The UK Plan is to turn a good inflation measure (RPI) into a bad one ( CPIH)

A feature of these times is that we see so many official attempts to hide the truth. In the UK at the moment one of the main efforts is around the inflation numbers and next week on the 25th we will get an announcement about it. The official documentation shows the real reason for the change albeit by accident.

Since 2010, the measured rate of RPI annual inflation has been on average one percentage point per annum above the CPIH.

They want to get rid of the RPI for that reason that it gives a reading some 1% higher as they can then tell people inflation is 1% higher at a stroke. The “independent” UK Statistics Authority and National Statistician have  thoroughly embarassed themselves on this issue. There have been 2 main efforts to scrap the RPI both of which have crumbed under their own inconsistencies and now the plan is to neuter it by applying some Lord of the Rings style logic.

One Ring to rule them all, One Ring to find them, One Ring to bring them all, and in the darkness bind them.

In the future we will only have one inflation measure and it will be the one that has been widely ignored since its introduction in spire of desperate attempts to promote it.

The Authority remains minded to address the shortcomings of the RPI by bringing the methods and data sources from the National Statistic, the CPIH, into the RPI. In practice this means that, from the implementation date, the RPI index values will be calculated using the same methods and
data sources as are used for the CPIH. Monthly and annual growth rates will then be calculated directly from the new index values.

So the “improvement” will involve including rents which do not exist and they comprise quite a bit of the index.

Given that the owner occupiers’ housing costs (OOH) component accounts for around 16% of the CPIH, it is the main driver for differences between the CPIH and CPI inflation rates.

For those unaware if you own your own home you are assumed to pay yourself rent and then increases in the rent you do not pay are put in the inflation numbers. Even worse they have little faith in the numbers used ( from actual renters) so they “smooth” them with an average lag of about 9 months. So today’s October rent numbers reflect what was happening around January and are therefore misleading. Putting it another way if you wish to have any idea of what is happening in the UK rental sector post pandemic do not look here for clues.

The supposedly inferior RPI uses house prices via a depreciation component ( a bit over 8%) and mortgage interest-rates ( 2.4%). Apparently using things people actually pay is one of the “shortcomings”. Meanwhile back in the real world if I was reforming the RPI I would put house prices in explicitly.

I find myself in complete agreement with the TUC on this.

Nobody is claiming the RPI is perfect. But it remains the best measure for living costs and would be straight forward to modernise.

As has been shown across Europe it would be perfectly possible to have RPI existing in parallel to CPIH (​or CPI) and have the latter measure focus on guiding monetary policy.

We are disappointed that expert calls to retain the RPI have been repeatedly ignored. The Royal Statistical Society and House of Lords Economic Affairs ​Committee have both presented compelling evidence for keeping it.

The basic issue is that the inflation numbers will be too low.In addition measures of real wages will be distorted too. These things echo around the system as for example when RPI was replaced by CPI in the GDP data the statistician Dr. Mark Courtney calculated that GDP was then higher by up to 0.5% a year. If you cant change reality then change how it is presented.

Today’s Data

We see that inflation is starting to pick up.

The Consumer Prices Index (CPI) 12-month rate was 0.7% in October 2020, up from 0.5% in September.

Remember that prices are being depressed right now by the VAT cut.

On 8 July 2020, the government announced that it would introduce a temporary 5% reduced rate of VAT for certain supplies of hospitality, hotel and holiday accommodation, and admissions to certain attractions.

I appreciated it last night when I bought a cooked chicken which has become cheaper. In terms of the inflation numbers we do have measures which allow for this. They are at 2.3% ( if you exclude indirect taxes called CPIY) and 2.4% ( if you have constant indirect tax rates or CPI-CT). We do not know exactly how prices would have changed without it but we do know that inflation would be a fair bit higher and would change the metric around Bank of England policy and its 2% inflation target.

The major movers were as follows.

Clothing; food; and furniture, furnishings and carpets made the largest upward contributions (with the contribution from these three groups totalling 0.16 percentage points) to the change in the CPIH 12-month inflation rate between September and October 2020………These were partially offset by downward contributions of 0.06 and 0.04 percentage points, respectively, from the recreation and culture, and transport groups.

You may note they have sneaked CPIH in there as it is the only way they can get it a mention as it is so poor it is widely ignored.

Another point of note is that the inflation measured by CPI is in services at 1.4% whereas good inflation is 0%.

If we look at the RPI we see another reason why it is described as having “shortcomings”. It has produced a higher number as it has risen from 1.1% in September to 1.3% in October.

The trend

In terms of the 2 basic measures we see that opposite influences are at play. The UK Pound £ has been reasonably firm and is just below US $1.33 as I type this so mo currency related inflation is on the way and maybe a little of the reverse. However the price of crude oil has been picking up lately with the January futures contract at US $44.27. Whilst this is around 30% below a year ago the more recent move this month has been for a US $7 rise.

In terms of this morning’s release there was a hint of a change.

The headline rate of output inflation for goods leaving the factory gate was negative 1.4% on the year to October 2020, up from negative growth of 1.7% in September 2020……The price for materials and fuels used in the manufacturing process showed negative growth of 1.3% on the year to October 2020, up from negative growth of 2.2% in September 2020.

So less negative and at this point crude oil was still depressing the prices so we can expect much more of a swing next time around if we stay at present levels.

Petroleum products and crude oil were the largest downward contributors to the annual rate of output inflation and input inflation respectively.

House Prices

I think you can see immediately why they want to keep house prices out of the official inflation measures.

UK average house prices increased by 4.7% over the year to September 2020, up from 3.0% in August 2020, to stand at a record high of £245,000.

They much prefer to put this in.

Private rental prices paid by tenants in the UK rose by 1.4% in the 12 months to October 2020, down from an increase of 1.5% in September 2020.

Just as a reminder home owners do not pay rent so this application of theory over reality conveniently reduces the headline inflation number called CPIH.

As ever there are regional differences in house price growth.

Average house prices increased over the year in England to £262,000 (4.9%), Wales to £171,000 (3.8%), Scotland to £162,000 (4.3%) and Northern Ireland to £143,000 (2.4%)….London’s average house prices hit a record high of £496,000 in September 2020.

Comment

Next week we will get the result of the official attempt to misrepresent inflation in the UK. All inflation measures have strengths and weaknesses but the UK establishment is trying to replace what is a strong measure (RPI) with a poor one ( CPIH). I think it is particularly insidious to keep the name RPI but in reality to make it a CPIH clone. A group that will be heavily affected is first time buyers of property who will be told there is little inflation because of a theoretical manipulation involving imputed rents but face a reality of much higher house prices.

“It takes all the running you can do, to keep in the same place. If you want to get somewhere else, you must run at least twice as fast as that!” ( Mad Hatter )

If you set out to destroy trust in national statistics then they are on the right road.

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!

 

 

The UK government plans to rip us all off

This morning has seen the publishing of some news which feels like it has come from another world.

