Welcome news from UK Inflation

This morning has brought some good news for hard pressed UK consumers and workers from the Office for National Statistics.

The Consumer Prices Index (CPI) 12-month rate was 0.2% in August 2020, down from 1.0% in July…….The all items RPI annual rate is 0.5%, down from 1.6% last month.

As you can see there has been quite a fall which will help for example with real wages (which allow for inflation). After yesterday’s figures which showed us we have been seeing wages falls this is helpful. Although it would appear that someone at the BBC is keen to pay more for everything.

Before the latest figures were published, there had been fears that the UK inflation rate might turn negative, giving rise to what is known as deflation.

Economists fear deflation because falling prices lead to lower consumer spending, as shoppers put off big purchases in the expectation that they will get cheaper still.

They would have had REM on repeat if they had lived through the Industrial Revolution.

It’s the end of the world as we know it (time I had some time alone)
It’s the end of the world as we know it (time I had some time alone)

Briefly I thought my work was influencing them as I noted the start of the sentence below but the final bit is pretty woeful.  Mind you if you think that the Industrial Revolution was bad I guess you might also think that inflation is bad for borrowers.

Low inflation is good for consumers and borrowers, but can be bad for savers, as it affects the interest rates set by banks and other financial institutions.

What is happening?

Here is the official explanation.

“The cost of dining out fell significantly in August thanks to the Eat Out to Help Out scheme and VAT cut, leading to one of the largest falls in the annual inflation rate in recent years,” said ONS deputy national statistician Jonathan Athow.

“For the first time since records began, air fares fell in August as fewer people travelled abroad on holiday. Meanwhile. the usual clothing price rises seen at this time of year, as autumn ranges hit the shops, also failed to materialise.”

As you can see we have a market effect in travel and also a result of a government policy. It looks as though the latter was pretty successful.

Last month, discounts for more than 100 million meals were claimed through the Eat Out to Help Out scheme.

In terms of the inflation data it had this impact.

Falling prices in restaurants and cafes, arising from the Eat Out to Help Out Scheme, resulted in the largest downward contribution (0.44 percentage points) to the change in the CPIH 12-month inflation rate between July and August 2020.

As you can see they are desperate to try to push their CPIH measure. We can deduce from that number that the impact on CPI will be a bit over 0.5% via its exclusion of the fantasy imputed rents in CPIH.

If we switch to the RPI we see this.

Catering Annual rate -7.0%, down from +3.4% last month
Never lower since series began in January 1988.

In fact the catering sector reduced the RPI by 0.52%. There was also another significant factor in its fall.

Fares and other travel costs. Annual rate -8.4%, down from +0.9% last month
Never lower since series began in January 1957.

That sector resulted in a 0.33% fall in the index.

Moving onto other detail there are increasing concerns over pork prices after the discovery of a case of swine flu in Germany but so far any price changes have not impacted the UK. Pork prices were in fact 1.3% lower than a year ago with bacon 0.3% higher. I must be buying the wrong sort of tea as I am paying more yet apparently prices are 8.3% lower than a year ago.

Are we sure?

We are still failing to record more than a few prices.

we have collected a weighted total of 86.9% of comparable coverage collected previously (excluding unavailable items).

The next bit is curious as what is still excluded?

As the restrictions caused by the ongoing coronavirus (COVID-19) pandemic have been eased, the number of CPIH items that were unavailable to UK consumers in August has reduced to eight……. these account for 1.1% of the CPIH basket by weight

When I checked it was things I should have thought of like football and theatre admission.

The Trend

There is downwards pressure on the goods sector in the short-term.

The headline rate of output inflation for goods leaving the factory gate was negative 0.9% on the year to August 2020, unchanged from June 2020.

This has been reinforced by the fall in the price of oil.

The price for materials and fuels used in the manufacturing process displayed negative growth of 5.8% on the year to August 2020, down from negative growth of 5.7% in July 2020…..The largest downward contribution to the annual rate of input inflation was from crude oil.

Owner Occupied Housing

It was hard not to laugh as I read this earlier.

The Consumer Prices Index including owner occupiers’ housing costs (CPIH) 12-month inflation rate was 0.5% in August 2020, down from 1.1% in July 2020.

Why? This is because the imputed rents used to keep the number lower have ended up producing a higher number than CPI.This is because they are smoothed are in fact on average from the turn of the year rather than now.

Private rental prices paid by tenants in the UK rose by 1.5% in the 12 months to August 2020, up from 1.4% in the 12 months to July 2020.

Quite a shambles may be building here because Daniel Farey-Jones has been following rent changes in London and here is an example from the last 24 hours.

Bloomsbury 1-bed down 21% to £1,300……….Waterloo 2-bed down 16% to £2,000……..Shoreditch 1-bed down 23% to £1,842.

Here is how this is officially reported.

London private rental prices rose by 1.3% in the 12 months to August 2020.

Whilst Daniel’s figures started as anecdotes he has built up a number of them which suggests there is something going on with rents that is very different to the official data.

Switching to house prices the official series is way behind so here is Acadata on the state of play.

In August, Halifax and Rightmove are showing broadly similar annual rates of price growth of 5.2%
and 4.6% respectively, with Nationwide and e.surv England and Wales reporting lower figures of 3.7%
and 1.5%

Comment

The lower inflation news is welcome but a fair bit of it is temporary as the Eat Out To Help Out scheme is already over. There is a feature in the numbers which is something that has popped up fairly regularly in recent times.

The CPI all goods index annual rate is -0.2%, down from 0.0% last month….The CPI all services index annual rate is 0.6%, down from 2.1% last month.

Goods inflation is lower than services inflation and in this instance went into disinflation.

However I think we are in for a period of price shifts as I note this.

The annual rate for CPI excluding indirect taxes, CPIY, is 1.8%, up from 1.0% last month.

So once the tax cuts end we will see a rally in headline inflation. Some places will need to raise prices but it is also true that others are cutting. For example Battersea Park running track and gym has just cut its monthly membership fee.

UK inflation measurement is a case of lies damned lies and statistics

This morning has brought us up to date with the latest UK inflation data and we ae permitted a wry smile. That is because we have been expecting a rise whereas there was a load of rhetoric and panic elsewhere about deflation ( usually they mean disinflation). The “deflation nutters” keep being wrong but they never seem to be called out on it. The BBC report put it like this.

