Imputed Rent is doing its job of reducing UK consumer inflation

Today is inflation day in the UK where we receive numbers for consumer, producer and house price inflation. As there were quite a few new readers yesterday let me open today in that spirit and explain the rotten heart of the UK inflation infrastructure. It comes via the issue of the housing sector and in particular people who own their own house or flat. What this involves is paying a large sum if you are lucky enough to be able to do so or taking a mortgage and paying it off in monthly instalments over years and indeed decades or some combination of the two. This presents us with two actual numbers which can be used in the inflation process which is house prices and mortgage payments.

Instead the UK authorities have chosen to make up their own number based on what are called imputed rents. They choose to assume that someone who lives in their own property rents it out ( of course they do not) and put that rental number in the inflation figures for the index which is called CPIH. There is an obvious issue in this which is the making up of the number when you have real ones to use! Even worse they have had a lot of trouble with the rental series based on those who do rent and in fact scrapped their first effort as it went so badly. So their number series has proven unreliable but they have ploughed on anyway and if you take the case to the National Statistician I am sorry to have to tell you that the response is much more like propaganda that reasoned argument. Why do they do it? Well I doubt it is a coincidence that it leads to a lower inflation number.

The trends

We know that there was some building producer price pressure last month although September itself saw some amelioration of that as the UK Pound £ had a better month against the US Dollar ( the currency in which most commodities are priced). So it will depend on which day they did the survey. But the price of crude oil was rising and has continued to do so since September ended with Brent crude oil above US $58 per barrel as I type this so that there is some inflationary pressure again from this source.

The producer price data today indicated a sort of steady as she goes position with a hint of a dip.

The headline rate of inflation for goods leaving the factory gate (output prices) rose 3.3% on the year to September 2017, from 3.4% in August 2017…….Prices for materials and fuels (input prices) rose 8.4% on the year to September 2017, which is unchanged from August 2017.

 

What about the impact of inflation?

This sadly tends to hit the poorest the hardest as this from the BBC indicates.

Benefit freezes combined with the predicted rise in inflation could set some low-income households back £300 next year, a think tank has warned.

September’s inflation data will be released on Tuesday, and some analysts predict the Consumer Price Index (CPI) will be 2.9%……….The Resolution Foundation’s analysis found that a single unemployed person would be £115 worse off, a single parent in work with one child would be £225 worse off, and a single earner couple with two children would be £305 worse off.

You may note that the analysis concentrates on our previous inflation measure and not the new CPIH version in yet another embarrassment for the Office for National Statistics.

Today’s numbers

The headline number will capture the er headlines.

The all items CPI annual rate is 3.0%, up from 2.9% in August.

Actually it was a very marginal shift as if we look into the detail the rate was in fact 2.9593%. Also I did point out above that the CPI was what everyone still concentrates on as this from the Financial Times whose economics editor Chris Giles was one of those who argued strongly for the CPIH inflation measure shows.

How times change! Back in the day he and I were taking opposite sides at the Royal Statistical Society and it is nice to see the implied view that he now agrees with me. This leaves the Office for National Statistics somewhat short of friends for its propaganda on the subject of CPIH.

The Consumer Prices Index including owner occupiers’ housing costs (CPIH) is the most comprehensive measure of inflation.

The CPIH number gets so few mentions our statistics authority sends out its staff to get the numbers up.

You might think that after the problems with the UK trade figures I highlighted yesterday the staff there might be too busy to be on social media plugging the new inflation measure but apparently not. James has contacted me to say he is working in the prices division at the moment which gives a partial answer although if he is tweeting official information he might want to use a more accurate title.

The housing problem

Let me explain with the relevant numbers why this is an issue. Firstly let me bring the house price numbers up to date.

Average house prices in the UK have increased by 5.0% in the year to August 2017 (up from 4.5% in July 2017). The annual growth rate has slowed since mid-2016 but has remained broadly under 5% during 2017.

Now let us look at the data on which the Imputed Rental numbers for owner-occupied housing is based.

Private rental prices paid by tenants in Great Britain rose by 1.6% in the 12 months to September 2017; this is unchanged from August 2017.

Which leads to this.

The OOH component annual rate is 1.9%, unchanged from last month.

So the machinations of the UK statisticians do the following. Firstly they are using a method which reduces the annual rate of inflation from 3% to 2.8% if we use their favoured CPI series. Even worse a previous change meant that the Retail Price Index was abandoned and it is at 3.9%. Those buying a house may reasonably wonder how annual price inflation which has been circa 5% ends up reducing the inflation rate!

If you wish to follow the timing of this there was a rush late last year from the Office for National Statistics to bring CPIH ignoring some of its own guidelines as it was “not a national statistic” at that point. I did tell the National Statistician John Pullinger that doing this at a time inflation was higher but rental inflation was likely to fall ( based on wages growth) was playing with fire as regards both his personal and the body’s overall credibility in my opinion.

Comment

So we have headlines of 3% consumer inflation in the UK in spite of the official machinations to keep it below by changing the measure. The latter may strengthen in influence if London continues its pattern of being a leading indicator in this regard.

London private rental prices grew by 0.9% in the 12 months to August 2017, which is 0.7 percentage points below the Great Britain 12-month growth rate.

Those of you who pointed out that owner occupied housing would only go into UK inflation when it lowered the numbers have been proven correct so well-played.

