Take your pick as UK Inflation rises via CPI and falls via RPI whilst staying the same via CPIH

The issue of UK inflation being above target is obviously troubling the UK establishment so much so that this morning HM Treasury has decided to tell us this.

Latest data from comes out today. Find out more about how the UK brought inflation under control:

There is a problem here as you see when we introduced inflation targeting in late 1992 the targeted measure called RPIX was below 4% and around 3.7% if the chart they use is any guide. It is currently 4% after 4.2% last month which is of course higher and not lower! So this is not the best time to herald the triumph of inflation targeting to say the least! Even worse if you look at the longer-term inflation charts in the release it is clear that the main fall in inflation happened before inflation targeting began. I will leave readers to mull whether the better phase was in fact the end of an economic mistake which was exchange-rate targeting.

The Forties problem

There will be a burst of inflationary pressure when we get the December inflation data from this issue. From the Financial Times.

The North Sea’s key Forties Pipeline System, which delivers the main crude oil underpinning the Brent benchmark, is likely to be shut for “weeks” to carry out repairs to an onshore section of the line, a spokesman for operator Ineos said on Monday. The move follows the worsening of a hairline crack in the 450,000 barrel-a-day pipe near Red Moss in Aberdeenshire over the weekend……..The FPS transports almost 40 per cent of the UK North Sea’s oil and gas production by connecting 85 fields to the British mainland.

If I was Ineos I would be crawling over the contract to buy the pipeline as they only did so in October and may have been sold something of a pup by BP. But in terms of the impact we have seen Brent Crude Oil move above US $65 per barrel in response to this. Also a cold snap in the UK is not the best time for gas supplies to be reduced as we wait to see how prices will respond. No doubt some of the production will get ashore in other ways but far from all. Also other news is not currently helping as this from @mhewson_CMC points out.

U.K. GAS FUTURES SURGE ON BAUMGARTEN EXPLOSION, NORWAY OUTAGE………front month futures jump about 20%.

Today’s data

This will have received a particularly frosty reception at the Bank of England this morning.

CPI inflation edged above 3% for the first time in nearly six years, with the price of computer games rising and airfares falling more slowly than this time last year. These upward pressures were partly offset by falling costs of computer equipment.

The annual reading of 3.1% means that Governor Mark Carney will have to write a letter to the Chancellor of Exchequer Phillip Hammond to explain why it is more than 1% over its target. I have sent via social media a suggested template.

Of course the official version could have been written by Shaggy.

I had tried to keep her from what
She was about to see
Why should she believe me
When I told her it wasn’t me?

We will not find out precisely until February as one of the improvements to the UK inflation targeting regime was to delay the publication of such a letter until it was likely to be no longer relevant.

How can we keep the recorded rate of inflation down?

This will have troubled the UK establishment and they came up with the idea of making a number up based on rents which are never paid. They rushed a proposal in last year as they noted that it was likely to be a downwards influence on inflation in 2017. How is that going? I have highlighted the relevant number.

The CPI rate is higher than the CPIH equivalent principally because the CPI excludes owner occupiers’ housing costs. These rose by 1.5% in the year to November 2017, less than the CPI rate of 3.1% and, as a result, they pulled the CPI rate down slightly, to CPIH.

That number which is a fiction as the Imputed Rents are never actually paid has a strong influence on CPIH.

Given that OOH accounts for around 17% of CPIH, it is the main driver for differences between the CPIH and CPI inflation rates.

This is like something straight out of Yes Prime Minister where a number which is never paid is used to reduce the answer. Just for clarity rents should be in the data for those who pay them but not for those who own their home and do not. Those who own their homes will be wondering why actual real numbers like the ones below are not used.

Average house prices in the UK have increased by 4.5% in the year to October 2017 (down from 4.8% in September 2017). The annual growth rate has slowed since mid-2016 but has remained broadly around 5% during 2017.

What do you think it is about a real number that would INCREASE the recorded inflation rate that led it to be rejected for a fake news one which DECREASES the recorded inflation rate?

House Prices

Tucked away in the release was this which may be a sign of a turn.