The rise was a surprise to economists, said Neil Birrell, chief investment officer at money manager Premier Miton. “It’s a bit early to call the return of inflation, but it does show that there is activity in the economy,” he said.

Perhaps they should find some better economists. Also only last night they were reporting on inflation were they not?

Manctopia: Billion Pound Property Boom……..Meet the people living and working in the eye of Manchester’s remarkable housing boom. ( BBC 2 )

Indeed it has been right in front of them as they now operate from Salford so at least they did not have to travel to do their research. Indeed this is how the BBC 5 live business presenter Sean Farrington tweeted the data.

Happy inflation day, by the way. Prices up 1% in 1yr FYI Inflation that everyone talks about came in at 1% (CPI) Inflation the @ONS prefers came in at 1.1% (CPIH) Inflation used for capping rail fares came in at 1.6% (RPI)

Down pointing backhand index

Here’s @ONS‘s view on RPI (tl;dr – it’s rubbish)

At least he bothered to say what the numbers for the Retail Price Index or RPI were and he gets credit for reporting numbers which the economics editor Faisal Islam has ignored but it touched a raw nerve with me and let me explain why below.

You might think with the BBC launching a flagship programme on property that you might mention that the RPI looks to measure housing inflation whereas CPI completely ignores it and CPIH uses fantasy imputed rents that are never paid. For those unaware the RPI includes owner-occupied housing ( it uses house prices via a depreciation component and mortgage costs). Whereas CPI has intended to include them for around 20 years now and been in a perpetual situation of the dog eating its homework. CPIH is based on the view that the truth ( rises in house prices) is inconvenient as they tend to rise too fast so they invented a fantasy where home owners charge themselves rent and use that to get a lower reading. Oh and the rents themselves are not July’s rent they are based on rents over the past 16 months or so because the series needs to be “smoothed” as it is so unreliable. I would say you really could not make it up but of course they have!

Where I agree is on the bits he goes onto which is the way that RPI is used for rail fares ( and student loans) which is a case of cherry-picking as we find ourselves paying the higher RPI but only receiving the lower CPI.

Today’s Numbers

The rises noted above were driven by several factors but one will be no surprise.

prices at the pump have started to increase as movement restrictions eased. Between June and July 2020,
petrol prices rose by 4.9 pence per litre, to stand at 111.4 pence per litre, and diesel prices rose by 4.0 pence per litre, to stand at 116.7 pence per litre. In comparison, between June and July 2019, petrol and diesel prices fell by 0.9 and 2.3 pence per litre.

I doubt anyone except the economists referred to above will have been surprised by that as negative oil price futures have been replaced by ones above US $40. Also there was this.

As government travel restrictions were eased, there were upward contributions from coach and sea fares, where prices rose between June and July 2020 by more than a year ago.

I have pulled those numbers out because this is going to be a complex and difficult area going forwards. Why? Well I was passed by several London buses yesterday and the all had “only 30 passengers” on the side so in future there is going to be a lot less output and higher inflation in that sector. Not easy to measure as the inflation will likely be in higher subsidies rather than bus,coach or rail fares. I am reminded at this point that the GDP data showed National Rail use at a mere 6%. That will have improved in July but even if we get to 50% we have a lot of inflation hidden there.

Another reason for the fall was that the summer clothing sales have been less evident so far.

Clothing and footwear, where prices overall fell by 0.7% between June and July 2020, compared with a fall of 2.9% between the same months in 2019.

Actually clothes for kids saw a price rise, do parents have any thoughts on what is going on?

prices for children’s clothes rose by 0.1% between June and July 2020 but fell by 2.6% between June and July 2019, with the stand out movements coming from clothes for children aged under four years old and from T-shirts for older boys.

There was bad news for smokers and drinkers too.

Alcoholic beverages and tobacco, where overall prices across a range of spirits increased by 0.6% between June and July 2020, but fell by 1.4% in 2019.

On the other side there was some good news.

Food and non-alcoholic beverages, with food prices falling by 0.3% this year, compared
with a rise of 0.1% a year ago

What is coming next?

Perhaps rather similar numbers.

The headline rate of output inflation for goods leaving the factory gate was negative 0.9% on the year to July 2020, unchanged from June 2020.

There is ongoing upwards pressure but it is also true that the stronger UK Pound £ ( US $1.32 as I type this ) is offsetting it.

Comment

Let me explain how we should measure inflation and the problems in the current approach. The text books say it is a continuous rise in prices which does not help much as even the actively traded oil price struggles to do that. So we measure price changes and we should do this.

  1. Measure as many as we can to represent as best we can the impact of price rises on the ordinary consumer. The use of consumer is important as it prevents a swerve I shall explain in a moment.
  2. Use mathematical formula(e) that works as best as possible and head towards using direct weights as much as we can.
  3. Do not make numbers up that do not exist ( Yes the made up fantasy rents in the officially approved CPIH I am looking at you).

The use of consumer matters because if we stay with housing costs we see Phillip Lane of the ECB recently estimate them as a third of consumer spending which is similar to the US CPI shelter measure. Yet if we use the officially approved word consumption then house price changes are an asset and go in it 0%. Do you see the problem? It is one that fantasy rents that are never paid make worse and not better and is why I spend so much time on this issue.Just for clarity rents for those who pay rent are the right measure although the UK effort at this has so much trouble they smooth it over 16 months to avoid embarrassing themselves too obviously.

Next comes the issue of the maths formula used which are Carli,Jevons and Dutot. Each have strengths and weaknesses and regular readers will have seen Andrew Baldwin and I debate them on here. In a nutshell he prefers Jevons and I Carli although you would also have seen us note that we could sort that sharpish as opposed to the 8 years going nowhere that the official UK bodies have done. The RPI now gets 43% of its data via direct weights and more of this would help to make things better. This was represented at the recent discussion at the Royal Statistical Society.