An impact of all of this is to widen the intergenerational issue as the basic state pension will rise next year by 3% which is higher than the wage growth we have seen. Of course Bank of England pensioners will do even better as theirs are linked to the higher Retail Price Index. If we stay with the Bank of England Governor Mark Carney does not have to get out his fountain pen and headed notepaper as the remit was eased and he only has to write if it exceeds 3% on the CPI measure.

Moving onto the detail we see that there has been a strong impact from the rising price of butter we have previously looked at as the oils and fats section has risen by 14.9% on a year ago. Will we now get Imputed Butter prices?

Meanwhile our old inflation target of RPIX is at 4.1% which poses a question for the “improved” measures.

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What are the prospects for inflation ( and hence wages )?

Yesterday saw a revealing insight into the establishment view of inflation. The world economic outlook of the International Monetary Fund was in general upbeat and positive but I noted this.

The outlook for advanced economies has improved, notably for the euro area, but in many countries inflation remains weak, indicating that slack has yet to be eliminated

You may note that it ignores the possible link between lower inflation and better economic growth in its rush to tell us that inflation below some arbitrary target is a bad thing. It really is old era economic thinking to say that low inflation is a sign of slack in the economy as well. Missing also is any thought that growth and inflation are being measured badly and that perhaps we have more inflation ( for example by factoring in one of the largest parts of any budget which is housing) and less growth than the IMF would like us to believe.

The same muddled thinking is evident in this excerpt as well.

Persistently low inflation in advanced economies, which could ensue if domestic demand were to falter, also carries significant risks, as it could lead to lower medium-term inflation expectations and interest rates, reducing central banks’ capacity to cut real interest rates in an economic downturn.

Central banks capacity to cut interest-rates was mostly reduced by them cutting them so much already! If that was the weapon implied here why would they need to do it again? Also as we know some central banks have been willing to employ negative interest-rates. If we move on in a word of low wage growth then most people would welcome low inflation and low inflation expectations. If we put this another way the IMF is skirting over the implication below in its view on asset valuations.

In advanced economies, monetary policy should remain accommodative until there are firm signs of inflation returning to targets. At the same time, stretched asset valuations

What are the inflation prospects?

So far in 2017 headline consumer inflation has been really rather low. For example the CPI in the Euro area is at 1.5% and the US CPI is at 1.9%. There was something of a warning though in the latest US data if we look at some of the detail.

Increases in the indexes for gasoline and shelter accounted for nearly all of the seasonally adjusted increase in the all items index. The energy index rose 2.8 percent in August as the gasoline index increased 6.3 percent.

So let us look at the oil price trend.

Crude Oil

If we look at the price of a barrel of Brent benchmark crude oil then we see it has been rising since late June when it dipped below US $45 per barrel as opposed to the US $56.62 as I type this. There have been various factors driving this of which one has been the economic growth described by the IMF. In addition there has been this factor according to Reuters.

A pact between the Organization of the Petroleum Exporting Countries (OPEC) and other producers including Russia to cut output by 1.8 million barrels per day (bpd) in order to prop up prices is due to expire by the end of March 2018. Discussions to extend the pact are taking place, but production elsewhere is rising.

There has been doubt as to how the OPEC deal has actually held but from its point of view the last 3 months or so have been a success as the oil price has risen. The other factor is the shale oil wildcatters in the United States who will also be benefitting from the higher price for crude oil as we wait to see if they expand output. If you recall the cash flow business model for the shale oil wildcatters then 2017 has been a good year as income will have been strong as we note higher prices are being accompanied by this.

U.S. producers are not participating in any pledge to restrain supply, and output has risen by 10 percent this year to over 9.5 million bpd.

Other Commodities

Reuters calculates a commodity price index which is currently at 183.2 which is just under 4% lower than a year ago albeit like in the oil price there has been a rise since late June. Back then it had dipped to 166.5. If we look at the index which excludes energy prices we see that there is a familiar if more subdued pattern as it has risen from just below 116 to 123.6 now.

If we look at metals prices we see Metal Bulletin reporting this today.

The underlying trends in the base metals are upward but those metals in or near high ground seem to be having to absorb selling which is capping the upside, while copper and nickel prices that are still some way below the highs seem to be having an easier time working higher, but neither seems in any rush. We remain quietly bullish, but expect trading to become choppier as prices run into more bouts of scale-up selling.

Dr.Copper had seen quite a surge as a year ago it was US $2.17 as opposed to the US $3.06 now as we wait to see the next move. I guess churches will be nervous about their copper pipes and roofs again. By contrast the Iron Ore price has been heading south at a rapid rate recently and this morning has fallen below the US $60 mark.

Benchmark Australian iron ore fines dropped 4.1% Tuesday to a three-month low of $59.1 a tonne, based on data provided by The Steel Index, taking losses since the start of September to more than 20%. ( Mining.com)

They attribute the fall to this factors.

Iron ore prices continued their downward trend Tuesday amid ongoing concerns that looming steel production cuts in China on environmental grounds will sap steel mill demand……..At the same time, supply from Australia — the world’s No. 1 iron ore producer — has risen,further pressuring prices.

Food Prices

The United Nations calculates an index for this.

The FAO Food Price Index* (FFPI) averaged 178.4 points in September 2017, up 1.4 points (0.8 percent) from August and 7.4 points (4.3 percent) above September 2016. Firmer prices in the vegetable oil and dairy sectors were behind the small month-on-month rise in the value of the FFPI.