The all items CPI annual rate is 1.7%, down from 1.8% in January…….The all items RPI annual rate is 2.5%, down from 2.7% last month.

Previously we would have been noting the good news and suggesting that more is to come as we look up the price chain.

The headline rate of output inflation for goods leaving the factory gate was 0.4% on the year to February 2020, down from 1.0% in January 2020. The price for materials and fuels used in the manufacturing process displayed negative growth of 0.5% on the year to February 2020, down from positive growth of 1.6% in January 2020.

There is something that remains relevant however as I note this piece of detail.

Petroleum products made the largest downward contribution to the change in the annual rate of output inflation. Crude oil provided the largest downward contribution to the change in the annual rate of input inflation.

That is something which is set to continue because if we look back to February the base for the oil price ( Brent Crude) was US $50 whereas as I type this it is US $27.50. So as you can see input and output costs are going to fall further. This will be offset a bit by the lower UK Pound £ but I will address it later. In terms of consumer inflation the February figures used are for diesel at 128.2 pence per litre whereas the latest weekly number is for 123.4 pence which is some 7.7% lower than a year ago. So there will be a downwards pull on inflation from this source.

There is a bit of an irony here because the Russo/Saudi turf war which began the oil price fall on the supply side has been overtaken by the large falls in demand we are seeing as economies slow. According to The Guardian we may run out of spaces to put it.

Analysts at Rystad estimate that the world has about 7.2bn barrels of crude and products in storage, including 1.3bn to 1.4bn barrels onboard oil tankers at sea.

In theory, it would take nine months to fill the world’s remaining oil stores, but constraints at many facilities will shorten this window to only a few months.

The Rip-Off

The plan hatched by a combination of HM Treasury and its independent puppets the UK Statistics Authority and the Office for National Statistics is to impose a type of stealth tax of 1% per annum. How?

In drawing up his advice, the National Statistician considered the views of the Stakeholder Advisory Panel on Consumer Prices (APCP-S). The Board accepted his advice and that was the basis of the proposals we put to the Chancellor to cease publication of RPI and in the short term to bring the methods of CPIH into RPI.The Chancellor responded that he was not minded to promote legislation to end RPI, but that the Government intended to consult on whether to bring the methods in CPIH into RPI between 2025 and 2030, effectively aligning the measures.

The emphasis is mine and the plan is to put the fantasy Imputed Rents that are used in the widely ignored CPIH into the RPI. There is good reason that the CPIH has been ignored so let me explain why. In the UK the housing market is a big deal and so you might think what owner-occupiers pay would be a considerable influence on inflation. But in 2002 a decision was made to completely ignore it in the new UK inflation measure called CPI ( Consumer Prices Index).

Putting it in was supposed to be on its way but plans took a decade and the saga took a turn in 2012 when the first effort to use Imputed Rents began. It got strong support from the Financial Times economics editor Chris Giles at the time. He stepped back from that when it emerged that there had been a discontinuity in the numbers, which in statistical terms is a disaster. So the fantasy numbers ( owner-occupiers do not pay rent) are based on an unproven rental series.

Why would you put a 737 Max style system when you have a reliable airplane? You would not, as most sensible people would be debating between the use of the things that are paid such as house prices and mortgage payments. That is what is planned in the new inflation measure which has been variously called HII and HCI. You may not be surprised to learn that there have been desperate official efforts to neuter this. Firstly by planning to only produce it annually and more latterly by trying to water down any house price influence.

At a time like this you may not think it is important but when things return to normal losing around 1% per year every year will make you poorer as decisions are made on it. Also it will allow government’s to claim GDP and real wages are higher than they really are.

Gold

There is a lot going on here as it has seen its own market discontinuity which I will cover in a moment. But we know money is in the offing as I note this from the Financial Times.

Gold continued to push higher on Tuesday as a recent wave of selling dried up and Goldman Sachs told its clients the time had come to buy the “currency of last resort”. Like other asset classes, gold was hit hard in the recent scramble for US dollars, falling more than 12 per cent from its early March peak of around $1,700 a troy ounce to $1,460 last week.  The yellow metal started to see a resurgence on Monday, rising by more than 4 per cent after the Federal Reserve said it would buy unlimited amounts of government bonds and the US dollar fell.

So we know that the blood funnel of the Vampire Squid is up and sniffing. On its view of ordinary clients being “Muppets” one might reasonably conclude it has some gold to sell.

Also there have been problems in the gold markets as I was contacted yesterday on social media asking about the gold price. I was quoting the price of the April futures contact ( you can take the boy out of the futures market but you cannot etc….) which as I type this is US $1653. Seeing as it was below US $1500 that is quite a rally except the spot market was of the order of US $50 below that. There are a lot of rumours about problems with the ability of some to deliver the gold that they owe which of course sets alight the fire of many conspiracy theories we have noted. This further went into suggestions that some banks have singed their fingers in this area and are considering withdrawing from the market.

Ole Hansen of Saxo Bank thinks the virus is to blame.

Having seen 100’s of anti-bank and anti-paper #gold tweets the last couple of days I think I will give the metal a rest while everyone calm down. We have a temporary break down in logistics not being helped by CME’s stringent delivery rules of 100oz bars only.

So we will wait and see.

Ah, California girls are the greatest in the world
Each one a song in the making
Singin’ rock to me I can hear the melody
The story is there for the takin’
Drivin’ over Kanan, singin’ to my soul
There’s people out there turnin’ music into gold ( John Stewart )

 

Comment

Quite a few systems are creaking right now as we see the gold market hit the problems seen by bond markets where prices are inconsistent. Ironically the central banks tactics are to help with that but their strategy is fatally flawed because if you buy a market on an enormous scale to create what is a fake price ( lower bond yields) then liquidity will dry up. I have written before about ruining bond sellers ( Italy) and buyers will disappear up here. Please remember that when the central banks tell us it is nothing to do with them and could not possibly have been predicted. Meanwhile the US Federal Reserve will undertake another US $125 billion of QE bond purchases today and the Bank of England some £3 billion. The ECB gives fewer details but will be buying on average between 5 and 6 billion Euros per day.

Next we have the UK deep state in operation as they try to impose a stealth tax via the miss measurement of inflation. Because they have lost the various consultations so far and CPIH has remained widely ignored the new consultation is only about when and not if.

The Authority’s consultation, which will be undertaken jointly with that of HM Treasury, will begin on 11 March. It will be open to responses for six weeks, closing on 22 April. HM Treasury will consult on the appropriate timing for the proposed changes to the RPI, while the Authority will consult on the technical method of making that change to the RPI.

Meanwhile for those of you who like some number crunching here is how a 123.4 pence for the price of oil gets broken down. I have done some minor rounding so the numbers add up.