I believe, and I’m fairly similar to Tony here, that the RPI only has one real flaw. That
is the combination of the Carli index with the way that clothing prices are collected. And that could
be mended………………………Turning back to the one flaw I do see. We are going to have scanner data which will give us a lot
more opportunity to use weighted indices and that should come on-stream in the next few years.  ( Jill Leyland)

I will simply point out that there has been a decade now to sort this out.

I hope that that gives you a picture of a debate that has gone on for a decade and have been dreadfully handled by our official bodies. I will not bore you with the details just simply point out they have lost every consultation so the latest one only involves the timing of changes which have kept being rejected ( by 10 to 1 back in 2012). It is very 1984.

Inflation measurement is not easy and let me give you an example of a problematic area from today’s numbers.

The effect came almost entirely from private dental examinations and non-NHS physiotherapy sessions, where price collectors reported that prices had risen, in part, as companies make their workplace COVID-secure;

Regular readers will know I have a big interest in athletics and sport and as part of that I have been noting reports of physiotherapy being ineffective due to Covid-19 changes. So the service is inferior. That is not easy to measure but we should measure steps backwards as well as forwards. As my dentist is able to inflict pain on me, may I point out that I am sure that is not true of her and the service will be superb…….

Meanwhile the inflation measure in the GDP numbers ( deflator) picked up inflation of 6.2% in the quarter and 7.9% for the year. Now the gap between that and the official consumer inflation measure is something for the UK Statistics Authority to investigate.

 

China is suffering from food and especially pork inflation

The week has opened with an additional focus on China. We have been reminded of the nature of its style of government by the arrest of the pro democracy business tycoon Jimmy Lai in Hing Kong. This adds to the issue of how the economy its doing post the original Covid-19 outbreak. Typically even the inflation data comes with a fair bit of hype and rhetoric.

In July , under the strong leadership of the Party Central Committee with Comrade Xi Jinping as the core, all regions and departments coordinated the epidemic prevention and control, emergency rescue and disaster relief, and economic and social development work, actively implemented the policy of ensuring supply and stabilizing prices, and the overall market operation was orderly.

Switching now to the actual numbers we are being told this.

From a month-on-month perspective, the CPI went from a decline of 0.1% last month to an increase of 0.6% ………From a year-on-year perspective, CPI rose by 2.7% , an increase of 0.2 percentage points from the previous month .

So out initial picture is that inflation is picking up a little again and that it is not far below the target which is around 3% ( one report said 3.5%). Yet again we see that those who rush to tell us inflation is over look like being wrong yet again.

Pork Prices

This is an important issue in China due to its importance in the diet and the swine flu problem which preceded the Covid-19 outbreak. According to this it has not gone away.

In food, with the gradual recovery of catering services, the demand for pork consumption continues to increase, and floods in many places have a certain impact on the transportation of pigs. The supply is still tight. The price of pork rose by 10.3% , an increase of 6.7 percentage points over the previous month.

The annual numbers further remind us of the issue.

In food, the price of pork increased by 85.7% , an increase of 4.1 percentage points from the previous month

The pig333 website only takes us to the end of July but reports a price of just under 37 Renminbi compared to a bit under 20 this time last year.

I also noted this on the same website and the emphasis is mine.

Senasa (National Service of Agri-Food Health and Quality) officials certified exports of 18,483 tons of pork products and by-products sent between January and June of 2020, representing an improvement of 49% compared to the 12,336 tons sent in the same period in 2019. The main destinations were: China (9,379 tonnes); Hong Kong (2,599 t), Russia (1,845 t), Chile (1,400 t) and Angola (644 t).

So some extra demand for Argentinian farmers which will no doubt be welcome in its difficulties. But Hub Trade China suggests it may be a while before things get better.

#China‘s #pork prices, which jumped in June and edged up in July, will continue to rise in coming months due to seasonal factors and the influence of #COVID19. But tight supplies will begin to ease in the 4th. quarter thanks to boosting hog production and the expansion of imports.

The official view of the Ministry of Agriculture is this.

In the first half of 2020, live pigs and sows have maintained momentum towards recovery. At the end of June, the national sow population of 36.29 million heads changed from negative to positive for the first time year-on-year, up 5.49 million head from the end of last year. The current sow population has recovered to represent 81.2% of the herd at the end of 2017.

We are left wondering what “largely under control” means in reality.

African swine fever has been largely under control, and no major regional animal epidemics occurred in the first half of the year.

I have tried to look at the underlying indices but the England version has not been updated but up until June we have seen them be 170% to 180% of what they were in the previous year.

Food Overall

In fact the annual rate of inflation is being driven by food prices.

Among them, food prices rose by 13.2% , an increase of 2.1 percentage points, affecting the increase in CPI by about 2.68 percentage points.

A major player in this is of course the pork prices we have just analysed, but it is far from the only player.

the price of fresh vegetables increased by 7.9% , an increase of 3.7 percentage points; the price of aquatic products rose by 4.7% , a decrease of 0.1 percentage point; the price of eggs fell 16.6% , The rate of decline expanded by 0.8 percentage points; the price of fresh fruits fell by 27.7% , and the rate of decline narrowed by 1.3 percentage points.

So if you can get by on eggs and fresh fruit you are okay, otherwise you are not. Although on a monthly basis egg prices rose so that trend mat have turned.

Fuel

I note these because after the excitement around the period when we saw negative prices for some crude oil futures things are rather different now. Brent Crude Oil was essentially above US $40 throughout July. So we see this in the report.

gasoline and diesel prices rose by 2.5% and 2.7% ( monthly)…….

If we switch to the producer prices report we see that the times they are a-changing.

Affected by the continued rebound in international crude oil prices, prices in petroleum-related industries continued to rise. Among them, the prices of petroleum and natural gas extraction industries rose by 12.0% , and the prices of petroleum, coal and other fuel processing industries rose by 3.4% .

So the situation has turned for oil and the overall picture is as follows.

PPI rose by 0.4% , the same rate as last month…….From a year-on-year perspective, PPI fell by 2.4% , and the rate of decline narrowed by 0.6 percentage points from the previous month

Comment

The rise in inflation in China is being reported as good news or rather a reason for a rally in equity markets. But in fact a look at the consumer inflation data shows that food prices have been rising in many areas with the price of pork continuing to surge. So the Chinese consumer and worker will be worse off. Of course central bankers love to ignore this sort of thing as for newer readers basically they define everything that is vital as non-core for inflation purposes. Also inflation calculations assume you substitute products when the price rises to keep the numbers lower, although here they may be correct because poorer Chinese may not be able to afford pork at all now.

