UK inflation measurement is in crisis

It is Wednesday so it is inflation numbers day in the UK. If that feels a little out of key then you are right as they used to be on a Tuesday and the labour market data set followed the next day. But in a sad indictment of our rulers it was decided that releasing the labour market numbers at 9:30 today did not give then enough time to spin, excuse me, analyse the numbers in time for Prime Ministers Questions at lunchtime. The theme of being out of tune though continues today as we note the ongoing problems in simply collecting the prices.

As a result of the ongoing coronavirus (COVID-19) pandemic, we identified 74 CPIH items (or 14.2% of the CPIH basket by weight) that were unavailable to UK consumers in May, as detailed in table 58 of the Consumer price inflation dataset; this is down from 90 unavailable items in April; compared with the February 2020 index (the most recent “normal” collection), we have collected a weighted total of 81.6% (excluding unavailable items) of the number of price quotes for the May 2020 index, although the coverage varies across the range of items.

There is a clear issue with being unable to collect some of the data. Added to that is the fact that prices which are unavailable are likely to be the ones which have risen in price. For example the new HDP ( High Demand Products) measure had to drop out things like face masks and hand sanitiser for a while which introduces a downwards bias to the reading. What happens when they cannot record something? Well let me hand you over to the BBC explanation.

The ONS admitted that it had difficulty compiling inflation statistics for May, since many areas of the economy were completely shut down.

For instance, inflation figures for holidays had had to be “imputed”, it said.

Of course some will be pleased by this as there is a lot of official enthusiasm for imputing prices as they have demonstrated in the area of rents. For newer readers the official CPIH measure uses fantasy rents to impute owner-occupied housing costs. This is the reason in spite of all the official effort it remains widely ignored as I doubt anyone charges themselves rent to live in their own home. Even worse they have had real trouble measuring actual rents and you do not have to take my word for it,just read the release from earlier this week.

To achieve this, completely new innovative methodology will be needed. In October 2019, we started building a prototype using a new methodology with the capability to meet the aims specified in Section 3.

Perhaps we will get inflation numbers with this year’s rents rather than last years? It is rather conspicuous that they have failed to answer my question on this subject

Today’s Data

A further fall was recorded in terms of the annual rate

The all items CPI annual rate is 0.5%, down from 0.8% in April……The all items CPI is 108.5, unchanged from last month.

As you can see prices were unchanged on a monthly basis although there were shifts in the structure.

The CPI all goods index annual rate is -0.9%, down from -0.4% last month……The CPI all services index annual rate is 1.9%, down from 2.0% last month.

That is intriguing as we see disinflation in the good sector but not that much impact at all on services.That teaches us a little about pricing in that sector as it has seen a volume drop that for once justifies the word collapse and yet the pricing impact has been small. Looking at specific areas we see this.

Transport, where the price of motor fuels fell this year but rose a year ago, contributing 0.12 percentage points to the easing in the headline rate. Petrol prices fell by 2.8 pence per litre between April and May 2020, compared with a rise of 4.2 pence per litre between the same two months a year ago. Similarly, diesel prices fell by 2.6 pence per litre this year, compared with a rise of 2.8 pence per litre a year ago.

I doubt any of you are surprised by this and it was joined by Recreation and Culture which is of note as a problem area popped up again.

Within this broad
group, there was a downward contribution (of 0.06 percentage points) from games, toys
and hobbies, with the effect coming from a variety of traditional toys and games, plus
computer games consoles and computer games

For newer readers this is the effect of computer games being discounted when they go out of fashion which the numbers struggle to cope with.Fashion clothing has the same problem and actually in an odd link led to them trying to neuter the RPI. Next we get an attempt at humour, at least I hope it is humour.

Health, where prices overall fell by 1.4% this year compared with a rise of 0.2% a year ago.
The effect came from pharmaceutical products, particularly pain killers and antihistamine
tablets, and other medical and therapeutic products, particularly daily disposable soft
contact lenses.

Does anybody believe health costs are falling?

On the other side of the coin was this.

Food and non-alcoholic beverages, with prices rising by 0.5% this year compared with a smaller rise of 0.1% a year ago.

The details are for the CPIH measure because our statistical establishment is so desperate to get it a mention they only break the numbers down for it. From the point of view of the Bank of England Governor Andrew Bailey can add the new CPI number to the letter he is presently composing to the Chancellor to explain why it is more than 1% below target. His quill pen is probably being dipped into the Bank of England official ink no doubt being held by a flunkey right now as he explains how he will expand QE by another £100 billion or so in response. That is something of a Space Oddity as of course QE will boost the asset prices it ignores. Oh well! As Fleetwood Mac would say.

Retail Prices Index

This too saw a fall in the annual rate.

The all items RPI annual rate is 1.0%, down from 1.5% last month……..The all items RPI is 292.2, down from 292.6 in April.

I note that on a monthly basis the RPI fell. If it did that more often it would quickly be back in official favour! Also even under the old system the Governor of the Bank of England would have to get his quill pen out.

The annual rate for RPIX, the all items RPI excluding mortgage interest payments (MIPs), is
1.3%, down from 1.6% last month

As to credibility of our inflation numbers I am afraid this is another downgrade.

The published RPI annual growth rate for April 2020 was 1.5%. If the index were to be recalculated
using the correct interest rate, it would reduce the RPI annual growth rate by 0.1 percentage points
to 1.4%.

To get mortgage rates wrong is really rather poor and it was not the only mistake.

In addition, an error has been identified in the adjustment made to reflect a change in product size
for a single price quote for “canned tuna” collected in April 2020.

Comment

As you can see there is a large amount of doubt about the inflation numbers right now. This has not stopped much of the media from already setting the scene for more monetary policy easing. The Bank of England votes later today and it has the problem that the Deputy Governor for this area Ben Broadbent has actively demonstrated a wide-ranging ignorance of the issues. Just as a reminder I expect them to vote for at least another £100 billion of QE bond buying. This is in spite of the fact that the asset prices it will boost are ignored by the CPI inflation measure they target.

Meanwhile some new research has suggested that prices are in fact rising more quickly, and the emphasis is mine.

In this paper, we use detailed scanner data to provide a portrait of inflation during the Great Lockdown, covering millions of transactions in the UK fast-moving
consumer goods sector. We find that there was an unprecedented spike in inflation at the beginning of lockdown, which coincided with a reduction in product variety.

Indeed there was more.

The price increases we found for many categories, including those not subject to demand spikes, indicate supply disruptions and changes in market power may be playing an important role.

This has a consequence.

Many households are subject to reduced
income and liquid wealth, and higher prices for foods, drinks and household goods
will feed into squeezed household budgets

Here are the numbers.

First, we find that in the first month of lockdown month-to-month inflation was
2.4%. This sharp upturn in inflation is unprecedented across the preceding eight
year

So thank you to Xavier Jaravel and Martin O’Connell for this paper which suggests that as well as Fake News we also have to contend with fake official statistics.

The Investing Channel

Where will all the extra US Money Supply end up?

Today brings both the US economy and monetary policy centre stage. The OECD has already weighed in on the subject this morning.

The COVID-19 outbreak has brought the longest economic expansion on record to a juddering halt. GDP
contracted by 5% in the first quarter at an annualised rate, and the unemployment rate has risen
precipitously. If there is another virus outbreak later in the year, GDP is expected to fall by over 8% in 2020
(the double-hit scenario). If, on the other hand, the virus outbreak subsides by the summer and further
lockdowns are avoided (the single-hit scenario), the impact on annual growth is estimated to be a percentage
point less.

Actually that is less than its view of many other countries. But of course we need to remind ourselves that the OECD is not a particularly good forecaster. Also we find that the official data has its quirks.

Total nonfarm payroll employment rose by 2.5 million in May, and the unemployment rate
declined to 13.3 percent, the U.S. Bureau of Labor Statistics reported today……In May, employment rose sharply in leisure and hospitality, construction, education and health services, and retail trade. By contrast, employment
in government continued to decline sharply……….The unemployment rate declined by 1.4 percentage points to 13.3 percent in May, and the number of unemployed persons fell by 2.1 million to 21.0 million.