Oil  44.9 pence

Duty 58 pence

VAT 20.5 pence

Good to see UK wage growth well above house price growth

Today brings the UK inflation picture into focus and for a while now it has been an improved one as the annual rates of consumer, producer and house price inflation have fallen. Some of this has been due to the fact that the UK Pound £ has been rising since early August which means that our consumer inflation reading should head towards that of the Euro area. As ever currency markets can be volatile as yesterdays drop of around 2 cents versus the US Dollar showed but we are around 12 cents higher than the lows of early August. The latter perspective was rather missing from the media reporting of this as “tanks” ( Reuters) and “tanking” ( Robin Wigglesworth of the FT) but for our purposes today the impact of the currency has and will be to push inflation lower.

The Oil Price

This is not as good for inflation prospects as it has been edging higher. Although it has lost a few cents today the price of a barrel of Brent Crude Oil is at just below US $66 has been rising since it was US $58 in early October. Whilst the US $70+ of the post Aramco attack soon subsided we then saw a gradual climb in the oil price. So it is around US $8 higher than this time last year.

If we look wider then other commodity prices have been rising too. For example the Thomson Reuters core commodity index was 167 in August but is 185 now. Switching to something which is getting a lot of media attention which is the impact of the swine fever epidemic in China ( and now elsewhere ) on pork prices it is not as clear cut as you might think. Yes the Thomson Reuters Lean Hogs index is 10% higher than a year ago but at 1.92 it is well below the year’a high of 2.31 seen in early April

Consumer Inflation

It was a case of steady as she goes this month.

The Consumer Prices Index (CPI) 12-month rate was 1.5% in November 2019, unchanged from October 2019.

This does not mean that there were no changes within it which included some bad news for chocoholics.

Food and non-alcoholic beverages, where prices overall rose by 0.8% between October and November 2019 compared with a smaller rise of 0.1% a year ago, especially for sugar, jam, syrups, chocolate and confectionery (which rose by 1.8% this year, compared with a rise of 0.1% last year). Within this group, boxes and cartons of chocolates, and chocolate covered ice cream bars drove the upward movement; and • Recreation and culture, where prices overall rose between October and November 2019 by more than between the same two months a year ago.

On the other side of the coin there was a downwards push from restaurants and hotels as well as from alcoholic beverages and tobacco due to this.

The 3.4% average price rise from October to November 2018 for tobacco products reflected an increase in duty on such products announced in the Budget last year.

Tucked away in the detail was something which confirms the current pattern I think.

The CPI all goods index annual rate is 0.6%, up from 0.5% last month……..The CPI all services index annual rate is 2.5%, down from 2.6% last month.

The higher Pound £ has helped pull good inflation lower but the “inflation nation” problem remains with services.

The pattern for the Retail Prices Index was slightly worse this month.

The all items RPI annual rate is 2.2%, up from 2.1% last month.

The goods/services inflation dichotomy is not as pronounced but is there too.

Housing Inflation ( Owner- Occupiers)

This is a story of many facets so let me open with some good news.

UK average house prices increased by 0.7% over the year to October 2019 to £233,000; this is the lowest growth since September 2012.

This is good because with UK wages rising at over 3% per annum we are finally seeing house prices become more affordable via wages growth. Also you night think that it would be pulling consumer inflation lower but the answer to that is yes for the RPI ( via the arcane method of using depreciation but it is there) but no and no for the measure the Bank of England targets ( CPI) and the one that our statistical office and regulators describes as shown below.

The Consumer Prices Index including owner occupiers’ housing costs (CPIH).

Those are weasel words because they use the concept of Rental Equivalence to claim that homeowners pay themselves rent when they do not. Even worse they have trouble measuring rents in the first place. Let me illustrate that by starting with the official numbers.

Private rental prices paid by tenants in the UK rose by 1.4% in the 12 months to November 2019, up from 1.3% in October 2019.

Those who believe that rents respond to wage growth and mostly real wages will already be wondering about how as wage growth has improved rental inflation has fallen? Well not everyone things that as this from HomeLet this morning suggests.

Newly agreed rents have continued to fall across most of the UK on a monthly basis despite above-inflation annual rises, HomeLet reveals.

Figures from the tenancy referencing firm show that average rents on new tenancies fell 0.6% on a monthly basis between October and November, with just Wales and the north-east of England registering a 1.1% and 0.4% increase respectively.

Both the north-west and east of England registered the biggest monthly falls at 0.8%.

Rents were, however, up 3.2% annually to £947 per month.

This is at more than double the 1.5% inflation rate for November.

As you can see in spite of a weak November they have annual rental inflation at more than double the official rate. This adds to the Zoopla numbers I noted on October 16th which had rental inflation 0.7% higher than the official reading at the time.

So there is doubt about the official numbers and part of it relates to an issue I have raised again with the Economic Affairs Committee of the House of Lords. This is that the rental index is not really November’s.

“The short answer is that the rental index is lagged and that lag may not be stable.I have asked ONS for the detail on the lag some while ago and they have yet to respond.”

Those are the words of the former Government statistician Arthur Barnett. As you can see we may well be getting the inflation data for 2018 rather than 2019.

The Outlook

We get a guide to this from the producer price data.

The headline rate of output inflation for goods leaving the factory gate was 0.5% on the year to November 2019, down from 0.8% in October 2019……..The growth rate of prices for materials and fuels used in the manufacturing process was negative 2.7% on the year to November 2019, up from negative 5.0% in October 2019.

So the outlook for the new few months is good but not as good as it was as we see that input price inflation is less negative now. We also see the driving force behind goods price inflation being so low via the low level of output price inflation.

Comment

In many respects the UK inflation position is pretty good. The fact that consumer inflation is now lower helps real wage growth to be positive. Also the fall in house price inflation means we have improved affordability. These will both be boosting the economy in what are difficult times. The overall trajectory looks lower too if we add in these elements described by the Bank of England.

CPI inflation remained at 1.7% in September and is expected to decline to around 1¼% by the spring, owing to the temporary effect of falls in regulated energy and water prices.

However as I have described above these are bad times for the Office for National Statistics and the UK Statistics Authority. Not only are they using imaginary numbers for 17% of their headline index ( CPIH) the claims that these are based on some sort of reality ( actual rental inflation) is not only dubious it may well be based on last year data.

The Investing Channel

 

Lower UK inflation provides some welcome good news for real wages

This morning allows us to take a deep breath and move from last night’s excitement which rapidly turned to apparent stalemate to a whole raft of UK inflation data. As we stand the UK Pound has rallied a bit to US $1.288 and 1.129 versus the Euro but in inflation terms that represents a drop as it was around 7% higher versus the US Dollar a year ago. So that is what is around the corner as today the influence will be a bit more than that as the UK Pound was weaker in December versus the Dollar which is the currency in which commodities are priced.

Moving to the price of crude oil there will be a downwards influence on today’s numbers from it as we note a March futures price which peaked at US $84.58 and was more like US $56 around the time the UK numbers are collected. If we look at the weekly fuel prices we see that petrol prices dropped from being around 12 pence per litre dearer than a year before to more like 2 pence. However this gain has been offset to some extent by the way that diesel has become much more expensive than petrol with the gap between the two being around 4 pence in December 2017 but more like 10 pence in December 2018. Does anybody have a good reason for this?