On the other side of the coin should China find a way out of the pork problem then inflation would be very low. Well for consumers and workers that would be a good thing because as we stand the chances for wage rises seem slim and I fear the reverse.

Looking at the exchange rate we get regular reports of a collapse on the way but whilst it has joined the rise against the US Dollar it has not done much. At just below 7 versus the US Dollar it is down 1% on the year. Are they running a pegged currency?

Podcast on GDP

 

UK Inflation Problems are not helped by the official attempts to mislead us

Today brings the UK inflation situation situation into focus. Or rather the official attempt to measure it which has more than a few problems in a virus pandemic.  To that we can add the fact that the Office for National Statistics has spent several years attempting to mislead about inflation with its use of fantasy Imputed Rents which are never paid outside its Ivory Tower. For now let us look at the measure used and targeted by the Bank of England

The Consumer Prices Index (CPI) 12-month rate was 0.6% in June 2020, up from 0.5% in May.

This gives us two perspectives. The most sensible one would be one of relief that in a time of trouble for economies at least inflation is not adding to it. Some of you will recall the “Misery Index” where the inflation rate was added to the unemployment rate. At least inflation is not contributing much to the misery being provided by unemployment right now. It will also help real wages.

The other perspective is the central banker one where low inflation is a bad idea as they pursue their Holy Grail of it being 2 percent per annum. So the Bank of England will see the number as a justification for all its monetary easing which it is adding to with its weekly dose of £6.9 billion buying of UK bonds or Gilts. They ignore the reality that this would make people worse off via lower real wage growth and frankly right now they would be causing real wage falls. Furthermore their policies raise the asset prices the inflation number are set up to ignore. The CPI measure ignores owner – occupied housing and has taken longer than it took to put a man on the moon to do nothing about that.

Causes

The monthly ebbs and flows are shown below.

The largest contribution to the CPIH 12-month inflation rate in June 2020 came from recreation and culture (0.32 percentage points).
Rising prices for games and clothing resulted in the largest upward contributions to the change in the CPIH 12-month inflation rate between May and June 2020.
Falling prices for food resulted in a partially offsetting downward contribution to the change.

The lower prices for food will be welcome as we also note two problem areas.Computer games and clothing are longstanding issues due to the role of fashion in their sectors.  A game which people are rushing to pay £60 for might go out of fashion and then be cut to £30. Objectively it is the same game but subjectively it is not  and in that gap is a world of problems for inflation measurement. Fashion clothing was the orginator of the official campaign against the Retail Price Index or RPI but as so often when the answer is inconvenient nothing happens or if you prefer we have seen another form of a lost decade. We could as the statistician Simon Briscoe suggested suspend fashion clothing for a while because as he pointed out it is about 0.2% of the index whereas owner – occupied housing is officially 17%. So it is revealing that you cannot ignore a small factor but a large one is just fine. I will leave readers to figure out for themselves what the impact on inflation would be.

Measurement Problems

These are ongoing.

As a result of the ongoing coronavirus (COVID-19) pandemic, we identified 67 CPIH items that were unavailable to UK consumers in June, as detailed in Table 58 of the Consumer price inflation dataset; these account for 13.5% of the CPIH basket by weight and made a downward contribution of 0.02 percentage points to the change in the CPIH 12-month rate; the number of unavailable items is down from 74 in May and 90 in April; for June, we have collected a weighted total of 84.0% (excluding unavailable items) of the number of price quotes collected for February (the most recent “normal” collection).

So we are missing a fair bit of the data and this is worse for e CPI measure as it ignores owner- occupied housing so it rises to around 20 percent for it. You may note apparently we cannot exclude fashion clothing for a while but can produce numbers excluding factors one hundred times larger. Indeed we can produce clothing numbers when department stores are shut.

The Trend

We get a guide to the direction of travel from the producer price series.

The headline rate of output inflation for goods leaving the factory gate was negative 0.8% on the year to June 2020, up from a negative 1.2% in May 2020.

The price for materials and fuels used in the manufacturing process showed negative growth of 6.4% on the year to June 2020, up from negative growth of 9.4% in May 2020.

So we see that the downward push on prices is fading and there is another factor.

Prices for both petroleum products and crude oil have increased on the month as lockdown and travel restrictions have eased and global demand has picked up; the monthly rate for petroleum products is the highest since May 2018 whilst crude oil has seen the largest monthly increase since PPI records began; the annual growth rates have picked up partly because of a base effect as crude oil prices rose sharply between May and June 2020 but fell sharply the same time last year.

The problem here is that we recorded inflation falls from lower oil prices when the use of oil had fallen quite sharply. I used my car for the first time in a while two weeks ago. for example. This issue is a very large one for the producer price series because is we add energy to the UK Pound we have about three-quarters of the usual changes. So we have mostly been measuring changes in products which have fallen sharply in use. Awkward but I guess I will be the only person pointing this out.

Also there are to be “improvements” in line with international standards as we switch from net to gross. You will not be surprised to see the impact.

 For the net output PPI, the annual growth fell to negative 0.8% in June 2020, up from negative 1.2% in May 2020. For the gross output excluding duty PPI, the annual growth in June 2020 was negative 3.3%, up from negative 4.4% in May 2020.

I am thinking of offering a prize for anyone who spots an international standard that raises the inflation rate. I would offer a bottle of wine but fear it will have gone off before any claims.

Comment

Let me now bring in the other measures of inflation.

The all items CPIH annual rate is 0.8%, up from 0.7% in May………….The all items RPI annual rate is 1.1%, up from 1.0% last month. The annual rate for RPIX, the all items RPI excluding mortgage interest payments (MIPs), is
1.3%, unchanged from last month.

The new headline measure CPIH which includes fantasy imputed rents is one which the Office for National Statistics is pushing hard. Fortunately it is being widely ignored and that is before people are aware that the rents are for the last 16 months not for June.