Those figures not only completely wrong footed the forecasters they nutmegged them as well in one of the most spectacular examples of this genre I have seen. I forget now if they were expecting a rise in unemployment of eight or nine million but either way you get the gist. We do not know where we are let alone where we are going although the Bureau of Labor Statistics did try to add some clarity.

If the workers who were recorded as employed but absent from work due to “other  reasons” (over and above the number absent for other reasons in a typical May) had
been classified as unemployed on temporary layoff, the overall unemployment rate  would have been about 3 percentage points higher than reported (on a not seasonally  adjusted basis).

We learn more about the state of play from the New York Federal Reserve.

The New York Fed Staff Nowcast stands at -25.5% for 2020:Q2 and -12.0% for 2020:Q3. News from this week’s data releases increased the nowcast for 2020:Q2 by 10 percentage points and increased the nowcast for 2020:Q3 by 24.5 percentage points. Positive surprises from labor, survey, and international trade data drove most of the increase.

As you can see the labo(u)r market data blew their forecasts like a gale and leave us essentially with the view that there has been a large contraction but also a wide possible and indeed probable error range.

The Inflation Problem

We get the latest inflation data later after I publish this piece. But there is a problem with the mantra we are being told which is that there is no inflation. Something similar to the April reading of 0.3% is expected. So if we switch to the measure used by the US Federal Reserve which is based on Personal Consumption Expenditures the annual rate if we use our rule of thumb would in fact be slightly negative right now. On this basis Chair Powell and much of the media can say that all the monetary easing is justified.

But there are more than a few catches which change the picture. Let me start with the issues I raised concerning the Euro area yesterday where the numbers will be pushed downwards by a combination of the weights being (very) wrong, many prices being unavailable and the switch to online prices. It would seem that the ordinary person has been figuring this out for themselves.

The May 2020 Survey of Consumer Expectations shows small signs of improvement in households’ expectations compared to April. Median inflation expectations increased by 0.4 percentage point at the one-year horizon to 3.0 percent, and were unchanged at the three-year horizon at 2.6 percent. ( NY Fed Research from Monday)

It is revealing that they describe an increase in inflation that is already above target as an “improvement” is it not? But we see a complete shift as we leave the Ivory Towers and media palaces as the ordinary person surveyed expects a very different picture. Still the Ivory Towers can take some solace from the fact that inflation is in what they consider to be non-core areas.

Expected year-ahead changes in both food and gasoline prices displayed sharp increases for the second consecutive month and recorded series’ highs in May at 8.7% and 7.8%, respectively, in May.

Just for the avoidance of doubt I have turned my Irony meter beyond even the “turn up to 11” of the film Spinal Tap.

Central bankers will derive some cheer from the apparent improvement in perceptions about the housing market.

Median home price change expectations recovered slightly from its series’ low of 0% reached in April to 0.6% in May. The slight increase was driven by respondents who live in the West and Northeast Census regions.

Credit

More food for thought is provided in this area. If we switch to US Federal Reserve policy Chair Jerome Powell will tell us later that the taps are open and credit is flowing. But those surveyed have different ideas it would seem.

Perceptions of credit access compared to a year ago deteriorated for the third consecutive month, with 49.6% of respondents reporting credit to be harder to get today than a year ago (versus 32.1% in March and 48.0% in April). Expectations for year-ahead credit availability also worsened, with fewer respondents expecting credit will become easier to obtain.

Comment

I now want to shift to a subject which is not getting the attention it deserves. This is the growth in the money supply where the three monthly average for the narrow measure M1 has increased in annualised terms by 67.2% in the three months to the 25th of May. Putting that another way it has gone from a bit over US $4 trillion to over US $5 trillion over the past 3 months. That gives the monetary system quite a short-term shove the size of which we can put into context with this.

In April 2008, M1 was approximately $1.4 trillion, more than half of which consisted of currency.  ( NY Fed)

Contrary to what we keep being told about the decline of cash it has grown quite a bit over this period as there is presently a bit over US $1.8 trillion in circulation.

Moving to the wider measure M2 we see a similar picture where the most recent three months measured grew by 40.6% compared to its predecessor in annualised terms. Or if you prefer it has risen from US $15.6 billion to US $18.1 billion. Again here is the historical perspective from April 2008.

 M2 was approximately $7.7 trillion and largely consisted of savings deposits.

So here is a question for readers, where do you think all this money will go? Whilst you do so you might like to note this from the 2008 report I have quoted.

While as much as two-thirds of U.S. currency in circulation may be held outside the United States….

The Investing Channel

 

The Euro area has an inflation problem that the ECB ignores

Yesterday brought us up to date with the thoughts of ECB President Christine Lagarde as she gave evidence to the European Parliament, and grim reading and listening it made.

After a contraction in GDP of 3.8% in the first quarter of the year, our new staff projections see it shrinking by 13% in the second quarter. Despite being expected to bounce back later in the year and recover some of its lost ground, euro area real GDP is now projected to fall by 8.7% over the whole of 2020, followed by growth of 5.2% in 2021 and 3.3% in 2022.

The numbers for 2021 and 22 are pure fantasy of course an area where President Lagarde has quite a track record after her claims about Greece and Argentina. But the fundamental polnt here is of a large and in many ways unprecedented fall in this quarter.

Germany

We have received some hints this morning via the April trade figures for the Euro areas largest economy Germany.

WIESBADEN – Germany exported goods to the value of 75.7 billion euros and imported goods to the value of 72.2 billion euros in April 2020. Based on provisional data, the Federal Statistical Office (Destatis) also reports that exports decreased by 31.1% and imports by 21.6% in April 2020 year on year.

In a pandemic it is no surprise that trade is hit harder than economic output or GDP and the impact was severe.

That was the largest decline of exports in a month compared with the same month a year earlier since the introduction of foreign trade statistics in 1950. The last time German imports went down that much was in July 2009 during the financial crisis (-23.6%).

This meant that the German trade surplus which is essentially the Euro area one faded quite a bit.

The foreign trade balance showed a surplus of 3.5 billion euros in April 2020. That was the lowest export surplus shown for Germany since December 2000 (+1.7 billion euros). In April 2019, the surplus was 17.8 billion euros. In calendar and seasonally adjusted terms, the foreign trade balance recorded a surplus of 3.2 billion euros in April 2020.

In itself that is far from a crisis as both Germany and the Euro area have had plenty of surpluses in this area. But it will be a subtraction to GDP although some will be found elsewhere.

exports to the countries hit particularly hard by the corona virus pandemic dropped sharply from April 2019: France (-48.3%), Italy (-40.1%) and the United States (-35.8%).

So for the first 2 countries the falls will be gains although of course they will have their own losses.

There was a considerable decline in German imports from France (-37.3% to 3.5 billion euros) and Italy (-32.5% to 3.2 billion euros).

So we have a sharp impact on the economy although we need the caveat that these compete with retail sales to be the least reliable numbers we have.

Inflation

If we return to President Lagarde there was also this.

The sharp drop in economic activity is also leaving its mark on euro area inflation. Year-on-year HICP inflation declined further to 0.1% in May, mainly due to falling oil prices. Looking ahead, the inflation outlook has been revised downwards substantially over the entire projection horizon. In the baseline scenario, inflation is projected to average 0.3% in 2020, before rising slightly to 0.8% in 2021, and further to 1.3% in 2022.

There are serious problems with inflation measurement right now and let me explain them.

The HICP sub-indices are aggregated using weights reflecting the household consumption expenditure patterns of the previous year.

This is clearly an issue when expenditure patterns have changed so much. This is illustrated by the area highlighted by President Lagarde oil prices as we note automotive fuel demand was down 46.9% on a year ago. So she is being very misleading. Also I am regularly asked about imputed rent well it has plenty of company right now.

The second principle means that all sub-indices for the full ECOICOP structure will be compiled even when for some categories no products are available on the market. In such cases prices do not exist and they should be replaced with imputed prices.

So if you cannot get a price you make it up. You really could not er make it up…..

Also online quotes are used if necessary. That reflects reality but there is a catch as the prices are likely to be lower than store prices in more than a few cases.

What you might think are minor issues can turn into big ones as we saw last year from a rethink of the state of play concerning package holidays in Germany.