So a rise overall which is influenced by the 27% rise in dairy prices over the past year as we note the influence of the butter shortage. Mind you if you have a sweet tooth and are a Maroon 5 fan the news is much better as the sugar price has fallen by 33% over the past year.

Comment

We see that there has been a nudge higher in the beginnings of the inflation food chain over the past 3 months or so. Much of this has been the higher oil price but there have been rises in some metal prices too although not Iron Ore. However whilst the trend is low especially for this stage in the economic cycle it can still be damaging. The rising cost of one of the basic essentials ( housing/shelter ) in many places is mostly ignored and at other times claimed as growth. Secondly the fact is that wage growth is overall low too so that pockets of real wage growth are also much less abundant that we would usually expect in a boom. If the IMF gets the inflation it seems to want there is no guarantee that wages would rise as well so it would have made us all worse off.

So in essence if we look at food and energy prices they are the major players in the consumer inflation measures we have and of course the central banks and IMF try to ignore them as “non-core.” Oh well…….

 

UK Inflation rises again but more hopefully the UK pound follows it

I was not expecting to publish an article today but my knee operation planned for today was cancelled with an hour’s notice. Let me wish the trauma patients who came into Chelsea and Westminster Hospital overnight well. Returning to the economics there is a link between today’s subject of inflation and that of yesterday because inflation will be over target and of course the Bank of England choose to ease policy into an inflation rise.

The impact of higher prices on the poor

One of the issues faced by the poor is that they pay a different set of prices to the rest of us. The Joseph Rowntree Federation has looked at this and intriguingly opens with something which could have been written by me.

Reducing the cost of essential goods and services is as important as increasing incomes for reducing poverty in the UK.  The less people must spend on meeting their needs, the more cash in their pocket.

The Bank of England will be annoyed on two counts. Firstly it aims for inflation of 2% per annum and secondly the idea that what it calls non core items are important.

The JRF moves onto the problem.

New research by Bristol University has laid bare the scale of the poverty premium for the first time.  They estimate that on average the poverty premium is costing low-income households £490 per year.

We get some more details.

Some premiums seem inconsequential, such as paying an extra £5 per year for a paper copy of an electric bill because you’re not online, or find it easier to keep on top of your budget with a paper copy. Others are eye watering, such as paying £540 over the odds for a doorstep loan because you can’t access mainstream credit or an additional £120 for a payday loan.

There are various factors at play here but we know that those that are poorer tend to pay more for many products. These comes from an inability to shop around both physically and online as well as being unable to use direct debits. Some of these represent a type of exploitation but it is also true that sometimes the problems create higher costs for businesses which need to be passed on.

There have been calls at times for different inflation measures to represent different groups. What we do know is that the establishment’s choice the Consumer Price Index performs badly in this regard. This is because it is weighted and based on total spending where of course the better off are more highly represented and so this means that rather than representing the median person it tends to represent those more like two-thirds of the way up the income scale. The much maligned Retail Price Index excludes the top 4% in terms of income so performs better in this regard although it does exclude some pensioner households.

The UK establishment’s view on measuring inflation

We can see this from simply looking at the progression of UK inflation targets. First the original one.

The annual rate for RPIX, the all items RPI excluding mortgage interest payments (MIPs), is 4.1%, up from 3.9% last month.

As we note an annual inflation measure that has passed 4% we move onto the current measure.

The all items CPI annual rate is 2.9%, up from 2.6% in July.

The clear trend is downwards and let us now look at the UK statistical establishment’s favourite measure.

The all items CPIH annual rate is 2.7%, up from 2.6% in July.

Of course the reality of price rises and inflation does not change but at the current rate the inflation reality of now will perhaps be accompanied by an official inflation measure at 0% in a few decades.

A major factor

Treatment of the housing market and particularly owner-occupied housing costs is at the heart of the matter. If we look at house prices we are told this by the Office for National Statistics.

Average house prices in the UK have increased by 5.1% in the year to July 2017 (unchanged from June 2017). The annual growth rate has slowed since mid-2016 but has remained broadly around 5% during 2017.

Those buying houses in the UK have seen a considerable amount of house price inflation in recent times.

The average UK house price was £226,000 in July 2017. This is £11,000 higher than in July 2016 and £2,000 higher than last month.

This compares to a pre credit crunch peak of just over £190,000 and a nadir of just under £155,000.

We are told by the UK statistics establishment that the best method in their opinion of measuring the impact of inflation on owner-occupiers of property is to use imputed rents which leads to this.

The OOH component annual rate is 1.9%, down from 2.0% last month.  ( OOH is Owner Occupiers Housing Costs).

As you can see there is something familiar at play a much lower number which is driven by the fact that rental inflation is much lower than house price inflation.

Private rental prices paid by tenants in Great Britain rose by 1.6% in the 12 months to August 2017; this is down from 1.8% in July 2017.

So yet again we find that the lower number has been selected! A particular issue here is that it is based on something which does not actually exist. Yes rents are paid by those who rent and they should go into the inflation numbers proportionately. But owner occupiers do not actually receive rent except in the calculations for the national accounts and so a statistical and economic concept replaces what is actually paid which is either the house price or the monthly mortgage repayment.

Oh and if London is a leading indicator ( which it often is) there is this to consider.