Moving to the RPI there has been quite a campaign to discredit it. This is based on its use of house prices via a depreciation measure and the clothing issue I pointed put earlier. However there are those who argue that clothing inflation has been under recorded since this issue began which means that the RPI has been right if true. I have seen many examples of people thinking inflation is higher than the official series and there are genuine reasons to support that. There is the problem with weights right now and I notice in the US there are suggestions for people to keep diaries and use them which seems worth a go.

But the real issue right now is that not only are the inflation numbers wrong they are adding to an official campaign to mislead via the use of last year’s fantasy Imputed Rents. Let me give you another example from their alternative basket. You all know fuel use has been lower but they think we will not spot this.

This is particularly apparent for motor fuels, which made a negative contribution to the 12-month growth rate of the official series in June 2020. Figure 2 shows that the downward contribution to the 12-month growth rate from motor fuels was even more pronounced for the rescaled basket as it has a higher weight.

 

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!

 

 

What has happened to the UK consumer?

One of the apparent certainties of economic life is that the British consumer will take the advice of the Pools winner from many years ago and “Spend! Spend! Spend!”. This has led to another feature of our economic life because it seems to have been forgotten by many economists but before the credit crunch there were calculations that out marginal propensity to import from this was of the order of 40%. So there was a clear link to the trade deficit as well. Oh and for millennials reading this the Pools was gambling before there was a lottery, mostly in my experience by older people as for example my grandfather did but my father did not.

However last month provided a counterpoint to such certainty as the slowing in growth that we saw in the latter part of 2019 turned into something more.

In the three months to December 2019, the quantity bought in retail sales decreased by 1.0% when compared with the previous three months……..The quantity bought in December 2019 fell by 0.6% when compared with the previous month; the fifth consecutive month of no growth.

There was still some annual growth just not much of it ( 0.9%). This led to some sill headlines across the media as they used the British Retail Consortium claim that we had seen the worst year since 1995 for retail sales as click bait. That ignored the fact that its numbers are invariably much weaker than the official ones suggesting it id wedded to the bricks and mortar style retail sales which we know is troubled and not enough of the online world. Indeed there was far less reporting of this month’s effort from the BRC as the equivalent of tourists saw fewer easy pickings.

On a Total basis, sales increased by 0.4% in January, against an increase of 2.2% in January 2019. This is above both the 3-month and 12-month average declines of 0.4% and 0.2% respectively.

So weaker than last year but up and should it continue would end the decline in the averages. Actually we now know that the BRC was confused in this area as the inflation numbers did not pick this up.

We have to remember, this semi-positive performance will also be the result of aggressive discounts and consumers’ preoccupation with bagging a bargain.

Labour Market

This brings a contrasting theme as it should be supporting retail sales just as growth has faded away.

Between October to December 2018 and October to December 2019, the level of employment increased by 336,000 (or 1.0%) to a record high of 32.93 million.

There was also some real wage growth over the year just not as much as reported.

In the year to December 2019, nominal total pay (not adjusted for change in prices) grew by 2.9% to £544. Nominal regular pay grew by 3.2% to £512 over the same period. The recorded growth rates show that wage growth is decelerating.

Sadly many places fell for the real regular wages are back to the pre crisis peak spinning of our official statisticians as they cherry-picked from the very top of the tree. But even using more realistic inflation measures than the official imputed rent driven CPIH we still had some real wage growth.

Payment Protection Insurance

I have long argued this has been like a form of QE for the consumer and retail sales so this caught my eye earlier.

The bill for PPI claims in 2019 would be about £2.5bn, but Lloyds said no further provisions were needed as it had already set aside enough money.

It brings the total paid out by Lloyds over the mis-selling saga to £21.9bn. ( BBC )

Today’s Data

As suggested above we had a better month in January.

Retail volumes increased by 0.9% in January 2020, recovering from the falls in the previous two months; the increase was mainly because of moderate growth in both food stores (1.7%) and non-food stores (1.3%).

Actually if we look into the detail the underlying position is stronger and I am pleased to report that my main theme in this area was clearly in play.

Fuel saw a large fall of 5.7% in the quantity bought in January 2020 when compared with December 2019, which coincides with a rise in fuel prices of 2.3 pence per litre between December and January.

For newer readers I first wrote on the 29th of January 2015 that lower inflation boosted retail sales growth which you may note is not only true but the opposite of what central bankers keep telling us. I was involved in a debate with Danske Bank yesterday on this subject and in the end they agreed with me although that last sentence!

Higher than expected inflation makes people worse off, as it means people’s real wage growth is not as high as expected. That is why stable and predictable inflation is so important. Whether the target is 0%, 1% or 2% is less important.

Anyway returning to the data we see a corollary of my theme which is that higher prices should led to lower consumption which seems to be in play. It is probably also true that we are seeing the impact of the switch towards electric vehicles.

Perspective

The better number for January although it may not initially look like it helped the three month average.

In the three months to January 2020, both the amount spent and the quantity bought in the retail industry fell by 0.5% and 0.8% respectively when compared with the previous three months.

This is because November and December were so weak that even a better January was unlikely to fix it. The Underlying index was 108.5 in October then went 107.7 and 107.1 before now rising to 108.1. The index was set at 100 in 2016 so we see this area has seen more growth than others.

On an annual basis we have some growth just not very much of it.

When compared with a year earlier, both measures reported growth at 2.1% for the amount spent and 0.8% for the quantity bought.

Comment

Today gives an opportunity to look at how economics applies in real world events. Having just lost all readers from the Ivory Towers let me apologise to anyone who was disturbed by any screaming from them! They may have just have been able to laugh off the idea that higher inflation is bad but the next bit is too much. You see we have a favourable employment situation especially with real wage growth being added to employment growth but we are losing two factors.

The first is the impact of the PPI claim repayment money which looks as though much of it went straight to the retail sales bottom line. Next there is this from the Bank of England.

The annual growth rate of consumer credit rose to 6.1% in December, having ticked down to 5.9% in November. The growth rate for consumer credit has been close to this level since May 2019. Prior to this it had fallen steadily from an average of 10.3% in 2017.

Whilst it is still the fastest growing area of the economy I can think of my point is that growth has slowed and that seems to be affecting retail sales. A particular area must be what is going on with car sales and a few months back the Bank of England said that but since then it has decided that silence is golden on this subject. For fans of official denials there was of course this from Governor Carney back in the day.