In the following years, the impact of the revision is smaller, between -0.2 and +0.3 p.p. Consequently, the euro area all-items annual rates are revised between 0.0 and +0.3 p.p. in 2015 and between -0.1 and +0.1 p.p. after.

Yes it did change the overall number for the Euro area which is I suppose a case f the mouse scaring and moving the elephant. This really matters when we are told this.

 the deteriorating inflation outlook threatening our medium-term price stability objective.

So we got this in response to a number which is dodgy to say the least.

The Governing Council last Thursday decided to increase the amount of the pandemic emergency purchase programme (PEPP) by an additional €600 billion to a total of €1,350 billion, to extend the net purchase horizon until at least the end of June 2021, and to reinvest maturing assets acquired under the programme until at least the end of 2022.

In context there is also this from Peter Schiff which raises a wry smile.

ECB Pres. Christine Lagarde claims that emergency action is necessary to protect Europeans from a mere 1.3% rise in their cost of living in the year 2022. Lagarde said such a small rise is inconsistent with the ECB’s goal of price stability. Prices must rise more to be stable.

George Orwell must wish he had put that in 1984, although to be fair his themes were spot on. He would have enjoyed how Christine Lagarde sets as her objective making people worse off.

The ECB measures will continue to be crucial in supporting the return of inflation towards our medium-term inflation aim after the worst of the crisis has passed and the euro area economy begins its journey to economic recovery.

Let’s face it even the (wo)man on Mars will probably be aware that these days wages do not necessarily grow faster than prices.

Comment

Let me now spin around to the real game in town for central bankers which is financial markets. Once they had helped the banks by letting them benefit from a -1% interest-rate which of course will in the end be paid by everyone else then boosting asset markets is the next game in town. I have already mentioned the large sums being invested to help governments borrow more cheaply with the 1.35 trillion. As a former finance minister Christine Lagarde can look forwards to being warmly welcomed at meetings with present finance ministers. After all Germany is being paid to borrow and even Italy only has a ten-year yield of 1.42% in spite of having debt metrics which are beginning to spiral.

Next comes equity markets where the Euro Stoxx 50 index was at one point yesterday some 1000 points higher than the 2386 of the 19th of March. The link from all the QE is of portfolio shifts as for example bonds providing less ( and in many cases negative income) make dividends from shares more attractive. As an aside this poses all sorts of risks from pensions investing in wrong areas.

But my main drive is that central banks can push asset prices higher but the problem is that the asset rich benefit but for everyone else there is them inflation. The inflation is conveniently ignored as those responsible for putting housing inflation in the numbers have been on a 20 year holiday. As even the ECB confesses that sector makes up a third of consumer spending you can see again how the numbers are misleading. Or to put it another way how the ordinary person is made worse off whilst the better off gain.

The Lebanon poses a problem for central banks and the belief they cannot fail

There is a lot going on in the Lebanon to say the least so let me open by offering my sympathy to those suffering there. My beat is economics where there is an enormous amount happening too and it links into the role of the new overlords of our time which is,of course, the central banking fraternity. They have intervened on an enormous scale and we are regularly told nothing can go wrong rather like in the way that The Titanic was supposed to be indestructible. If you like me watched Thunderbirds as a child you will know that there were few worse portents than being told nothing can go wrong.

The State of Play

The central bank summed things up in its 2019 review like this.

The Lebanese economy has moved into a state of recession in 2019 with GDP growth touching the negative territory. The International Monetary Fund projected Lebanon’s real GDP to shrink by 12% in 2020, a new double-digit contraction not seen in more than 30 years. In comparison, the IMF forecasted real GDP to contract by 3.3% in the MENA region and by 3% globally in 2020. Inflation in Lebanon recorded 2.9% in 2019, and it is expected to reach 17% in 2020, according to the IMF.

As you can see we have two double-digit measures as output falls by that as we note that the ordinary person will be hurt by double-digit inflation. This poses yet another question for output gap theory. I have to confess I am a little surprised to note that the IMF has not updated the forecasts unlike the government. From the Financial Times.

The government says the economy shrank by 6.9 per cent of GDP last year and expects a further contraction this year of 13.8 per cent — a full-blown depression with an estimated 48 per cent of people already below the poverty line.

The next feature is a currency peg to the US Dollar as we return to the Banque Du Liban.

At the monetary level, the year was marked by noticeable net conversions in favor of foreign currencies, a decline in deposit inflows, a shortage of US dollars and a lack of local currency liquidity. As a result, BDL’s assets in foreign currencies witnessed a contraction of 6% to reach $37.3 billion at end December 2019.

Troubling and a signal that if you control the price via a currency peg the risk is that you have a quantity problem which is always likely to be a shortage of US Dollars.

Well I need a dollar dollar, a dollar is what I need
Hey hey
And I said I need dollar dollar, a dollar is what I need
And if I share with you my story would you share your dollar with me ( Aloe Blacc)

This led to what Taylor Swift would call “trouble,trouble,trouble”

It is worth mentioning that in the last quarter of 2019, the Lebanese pound has plunged on a parallel market by nearly 50% versus an official rate of 1507.5 pounds to the dollar. The Central Bank is still maintaining the official peg in bank transactions and for critical imports such as medicine, fuel and wheat.

This leads to the sort of dual currency environment we have looked at elsewhere with Ukraine coming to mind particularly.

The present position is that the official peg is “Under Pressure” as Queen and David Bowie would say as it has been above 1500 for the whole of the last year. There was particular pressure on the 4th of May when it went to 1522. Switching to the unofficial exchange rate then Lira Rate have it at 3890/3940. I think that speaks for itself.

The official Repo rate is 10% and rise as we move away from overnight to 13.46% for three-year paper. Just as a reminder the United States has near zero interest-rates so this is another way of looking at pressure on the currency peg and invites all sorts of problems.For example the forward rate for the official Lebanese Pound will be around 10% lower for a year ahead due to the interest-rate gap. So more pressure on a rate which is from an alternative universe.

It looks like there has been some currency intervention as in the fortnight to the end of May foreign currency assets fell from 51.6 trillion Lebanese Pounds to 50.5 trillion.

Corruption

We start with the Financial Times bigging up the banking sector but even it cannot avoid the consequences of what has happened.

The banks, long the jewel in Lebanon’s economic crown, and the central bank, the Banque du Liban, are at the heart of this crisis. The banks long offered high interest rates to attract dollar deposits, especially from the far-flung Lebanese diaspora. But Riad Salameh, BdL governor since 1993, began from 2016 offering unsustainable interest returns to the banks to lend on these dollars to the government, through the central bank.

That has led to a type of economic dependency.

In sum, 70 per cent of total assets in the banking system were lent to an insolvent state. The recovery programme estimates bank losses at $83bn and “embedded losses” at the BdL at $44bn (subject to audit). Together that is well over twice the size of the shrinking economy.

One of the worst forms of corruption is where government and the banks get together. For them it is symbiotic and both have lived high on the hog but they have a parasitical relationship with the ordinary Lebanese who now find the price is inflation and an economic depression.

Bankers are protesting at government plans to force mergers and recapitalisation, through a mix of wiping out existing shareholdings; fresh capital investment for banks that wish to stay in business, especially by repatriating dividends and interest earnings; recovered illicit assets; and “haircuts” on wealthy depositors.

Or as Reuters put it.

But the banks were not responsible for the devastating waste, pillage and payroll padding in the public sector – about which this plan has little detailed to say.

Comment

We find that this sort of situation involves both war and corruption. Big business, the banks and government getting to close is another warning sign and one we see all around us. But as we review a parallel currency, an economic depression and upcoming high inflation there is also this.

The sources say the plan focuses overwhelmingly on the banks and the central bank, which together lent more than 70% of total deposits in the banking system to an insolvent state at increasingly inflated interest rates put in place by central bank governor Riad Salameh. ( Reuters)

Ordinarily we assume that a central bank cannot fold as the stereotype is of one backed by the national treasury to deal with losses. There is a nuance with the Euro area where the fact there are 19 national treasuries adds not only nuance but risk for the ECB. But in general if you control the currency you can just supply more to settle any debts.the catch is its overseas value or exchange rate as we note that Mr and Mrs Market have already voted on the Lebanese Pound. But there is more as I noted on Twitter last week.