The growth rate for London (1.2%) in the 12 months to August 2017 is 0.4 percentage points below that of Great Britain.

Inflation Trends

This month saw a rise in UK inflation across the various measures and was driven by this.

Clothing and footwear, with average prices rising by 2.4% between July and August 2017 compared with a smaller rise of 1.0% between the same two months a year ago. Prices of clothing and footwear usually rise between July and August as autumn ranges start to enter the shops following the summer sales season.

So there was less of a summer sale in clothing this year and we have seen the numbers be erratic before as we move into autumn so we need to tread carefully. Also there was this.

Fuel prices rose by 1.6% between July and August 2017. This contrasts with the same period last year, when fuel prices fell by 1.3%.

Producer Prices

These give us an idea of what is coming down the inflation chain and there was a rise here too reversing recent trends.

Factory gate prices (output prices) rose 3.4% on the year to August 2017, up from 3.2% in July 2017, with the change in the rate being driven mainly by petroleum products. Prices for materials and fuels (input prices) rose 7.6% on the year to August 2017, up from 6.2% in July 2017, with the change in the rate being driven mainly by crude oil.

Comment

Today’s reversal on the inflation front follows a month were there was better news. Not only were the annual consumer inflation  numbers higher today but the producer ones were too. Some care is needed however as it was issue with the measurement of clothing prices and inflation back in 2010 which kicked off a lot of the debate around UK inflation methodology. Actually the issues there are still in dispute!

As to the trends there is something which may help out as we go forwards.

As many commodities including crude oil are priced in US Dollars the rise in the UK Pound £ will help us going forwards. Although of course currency movements do not always last and can turn out to be a figment of our Imagination.

Could it be that it’s just an illusion
Putting me back in all this confusion?
Could it be that it’s just an illusion now?
Could it be that it’s just an illusion
Putting me back in all this confusion?
Could it be that it’s just an illusion now?

 

 

How are UK manufacturing, trade and construction doing?

Let me commence today with some Friday humour provided by the British Chamber of Commerce. At this time of hurricanes and now an earthquake off Mexico we could do with it.

UK GDP growth forecast for 2017 is upgraded to 1.6% from 1.5%, and is expected to slow to 1.2% in 2018 (downgraded from 1.3%), before rising to 1.4% in 2019 (downgraded from 1.5%)

Yes they think they can forecast UK GDP to 0.1%! Also whilst it has caught some headlines it is pretty much what it was before. But there is a difference to what we have been hearing from the CBI ( Confederation of British Industry) and the Markit business surveys ( PMIs).

The contribution of net trade to UK GDP growth is not expected to be as strong as we previously predicted, as we see little evidence that the depreciation of the pound is materially boosting the UK’s external position.

Of course only time will tell as to whether our manufacturing industry will see a boost but it would appear that the BCC has a strong sense of humour.

Our new forecast is that the first increase in UK official interest rates, to 0.5%, will occur in Q3 2018. This is two quarters later than predicted in our Q2 forecast.

UK Manufacturing

The official data this morning brought some positive news on this front.

In July 2017, total production was estimated to have increased by 0.2% compared with June 2017, due mainly to a rise of 0.5% in manufacturing; the largest contribution to the rise came from transport equipment, which rose by 7.6%.

The good news from the motor industry was not a surprise as the industry had reported good numbers for July.

The monthly increase within transport equipment was due to motor vehicles, trailers and semi-trailers, which rose by 13.7%, the strongest growth since March 2009; evidence suggested that the production of new models contributed to the growth.

The industry which had been pushing the numbers around has been the pharmaceutical one but by its standards a 7% monthly fall had a mild impact as it was up 2% on a year ago. You get an idea of what it has been doing by the way a 7% monthly change seems mild. On the subject of pharmaceuticals there was some chilling news from a research project in the US yesterday from which I spotted this . From Alan Krueger of Princeton University and NLF is not in the US labour force.

Nearly half of prime age NLF men take pain medication on a daily basis, and in nearly two-thirds of these cases they take prescription pain medication

This of course needs further investigation as indeed does the mushrooming opium problem.

Back to UK production and the only slightly smaller gap between surveys and the official data there is this from Markit.

ONS say having best month this year in July. Further rebound expected in August according to PMI. ONS data very volatile…  ( Chris Williamson ).

There is a bit of a cheek calling the official data volatile if you look at the PMI series but also some truth.

 

Construction

There were promises of more house building from Bovis earlier this week however this bit caught my eye.

Special dividends totalling £180m equivalent to c.134 pence per share to be paid over three years to 2020…….Group will continue to be strongly cash generative and the Board is committed to reviewing further capacity for returns to shareholders over time.

There are two issues here. Firstly the main beneficiaries of the Help To Buy programme seem to have been construction company shareholders. But a more subtle point was made to me, if the outlook is as bright as we are told why are they returning money to shareholders? After all ordinary dividends are rising anyway.

Board to recommend 5% increase in ordinary dividend in 2017 to 47.5p with a further 20% increase in 2018 to c.57p, demonstrating its confidence in the business and the strong outlook.

Yet all this largesse for building company shareholders of which Bovis is just an example does not seem to have had much of a lasting impact on UK construction if today’s figures are any guide.

Construction output contracted by 1.2% in the 3 month on 3 month series in July 2017 but remains at relatively high levels……Construction output also fell month-on-month, falling by 0.9% in July 2017, predominantly driven by a 1.4% fall in all new work.