Inflation Targeting

Bank of England Governor Mark Carney answered some online questions on the 9th of this month at what is called the Future Forum. Let me open with a point of agreement.

On your question about the level of the inflation target, long and varied experience has shown that price stability is the best contribution monetary policy can make to the public good.

The problem is that whilst I mean price stability he is being somewhat disingenuous as that is not what he means. Let me highlight with this.

There are good reasons why central banks around the world, including the Bank of England, target a low, positive rate of inflation not no inflation.

As you can see he talks the talk but does not walk the walk and here is his explanation.

 A little inflation ‘greases the wheels’ of the economy, for example by helping inflation-adjusted wages adjust more smoothly to changes in companies’ demand for labour and facilitating shifts in resources between sectors in response to changes in supply and demand. Moreover, a positive inflation rate gives monetary policy space to deliver better outcomes for jobs and growth

So it helps him to look like a master of the universe and helps wages adjust. Seeing as wages have adjusted downwards I hope he was challenged on that point. But there is more.

From a more technical point of view, the official rate of inflation might also over-estimate the true rate at which prices are rising because it is hard to strip out increases that reflect improvements in the quality of goods and services on offer. Aiming for a 0% inflation target would risk forcing the economy into deflation in the medium term.

That is really rather breathtaking! Let me explain why by comparing his “might” by the reality that UK consumer inflation has since the change to CPI as the inflation target in 2003 consistently under recorded inflation via the way that owner occupied housing is ignored completely. They always meant to get around to it but somehow forget until they managed to find a way ( imputed rent) of having one of the fastest areas of inflation recorded as one of the slowest in the new “comprehensive” CPIH measure.

At least he has dropped the effort to claim that relative prices could not move with a 0% inflation target. This is because I kept pointing out that when we had around 0% around 3 years ago there was a big relative price shift via the much lower price of crude oil which had driven it. So it is good that this particular fantasy had its bubble burst but not so good that the Ivory Towers responsible carry on regardless.

Also if we return to the quality issue a powerful point was made by the statistician Simon Briscoe who stood up and stated that each time he bought a new I-Pad it cost him more than a thousand pounds. But whilst he realised each one was better how does that work if he neither needs nor uses the additions or only uses a few of them?

Inflation

As we had been expecting the consumer inflation numbers provided some good news this morning.

The all items CPI annual rate is 2.1%, down from 2.3% in November……..The all items RPI annual rate is 2.7%, down from 3.2% last month.

The main driver here was transport costs as we expected because if we throw in the whole sector then annual inflation was cut by a bit more than 0.2% due to it. Actually slightly more for the RPI as it has a higher weight for air fares. Also the RPI was affected by something a little embarrassing for a Bank of England which had raised Bank Rate in November by 0.25%.

Mortgage interest payments, which decreased the RPI 12-month rate by 0.09 percentage points between November and December 2018 but are excluded from the CPIH.

Of course they are excluded from the woeful CPIH which essentially only includes things which do not exist in its calculations about owner occupied housing and ignores things which are paid. Here is its major player.

Private rental prices paid by tenants in the UK rose by 1.0% in the 12 months to December 2018, up from 0.9% in November 2018.

As you can see even at the new overall lower trend for house price growth (which was previously around 5% per annum ) it way undershoots the number.

Average house prices in the UK increased by 2.8% in the year to November 2018, up slightly from 2.7% in October 2018 (Figure 1). 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.

The lowest annual growth was in London, where prices fell by 0.7% over the year to November 2018, unchanged from October 2018.

 

Comment

There are two entwined elements of good news here as we note first the fact that the annual rate of inflation has fallen and done so quite sharply if we look at RPI. The next is that it has helped UK real wage growth into positive territory on a little more clear-cut basis. Should total pay growth continue to exceed 3% ( it was last 3.3%) then it is hardly a boom but hopefully we will see a sustained rise. At a time when the economic outlook has plenty of dark clouds this is welcome especially as the outlook seems set fair.

The headline rate of output inflation for goods leaving the factory gate was 2.5% on the year to December 2018, down from 3.0% in November 2018. The growth rate of prices for materials and fuels used in the manufacturing process slowed to 3.7% on the year to December 2018, down from 5.3% in November 2018.

Inflationary pressure in the system has slowed.

Moving to measurement I have some hopes for this from the House of Lords Economic Affairs Committee.

Next Thursday 17 January we will publish “Measuring Inflation”, our report on the use of RPI.

It did appear that something of a stitch-up was underway but efforts were made to provide an alternative view as for example I invited them to a debate at the Royal Statistical Society on the subject. They then became quite critical of the way that our official statistician have refused to update the RPI even for changes which would be simple. So fingers crossed! Although of course the establishment is a many-headed hydra.

Sticking with the RPI I referred yesterday to an article in the Financial Times about index-linked Gilts and here is the most relevant sentence.

 This implies inflation of about 3.2 per cent — well above current levels and the Bank of England’s 2 per cent target.

So it implies inflation of 3.2% which was well above the 3.2% the RPI was at the time the piece was written?!

 

 

UK Inflation starts to head lower and help real wage growth

Today brings the latest UK official inflation data into focus. However the last 24 hours have brought another shift in the environment because the crude oil price had another of those days when it took something of a dive. Here is Oilprice.com on the subject.

Crude prices fell 4 percent on Monday and about 7 percent on Tuesday. WTI dropped below $47 per barrel and Brent fell to the $56 handle.

Moving onto the likely causes they tell us this.

Oil prices crashed to new one-year lows on Tuesday, dragged down by a deepening sense of global economic gloom as well as fears of oversupply in the oil market itself.

The reasons for the sudden meltdown were multiple. Rising crude oil inventories and expected increases in shale production weighed on oil prices, but the price crash was accentuated by the broader selloff in financials.

Genscape said that inventories are rising, which has raised fears of tepid demand amid soaring supply growth.

We are back to mulling an increase in shale oil production at a time when demand is weakening. As ever there is an undercut as we wonder if the shale oil producers will be so enthusiastic if the oil price remains at these new lower levels. If we switch to the impact on the inflation outlook then we now have an oil price that is around 10% lower than a year ago if we use the Brent Crude benchmark and more than that using West Texas Intermediate as the gap between the two has approached US $10.

The impact of this should be felt to some extent in the input version of the producer price data for November and maybe via fuel prices at the pump in a much more minor way on the consumer price inflation number. By the time we get the December data there will be a stronger influence and this will be accompanied by other commodity prices falls. For example Dr. Copper is at US $2.68 as I type this or 14% lower than a year ago. The CRB Commodity Index has not fallen as much but is still some 6% lower than a year ago.

Central Banks

The news above will be debated at the US Federal Reserve as it decides US interest-rates and the subject of QT today. Of course central bankers ignore what they call non-core factors such as energy and food in their favourite inflation measures but the ordinary person cannot and the picture has changed. Also as @fwred reminds us central banks are no longer using their balance sheets to raise inflation.