This is not a debt fuelled expansion

 

The campaign against the UK Retail Price Index carries on

This week brought some disappointing news for the Bank of England. If we go back to Monday we were told this.

LONDON (Reuters) – British households’ expectations for inflation over the next 12 months rose to 2.8% in July from 2.6% in June, according to a survey from U.S. investment bank Citi and pollsters YouGov.

Longer-term inflation expectations rose to 3.4% from 3.3% in June, the Citi/YouGov survey of 2,011 adults showed.

“Rising inflation expectations should … support hawks at the (Bank of England),” Citi economists Christian Schulz and Ann O’Kelly said.

There are two problems there for the Bank of England. The first is that expectations imply that people think that inflation is above the 2% target and has been so. This is an implied defeat for the enormous effort that it and other parts of the UK establishment have put it getting our official statisticians have put into getting the Imputed Rent driven CPIH as the headline inflation measure.

Even worse the measure of future expectations has risen. This shows two factors at play. One is rhetoric as we are subjected to a media barrage about future falls in the UK Pound £ exchange rate. The other is the reality that the UK Pound £ has been in a weak phase and in inflation terms this is best represented by the rate against the US Dollar because it is the currency in which nearly all commodities are priced. Whilst it is relatively stable this morning at US $1.2060. Whereas if we go back a bit over 3 months to the early part of May we see that it was some 11 cents higher. Over the past year it is some 5.5% lower so we can see that there is some commodity price pressure on the cards so well done to the ordinary person surveyed for inflation expectations.

Producer Price Inflation

We can find out what is coming down the inflation pipeline from these numbers.

The headline rate of output inflation for goods leaving the factory gate was 1.8% on the year to July 2019, up from 1.6% in June 2019…….The growth rate of prices for materials and fuels used in the manufacturing process was 1.3% on the year to July 2019, up from 0.3% in June 2019.

This is a change as the previous overall trend was for both input and output inflation to be falling. The main area is a little awkward so let us look at it.

On the month, crude oil provided the largest positive contribution of 0.30 percentage points with monthly growth of 1.8%. This is a 9.3 percentage points increase following negative growth of 7.5% in June 2019.

This is because the lower UK Pound has been a constant influence but the oil price has been ebbing and flowing to some extent mirroring the tweets of President Trump on the trade war. For example yesterday it rose 3/4% as he announced delays in planned tariffs on China. So the outlook with Brent Crude around US $61 per barrel is for it to have a small disinflationary impact looking ahead but the trend may change with one tweet.

Also do any of you have thoughts on this? The subject is on my mind anyway after last Friday’s power cut in Battersea.

This growth was mainly driven by electricity production and distribution, which increased 20.1% on the year to July 2019, the highest the rate has been since records began in 2009.

Consumer Inflation

Here the situation looks calm on the surface but there are two serious problems below it.

The Consumer Prices Index (CPI) 12-month rate was 2.1% in July 2019, increasing from 2.0% in June 2019.

In a world where US President Trump describes a 0.3% monthly and 1.8% annual increase like this I am not sure where this puts us!

Prices not up, no inflation.

Anyway if we return to the UK we see that a problem I have warned about before is back.

The largest upward contribution (of 0.08 percentage points) to change in the CPIH 12-month rate came from recreation and culture. Within this group, the largest effect came from games, toys and hobbies (in particular from computer games and consoles) where prices overall rose by 8.4% between June and July 2019 compared with a rise of 4.1% between the same two months a year ago.

Here is the confession that we are blundering in the dark here.

Price movements for these items can often be relatively large depending on the composition of bestseller charts and the upward contribution between the latest two months follows a downward contribution, from computer games purchased online and games consoles, between May and June 2019.

This matters because it highlights a systemic problem. A similar problem is in play with fashion clothing. Rather than doing something about it the UK establishment has been using the latter problem as a tool for beating the Retail Price Index with. Rather than research and reflection we get rhetoric.

Retail Price Index

Speaking of the RPI the annual rate fell to 2.8% which is partially good news for rail passengers because the rate at which regulated fares rise will be that. At east it is below the rate of wages increases. But there is a problem here too.

An error has been identified in the Retail Prices Index (RPI) in 2019, caused by an issue with the 2017 to 2018 Living Costs and Food Survey (LCF)dataset, which is used to produce the weights underpinning the RPI.

Indicative estimates show that if the corrected LCF dataset had been used to calculate the 2019 RPI weights, it would have led to an upward revision of 0.1 percentage points to the published RPI annual growth rate in March 2019, from 2.4% as currently published to 2.5% and a downward revision of 0.1 percentage points to the June 2019 rate, from 2.9% as currently published to 2.8%. No other month’s annual growth rates have been affected.

It is a good job that large amounts of financial contracts do not depend on this, Oh wait! But these numbers also matter in themselves.

House Prices

There was some excellent news here.

Average house prices in the UK increased by 0.9% in the year to June 2019, unchanged from May 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 2.7% over the year to June 2019, less than the 3.1% fall in May 2019. Average house prices in London have now been falling over the year each month since March 2018.

With wage growth at 3.7% finally houses are on average becoming more affordable. As the London numbers highlight there are regional disparities though. On the other side of the coin house prices in Wales rose by 4.4%.

Comment

I have a couple of serious points to make so let me start with some humour courtesy of The Guardian.

City economists had forecast CPI to fall to 1.9% – instead, it’s now over the Bank’s target of 2%.

The unexpected rise could pile pressure on Threadneedle Street to raise interest rates, even as economic growth falters…

Meanwhile the problems with how we measure inflation in the UK pile up as computer game are added to the problems with fashion clothing. Yet the UK Statistics Authority and the ONS have instead spent their time joining the establishment campaign against the RPI. Please do not misunderstand me as I have a lot of sympathy with the ordinary statisticians who in my experience are doing their best, but it was hard not to have a wry smile this morning at us getting the numbers wrong and creating their worst nightmare a “discontinuity”.

If we look wider we see that there are problems elsewhere as the changes to package holiday prices showed in Germany and in the wider Euro area inflation data. That will impact the GDP numbers via the deflator. Ironically with an RPI style inflation measure or perhaps based on the new HII/HCI the UK could be in good shape here.