Also the outlook was none too bright either.

New orders fell 7.8% in Quarter 2 (Apr to June) 2017 compared with the previous quarter, dropping to its lowest level since Quarter 1 (Jan to Mar) 2014.

I have written before that I do not have much confidence in the official construction data. For newer readers they had a lot of trouble with the deflator ( inflation measure) and shifted a large business from services to construction which meant it was hard to keep the faith. Also the numbers tend to be revised higher over time. However they have presented a declining trend in 2017 which has persisted, perhaps the election was an influence on infrastructure projects but that of course will fade over time.

Trade

There is an element of repetition here as we note the ongoing deficit and the fact that it seems unusually stable.

Between the 3 months to April 2017 and the 3 months to July 2017, the total UK trade (goods and services) deficit widened by £0.4 billion to £8.6 billion.

But these numbers are very unreliable as the revisions below show.

A downward revision to both imports of goods and services (negative £0.6 billion and negative £0.8 billion respectively) and an upward revision of £0.3 billion to total trade exports resulted in a narrowing of the trade deficit by £1.7 billion in June 2017 compared with the previous UK trade release.

Comment

Overall today’s data brought a possible hint of good news for the UK economy as manufacturing had a better month. In terms of the detail however the boost from the car industry seems unlikely to persist so we will still wait for a clear impact ( J-Curve) from the lower level of the UK Pound £. Construction continues to struggle.

Meanwhile there was troubling news for the Bank of England from its own inflation survey. Firstly the respondents do not seem to have much faith in it hitting its target.

Asked about expectations of inflation in the longer term, say in five years’ time, respondents gave a median answer of 3.4%, compared to 3.3% in May.

It is particularly interesting that the ordinary person seems to have a completely different view of inflation trends to central bankers. Maybe they have caught on that the central bankers are usually wrong! Or perhaps they consider  a “non-core” factor as well say vital for life.

Price inflation for food and drink rose sharply between July 2016 and July 2017, going from minus 2.6% to +2.6%.

The 3 economists who started their Underground report at the Bank of England with this are probably wondering where the tea and cake trolley has gone? If we return to the survey there was a further problem for central bankers who want higher inflation.

By a margin of 53% to 7%, survey respondents believed that the economy would end up weaker rather than stronger if prices started to rise faster.

Oh and this on Twitter provided some food for thought.

USD has stopped out everyone this morning and hence has no other place to go but up. ( h/t @FemaleTrader_A ).

@boomsbustsshow has expressed the same view and these attracted my attention because the media is now full of reports of a weak US Dollar.

Steely Dan

As a fan let me mourn the death of Walter Becker this week and leave you with this from Aja. RIP Walter.

Up on the hill
They’ve got time to burn
There’s no return
Double helix in the sky tonight
Throw out the hardware
Let’s do it right
Aja
When all my dime dancin’ is through
I run to you

Me on Core Finance TV

http://www.corelondon.tv/uk-economy-official-figures-yet-confirm-j-curve-effect-not-yes-man-economics/

 

Is the football transfer market rational?

As we approach what in the UK is a Bank Holiday weekend many thoughts turn to the weekend’s sport and football in particular. News is increasingly dominated by the UK Premier League but of course there are strong European influences highlighted by yesterday’s Champions League draw and today’s Europa League one. The latter indicates a change as it replaced the UEFA Cup which had a fair bit of prestige back in the day as opposed to a league that many teams were not keen to be in although in recent times that appears to have switched again, That may of course simply be because Chelsea and Manchester United have won it as opposed to much poorer recent UK efforts in the Champions League.

If we move to the economics then the ever larger sums are having an impact and regular readers will be aware that I mull from time to time how much of this is inflation and how much genuine growth? From Deloittes.

In 2015/16 Premier League revenues rose to a record £3.6 billion. Each club generated more on average than the whole top division of 22 clubs did in total in 1991/92 and commercial revenues exceeded £1 billion for the first time in the league’s history.

It has been a heady mix of higher ticket prices and subscription TV fees which have been mostly inflationary and higher commercial revenues which I would suggest are growth. Oh and for those unaware the UK has split its subscription TV coverage so you need to pay 2 subscriptions now to get everything. Sneaky inflation I think especially as at least some of the European competitions was free to air albeit you might have to watch some advertisements.

The balance of payments issue is even more complex as we have the tap running into the sink via ever larger fees from overseas viewers of the Premiership but also a plug hole as we buy ever more foreign players. As to the wages we pay foreign players it is almost impossible to figure out how much will be spent here.  I also note with a wry smile that the Premier League all time 11 just voted for on the BBC website had 8 British players. So we continually buy foreign players when the best ones were British all along? What of course we are seeing here is the influence of emotion and irrationality which strongly influences these matters. Also if 25 years the new all-time?

Is it Rational?

The Financial Times has published some research suggesting that the various transfer fees are rational.

Data analysis suggests sums spent on players are in proportion to resources available

Care is needed with something like that as if we look at other news the woman who has won that enormous sum on the US Lottery could easily massively overpay for things and say she has plenty left. In fact it is exactly the sort of argument used to justify any raging bubble and at that specific moment in time it is usually true, the catch is of course that time only seems to be suspended and moves on. First let us update the numbers which have soared again.