From an economic perspective, we’ll be debating the impact of QE for years looking at the counterfactual and the complementary effects of other policy tools, including negative rates. ECB’s estimate: ~2% boost both to real GDP and inflation, or +40bp per year.

Well apart from the Bank of Japan anyway, but it has failed to do much about inflation at all in spite of the size of its actions which now exceed annual economic output or GDP.

Today’s data

Having emphasised the impact of lower oil prices let us get straight to the impact.

The annual rate of inflation for materials and fuels purchased by manufacturers (input prices) slowed to 5.6% in November 2018, down 4.7 percentage points from October 2018 . The 12-month rate of input inflation has been positive since July 2016. The annual rate was driven predominantly by crude oil prices, which showed growth of 15.5% in November 2018, although this was down from 40.4% in October 2018. The one-month rate for materials and fuels fell 3.1 percentage points to a negative 2.3% in November 2018.

As you can see there was quite a change in the trajectory in November and as the annual rate remained positive there is more to come. There was also the beginning of an effect on the output number.

The annual rate of inflation for goods leaving the factory gate (output prices) fell by 0.2 percentage points to 3.1% in November 2018 . The 12-month rate of output inflation has remained positive since July 2016. On the month, output inflation also slowed, falling 0.1 percentage points to 0.2%.

Actually there was a larger impact from the lower oil price than this but it got offset by this.

This increase reflects the rise in Tobacco Duty introduced in November 2018 and is the highest the rate has been since March 2014.

So not the best of months for Oasis fans.

But all I need are cigarettes and alcohol!

Consumer Inflation

Here we also saw a marginal nudge lower in the main two measures.

The all items CPI annual rate is 2.3%, down from 2.4% in October…….The all items RPI annual rate is 3.2%, down from 3.3% last month

This was driven by lower rates of inflation for recreation and culture and this.

Petrol prices fell by 2.6 pence per litre between October and November 2018, compared with a rise of 1.8 pence per litre between October and November 2017.

Actually I noted this mention about recreation and culture.

Price movements for both
computer games and live music events can often be relatively large depending on the composition of
bestseller charts and the bands that are touring at the time of price collection.

This was on my mind due to the fact that Ringo Starr and Ronnie Wood joined Paul McCartney on stage at the O2 in London on Sunday night. My point is that you can measure the ticket price but what is your quality measure? From the excitement on social media that changed by Ringo’s presence in the crowd before we get to having the only surviving Beatles playing on stage and to top it off being joined by a Rolling Stone.

How to measure inflation

We can move onto the widely ignored official measure called CPIH.

The all items CPIH annual rate is 2.2%, unchanged from last month.

It is widely ignored because of the way it uses Imputed Rents to get to this.

The OOH component annual rate is 1.1%, unchanged from last month ( OOH = Owner Occupied Housing).

House Prices

A couple of weekends ago when the economics editor of the Financial Times was presumably otherwise engaged I noted this.

The original consumer price index included house prices. But they were removed in 1983 and replaced with “non-market rents” — an estimate of how much owners could charge to let their homes…….
Including house prices in the new index would not guarantee a higher rate of inflation as high house price inflation might be offset by smaller increases, if not a decline, in rents or offset by price changes in other components. But large and persistent acceleration in this new economy-wide index would be a sign of more general inflation.

This was about the US and written by Joseph Carson but it applies to the UK as well. I note it got widespread support in the comments, although we cannot make a comparison to the pro Imputed Rent articles as they seem to have suspended the comments system for those.

The rate of UK house price inflation has slowed and I welcome that but it remains a much better guide to inflation than any rental fantasies.

Average house prices in the UK increased by 2.7% in the year to October 2018, down from 3.0% in September 2018. This is the lowest annual rate since July 2013 when it was 2.3%. 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.

Comment

There is some pre-Christmas cheer in the UK inflation data today as we see the new lower oil price start to have an impact on the numbers. If it is true that the New Year Sales have started early then that too may impact on the December data although of course it will wash out to some extent in January.

But for the moment the trend for consumer and indeed asset inflation is down and we should welcome the way that will benefit real wages and indeed first time buyers in the property market. Also as someone who has spent the last 6 years or so arguing about inflation measurement with official bodies being operated like puppets by HM Treasury I had a wry smile at this tweet which ignores the measure it has pressed for.

The UK inflation picture is shifting again

After disappointing news on wage growth yesterday for the Bank of England the day ended with some good news for it on this front. From the Financial Times.

The chief executives of the UK’s biggest listed companies received an 11 per cent raise last year pushing their median pay up to £3.93m, according to a report which found that full-time workers received a 2 per cent rise over the same period. The figures for FTSE 100 bosses include base salary, bonuses and other incentives and have been revealed at a time of growing shareholder activism over big payouts. Shareholders at companies including BT, Royal Mail and WPP have rebelled against chief executive pay at stormy annual investor meetings this year.

So some at least are getting above inflation pay rises Actually you can make the number look even larger if you switch to an average rather than the median as this from the original CIPD report shows.

 If we divide this amount equally among all the CEOs covered by our report, they would each receive a mean annual package worth £5.7 million, 23% higher than the 2016 mean figure of £4.6 million.

Why is this so? Well a lot of it is due to a couple of outliers as this from the FT shows.

The highest-paid chief executive in 2017 was Jeff Fairburn at housebuilder Persimmon who received £47.1m, or 22 times his 2016 pay. Ranking second, Simon Peckham of turnround specialist Melrose Industries banked £42.8m, equal to 43 times his 2016 pay, according to the analysis.

The case of Mr.Fairburn at Persimmon is an especially awkward one for the establishment as he has personally benefited on an enormous scale from the house price friendly policies of the Bank of England and the UK government. As so often we face the irony of the government supposedly being on the case of executive pay which it has helped to drive higher.  Indeed I note this seems to be a wider trend as Persimmon is not alone amongst house builders according to the CIPD report.

Berkeley Group Holding plc’s Rob Perrins, whose total pay package rose from £10.9 million in 2016 to £27.9 million.

Inflation

If we step back for a moment and look at the trends we see that they have shifted in favour of higher inflation. A factor in this has been the US Dollar strength we have seen since the spring which was not helped by the unreliable boyfriend behaviour of Bank of England Governor Mark Carney back in April. So now we face as I type this an exchange rate a bit over US $1.27 meaning we will have to pay more for many commodities and oil.

Moving onto the oil price itself care is needed as whilst we have dropped back from the near US $80 for a barrel of Brent Crude seen at the end of May to US $72 we are up around 42% on a year ago. This time around the OPEC manoeuvering has worked for them but of course not us.

There are various ways these feed into our system and perhaps the clearest is the price of fuel at the pump where a 5 pence rise raises inflation by ~0.1%. We are also experiencing another impact as we see domestic energy costs rise as NPower raised on the 17th of June, SSE on the 11th of July, E.ON will raise them tomorrow and EDF Energy will raise them at the end of the month. These are of course not only the result of higher worldwide energy prices but also a form of administered inflation via changes in energy policy for which we foot the bill. People will have different views on types of green energy which are expensive but much fewer will support the expensive white elephant which is the smart meter roll out and further ahead is the Hinkley Point nuclear plant.