Let me give another perspective by quoting Paul Johnson of the IFS in Prospect Magazine from February.

A version of it, CPIH, takes account of owner occupiers’ housing costs and is the one that the statisticians would like us to use. But it is of relatively recent vintage and hasn’t really caught on yet.

He seems to have forgotten that it was the Johnson Review ( yes him) that recommended this in 2016.

ONS should move towards making CPIH its main measure of inflation. In the meantime, the CPI should continue to be the main measure of inflation.

 

 

Good to see UK wages rising faster than house prices

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
$51.93.

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.

Today’s data

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.

Prospects

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…..

House Prices

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.

Comment

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.

 

 

 

The Bank of England reveals it is an inflation creator rather than targeter

Yesterday Bank of England Governor Mark Carney spoke at the ECB summer conference in sunny Sintra Portugal. Tucked away in a speech mostly about the Euro was a reference to the problems the Bank of England has had with inflation as you can see below.

While the euro area has continued to experience ‘divine
coincidence’ the UK has not (Chart 1). In the euro area, inflation has averaged half a point below target,
reflecting in part the drag from persistent slack in the labour market. In contrast, UK inflation has been above
target, averaging 2.3%, during a period where the economy was operating well below potential.

Over such a period that is quite a difference and for the moment I will simply point out that he has no idea about the “potential” of the UK economy as his speech later inadvertently reveals. But let us move on to his explanation.

That reflects the inflationary impacts of two large exchange rate depreciations and weak productivity that have
offset a major positive shock to labour supply. This has created tensions between short-term output and
inflation stabilisation in the UK that have not been evident in other major economic regions.

Missing from his explanation is the way that expectations of easier policy from the Bank of England helped drive both “large exchange rate depreciations”. The 2007/08 one pre dates his tenure at the Bank of England but the post EU Leave vote one was on his watch. I still come across people who think he pumped £500 billion into the UK economy on the following morning rather than getting the ammunition locker ready. But he did cut interest-rates ( after promising to raise them) and pour money into the UK Gilt Market with £60 billion of Sledgehammer QE purchases.

So rather than something which just happened he and the Bank of England gave it a good shove and that is before we add in that he planned even more including a cut to a Bank Rate of 0.1% that November. That did not happen because it rapidly became apparent that the Bank of England had completely misread the UK economic situation. But by then the damage had been done to the UK Pound which was pushed lower than it would otherwise have done.

We get an implicit confirmation of that from this.

Since 2013, the MPC’s remit has explicitly recognised that there are circumstances in which bringing inflation
back to target too quickly could cause undesirable volatility in output and employment.

In other words in a world where inflation is lower than before  it is no longer an inflation targeter and instead mostly targets GDP. Actually we get a confession of this and a confirmation of a point I have made many times on here as we note this bit.

Indeed, on the basis of this past behaviour in the great moderation, the MPC would have raised interest rates by 2 to 3 percentage points between August 2013 and the end of 2014.

Due to the international environment with the Euro area heading for negative interest-rates that would have been to much, But we could have say moved from 0.5% to 1.5% as I have regularly argued and would have put ourselves on a better path. Oh and I did say that Governor Carney has no idea of the potential of the UK economy, so here that is in his own words.

What we – and others – learnt as the recovery progressed was that the UK economy had substantially more
spare capacity than previously thought.

UK Inflation

It is hard not to have a wry smile at UK inflation being bang on target after noting the above.

The Consumer Prices Index (CPI) 12-month rate was 2.0% in May 2019, down from 2.1% in April 2019.

Tucked away in the detail was something which should be no surprise if we note the state of play in the car industry.

there were also smaller downward contributions from the purchase of vehicles (second-hand and new cars).

The other factor was lower transport costs as air fares fell mostly due to the Easter timing effect and the cost of diesel in particular rose more slowly than last year. On the other side of the coin was something which has become very volatile and thus a problem for our statisticians.

Price movements for computer games can often be relatively large depending on the composition of bestseller charts.

Looking for future trend we see what looks like a relatively benign situation.

The headline rate of output inflation for goods leaving the factory gate was 1.8% on the year to May 2019, down from 2.1% in April 2019.

There had been worries about the input inflation rate which picked up last time around but the oil price seems to have come to the rescue for now at least.

Petroleum provided the largest downward contribution to the change in the annual rate of output inflation. The annual rate of input inflation fell 3.2 percentage points in May 2019, driven by a large downward contribution to the change in the rate from crude oil.

Welcome news from house prices

If we switch to this area we see that the slow down in the annual rate of growth continues.

Average house prices in the UK increased by 1.4% in the year to April 2019, down from 1.6% in March 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 1.2% over the year to April 2019, up from a fall of 2.5% in March 2019.

I am pleased to see that as the best form of help for prospective buyers is for wage growth ( currently around 3%) to exceed house price growth. There is a lot of ground to be gained but at least we are making a start.

There is an irony here as I note that for once this will be similar to the number for rents that are being imputed as the inflation measure for owner-occupiers. Yes for newer readers you do have that right as the official CPIH inflation measure assumes that those who by definition do not pay rent rush out and act as if they do.

Private rental prices paid by tenants in the UK rose by 1.3% in the 12 months to May 2019, up from 1.2% in April 2019.

The problem for CPIH is that we have had an extraordinary house price boom without it picking anything up, so this is an anomaly and is unlikely to last.

Comment

There is a sort of irony in UK inflation being on target in spite of the fact that the Bank of England has mostly lost interest in it. The credit crunch era has seen other examples of this sort of thing which echoes when the Belgian economy did rather well when it had no government. We might well be better off if we sent the Monetary Policy Committee on a long holiday.

At the moment there have been quite a few welcome developments in this area. Because wage growth is positive compared to both CPI inflation and house prices after sustained periods of falls. Some caution is required as the RPI is still running at an annual rate of growth of 3% but we are in sunnier climes.There are troubles in other areas as the lower car prices highlight so we need to grab what we can.

Let me finish with a thank you to the Guardian for quoting me in their business live blog and for providing some humour.

