the economy.

That was Raphael Bostic of the Atlanta Fed and the emphasis is mine. It was not only me noting that as the next question from NPR shows.

KING: And if it is six to nine months, as opposed to two to three months, is there something specific that the Fed should be doing?

The reply is fascinating.

BOSTIC: Well, I think there are a couple of things that we would do. First of all, we’d monitor very closely what’s happening with expectations. That is the key to determining whether there are some real structural changes in how the economy is playing out. And then the second is really to dive deeper into this to see if there are things that policymakers might be able to do to break the – those dynamics and leave the crisis to return to normal.

So basically nothing and here he is later explaining that.

We’re still 7.5 million jobs short of where we were pre-pandemic, and that is a benchmark that I think we all need to keep our eye on.

Later he told reporters this.

“Given the upside surprises and recent data points, I pulled forward my projection for a first move to late 2022” Adds he has 2 moves in 2023 ( @bcheungz )

So not much use for now and in fact it gets worse because he is projecting interest-rate moves for years in which he is a non-voter. Also there was a question which will have discomfited them as it asked about an area they normally ignore which is necessities which in central banking terms are mostly non-core.

Are we seeing the rise – a rise in prices of basics, things that families need, like bread and milk and diapers?

Pack animal behaviour

The reason I am emphasising the points about is that these days central bankers the world around are mostly like clones. So they believe and do the same things, to the extent that they believe anything. Thus the points made apply to the Bank of England as well. So it too is more bothered about unemployment than inflation. It too will look through the recent inflation rise and will suggest interest-rate rises that are far enough away to be meaningless as right now we can only see a few months ahead.Actually the Bank of England has already played that card when Gertjan Vlieghe told us this at the end of last month.

In that scenario, the first rise in Bank Rate is likely to become appropriate only well into next year, with
some modest further tightening thereafter.

There is a curious link in that he will not have a vote then like Raphael Bostic. But the point is the same especially as we recall the period of Forward Guidance with all its promises of interest-rate rises when in fact the next move was a cut.

Inflation,Inflation,Inflation

This is an issue with several contexts. The simplest is that we are now above the inflation target and with the numbers from producer prices look set to remain there for at least a bit. Then there is the way that the numbers ignore the rises in house prices which are well above such levels.

UK average house prices increased by 8.9% over the year to April 2021, down from 9.9% in March 2021.

This was reinforced yesterday by a metric which the Bank of England regularly tells us it follows as the Markit PMI headline included this.

 but inflationary pressures also strengthen

It went on to ram the point home.

Also hitting previously unsurpassed levels, however, were rates of inflation of input costs and output prices as supply-chain disruption fuelled price pressures.

And later.

The rate of input cost inflation accelerated for the fifth month running and was the joint-fastest on record, equal with that seen in June 2008. While inflation continued to be led by the manufacturing sector, service providers also posted a marked increase in input prices. In turn, the rate of output price inflation hit a fresh record high for the second month running.

The Economy

The same survey told us it was pretty much full speed ahead.

Businesses are reporting an ongoing surge in demand in
June as the economy reopens, led by the hospitality sector,
meaning the second quarter looks to have seen economic
growth rebound very sharply from the first quarter’s decline.

I did my little bit by going out for some drinks and dinner, the first tome I has been out in that way for 7 months.

Comment

A picture like that would have conventional central bankers taking away the stimulus and maybe even raising interest-rates. According to Getjan Vlieghe that was all wrong.

First, given the proximity of the effective lower bound (even with the possibility of modestly negative rates),
tightening too early would be a much costlier mistake than tightening too late

A curious assertion considering we have seen interest-rates only reach 0.75% Next is a curiosity as central bankers keep chanfing their mind on this as I recall the ECB telling us that policy responses had slowed.

Second, monetary policy does, in fact, work quite quickly

Indeed he rather contradicts his prediction of future interest-rate rises.

That was apparent before we were hit by the Covid shock, when Bank Rate was just 0.75% and inflation pressures were too weak.

If 0.75% was too high then and things are worse now well you do the maths.

As you can see there are good reasons for the Bank of England to change course but I do not expect it too and today will be unchanged. It seems set to mimic the four stage plan described in Yes Minister.

Sir Richard Wharton“In stage one, we say nothing is going to happen.”

Sir Humphrey Appleby“Stage two, we say something may be about to happen, but we should do nothing about it.”

Sir Richard Wharton“In stage three, we say that maybe we should do something about it, but there’s nothing we can do.”

Sir Humphrey Appleby“Stage four, we say maybe there was something we could have done, but it’s too late now.”