Today’s data

There was a small pick-up.

The all items CPI annual rate is 2.5%, up from 2.4% in June

Some of it was from the source described above.

Transport, with passenger transport fares seeing larger price rises between June and July 2018
compared with the same period a year ago. Motor fuels also made an upward contribution,

Another was from the area of computer games where we seem to have found another area that the statisticians are struggling with.

these are heavily dependent on the composition of bestseller charts, often resulting
in large overall price changes from month to month;

Let us hope that this clams down as we have plenty to deal with as it is! As to downwards influences we should say thank you ladies as we mull whether this is being driven by the problems in the bricks and mortar part of the retail sector.

Clothing and footwear, with prices falling by 3.7% between June and July 2018, compared with a smaller fall of 2.9% between the same two months a year ago. The effect came mainly from women’s clothing and footwear.

If we look further down the inflation food chain we see a hint of what seems set to come from the lower Pound £.

Prices for materials and fuels (input prices) rose 10.9% on the year to July 2018, up from 10.3% in June 2018.

In essence it was driven by this.

 The annual rate was driven by crude oil prices, which increased to 51.9% on the year in July 2018, up from 50.2% in June 2018.

However in a quirk of the data this did not feed into output producer price inflation which dipped from 3.3% to 3.1%. Whilst welcome I suspect that this is a quirk and it will be under upwards pressure in the months ahead if we see the Pound £ remain where it is and oil ditto.

House Prices

Here we saw what might be summarised as a continuation of the trend we have seen.

Average house prices in the UK have increased by 3.0% in the year to June 2018 (down from 3.5% in May 2018). This is its lowest annual rate since August 2013 when it was also 3.0%. The annual growth rate has slowed since mid-2016.

However there is a catch because even at this new lower level it is still considerably above what we are officially told is inflation in this area.

Private rental prices paid by tenants in Great Britain rose by 0.9% in the 12 months to July 2018, down from 1.0% in the 12 months to June 2018.

This is what feeds into what is the inflation measure that the Office for National Statistics has been pushing hard for the last 18 months or so. But there also is the nub of its problem. Actually they have problems measuring rents in the first place which affects the process of measuring inflation for those who do rent but then fantasising that someone who owns a property rents it to themselves has led to quite a mess.

Comment

As we look forwards we see the prospect of inflation nudging higher again. However there are two grounds for optimism. One is short-term in that the next two monthly increases for comparison are rises of 0.6 and then 0.3 in the underlying index for CPI .The other is that I do not think that the all the prices which rose back in late 2016 early 2017 went back down again so we may see a lesser impact this time around.

Meanwhile the issue around the RPI has arisen again. Some of it has been driven by Chris Grayling suggesting the use of CPI for rail fares. Ed Conway of Sky News has been joining in the campaign against the RPI this morning on Twitter.

Don’t let anyone tell you RPI is better/different because it includes housing. First, these days CPI does include a housing element.

To the first bit I will and to the second I am waiting for a reply to my point that CPI excludes owner-occupied housing. As it happens RPI moved downwards this month which will be welcomed by rail travellers as it is the number used to set many of the annual increases.

The all items RPI annual rate is 3.2%, down from 3.4% last month.

 

 

Lower house price inflation adds to the headache at the Bank of England

Today is inflation day in the UK where we receive the latest data but before we get to that there were some developments on the issue of how we measure it. This took place at the Economic Affairs Committee of the House of Lords where its ongoing enquiry into the Retail Price Index  or RPI continued and took evidence from the National Statistician John Pullinger. Regular readers will be aware that I have been making the case for the RPI for more than six years now as the UK establishment set a plan to try to get rid of it and more recently attempting to let it wither under a policy of neglect where they do not update it even if the changes required are ones which are easy to do because the data is already collected for other indices. Actually they have not even been consistent in that policy as they did make a change last year to bring in a new house price index as the previous one had been discovered to be incorrect.

For newer readers this matters because put simply it is the indices that give the higher readings for inflation which seem to come under official challenge. The pensioners index went about five years ago and the RPI has been under fire for most of this decade. The measure they would like to replace it with called CPIH has in its relatively short life consistently given the lowest reading. The latest numbers go RPI ( 3.4%) which of course was replaced by the CPI ( 2.4%) and then CPI (2.3%). I am sure you can see the trend for yourself but in case you think this is arcane it mattered a lot yesterday as with total wage growth being 2.5% then we get quite different answers for real wage growth. Another impact is on GDP growth where the statistician Mark Courtney has estimated that the use of CPI rather than RPI has raised recorded growth by something of the order of 0.5%. At times of low growth like now that gets even more significant.

Moving to yesterday John Pullinger said this.

The RPI is not a good measure of inflation ( slight delay) as captured by prices that capture the impact on the consumption of goods and services, it is not a good measure of inflation if you look at the impact of prices on households.

Even this opening salvo represents a change as the previous position was the bit before the slight delay whereas now room for manoeuvre is being created. As the meeting developed there was a shift to this as reported by the Financial Times.

Mr Pullinger had previously refused to consider reforms to the RPI, saying it was a legacy index that could not be changed.But in response to insistent questions by committee members, he said the statistics agency had now changed its mind, but needed to get the Treasury and the Bank of England on board before it would act.

So just like the Financial Times itself where the economics editor Chris Giles argued for some years against the RPI before mellowing recently. Let me cut to the two main issues here which are owner-occupied housing costs and the formula effect. The UK establishment have campaigned in favour of inflation measures which exclude owner occupied housing costs ( CPI) or use fantasy rents which are never paid in reality to do so ( CPIH). In some ways I think the latter is worse as it flies under a false flag as cursory readers may only read the headlines which say it covers housing costs. In reality it has been an embarrassment which I have covered many times.

The “formula effect” is more complex and many of you will have read the eloquent arguments in  favour of what was called RPIJ  by Andrew Baldwin in the comments section here which in essence is RPI without it. The UK establishment took that line for a few years then dropped it as you have to calculate it yourself now ( or wait for Andrew to do it for you). The bone of contention here is that some of it at least is due to changes in the way clothing prices were measured in 2010 which caused as Taylor Swift would put it “trouble,trouble,trouble”. You see until then there were arguments CPI under measured inflation not RPI being over. If I was in charge there would be a major project into investigating and reforming this area as before then the formula effect was smaller. It is a matter for the UK authorities as to why such work began but then stopped. Research was replaced by rhetoric.

Today’s numbers

We dodged a little bit of a bullet I think.

The all items CPI annual rate is 2.4%, unchanged from last month

What I mean by that is that there were upwards pressure as three utilities raised domestic energy costs and the comparison for petrol prices was with 115.3 pence last year. Having written what I have above it was hard not to have a wry smile at what held inflation down.

where prices of clothing fell by 2.3% between May and June this year compared with a fall of 1.1% between the same two months a year ago. Prices usually fall between May and June as the summer sales season begins but the fall in 2018 is the largest since 2012.