 

According to Deloitte, more than £1.17bn has been splashed out this summer by clubs in the Premier League, Europe’s wealthiest division, where they have combined revenues of roughly £4.5bn. Overall spending in this summer’s window has already breached the £1.16bn spent by English sides during the same period in 2016.

Okay but let me point out the missing number here which is the wages commitment which over time might not be far off as much again. As transfer fees rise clubs are keen to sign these players up for long contracts at high wages which is an ongoing annual burden. Also it is hard to know where to start with this below.

 

Neymar’s transfer is an outlier, with the Brazilian forward’s fee representing more than 40 per cent of PSG’s revenues of €521m. However, the French club believes the global superstar will enable it to secure higher income from future commercial and merchandising deals, as well as achieve better performances in European competition.

We may be about to get a lesson in how quickly an outlier becomes the norm! Maybe not too long if this from L’Equipe is any guide.

Barcelona have agreed a deal worth up to 150m euros (£138m) to sign Borussia Dortmund’s 20-year-old France forward Ousmane Dembele.

They are also offering what only a few months ago would have been an extraordinary sum for Phillipe Coutinho at Liverpool. We get a hint here at the inflation around because he was bought by Liverpool for £8.5 million according to the BBC and he has played really well so shall we say his price should be now treble or quadruple? I would be interested in reader’s thoughts as trying that sort of analysis has a lot of growth but also lashings of inflation. We also need the caveat that the media is not entirely reliable with its price estimates as rumour is dressed up as fact.

Bubbilicious

Apparently the numbers do work.

 

21st Club, a London-based football consultancy that advised the new owners of Everton and Swansea City on recent takeovers, is among those to develop a statistically based model to assess signings……….21st Club, a London-based football consultancy that advised the new owners of Everton and Swansea City on recent takeovers, is among those to develop a statistically based model to assess signings.

So current prices tell us that prices are statistically current? It is hard not to think of someone proclaiming Dutch Tulip prices were statistically based back in the day. Even if we suspend such thoughts the model as presented gives some rather odd results. For example Arsenal would presumably not have bought Lacazette if they had known he was about as likely to lose as win them points. Chelsea are certainly not users of the system as for Rudiger and Bakayoko it is apparently only a question of how many points they will cost them. Let’s face it any football fan would be able to figure out that Bonucci would improve pretty much any team he joined. Those who watched the woeful keepy-uppy skills of Paulinho at his Barcelona presentation may be scratching their heads at any scenario where he will improve them.

Oh and correct me if I am wrong but is this not simply another form of extend and pretend?

 

Tim Bridge, a senior manager at Deloitte’s sports business group, says: “Clubs do not account for a transfer all upfront, instead spreading the fee across the life of the contract, so a £30m to £40m revenue uplift in one year translates to £200m in transfer spend across a five-year period.”

They do of course have some income sources which may be fixed for this period but not all of them.

Comment

Can something which depends so much on emotion ever be fully rational? I doubt it. This does not mean that there have not been pockets of rationality such as past purchases of loss making UK Premiership clubs who later turned into money machines. In some cases this involved luck as the debt that the Glazers loaded on Manchester United should have both imploded and exploded after the credit crunch but of course the central banks stepped in. So they should perhaps raise a glass to Janet Yellen and Mario Draghi as they speak later at Jackson Hole. Actually in more ways than one because if I recall correctly the loans that were used by Real Madrid to buy Cristiano Ronaldo were used as collateral at the ECB.

Over my career I have seen so many statistical models suddenly collapse as the assumptions behind them disappear into a mathematical quicksand. So in essence here apparent rationality becomes something else or the modellers can sing along with both football fans and The Monkees.

Then I saw her face, now I’m a believer
Not a trace of doubt in my mind.
I’m in love, I’m a believer!
I couldn’t leave her if I tried.

Me on Core Finance TV

http://www.corelondon.tv/consequences-parallel-currency-italy-not-yes-man-economics/

 

 

The Jackson Hole symposium should embace lower inflation

Later this week the world’s central banks will gather at the economics symposium of the US Kansas Federal Reserve at Jackson Hole in Wyoming. The description can be found below.

The 2017 Economic Symposium, “Fostering a Dynamic Global Economy,” will take place Aug. 24-26, 2017.  (The program will be available at 6 p.m., MT, Aug. 24, 2017).

It is appropriate that they do not yet know the program as the world’s central bankers find themselves at a variety of crossroads which they are approaching from different directions. It is also true that after all their expansionary monetary policy and “masters ( and mistresses) of the universe” activities over the last decade or so they now approach one of the most difficult decisions which is how to exit these programs. For some this will simply mean a slowing of the expansion. This all looks very different to when a speech on Forward Guidance was eagerly lapped up by a receptive audience and quickly became policy in many countries. After all Open Mouth Operations make a central banker feel both loved and important as we all hang on every word. Oh and there is a clear irony in the title of “Fostering a Dynamic Global Economy” for a group of people whose propping up of many zombie banks has led to anything but. That is of course assuming anyone knows what the phrase means in practice!

The inflation issue

The issue here is highlighted by this from Bloomberg today.

The world’s top central bankers head to Jackson Hole amid growing unease about low inflation.

Of course central bankers and those in the media subject to their brainwashing program may think this but the ordinary worker and consumer will be relieved. Should any of the central bankers suffer from stomach problems no doubt they will be delighted to discover this from CNBC.