Auditors are asking banks to take a provision of ~40% against exposure to its central bank. This has to be a first in history. ( @dan_azzi)

We have become used to that being the other way around. The next bit is rather mind boggling as we mull the moral hazard at play here.

Even funnier is that BDL is about to send a circular asking banks to take a 30% provision on their exposure to BDL.

Frankly both look too low which means for the ordinary person that there is a risk of bail ins.

Podcast

 

The blue touch paper has been lit on the Money Supply boom of 2020

Today as I shall explain later is a case of back to the future especially for me. It brings an opportunity to examine one of the economic features of the current Covid-19 pandemic. This is a surge in money supply growth which has been quite something such that I think we will look back and consider it to be unprecedented. I expect that to be true in absolute terms in many places and it is already being true in relative terms in many.

The Euro Area

This morning has brought another signal of this so let us go straight to the ECB data.

Annual growth rate of narrower monetary aggregate M1, comprising currency in circulation and overnight deposits, increased to 11.9% in April from 10.4% in March.

Previously we had eight months of growth of ~8% so as you can see going to 10.4% and then 11.9% shows that the accelerator has been pressed hard and maybe the pedal has been pushed to the metal. If we switch to the cause of this which is mostly the rate of QE purchases by the ECB well you can see below. Apologies for the alphabeti spaghetti.

ECB PSPP (EUR): +9.545B To 2.216T (prev +10.936B To 2.207T) –

CSPP: +1.181B To 213.147B (prev +2.324B To 211.966B) – CBPP: +1.028B To 280.778B (prev +1.030B To 279.750B) – ABSPP: -377M To 30.738B (prev +161M To 31.115B) –

PEPP: +30.072B To 211.858B (prev +28.878B To 181.786B) ( @LiveSquawk) ( B= Billion and T=Trillion )

These are the weekly increases and if we stick to the money supply we see that in one week alone some 42 billion Euros of QE took place which means that on the other side of the ledger the narrow money supply has been increased by the same amount. Some of this was previously taking place and the more recent boost is called PEPP and is of the order of 30 billion Euros a week.

What this means is that the total amount of narrow money has gone from just under 9 trillion Euros in January to just over 9.5 trillion in April and will be going past 10 trillion fairly soon ( at the current pace in July).

Tucked away in the detail is that people have been wanting cash as well. The amount in circulation rose by 25.6 billion Euros in March and by 15.1 billion in April. Only a couple of months but that represents a clear shift of gear as we note April was the same as the whole of the third quarter last year and 2020 so far has already exceeded 2019.

Broad Money

This is a case of the same old song.

Annual growth rate of broad >monetary aggregate M3 increased to 8.3% in April 2020 from 7.5% in March.

The pick-up in annual growth is of the order of 3% and this is the highest growth rate for nearly 12 years, well until next month anyway! Switching to totals it is now 13.6 trillion Euros.

The breakdown is rather revealing I think.

The annual growth rate of the broad monetary aggregate M3 increased to 8.3% in April 2020 from 7.5% in March, averaging 7.1% in the three months up to April. The components of M3 showed the following developments. The annual growth rate of the narrower aggregate M1, which comprises currency in circulation and overnight deposits, increased to 11.9% in April from 10.4% in March. The annual growth rate of short-term deposits other than overnight deposits (M2-M1) decreased to -0.3% in April from 0.0% in March, while the annual growth rate of marketable instruments (M3-M2) decreased to 6.7% in April from 10.1% in March.

This tells us a couple of things. The opener is that the expansion is a narrow money thing and in fact narrow money over explains it. That means that in terms of wider bank intermediation there was a credit contraction here as we shift from M1 to M3 via M2.

Also at first it looks like the rate of deposits from businesses has picked up but then we see it seems to be insurance companies and pension funds. Or if you prefer the ECB has just bought a load of bonds off them and they have deposited the cash for now.

From the perspective of the holding sectors of deposits in M3, the annual growth rate of deposits placed by households increased to 6.7% in April from 6.0% in March, while the annual growth rate of deposits placed by non-financial corporations increased to 13.7% in April from 9.7% in March. Finally, the annual growth rate of deposits placed by non-monetary financial corporations (excluding insurance corporations and pension funds) decreased to 12.3% in April from 16.9% in March.

Although that might seem obvious we have seen stages where it has not appeared to be true.

Credit

The credit punch bowl has been out too.

As regards the dynamics of credit, the annual growth rate of total credit to euro area residents increased to 4.9% in April 2020 from 3.6% in the previous month. The annual growth rate of credit to general government increased to 6.2% in April from 1.6% in March, while the annual growth rate of credit to the private sector increased to 4.4% in April from 4.2% in March.

The main thing of note here is the surge in credit given to governments which links to the increases in public expenditure we have seen. There has been quite a swing here as it was negative ( -2%) as recently as February and had been negative for 9 months. So the Stability and Growth Pact was applied and then abandoned.

Looking at the breakdown the fall in loans to households is presumably a decline in mortgage lending and I think you can all figure out why companies were borrowing more.

The annual growth rate of adjusted loans to the private sector (i.e. adjusted for loan sales, securitisation and notional cash pooling) stood at 4.9% in April, compared with 5.0% in March. Among the borrowing sectors, the annual growth rate of adjusted loans to households decreased to 3.0% in April from 3.4% in March, while the annual growth rate of adjusted loans to non-financial corporations increased to 6.6% in April from 5.5% in March.

@fwred of Bank Pictet has got his microscope out.

Wow, another massive increase in bank loans / credit lines to euro area corporates, up €73bn in April following €121bn in March (both the largest on record by a huge margin)…….Finally, the surge in bank loans in March-April was broad-based across countries. No one left behind.

His Euro area glass is always full so let me point out that there are times when companies are borrowing to invest (good) and times they are borrowing because they are in trouble.

Also he has been kind enough to illustrate one of my main themes so thank you Fred and the emphasis is mine

Euro area corporates are drawing on their credit lines and taking new bank loans like there *is* tomorrow.

Side-effect: most banks will easily qualify for the lowest TLTRO-III rate from June (-1%).

What a coincidence!

Comment

This is an example in a way of the circle of life as back in the day I got a job because as a graduate monetary economist City firms wanted people to look at the money supply. Although there was a difference in that the central banks and governments were trying to bring it down as opposed to pumping it up. Rather ominously it did not work as planned and sometimes did not work at all.

How should it work? In essence the extra money balances (narrow money) should be spent relatively quickly and thereby give the economy a boost. That is why I look at narrow money and as an indicator it has worked pretty well. The catch or “rub” as Shakespeare would put it is velocity or how quickly the money circulates and there we have a problem as it is hard to measure especially right now. We know that for a while it will have been extremely low because in many areas you simply cannot spend money at the moment.

As we look internationally we see many examples of this. I have gone through the Euro area data today but if we switch to the US the numbers are even higher. The annual rate of M1 growth is 27.5% there so the pedal may even have been pushed through the metal. Care is needed as definitions vary but even using a more Euro area one it looks as though it would be over 20%.

As well as some hoped for economic growth there is a clear and present danger which is inflation. We seem likely to be singing along with BB King.

Hey, Mr. President
All your congressmen too
You got me frustrated
And I don’t know what to do
I’m trying to make a living
I can’t save a cent
It takes all of my money
Just to eat and pay my rent

I got the blues
Got those inflation blues

The one thing we can be sure of is that the inflation numbers are wrong

Today’s has brought us inflation data with more and indeed much more than its fair share of issues. But let me start by congratulating the BBC on this.

The UK’s inflation rate fell in April to its lowest since August 2016 as the economic fallout of the first month of the lockdown hit prices.

The Consumer Prices Index (CPI) fell to 0.8% from 1.5% in March, the Office for National Statistics (ONS) said.

Falling petrol and diesel prices, plus lower energy bills, were the main drivers pushing inflation lower.

But prices of games and toys rose, which the ONS said may have come as people occupied their time at home.

They have used the CPI inflation measure rather than the already widely ignored CPIH which the propagandists at HM Treasury are pushing our official statisticians to use. Although in something of an irony CPIH was lower this month! Also it would be better to use the much more widely accepted RPI or Retail Prices Index and the BBC has at least noted it.