Fortunately in some ways this was not the reason why the RPI went the other way.

The all items RPI annual rate is 3.4%, up from 3.3% last month.

Looking Ahead

There continues to be a tug higher from the producer price numbers.

The headline rate of inflation for goods leaving the factory gate (output prices) was 3.1% on the year to June 2018, up from 3.0% in May 2018. Prices for materials and fuels (input prices) rose 10.2% on the year to June 2018, up from 9.6% in May 2018.

These do not impact on a one for one basis by any means as the effect weakens from input prices to output prices and even more so to consumer inflation. The input number is mostly ( ~70%) the impact of the oil price and changes in the value of the UK pound £.

House Prices

Finally the official data series is catching up with the other measures that we look at.

Average house prices in the UK have increased by 3.0% in the year to May 2018 (down from 3.5% in April 2018). This is its lowest annual rate since August 2013 when it was also 3.0%.

This means that the other measures seem to be working well as a leading indicator although it is also true that there remain challenges to the new series ( there is still some debate about its treatment of new builds)

Comment

There is good news today in that inflation at least on the official measures did not rise and there is hope for something of an official rethink on how it is measured. Let me give some credit to the Economic Affairs Committee which did challenge the National Statistician yesterday. For purposes of transparency I did contact them last month to point out they should widen their evidence base and to invite them to the Royal Statistical Society meeting on the RPI at which I was one of the speakers. Sadly their Lordships were otherwise engaged but staff members did attend I am told. I note that they were also willing to reflect evidence that the CPI measure has under recorded inflation ( housing costs for a start).

Moving to today’s numbers we see that upwards pressure remains on consumer inflation but that there is plenty for the Bank of England to consider. We saw yesterday that wage growth has dipped albeit only by a small amount and now inflation has remained static. Some may consider that its eyes will be on the fall in house price inflation especially should its mood be of behaving like an unreliable boyfriend.

But even so let me compare house price growth’s 3% with this which is a basis of the CPIH housing costs section.

Private rental prices paid by tenants in Great Britain rose by 1.0% in the 12 months to June 2018; unchanged since April 2018.

What is the trend for inflation?

The issue of inflation is one which regularly makes the headlines in the financial media. However the credit crunch era has seen several clear changes in the inflation environment. The first is the way that wage and price inflation broke past relationships. There used to be something of a cosy relationship where for example in my country the UK it was assumed that if inflation was 2% then wage growth would be around 4%. Actually if you look at the numbers pre credit crunch that relationship had already weakened as real wage growth was more like 1% than 2% but at least there was some. Whereas now we see many situations where real wage growth is at best small and others where there has not been any. For example the “lost decade” in Japan which of course is now more than two of them can in many respects be measured by (negative) real wage growth. Even record unemployment levels have failed to do much about this so far although the media have regularly told us it has.

At first inflation dipped after the credit crunch but was then boosted as many countries raised indirect taxes ( VAT in the UK) to help deal with ballooning fiscal deficits.. There was also the really rather odd commodity price boom that made it look like all the monetary easing was stoking the inflationary fires. I still think the bank trading desks which were much larger back then were able to play us through that phase. But once that was over it became plain that whilst via house prices for example we had asset price inflation we had weaker consumer price inflation which around 2016 became no inflation for the latter and for a time we had disinflation. This was the time when the “Deflation Nutters” became a little like Chicken Licken and told us the economic world would end. Whereas that was in play only in Greece and for the rest of us things changed as easily as an oil price rise. Also recorded consumer inflation would not have been so low if house and asset prices were in the measures as opposed to being ignored?

What about now?

The United States is in some ways a generic guide mostly because it uses the reserve currency the US Dollar. Whilst there have been challenges to its role such as oil price in Yuan it is still the main player in commodities markets. Yesterday we were updated by  on what is on its way.

The Producer Price Index for final demand rose 0.3 percent in June, seasonally adjusted, the U.S. Bureau of Labor Statistics reported today. Final demand prices advanced 0.5 percent in May and 0.1 percent in April.  On an unadjusted basis, the final demand index moved up 3.4
percent for the 12 months ended in June, the largest 12-month increase since climbing 3.7 percent in November 2011.

As we look at the factors at play we see the price of oil yet again as it looks like being an expensive summer for American drivers.

Over 40 percent of the advance in the index for final demand services is attributable
to a 21.8-percent jump in the index for fuels and lubricants retailing.

There was also maybe a surprise considering the state of the motor industry.

A major factor in the June increase in prices for final demand goods was the index
for motor vehicles, which moved up 0.4 percent.

We can look even further down the chain to what is called intermediate demand.

For the 12 months ended in June, the index for
processed goods for intermediate demand increased 6.8 percent, the largest 12-month rise since
jumping 7.2 percent in November 2011.

As you can see this is moving in tandem with the headline but do not be too alarmed by the doubling in the rate as these numbers fade as they go through the system as they get diluted for example by indirect taxes and the like. Peering further we see a hint of a possible dip and as ever the price of oil is a major player.

For the 12 months ended in June, the index for unprocessed goods for
intermediate demand increased 5.8 percent…..Most of the June decline in the index for unprocessed goods for intermediate demand can be traced to a 9.5-percent drop in prices for crude petroleum.

Such numbers which we call input inflation in the UK are heavily influenced by the oil price and in our case around 70% of changes are the Pound £ and the oil price. As the currency is not a factor for the US so much of this is oil price moves. That is of course awkward for central bankers who consider it to be non core.If you ever are unsure of the definition of non-core factors then a safe rule of thumb is that it is made up of things vital to life.

Commodity Prices

We find that if we look at commodity prices the pressure has recently abated. Yesterday;s falls took the CRB Index to 435 which compares to the 452 of a month ago and is pretty much at the level at which it started 2018 ( 434). The factor that has been pulling the index lower has been the decline in metals prices. The index for metals peaked at 985 in late  April as opposed to the 895 of yesterday.

OilPrice.com highlighted this yesterday.

Two weeks ago, Hootan Yazhari, head of frontier markets equity research at Bank of America Merrill Lynch,said Trump’s push to disrupt Iranian oil production could cause oil prices to hit $90 per barrel by the end of the second quarter of next year. Others have forecasted even higher prices, breaching the $100 plus per barrel price point.

Unfortunately for them whilst they may turn out to be right there are presentational issues it informing people of that on a day when events are reported like this by the BBC.

Brent crude dropped 6.9% – the biggest decline in more than two years – to end at $73.40 a barrel for the global benchmark………Wednesday’s sell-off started after the announcement by Libya’s National Oil Corp that it would reopen four export terminals that had been closed since late June, shutting most of the country’s oil output.

Comment

We see that the move towards higher inflation has this month shown signs of peaking and maybe reversing. Of course some of this is based on a one day move in the oil price but there are possible reasons to think that this signified something deeper. From Platts.