Today’s drop in inflation means there’s no chance of the Bank of England raising interest rates on Thursday, say City economists.

Where have those people been in the credit crunch era?

 

 

 

Good to see UK wages rising much faster than house prices at last

Today feels like spring has sprung and I hope it is doing the same for you, or at least those of you also in the Northern Hemisphere. The economic situation looks that way too at least initially as China has reported annual GDP growth of 6.4% for the first quarter of 2019. However the industrial production data has gone in terms of annual rates 5.8%,5.9%,5.4%,5.7%, 5.3% and now 8.7% in March which is the highest rate for four and a half years. Or as C+C Music Factory put it.

Things that make you go, hmm
Things that make you go, hmm
Things that make you go, hmm, hey
Things that make you go, hmm, hmm, hmm

In the UK we await the latest inflation data and we do so after another in a sequence of better wage growth figures. In its Minutes from the 20th of March the Bank of England looked at prospects like this.

Twelve-month CPI inflation had risen slightly in February to 1.9%, in line with Bank staff’s expectations
immediately prior to the release, and slightly above the February Inflation Report forecast. The near-term path
for CPI inflation was expected to be a touch higher than at the time of the Committee’s previous meeting,
though remaining close to the 2% target over the coming months. This partly reflected a 6% increase in sterling
spot oil prices, and the announcement by Ofgem on 7 February of an increase in the caps for standard variable
and pre-payment tariffs, from April, which had been somewhat larger than expected.

I do like the idea of claiming you got things right just before the release, oh dear! Also it is not their fault but the price cap for domestic energy rather backfired and frankly looks a bit of a mess. It will impact on the figures we will get in a month.

Prospects

Let us open with the oil prices mentioned by the Bank of England as the price of a barrel of Brent Crude Oil has reached US $72 this morning. So a higher oil price has arrived although we need context as it was here this time last year. The rise has been taking place since it nearly touched US $50 pre-Christmas. Putting this into context we see that petrol prices rose by around 2 pence per litre in March and diesel by around 1.5. So this will be compared with this from last year.

When considering the price of petrol between February and March 2019, it may be useful to note that the average price of petrol fell by 1.6 pence per litre between February and March 2018, to stand at 119.2 pence per litre as measured in the CPIH.

Just for context the price now is a penny or so higher but the monthly picture is of past falls now being replaced by a rise. Also just in case you had wondered about the impact here it is.

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.

If we now switch to the US Dollar exchange rate ( as the vast majority of commodities are priced in dollars) we see several different patterns. Recently not much has changed as I think traders just yawn at Brexit news although we have seen a rise since it dipped below US $1.25 in the middle of December. Although if we look back we are around 9% lower than a year ago because if I recall correctly that was the period when Bank of England Governor Mark Carney was busy U-Turning and talking down the pound.

So in summary we can expect some upwards nudges on producer prices which will in subsequent months feed onto the consumer price data. Added to that is if we look East a potential impact from what has been happening in China to pig farming.

Chinese pork prices are expected to jump more than 70 percent from the previous year in the second half of 2019, an agriculture ministry official said on Wednesday………China, which accounts for about half of global pork output, is struggling to contain an outbreak of deadly African swine fever, which has spread rapidly through the country’s hog herd.

That is likely to have an impact here as China offers higher prices for alternative sources of supply. So bad news for us in inflation terms but good news for pig farmers.

Today’s Data

I would like to start with something very welcome and indeed something we have been waiting for on here for ages.

Average house prices in the UK increased by 0.6% in the year to February 2019, down from 1.7% in January 2019 . This is the lowest annual rate since September 2012 when it was 0.4%. Over the past two years, there has been a slowdown in UK house price growth, driven mainly by a slowdown in the south and east of England.

This means that if we look at yesterday’s wage growth data then any continuation of this will mean that real wages in housing terms are rising at around 3% per annum. There is a very long way to go but at least we are on our way.

The driving force is this and on behalf of three of my friends in particular let me welcome it.

The lowest annual growth was in London, where prices fell by 3.8% over the year to February 2019, down from a decrease of 2.2% in January 2019. This was followed by the South East where prices fell 1.8% over the year.

As they try to make their way in the Battersea area prices are way out of reach of even what would be regarded as good salaries such that they are looking at a 25% shared appreciation deal as the peak. Hopefully if we get some more falls they will be able to average down by raising  to 50% and so on but that is as Paul Simon would say.

Everybody loves the sound of a train in the distance
Everybody thinks it’s true

One development which raises a wry smile is that house price inflation is now below rental inflation.

Private rental prices paid by tenants in the UK rose by 1.2% in the 12 months to March 2019, up from 1.1% in February 2019……..London private rental prices rose by 0.5% in the 12 months to March 2019, up from 0.2% in February 2019.

What that tells us is not as clear as you might think because the numbers are lagged. Our statisticians keep the exact lag a secret but I believe it to be around nine months. So whilst we would expect rents to be pulled higher by the better nominal and real wage data the official rental series will not be showing that until the end of the year

Comment

The development of real wages in housing terms is very welcome. Of course the Bank of England will be in a tizzy about wealth effects but like so often they are mostly for the few who actually sell or look to add to their mortgage as opposed to the many who might like to buy but are presently priced out. Also existing owners have in general had a long good run. Those who can think back as far as last Thursday might like to mull how house price targeting would be going right now?

Moving to consumer inflation then not a lot happened with the only move of note being RPI inflation nudging down to 2.4%. The effects I described above were in there but an erratic item popped up and the emphasis is mine.

Within this group, the largest downward effect came from games, toys and hobbies, particularly computer games

If a new game or two comes in we will swing the other way.

Looking further up the line I have to confess this was a surprise with the higher oil price in play.

The growth rate of prices for materials and fuels used in the manufacturing process was 3.7% on the year to March 2019, down from 4.0% in February 2019.

So again a swing the other way seems likely to be in play for this month.

Meanwhile,what does the ordinary person think? It is not the best of news for either the Bank of England or our official statisticians.

Question 1: Asked to give the current rate of inflation, respondents gave a median answer of 2.9%, compared to 3.1% in November.

Question 2a: Median expectations of the rate of inflation over the coming year were 3.2%, remaining the same as in November.