Inflation as measured by the Retail Prices Index (RPI) – an older measure of inflation which the ONS says is inaccurate, but is widely used in bond markets and for other commercial contracts – dropped to 1.5% from 2.6%.

Yes it is pretty much only the establishment which makes that case about the RPI now as supporters have thinned out a lot. It also has strengths and just as an example does not require Imputed or fantasy Rents for the housing market as it uses actual prices for houses and mortgages.

So as an opener let us welcome the lower inflation numbers which were driven by this.

Petrol prices fell by 10.4 pence per litre between March and April 2020, to stand at 109.0 pence per litre, and
diesel prices fell by 7.8 pence per litre, to stand at 116.0 pence per litre……..which was the result of a 0.2% rise in
the price of electricity and a 3.5% reduction in the price of gas between March and April 2020, compared with price rises of 10.9% and 9.3% for electricity and gas over the same period last year.

Problems. Problems,Problems

Added to the usual list of these was the fact that not only did the Office for National Statistics have to shift to online price collection for obvious reasons which introduces a downwards bias there was also this.

Hi Shaun, the number of price quotes usually collected in store was about 64% of what was collected in February – so yes just over a third. This is for the local collection only.

Let me say thank you to Chris Jenkins for replying so promptly and confirming my calculations. However the reality is that there is a problem and let me highlight with one example.

prices for unavailable seasonal items such as international travel were imputed for April 2020. This imputation was calculated by applying the all-items annual growth rate to the index from April 2019.

Yes you do read that correctly and more than one-third of the index was imputed. In addition to this rather glaring problem there is the issue of the weighting being wrong and I am sure you are all already thinking about the things you have spent more on and others you have spent less on. Officially according to our Deputy National Statistician Jonathan Athow it does not matter much.

A second was to also account for lower consumption of petrol and diesel, which has been falling in price. Reducing the weight given to petrol and diesel gives a figure similar to the official CPI estimate.

Sadly I have learnt through experience that such research is usually driven by a desire to achieve the answer wanted rather than to illuminate things. If we switch to the ordinary experience I was asked this earlier on social media.

Are face masks and hand sanitiser included in the CPI basket? (@AnotherDevGuy)

I have just checked and they are not on the list. This poses a couple of issues as we note both the surge in demand ( with implications for weighting) and the rise in price seen. A couple of area’s may pick things up as for example household cleaners are on the list and judging by their suddenly popularity albeit in a new role lady’s scarves but they are on the margins and probably underweighted.

The New Governor Has A Headache

If we check the inflation remit we see that the new Governor Andrew Bailey will be getting out his quill pen to write to the new Chancellor Rishi Sunak.

If inflation moves away from the target by more than 1 percentage point in either direction, I
shall expect you to send an open letter to me, covering the same considerations set out above
and referring as necessary to the Bank’s latest Monetary Policy Report and forecasts, alongside
the minutes of the following Monetary Policy Committee meeting.

He will of course say he is pumping it up with record low interest-rates and the like. He is unlikely to be challenged much as this morning has brought news of a welcome gift he has given the Chancellor.

Negative Interest-Rates in the UK Klaxon!

For the first time the UK has issued a Gilt (bond) with a negative yield as the 2023 stock has -0.003%. So yes we are being paid to borrow money.

A marginal amount but it establishes a principle which we have seen grow from an acorn to an oak tree elsewhere.

There is trouble ahead

There are serious issues I have raised with the ONS.

How will price movements for UK houses be imputed when there are too few for any proper index? The explanation is not clear at all and poses issues for the numbers produced.

Also this feeds into another issue.

“It should be noted that the methodologies used in our consumer price statistics for many of these measures tend to give smoothed estimates of price change and will therefore change slowly.”

The suspension of the house price index below after today poses big problems for the RPI which uses them and actually as happens so often opens an even bigger can of worms which is smoothing.

In other words we are being given 2019 data in 2020 and this is quite unsatisfactory. So whilst the ONS may consider this a tactical success it is a strategic failure on the issue of timeliness for official statistics. I think all readers of this would like to know more detail on the smoothing process here as to repeat myself it goes against the issue of producing timely and relevant numbers.

Some of you may recall the disaster smoothing had on the with-profits investment industry and once people understand its use in inflation data there will be plenty of issues with it there too. My full piece for those who want a fuller picture is linked to below.

https://www.statsusernet.org.uk/t/measuring-prices-through-the-covid-19-pandemic/8326/2

Comment

As the media projects lower inflation ahead sadly the picture is seeing ch-ch-changes,

Oil prices rose for a fourth straight session on Tuesday amid signs that producers are cutting
output as promised just as demand picks up, stoked by more countries easing out of curbs
imposed to counter the coronavirus pandemic. Brent crude, climbed 25 cents or 0.7% to
$35.06 a barrel, after earlier touching its highest since April 9. (uk.reuters.com 19 May 2020)

That may not feed into the May data but as we move forwards it will. That also highlights something which may be one of the Fake News events of our time which is the negative oil price issue. Yes it did happen but since then we have seen quite a bounce as we are reminded that some issues are complex or in this instance a rigged game.

How much of other price rises the inflation numbers will pick up is open to serious doubt. Some of this is beyond the control of official statistics as they could hardly be expected to know the changes in the patterns for face masks for example. But the numbers will be under recorded right now due to factors like this from the new HDP measure.

Out of stock products have been removed where these are clearly labelled, however, there may be products out of stock that have still been included for some retailers. If the price of these items do not change, this could cause the index to remain static.

What do you think might have happened to prices if something is out of stock?

Meanwhile there is another signal that inflation may be higher ahead.

BoE Deputy Governor Ben Broadbent said it might go below zero around the end of 2020

The reality is of a complex picture of disinflation in some areas and inflation sometimes marked inflation in others.

 

 

 

The Bank of England sets interest-rates for the banks and QE to keep debt costs low

This morning has seen a change to Bank of England practice which is a welcome one. It announced its policy decisions at 7 am rather than the usual midday. Why is that better? It is because it voted last night so cutting the time between voting and announcing the result reduces the risk of it leaking and creating an Early Wire. The previous Governor Mark Carney preferred to have plenty of time to dot his i’s and cross his t’s at the expense of a clear market risk. If it was left to me I would dully go back to the old system where the vote was a mere 45 minutes before the announcement to reduce the risk of it leaking. After all the Bank of England has proved to be a much more leaky vessel than it should be.

Actions

We got further confirmation that the Bank of England considers 0.1% to be the Lower Bound for official UK interest-rates.

At its meeting ending on 6 May 2020, the MPC voted unanimously to maintain Bank Rate at 0.1%.

That is in their terms quite a critique of the UK banking system as I note the Norges Bank of Norway has cut to 0% this morning and denied it will cut to negative interest-rates ( we know what that means) and of course the ECB has a deposit rate of -0.5% although to keep that it has had to offer Euro area banks a bung ( TLTRO) at -1%

Next comes an area where action was more likely and as I will explain we did get a hint of some.

The Committee voted by a majority of 7-2
for the Bank of England to continue with the programme of £200 billion of UK government bond and sterling
non-financial investment-grade corporate bond purchases, financed by the issuance of central bank reserves, to
take the total stock of these purchases to £645 billion. Two members preferred to increase the target for the
stock of asset purchases by an additional £100 billion at this meeting.

The two who voted for “More! More! More!” were Jonathan Haskel and Michael Saunders. The latter was calling for higher interest-rates not so long ago so he has established himself as the swing voter who rushes to vote for whatever is right in front of his nose. Anyway I suspect it is moot as I expect them all to sing along with Andrea True Connection in the end.

(More, more, more) how do you like it, how do you like it
(More, more, more) how do you like it, how do you like it

What do they expect?

The opening salvo is both grim and relatively good.

The 2020 Q1 estimate of a fall in GDP of around 3% had been informed by a wide range of high-frequency indicators, as set out in the May Monetary Policy Report.

A factor in that will be that the UK went into its version of lockdown later than many others. But then the hammer falls.

The illustrative scenario in the May Report incorporated a very sharp fall in UK GDP in 2020 H1 and a
substantial increase in unemployment in addition to those workers who were furloughed currently. UK GDP was
expected to fall by around 25% in Q2, and the unemployment rate was expected to rise to around 9%. There were large uncertainty bands around these estimates.