Hikma Pharmaceuticals Plc’s U.S. subsidiary has raised the price of a common diarrhea drug by more than 400 percent and is charging more for five other medicines as well, the Financial Times reported on Sunday……The average wholesale price of a 60 ml bottle of liquid Atropine-Diphenoxylate, a common diarrhea drug also known as Lomotil, went from about $16 a bottle to $84, the FT reported.

Central banker heaven apparently and what needs looking into in my opinion is the clear examples of price gouging we see from time to time. Also more mundane products are seeing price rises. From Mining.com last week.

The iron ore price is now trading up a whopping 43% from its 2017 lows struck just two months ago.

According to Yuan Talks the Dalian futures contract rose 6.6% today before price limits kicked in. It is not alone as the Nikkei Asian Review points out.

Three-month zinc futures were at their highest level in 10 years, at about $3,100 per ton, rising 26% over the same period.
Aluminum also rose 10% over the same period.

So as well as raising a smile on the face of the heads of the central banks of Canada and Australia there are hints of some commodity inflation about. This provides a counterpoint to the concerns about low inflation which in the Euro area and the US is not that far below especially when we allow for the margin of error.

Does QE lead to inflation?

Some care is needed here as of course we have seen waves of asset price inflation across a wide range of countries. But of course the statistical policy across most of the world is to avoid measuring that in consumer inflation. Then it can be presented as growth which for some it is but not for example for first time buyers. However one of the building blocks of economics 101 is that QE ( Quantitative Easing) leads to inflation. Yet the enormous programs in the US and the ongoing one in the Euro area have not got consumer inflation back to target and the leader of the pack in this regard Japan has 0% inflation. After all the money involved has it simply led to price shifts? That is especially awkward for Ivory Tower theorists as they are not supposed to be able to happen with ~0% inflation so I guess they sent their spouse out to fill up the car as the petrol/diesel price fell.

More deeply whilst the initial effect of QE should have some inflationary implications is there something in it such as the support of a zombie business culture that means inflation the fades. It could of course be something outside of the monetary environment such as changing demographics involving ageing populations. Perhaps it was those two factors which broke the Phillips Curve.

As to future prospects there are two issues at play. The US Federal Reserve will start next month on an exit road which I remember suggesting for the Bank of England in City-AM some 4 years ago. If you do not want QE to become a permanent feature of the economic landscape you have to start somewhere. The issue for the ECB is getting more complex mostly driven by the fiscal conservatism of Germany which means that a supply crunch is looming as it faces the prospect of running out of German bonds to buy.

Currency Wars

There are two specific dangers here which relate to timing ( during thin summer markets) and the fact that markets hang on every central banking word. Eyes will be on the Euro because it has been strong in 2017 and in particular since mid April when it did not quite touch 93 on its effective ( trade-weighted) index as opposed to the 98.7 the ECB calculated it at on Friday. It has put another squeeze on the poor battered UK Pound £ but of more international seriousness is yet another example of a problem for economics 101 as interest-rate rises should have the US Dollar rising. Of course there is a timing issue as the US Dollar previously rose anticipating this and maybe more, but from the point of Mario Draghi and the ECB there is the fear that cutting the rate of QE further might make the Euro rally even more. Although one might note that in spite of the swings and roundabouts along the way the Euro at 98.7 is not far away from where it all began.

The Bank of Japan is also facing a yen rallying against the US Dollar and this morning it briefly rose into the 108s versus the US Dollar. Whilst it is lower than this time last year the trend seemed to change a few months back and the Yen has been stronger again.

Comment

It is hard not to have a wry smile at a group of people who via Forward Guidance and Open Mouth Operations have encouraged markets to hang on their every word now trying to downplay this. If you create junkies then you face the choice between cold turkey or a gradual wind down. Even worse you face the prospect of still feeding addiction number one when a need for number two arises as sooner or later an economic slow down will be along. Or creating fears about low inflation when the “lost decades” of Japan has shown that the world does not in fact end.

If we move onto the concept of a total eclipse then I am jealous of those in the United States today. From Scientific American.

Someone said that it is like suddenly being in some sort of CGI of another world or maybe like a drug-induced hallucination that feels (and is) totally real.

No they have not switched to central banking analysis but if the excellent BBC 4 documentary ”  do we really need the moon?” is any guide we should enjoy solar eclipses whilst we still have them. Meanwhile of course there is Bonnie Tyler.

I don’t know what to do and I’m always in the dark
We’re living in a powder keg and giving off sparks.

 

 

 

 

Expensive times are ahead for UK railway travellers and commuters

Before we even get to the latest UK inflation data some worrying data has emerged. What I mean by this is that Sweden has announced its inflation data which makes its monetary policy even more mind-boggling.

The inflation rate according to the Consumer Price Index (CPI) was 2.2 percent in July 2017, up from 1.7 percent in June. The Swedish Consumer Price Index (CPI) rose by 0.5 percent from June to July 2017

If we look back to the July Minutes we see that the forecasting skills of the Riksbank are unchanged.

several board members emphasised that it was not sufficient for inflation to temporarily touch the 2 per cent mark.

Actually they are considering a switch of target but in fact that poses even more of a problem.

The inflation rate according to the CPI with a fixed interest rate (CPIF) was 2.4 percent in July, up from 1.9 percent in June. The CPIF rose by 0.6 percent from June to July 2017.

