After yesterday’s employment and wages data we advance on the latest UK inflation and house price data today. If that seems the wrong way around then yes it did used to be the other way around. But it was decided that getting the wages numbers at 9:30 on a Wednesday did not give our parliamentarians time to use them at Prime Ministers Questions later in the day.
Moving on from that let me set the scene by pointing out that with a few exceptions inflation seems to be in retreat. When we consider the world of low and negative interest-rates in which we live then this is another fail for economics 101. Inflation should have been higher as we observe another gap between theory and reality. Mostly the issue comes from putting the world consumer in front of inflation as those are the numbers used whereas the monetary easing went into asset prices. I noted someone pointing out that Germany had very little house price inflation before 2010 yesterday and had a wry smile. But with the US S&P 500 index above 3000 it is also true that money went into equity prices although of course some of that is genuine growth. Also bond markets have been pumped up to extraordinary levels making final salary pensions and annuities eye-wateringly expensive.
So as we note that it is a narrow measure of inflation we are pointed towards we also note that it looks like it has been trending lower.
The US looks to be below target, the Euro area has got further away from it in spite of all the actions and the line for Japan shows complete failure in the main Abenomics objective. Oh and they should have put the Europe line in the middle as they mean 0.9% not -0.9%.
The UK Pound £
There is some currency driven inflation in play for the UK however as we are in the midst of a weak run. The recent decline started on the 3rd of May when the effective or trade-weighted index was at 79.8 as opposed to the latest 75.6. The main player here is the US Dollar due to the vast majority of commodities being price in it. The fall here over the same time period is from US $1.317 to US $1.24 as I type this. So slightly worse.
If we switch to the oil price we see that things have changed since last month. Here are our official statisticians from back then.
Brent futures were down to $61.33 a barrel and U.S. West Texas Intermediate (WTI) crude futures were down to
Since then the decreases they were looking at have been increases with Brent Crude at US $64.60 and even more so with WTI at US $57.70. That will not feed into the consumer inflation numbers today but will do so over time. So whilst there is not much inflation in the offing the UK is likely to see more mostly via a weak currency.
This was something to put a smile on the face of Bank of England Governor Mark Carney as he whiles away the time waiting for a phone call from the IMF.
The Consumer Prices Index (CPI) 12-month rate was 2.0% in June 2019, unchanged from May 2019.
So dead on target although the superficial theme of a type of summer lull ignores a fair bit of action under the surface.
The largest downward contributions to change in the 12-month rate between May and June 2019 came from motor fuels, accommodation services and electricity, gas and other fuels, with prices in each category falling between May and June 2019 compared with price rises between the same two months a year ago………The largest offsetting upward contributions to change came from clothing and food.
Just for clarity utility prices were unchanged as opposed to last year when gas and electricity prices were raised. The clothing picture is also more complex than presented as prices there still hint at trouble on the high street.
Clothing and footwear was the only broad group producing a downward contribution in June 2019, reflecting a fall in prices of 0.4% on the year.
Prices fell by less than earlier in the year.
The immediate prospects are downwards.
The headline rate of output inflation for goods leaving the factory gate was 1.6% on the year to June 2019, down from 1.9% in May 2019.
So goods inflation should trend lower and that may hold sway for a bit.
The growth rate of prices for materials and fuels used in the manufacturing process fell 0.3% on the year to June 2019, down from 1.4% in May 2019…….The annual rate of input inflation was negative for the first time since June 2016, driven by a large downward contribution from crude oil.
Thus we see the broad sweep of lower inflation that we looked at earlier via lower inflation expectations. The cautionary note is that due to the lower UK Pound we will see more inflation than elsewhere and in this instance also a higher oil price will affect us. We have a rough rule of thumb for how this is playing out if we look at the Euro area.
The euro area annual inflation rate was 1.3% in June 2019, up from 1.2% in May.
So 0.7% it is then…..
Here is something that on national emoji day should be represented with a thumbs up and a smile.
Average house prices in the UK increased by 1.2% in the year to May 2019, down from 1.5% in April 2019 . Over the past three years, there has been a general slowdown in UK house price growth, driven mainly by a slowdown in the south and east of England.
The lowest annual growth was in London, where prices fell by 4.4% over the year to May 2019, down from a fall of 1.7% in April 2019 and the lowest annual rate in London since August 2009 when it was negative 7.0%.
We see that real wages are increasing by around 2% per annum compared to house prices which is very different to the general picture in the credit crunch era as Rupert Seggins reminds us.
The longer term picture. Average London house prices up 53% on January 2008 vs a UK average of 24%.
Also the house price falls in London which seem to be creating quite a scare on social media amongst the journalist fraternity are welcome. Prices in London are too high for the vast majority.
There is an irony in that for once, by fluke the woeful use of imputed rents does not affect the situation too much.
The OOH component annual rate is 1.2%, unchanged from last month.
Although we have another conceptual problem with it. That is the issue of rents usually rising with wages as the rise in both nominal and real wages are not impacting. This may be because the rent numbers are heavily lagged, I suspect that any impact takes around nine months and the full impact 18 but that is my opinion as we are not told.
We have had a couple of days of good data from the UK economy giving us a summer tinge. A fall in inflation would have been better but actually RPI fans did get one.
The all items RPI annual rate is 2.9%, down from 3.0% last month.
The gap between it and the other measures may trim a little over the next few months as the house price measure it uses ( depreciation) is lagged too. One clear improvement that could be made to it would be to put house prices in directly and I would look to increase the weight of it in the basket. Why? Well if we take the broad sweep using rent has owner occupied housing with a weight of around 17% in the basket whereas house prices in the two versions of it are weighted at 7-8%. So your average brick or window has twice the impact using rents which have lower inflation than house prices which generally have higher inflation.