As you can see GDP dived faster than any submarine But fear not as according to the Bank of England it will bounce like Zebedee.

UK GDP in the scenario falls by 14% in 2020 as a whole. Activity picks up materially in the latter part of 2020 and into 2021 after social distancing measures are relaxed, although it does not reach its pre‑Covid level until the second half of 2021 . In 2022, GDP growth is around 3%. Annual household consumption growth follows a similar
pattern.

Is it rude to point out that it has been some time since we grew by 3% in a year? If so it is perhaps even ruder to point out that it is double the speed limit for economic growth that the Bank of England keeps telling us now exists. I guess they are hoping nobody spots that.

Anyway to be fair they call this an illustrative scenario although they must be aware it will be reported like this.

NEW: UK GDP set for ‘dramatic’ 14% drop in 2020 amid coronavirus shutdown, Bank of England predicts ( @politicshome )

Inflation Problems

In a way this is both simple and complicated. Let us start with the simple.

CPI inflation had declined to 1.5% in March and was likely to fall below 1% in the next few months, in large
part reflecting developments in energy prices. This would require an exchange of letters between the Governor
and the Chancellor of the Exchequer.

So for an inflation targeting central bank ( please stay with me on this one for the moment) things are simple. Should the Governor have to write to the Chancellor he can say he has cut interest-rates to record lows and pumped up the volume of QE. The Chancellor will offer a sigh of relief that the Bank of England is implicitly funding his spending and try to write a letter avoiding mentioning that.

However things are more complex as this sentence hints.

Measurement challenges would temporarily increase the noise in the inflation data, and affect the nature and behaviour of the index relative to a normal period.

It is doing some heavy lifting as I note this from the Office for National Statistics.

There are 92 items in our basket of goods and services that we have identified as unavailable for the April 2020 index (see Annex B), which accounts for 16.3% of the CPIH basket by weight. The list of unavailable items will be reviewed on a monthly basis.

There is their usual obsession with the otherwise widely ignored CPIH, But as you can see there are issues for the targeted measure CPI as well and they will be larger as it does not have imputed rents in it. A rough and ready calculation suggests it will be of the order of 20%. Also a downwards bias will be introduced by the way prices will be checked online which will mean that more expensive places such as corner shops will be excluded.

Also I am not surprised the Bank of England does not think this is material as the absent-minded professor Ben Broadbent is the Deputy Governor is in charge of this area but I do.

The ONS and the joint producers have taken the decision to temporarily suspend the UK House Price Index (HPI) publication from the April 2020 index (due to be released 17 June 2020) until further notice……..The UK HPI is used to calculate several of the owner occupiers’ housing costs components of the RPI. The procedures described in this plan apply to those components of the RPI that are based on the suspended UK HPI data.

Perhaps they will introduce imputed rents via the back door which is a bit sooner than 2030! Also the point below is rather technical but is a theme where things turn out to be different from what we are told ( it is annual) so I will look into it.

 

Unfortunately, since weights are lagged by two years, we would see no effect until we calculate the 2022 weights1. This means that the current weights are not likely to be reflective of current expenditure and that the 2022 weights are unlikely to be reflective of 2022 expenditure.

That sort of thing popped up on the debate about imputed rents when it turned out that they are (roughly) last year’s rather than the ones for now.

Comment

There are three clear issues here. Firstly as we are struggling to even measure inflation the idea of inflation-targeting is pretty much a farce. That poses its own problems for GDP measurement. Such as we have is far from ideal.

The all HDP items index show a stable increase over time, with an increase of 1.1% between Week 1 and Week 7. The index of all food has seen no price change from Week 5 to Week 7, resulting in a 1.2% price increase since Week 1.

As to Bank of England activity let me remind you of a scheme which favours larger businesses as usual.

As of 6 May, the Covid Corporate Financing Facility
(CCFF), for which the Bank was acting as HM Treasury’s agent, had purchased £17.7 billion of commercial
paper from companies who were making a material contribution to the UK economy.

I wonder if Apple and Maersk are on the list like they are for Corporate Bonds?

Within that increase, £81 billion of UK government bonds,
and £2.5 billion of investment-grade corporate bonds, had been purchased over recent weeks.

By the way that means that their running totals have been wrong. As to conventional QE that is plainly targeted at keeping Gilt yields very low ( the fifty-year is 0.37%)

Let me finish by pointing out we have a 0.1% interest-rate because it is all the banks can stand rather than it being good for you,me or indeed the wider business sector. Oh did I mention the banks?

As of 6 May, participants had drawn £11 billion from the TFSME

Podcast

 

 

What to do when we do not know GDP,Inflation or even Unemployment levels?

Today has brought a whole raft of data for our attention and much of it is eye-catching. So let is begin with La Belle France a subject on my mind after watching the film Waterloo last night.

In Q1 2020, GDP in volume terms fell sharply: –5.8%, the biggest drop in the series’ record, since 1949. In particular, it is bigger than the ones recorded in Q1 2009 (–1.6%) or in Q2 1968 (–5.3%). ( Insee )

I have to confess I am a little in the dark as to 1968 and can only think it may have been related to the student riots of the era. The Covid-19 vibe is established by the way that domestic demand plunged.

Household consumption expenditures dropped (–6.1%), as did total gross fixed capital formation in a more pronounced manner (GFCF: –11.8%). Overall, final domestic demand excluding inventory changes fell sharply: it contributed to –6.6 points to GDP growth.

I guess no-one is going to be surprised by this either.

Overall production of goods and services declined sharply (–5.5%). It fell the hardest in construction (–12,6%), while output in goods declined –4.8% and output in manufactured goods dropped –5.6%. Output in market services declined by –5.7% overall.

Such production as there was seems to have piled up.

Conversely, changes in inventories contributed positively to GDP growth (+0.9 points).

At a time like this GDP really struggles to deal with trade so let me use France as an example on the way to explaining the issue.

Exports also fell this quarter (–6.5%) along with imports (–5.9%), in a less pronounced manner. All in all, the foreign trade balance contributed negatively to GDP growth: –0.2 points, after –0.1 points the previous quarter.

As you can see the net effect here is rather small especially in these circumstances. But there is a lot going on as we see large moves in both exports and imports. Another way of looking at this is provided by the Bureau of Economic Analysis in the US.

Imports, which are a subtraction in the calculation of GDP, decreased

A lot less detail for a start. Let me help out as imports in the US fell heavily by US $140.1 billion in fact and exports only fell by US $56.9 billion. So net exports rose by US $83.3 billion and boosted the numbers. This is really awkward when a signal that the US is doing badly raises GDP by 2.32% on its own and in net terms by 1.3% ( care is needed with US numbers because they are annualised).

So here is a major caveat that the US may appear to be doing better but the trade breakdown hints strongly things are much worse than that.

Spain

Spain had been having a good run but sadly that is now over.

Spanish GDP registers a -5.2% variation in the first quarter of 2020 compared to the previous quarter in terms of volume. This rate is 5.6 points less than the Registered in the fourth quarter. ( INE)

The chart is quite extraordinary as the good run since around 2014 is replaced by quite a plummet. We see that it is essentially a domestic game as like France the international factor small.

For its part, external demand presents a contribution of 0.2 points, three tenths lower than that of the previous quarter.

We do get a hint of what is about to hit the labour market and indeed unemployment which had remained high in Spain.

The employment of the economy, in terms of hours worked, registers a variation of ,5.0% compared to the previous quarter.

Inflation

Let me return to France to illustrate the issues here.

Over a year, the Consumer Price Index (CPI) should rise by 0.4% in April 2020, after +0.7% in the previous month, according to the provisional estimate made at the end of the month. This drop in inflation should result from an accentuated fall in energy prices and a sharp slowdown in service prices.

A problem leaps off the page and ironically they have unintentionally described it

an accentuated fall in energy prices

That is because the weight for energy is too high as for example factories stopped work and there was much less commuting. Then there is this.

Food prices should rebound sharply, due to a strong rise in fresh food product prices.