Russia and Saudi Arabia raised their oil production by a combined 500,000 b/d, and OPEC crude output hit a four-month high of 31.87 million b/d in June, reflecting agreement on easing output cuts, the IEA said Thursday.

Another factor is the Donald as President Trump is in play in so many areas here via the impact of his trade policies which have clearly impacted metals prices for example.Also his threats to Iran pushed the oil price the other way.

For those of us who do not use the US Dollar as a currency there is another effect driven by the fact that it has been strong recently which will tend to raise inflation. This will be received in different ways as for example there may have been a celebratory glass of sake at the Bank of Japan as the Yen weakened through 112 versus the US Dollar but others will (rightly) by much less keen. This is because returning to the theme of my opening paragraph wage growth has plainly shifted lower worldwide which means that those who panicked about deflation actually saw reflation as real wages did better.

As a final point it is hard not to have a wry smile at yesterday’s topic which was asset price inflation on the march in Ireland. So much of this is a matter of perspective.

We have good news as the Bank of England gets an inflation headache

As our attention moves today to inflation in the UK there is something we have cause to be grateful for. Let me hand you over to the Independent.

The pound hit its highest level against the dollar since the Brexit vote in June 2016, rising to $1.4364 by mid-morning………….

It has fallen back to US $1.43 since that but the principle that we have seen a considerable recovery since we fell below US $1.20 holds. If we look back to a year ago then we were just below US $1.28 and this matters for inflation trends because so many basic materials and commodities in particular are priced in US Dollars. We have not done so well against the Euro as we are around 2% lower than a year ago here which used to be considered as a dream ticket but as ever when we get what we want we either ignore it or forget we wanted it. The Euro has been strong which we can observe by looking at it versus the Swiss Franc where it has nearly regained the famous 1.20 threshold which caused so much trouble in January 2015.  But overall for us currency driven inflation has become currency driven disinflationary pressure.

Oil

On the other side of the coin we are seeing some commodity price pressure from crude oil and those who follow trading will be worried by this development.

DG closes long USDJPY position (Short of 3 units of yen vs the dollar). Opens short WTI & Brent (one unit of each) ( @RANsquawk )

You have reached a certain level of fame or infamy in this case when you are known by your initials but Dennis Gartman has achieved this with claims like the oil price will not exceed US $44 again in his lifetime. So we fear for developments after finding out he has gone short and if we look back we see that the price has been rising. The rally started around midsummer day last year when it was just below US $45 per barrel for Brent crude as opposed to the US $72 as I type this. More specifically it was at US $53  a year ago.

If we look wider at commodity prices we see that there has been much less pressure here as the CRB Index was 423 a year ago as opposed to the 441 of now. What there has been seems to have been in the metals section which has risen from 894 to 968. We can add to that the recent Russia sanctions driven rise in the Aluminium price as it is not included in the index.

Shrinkflation

This is on my mind because as many of you will recall we were told that products were shrinking because of the lower level of the UK Pound £. Last July the Office for National Statistics told us this.

No, you’re not imagining it – some of your favourite sweets really are shrinking. In November 2016, Toblerone chocolate bars reduced in size by about 10%, provoking outrage online. And Maltesers, M&Ms and Minstrelshave gone the same way.

It’s a phenomenon known as “shrinkflation” – where manufacturers reduce the package size of household goods while keeping the price the same.

I just wondered if any of you have seen signs of prices going back down or more specifically pack sizes growing? If we move to the price of ingredients which was blamed I note that sugar prices are lower over the past year from above US $17 to below US $12 and whilst cocoa prices have risen this year they are still below where they were in early 2016.

Even if the picture for chocoholics is a little mixed there were plenty of products which rose in price which we were told was due to the lower Pound £, have any of these fallen back now it is higher? I can tell you that the new running shoes I have just received were at the new higher £65 rather than the previous £55. I also recall Apple raising prices did they come back down?

Moving back to a more literal shrinkflation there was this a week ago. From City AM

According to new research from LABC Warranty, average house sizes have shrunk by over 12 square metres over the last 50 years.

The study looked at 10,000 houses built between 1930 and the present day, using open data from property sites Rightmove and Zoopla. The analysis concluded that house sizes are smaller than they were in the 1930s, after reaching a peak in the 1970s.

How does that work with the obesity crisis?

Today’s data

There was more of the welcome news we have been expecting on here although I note that the Financial Times has called it “disappointing.”

The all items CPI annual rate is 2.5%, down from 2.7% in February.

We do get a hint that the rally in the UK Pound £ has helped from this part of the detail.

The CPI all goods index annual rate is 2.4%, down from 3.0% last month.

Good prices were pushed up by the previous fall in the currency but now inflation in this area is rather similar to that in the services sector ( 2.5%) so after the recent drops we may see a plateau of sorts. As to the factors at play this month as I have noted several times in the past couple of years it is time to say thank you ladies.

Large downward effect…….. Prices overall rose this year by less than a year ago, with the main downward contributions coming from women’s dresses, jumpers, cardigans and coats, and boys’ T-shirts.

The good news carried on with the Retail Prices Index although of course with a higher number albeit less of a gap than we have got used to.

The all items RPI annual rate is 3.3%, down from 3.6% last month.

Producer Prices

These give us an idea of what is “coming up that hill” as Kate Bush would put it. Here we see some better news at the start.

The headline rate of inflation for goods leaving the factory gate (output prices) was 2.4% on the year to March 2018, down from 2.6% in February 2018.

However we do see the beginnings of the influence of the higher oil price further in the distance.

Prices for materials and fuels (input prices) rose 4.2% on the year to March 2018, up from 3.8% in February 2018.

House Prices

We even had better news on this front.

Average house prices in the UK have increased by 4.4% in the year to February 2018 (down from 4.7% in January 2018). The annual growth rate has slowed since mid-2016 but has remained generally under 5% throughout 2017 and into 2018. Average house prices in the UK decreased by 0.1% on the month.

Of course if we look at all the different measures we seem to be bouncing between 0% and 5% but that in itself is better and the 5% upper barrier looks like it might be set to fall.

Comment

Just in time for the sunny spring weather the UK economy has produced two days of good data. Yesterday’s employment data has been followed by a fall in nearly all our inflation measures which of course sprinkles a few rays of sunshine on the prospects for real wages. These numbers will take time to filter into the other data such as consumption and GDP ( from the autumn perhaps) but the worm has now turned in this respect albeit not in time for the first quarter of this year.

Meanwhile there are two pockets of trouble and they are centred within our establishment. Firstly Bank of England Governor Carney has apparently had a headache and asked for some ibuprofen as he mulls how an inflation targeting central banker can raise interest-rates into falling inflation having ignored its rise?

Also the Office of National Statistics has argued itself into an increasingly lonely corner with this.

The all items CPIH annual rate is 2.3%, down from 2.5% in February.

Why has it become the economics version of “Johnny no mates”? Because nobody believes this version of property inflation.

The OOH component annual rate is 1.2%, unchanged from last month

If you have to make up a number my tip is to make at least some effort at credibility.