So let us leave the Riksbank to explain why it has an interest-rate of -0.5% and is adding to its QE bond purchases with inflation as above and the economy growing at an annual rate of 4%? This inflation rise added to the rise in India yesterday and in terms of detail was driven by package holiday (0.3%) and air fare ( 0.2%) price rises. Transport costs rises are a little ominous on the day that we find out how much UK rail fares will rise next January.

CPIH

This is the new UK inflation measure and is described thus.

CPIH is our lead measure of inflation and offers the most comprehensive picture of how prices are changing in the economy.

As it uses imputed rents for the housing sector I have challenged them on the use of “comprehensive” so far without much success but you may note the use of “lead” where I have had more success. Efforts to call it “headline” or “preferred” have been extinguished. Meanwhile this happened at the end of July.

On behalf of the Board of the Statistics Authority, I am pleased to confirm the re-designation of CPIH as a National Statistics.

I wish to challenge this by concentrating on the issue of rents. There are two issues here the first is the fantasy economics  that owner-occupiers rent out their homes and the second is the measurement of rents has problems.

  1. There is an issue over the spilt between new lets and existing ones which matters as new let prices tend to rise more quickly.
  2. There is an issue over lags in the data which has been kept under wraps but is suspected to be as long as 18 months so today’s data for July is actually last year’s.
  3. There is the issue that we are being reassured about numbers they confess to not actually knowing.

    “. I acknowledge the efforts by ONS staff to provide reassurance around the quality of the Valuation Office Agency (VOA) private rents microdata, which are currently unavailable to ONS. “

There are alternatives which dissidents like me are pressing such as Household Costs Index designed originally by John Astin and Jill Leyland under the auspices of the Royal Statistical Society. This aims to measure what households experience in terms of inflation and thereby includes both house prices and interest-rates rather than fantasy calculations such as imputed rents. Officially it is in progress whereas in practice an effort is underway to neuter this such as the suggestion from the Office for National Statistics ( ONS) it would only be produced annually.

Why does this matter? Well look at the numbers and below is the housing section from CPIH.

The OOH component annual rate is 2.0%, unchanged from last month.  ( OOH = Owner Occupied Housing costs)

Now here are the ONS house price numbers also released today.

Average house prices in the UK have increased by 4.9% in the year to June 2017 (down from 5.0% in the year to May 2017). The annual growth rate has slowed since mid-2016 but has remained broadly around 5% during 2017.

As you can see they are quite different in spite of the slow down in house price rises. Also we took the CPI numbers to align ourselves with Europe which is using house prices in its own plans for a new measure. This is a familiar theme where rationales are pressed and pressed but then dropped when inconvenient a bit like the RPIJ inflation measure.

Today’s data

We learnt something today I think.

The all items CPI annual rate is 2.6%, unchanged from last month…….The all items CPIH annual rate is 2.6%, unchanged from last month.

Firstly we have detached a little from the recent international trend which may well be because we have been seeing higher inflation here. Also you may note that the fanfare of CPIH is currently rather pointless as it is giving the same result! Added to this there is a completely different picture to Sweden.

Transport, in particular motor fuels. Fuel prices fell by 1.3% between June and July 2017, the fifth successive month of price decreases. This contrasts with the same period last year, when fuel prices rose by 0.7%.

I checked air fares too and they fell.

Looking Ahead

There was a continuation of the good news on this front from the producer price indices.

The annual rate of inflation for goods leaving the factory gate slowed for the third time this year, mainly as a result of 2016 price movements dropping out of the annual comparison.

Much of the effect here comes from the change in the exchange rate where the post EU leave vote is beginning now to drop out of the annual data comparisons. Below are the latest numbers.

Factory gate prices (output prices) rose 3.2% on the year to July 2017, from 3.3% in June 2017, which is a 0.5 percentage points decline from their recent peak of 3.7% in February and March 2017……Prices for materials and fuels (input prices) rose 6.5% on the year to July 2017, from 10% in June 2017; as per factory gate prices, the drop in July’s rate is due to 2016 price movements dropping out of the annual comparison.

In the detail there is something which will only be welcomed by farmers and central bankers ( who for newer readers consider food and energy inflation to be non-core)

Food production continued to be the main source of upward contributions to input and output price inflation fuelled by rising prices for home food materials and food products respectively.

We get a little more detail but not much.

Within home food materials the largest upward contribution came from crop and animal production, with prices rising 12.3% on the year to July 2017.

Comment

We see a welcome development in that the pressure for UK inflation rises has faded a bit. But commuters and rail travellers will be noting that my theme that the UK is a country with administered inflation is in play here.

The all items RPI annual rate is 3.6%, up from 3.5% last month.

You see the “Not a National Statistic” Retail Prices Index is suddenly useful when setting things like rail fares or mobile phone contracts. A rough summary is that the ordinary person pays using the higher RPI but only receives ( pensions, tax allowances indexation) the lower CPI. This reminds me that the gap is 1% which gets little publicity. Indeed the gap between our old inflation measure and the new one continues to be much wider than the change in the target.

The annual rate for RPIX, the all items RPI excluding mortgage interest payments (MIPs) index, is 3.9%, up from 3.8% last month.

As a final note UK new car prices edged higher as used car prices nudged lower. I mention this because there are falling prices in the US leading to worries about the car loans situation.