Fresh food prices rose by 18.1% in March but are weighted at a mere 2.3% as opposed to the 8.1% of energy, when we know that there was heavy demand to stock up. I do not wish to demean their efforts but the claim that other food prices rose by 1.4% compared to 2.3% this time last year looks dodgy and may well be suffering from this

The price collection carried out by collectors on the field (about 40% in the CPI) has been suspended since 16 March:

Also it was a rough month for smokers as tobacco rose by 13.7%.

If we look at Spain we see the energy/fuel problem emerge again.

The preliminary data that is presented today through the leading indicator of the CPI, places its annual variation at –0.7% in April, seven tenths below that registered in March, influenced for the most part by the drop in fuel prices and fuels, compared to the increase registered in 2019.

Also with food prices albeit it on a lower scale.

It is remarkable the behavior of food prices, whose annual rate passes from 2.5% in March to 4.0% in April. Of these, fresh food reaches a rate of 6.9%, three points above that of the previous month, and packaged foods, place their annual rate at 2.2%, six tenths above that of March.

Although to be fair to INE in Spain they are trying to adapt to the new reality.

the prices of the products included in the goods special group COVID-19 increased 1.2% in April, compared to the previous month. While the services COVID-19 decreased 1.4% in April compared to March.

Unemployment

This may well be the biggest statistical fail I have seen in the world of economics.

In March 2020, in comparison with the previous month, employment slightly decreased and unemployment sharply fell together with a relevant increase of inactivity.

Yes you did read the latter part correctly.

In the last month, also the remarkable fall of the unemployed people (-11.1%, -267 thousand) was
recorded for both men (-13.4%, -169 thousand) and women (-8.6%, -98 thousand). The unemployment
rate dropped to 8.4% (-0.9 percentage points) and the youth rate fell to 28.0% (-1.2 p.p.).

They had two issues to contend with but tripped over a theoretical flaw. The issues were having to do the survey by telephone and a sample size some 20% lower. The flaw is that to be unemployed you have to be available for work and in this situation I am sure many reported that they were not. Indeed you can see this below.

In the last three months, also the number of unemployed persons decreased (-5.4%, -133 thousand), while
a growth among inactive people aged 15-64 years was registered (+1.5%, +192 thousand)……..On a yearly basis, the decrease of employed people was accompanied by a fall of unemployed persons
(-21.1%, -571 thousand) and a growth of inactive people aged 15-64 (+4.4%, +581 thousand).

Comment

I summarised the situation on social media yesterday.

Reasons not to trust the US GDP print

1. Advance estimates only have ~50% of the full data

2. Inflation estimates will be nearly hopeless at a time like this.

3. Output of say planes for no one to fly in them has obvious issues….

Let me add a fourth which is the impact of imports that I have described above.

Switching to the unemployment numbers from Italy I do not blame those compiling the numbers and find them helpful when I have an enquiry. But someone higher up the chain should at least have put a large warning on these numbers and maybe even stopped their publication as statistics are supposed to inform not mislead. They seem to have taken Talking Heads a little too literally.

Stop making sense
Quit talking
Stop making sense
Start falling
Stop making sense
Hold onto me
You’re always at your best
When you’re not making sense

Me on The Investing Channel

Do we know where we are going in terms of inflation and house prices?

The credit crunch has posed lots of questions for economic statistics but the Covid-19 epidemic is proving an even harsher episode. Let me illustrate with an example from my home country the UK this morning.

The all items CPI annual rate is 1.5%, down from 1.7% in February…….The all items CPI is 108.6, unchanged from last month.

So the March figures as we had been expecting exhibited signs of a a downwards trend. But in terms of an economic signal one of the features required is timeliness and through no fault of those compiling these numbers the world has changed in the meantime. But we do learn some things as we note this.

The CPI all goods index annual rate is 0.6%, down from 1.0% last month…..The CPI all goods index is 105.7, down from 105.8 in February.

The existing world economic slow down was providing disinflationary pressure for goods and we are also able to note that domestic inflationary pressure was higher.

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

So if it is not too painful to use a football analogy at a time like this the inflation story was one of two halves.

Although as ever the picture is complex as I note this.

The all items RPI annual rate is 2.6%, up from 2.5% last month.

Not only has the RPI risen but the gap between it and CPI is back up to 1.1%. Of this some 0.4% relates to the housing market and the way that CPI has somehow managed to forget that owner occupied housing exists for around two decades now. Some episode of amnesia that! Also in a rather curious development the RPI had been lower due to different weighting of products ( partly due to CPI omitting owner-occupied housing) which pretty much washed out this month giving us a 0.3% shift on the month.

Of course the RPI is unpopular with the UK establishment because it gives higher numbers and in truth is much more trusted by the wider population for that reason.

But let me give you an irony for my work from a different release.

UK average house prices increased by 1.1% over the year to February 2020, down from 1.5% in January 2020.

I have argued house prices should be in consumer inflation measures as they are in the RPI albeit via a depreciation system. But we are about to see them fall and if we had trade going on I would be expecting some large falls. Apologies to the central bankers who read my blog if I have just made your heart race. Via this factor we could see the RPI go negative again like it did in 2009 although of course the mortgage rate cuts which also helped back then are pretty much maxxed out now.

If we switch to the widely ignored measure that HM Treasury is so desperately pushing we will see changes here as well.

Private rental prices paid by tenants in the UK rose by 1.4% in the 12 months to March 2020, unchanged since February 2020…..Private rental prices grew by 1.4% in England, 1.2% in Wales and by 0.6% in Scotland in the 12 months to March 2020…..London private rental prices rose by 1.2% in the 12 months to March 2020.

Rises in rents are from the past. I have been told of examples of rents being cut to keep tenants. Of course that is only anecdotal evidence but if we look at the timeliness issue at a time like this it is all we have. Returning to the conceptual issue the whole CPIH and Imputed Rents effort may yet implode as we mull this announcement.

Cancelled

The comparison of private rental measures between the Office for National Statistics and private sector data will be published in the Index of Private Housing Rental Prices bulletin released on 22 April 2020.

Oh well! As Fleetwood Mac would say.

Oil Prices

We can look at a clear disinflationary trend via the inflation data and to be fair our official statisticians are awake.

U.S. crude oil futures turned negative for the first time in history, falling to minus $37.63 a
barrel as traders sold heavily because of rapidly filling storage space at a key delivery point.
Brent crude, the international benchmark, also slumped, but that contract is not as weak
because more storage is available worldwide. The May U.S. WTI contract fell to settle at a
discount of $37.63 a barrel after touching an all-time low of -$40.32 a barrel. Brent was down
to $25.57 a barrel. (uk.reuters.com 19 April 2020)

Actually Brent Crude futures for June are now US $18 so more is on its way than they thought but it is a fast moving situation. If we look at diesel prices we see that falls were already being noted as per litre prices had gone £1.33, £1.28 and £1.24 so far this year. As of Monday that was £1.16 which of course is well before the recent plunge in oil prices. This feeds in to the inflation data in two ways.

A 1 pence change on average in the cost of a litre of motor fuel contributes approximately 0.02 percentage points to the 1-month change in the CPIH.

Also in another way because the annual comparison will be affected by this.

When considering the price of petrol between March and April 2020, it may be useful to note
that the average price of petrol rose by 3.8 pence per litre between March and April 2019, to
stand at 124.1 pence per litre as measured in the CPIH.

If we switch to the producer price series we see that the Russo/Saudi oil price turf war was already having an impact.

The annual rate of inflation for materials and fuels purchased by manufacturers (input prices) fell by 2.9% in March 2020, down from negative 0.2% in February 2020. This is the lowest the rate has been since October 2019 and the sixth time in the last eight months that the rate has been negative.

The monthly rate for materials and fuels purchased was negative 3.6% in March 2020, down from negative 0.9% in February 2020. This is the lowest the rate has been since January 2015.

Roughly they will be recording about half the fall we are seeing now.

Comment

These times are providing lots of challenges for economic statistics. For example if we stay with oil above then it is welcome that consumers will see lower prices but it is also true we are using less of it so the weights are wrong ( too high). As to this next bit I hardly know where to start.

Air fares have shown variable movements in April which can depend on the position of Easter.

I could of course simply look at the skies over Battersea which are rather empty these days. I could go on by looking at the way foreign holidays are in the RPI and so on. There will of course be elements which are booming for example off-licence alcohol sales. DIY is booming if the tweet I received yesterday saying paint for garden fences had sold out is any guide. So you get the drift.

Returning to other issues the UK remains prone to inflation as this suggests.

“It’s right that retailers charge a fair price for fuel that reflects the price of the raw product, and in theory petrol prices could fall below £1 per litre if the lower wholesale costs were reflected at the pumps – but at the same time people are driving very few miles so they’re selling vastly lower quantities of petrol and diesel at the moment. This means many will be at pains to trim their prices any further.” ( RAC)

We learnt last week that some areas are seeing a fair bit of it as the new HDP ( Higher Demand Products) inflation measure recorded 4.4% in just 4 weeks.

So there are plenty of challenges. Let me give you an example from house prices where volumes will be so low can we calculate an index at all? Regular readers may recall I have pointed this out when wild swings have been recorded in Kensington and Chelsea but based on only 2 sales that month. What could go wrong?

Also we are in strange times. After all someone maybe have borrowed at negative interest-rates this week to buy oil at negative prices and then maybe lost money. If so let us hope they get some solace from some glam-rock from the 70s which is rather sweet.

Does anyone know the way?
Did we hear someone say
“We just haven’t got a clue what to do!”
Does anyone know the way?
There’s got to be a way
To Block Buster!

 

 

We are facing both inflation and disinflation at once

Before we even get to the issue of inflation data we have been provided an international perspective from China Statistics.

According to the preliminary estimates, the gross domestic product (GDP) of China was 20,650.4 billion yuan in the first quarter of 2020, a year-on-year decrease of 6.8 percent at comparable prices.

This provides several perspectives. Firstly there is clear deflation there and as this gets confused let me be clear that it is a fall in aggregate demand and whether you believe the China data or not there has clearly been a large fall. That is likely to have disinflationary influences but is not necessary the same thing as many assume.

After all China has had an area where the heat is on as Glenn Frey would say for some time.

pork up by 122.5 percent, specifically, its prices went up by 116.4 percent in March, 18.8 percentage points lower than February.

This contributed to this.

Grouped by commodity categories, prices for food, tobacco and alcohol went up by 14.9 percent year on year;

Vegetable prices were up by 9% too adding to the food inflation and this led to the Chinese being poorer overall.

In March, the consumer price went up by 4.3 percent…….In the first quarter, the nationwide per capita disposable income of residents was 8,561 yuan, a nominal increase of 0.8 percent year on year, or a real decrease of 3.9 percent after deducting price factors.

Regular readers will be aware that a feature of my work is to look at the impact of inflation on the ordinary worker and consumer as opposed to central bankers who love to torture the numbers to get the answer they wanted all along. An example of this is the use of core inflation which excludes two of the most vital components which are food and energy. Also if you use the European measure called CPI in the UK you miss a dair bit of shelter as well as owner-occupied housing is ignored.

The Bank of England

One of its policymakers Silvana Tenreyro was drumming a familiar beat yesterday.

During Covid-19, large, temporary changes in relative prices and consumption expenditure shares will make inflation data difficult to interpret.

Many of you are no doubt thinking that higher prices will be “looked through” and falls will led to some form of a central banking war dance. In an accident of timing we were updated on this subject by the Office for National Statistics yesterday as well.

Prices for the HDP basket increased by 1.8% from 30 March to 5 April (week 3) to 6 April to 12 April (week 4) with prices for all long-life food items decreasing by 1.5% and all household and hygiene items increasing by 1.1%.

At a more detailed level, prices for pet food and rice rose by 8.4% and 5.8% respectively, while prices of pasta sauce fell by 4.5% (note that the size of the sample means that sometimes single retailers can contribute to substantial movements at the item level).

Firstly let me welcome this new initiative from the ONS which in fact is likely to be too low as to be fair even they admit. If you look at the Statsusernet website I have made some suggestions but for now let me point out that something were prices are likely to have shot up ( face masks) have been dropped. The overall picture is as below.

Movements in the all HDP items index show a stable increase over time, with an increase of 4.4% since week 1. Pet food has a high weight in the all HDP items basket and is one of the main drivers of this change.

Up is the new down

Silvana seems to be heading in another direction though.

.Current policy actions will help counterbalance some of
this underlying weakness in inflation.

If she was aware of the numbers above maybe she has a sense of humour. Sadly we then get an outright misrepresentation.

Low and stable inflation is an essential pre-requisite for longer-term economic prosperity.

For example the Industrial Revolution must have seen quite large disinflation and in modern times areas of technology have seen enormous advances and price falls. This next bit is wrong too.

And it allows households, businesses and governments to finance their spending without introducing inflation risk premia to their borrowing costs.

If the inflation target of 2% per annum is hit as is her claimed objective then that is a clear inflation risk premium that needs to be paid. We are back to the central banking fantasy that 2% per annum is of significance rather than plucked out of thin air because it seemed right.

Indeed she continues in the same vein.

Our recent policy decisions will help ensure price stability by mitigating any deflationary pressures arising
from recent events.

Just for clarity central bankers merge both deflationary and disinflationary pressures and as she says there has already been a policy response.

The MPC’s policy actions have involved reducing Bank Rate from 0.75% to 0.1%, introducing a Term
Funding scheme with additional incentives for Small and Medium-sized Enterprises (TFSME) and increasing
the size of our asset purchase programme, or quantitative easing, by £200 billion.

That gets awkward when she shifts to agreeing with me about inflation trends..

The exact effect of these issues, or even the sign of their effect, is going to be difficult to gauge.

Why? Again we are in agreement.

The key conceptual challenge is that there have been large shifts in spending patterns, which will change the
representative household consumption basket. Spending on social consumption has stopped almost
completely, for example, while spending on essentials from supermarkets has increased markedly.

Then she is in agreement again.

There are also likely to be considerable shifts in the prices of some goods still in high demand relative to
those no longer being purchased

Trouble is she had already acted.

Disinflation

A clear sign of a disinflationary trend is the price of crude oil. There are all sorts of issues with measuring it but according to oilprice.com the WTI benchmark is around US $25 and Brent Crude around US $28. Both have more than halved compared to this time last year.

Silvana looks at this with relation to labour costs and maybe my influence is beginning to spead as she wonders about the numbers.

While not mismeasurement per se, measured
productivity growth has been stronger in consumer goods producing sectors than in aggregate. Thinking
about how the consumption basket relates to inflation behaviour may be crucial over the coming years, given
the vast changes we are currently seeing in spending patterns.

We diverge on the fact that I think there has been mismeasurement.

As to the weakness in commercial rents I think most of you can figure that one out merely be looking at your local high street.

There are a range of possible explanations for the weakness in rent inflation over the past few years.

Comment

Let me welcome a Bank of England policymaker actually looking at inflation developments and doing some thinking. But as an external member I think one should be going further. For example I know she is looking mostly at commercial rents but there have been similar issues with ordinary rents but where is the challenge to these numbers being foisted on the owner-occupied housing sector. Or indeed the attempt to gerrymander the inflation data by replacing house prices and mortgage rates with Imputed Rents in the Retail Prices Index?

The UK Statistics Authority (the Authority) and HM Treasury are jointly consulting on reforming the methodology of the Retail Prices Index (RPI).

If you like it will be a case of one inflation measure to rule them all and in the darkness bind them. At least the consultation has now been extended until August as believe it or not they were hoping to get away with running it during the lockdown. As to the changes let me hand you over to the RPI-CPI User Group of the Royal Statistical Society.

1. The UKSA is consulting on how to splice the RPI and CPIH together – effectively replacing RPI with CPIH, but retaining the name RPI.
2. The Treasury is consulting on when (between 2025 and 2030) this change should take place.
Importantly, neither is consulting on whether this change should be made.

Looking ahead we will see pockets of inflation in for example medical areas and as some are reporting essential goods too. Or rather what are called non-core by central bankers and Ivory Towers.

My usual essential shopping has cost between £32 – £38 for months, now jumped to £42 – £48. Inflation, the quiet poverty maker. ( @KeithCameron5 )

In other areas like fuel costs we will see disinflation. But further ahead as we see production of some items brought back to domestic industry we are likely to see higher prices. So our central bankers have abandoned inflation targeting if you look several years ahead as they are supposed to.