The average UK house price was £224,000 in October 2017. This is £10,000 higher than in October 2016 and £1,000 lower than last month.

A 0.5% monthly fall. As the series is erratic we will have to wait for further updates.

What is coming over the hill?

We are being affected by the higher oil price.

The one-month rate for materials and fuels rose 1.8% in November 2017 (Table 3), which is a 0.8 percentage points increase from 1.0% in October 2017, driven by inputs of crude oil, which was up 7.6% on the month.

This meant that producer price inflation rose on the month.

The headline rate of inflation for goods leaving the factory gate (output prices) rose 3.0% on the year to November 2017, up from 2.8% in October 2017. Prices for materials and fuels (input prices) rose 7.3% on the year to November 2017, up from 4.8% in October 2017.

This is more than a UK issue as this from Sweden Statistics earlier indicates.

The rise in the CPI from October to November 2017 was mainly due to a price increase of vehicle fuels and lubricants (4.5 percent),

Comment

There is a lot to consider here as headlines will be generated by the fact that Bank of England Governor Mark Carney will have to write an explanatory letter about the way CPI inflation has risen to more than 1% above its annual target. He might briefly wish that the old target of RPIX was still in use.

The annual rate for RPIX, the all items RPI excluding mortgage interest payments (MIPs), is 4.0%, down from 4.2% last month.

Although actually he would soon realise that he would have had to have written a formal letter a while ago for it. For the thoughtful there is interest in one measure rising as another falls and here are the main reasons.

Other differences including weights, which decreased the RPI 12-month rate relative to the CPI 12-month rate by 0.15 percentage points between October and November 2017.

Ironically putting house prices into the inflation measure would have reduced it last month.

Other housing components excluded from the CPI, which decreased the RPI 12-month rate relative to the CPI 12-month rate by 0.06 percentage points between October and
November 2017. The effect came mainly from house depreciation.

Will the UK establishment do another u-turn and suddenly decide that house prices are fit for use ( now they may be falling) in the same way they abandoned aligning us with Europe by not using them or the way they dropped RPIJ?

The trend now sees two forces at play. The trend towards higher inflation from the lower UK Pound £ is not far off over. However we are seeing a higher oil price offset that for the time being and I am including the likely data for December in this. So we will have to wait for 2018 for clearer signs of a turn although the Retail Price Index may already be signalling it.

Meanwhile the “most comprehensive measure of inflation” and the Office for National Statistics favourite CPIH continues to be pretty much ignored. The punch may need fortifying for this years Christmas party.

Meanwhile I guess it could be (much) worse.

The Financial Times said Avondale Pharmaceuticals bought the rights to Niacor from Upsher Smith, a division of Japan’s Sawai Pharmaceutical, earlier this year. The company also bought the rights to a drug used to treat respiratory ailments, known as SSKI, and increased the price by 2,469 per cent, raising the cost of a 30ml bottle from $11.48 to $295.

 

 

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

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

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

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

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

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

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

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

What are the inflation prospects?

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

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

So let us look at the oil price trend.

Crude Oil

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

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

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

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

Other Commodities

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

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

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

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

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

They attribute the fall to this factors.

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

Food Prices

The United Nations calculates an index for this.

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

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

Comment

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

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

 

Expensive times are ahead for UK railway travellers and commuters

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

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

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

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

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

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

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

CPIH

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

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

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

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

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

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

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

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

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

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

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

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

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

Today’s data

We learnt something today I think.

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

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

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

I checked air fares too and they fell.

Looking Ahead

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

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

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

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

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

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

We get a little more detail but not much.

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

Comment

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

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

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

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

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

 

Welcome relief for UK real wages from lower inflation numbers

Today is inflation day in the UK as we get the official data for consumer, producer and house price inflation. In case you were wondering why they all come out on one day  meaning that some details get ignored in the melee ( mostly producer price inflation) well that is the point! Previously when the data were released separately there were potentially three days of embarrassment for the government and establishment which they have reduced to just one. Job done in a way.

However even before we get today’s numbers the subject is in the news in several ways. From the BBC.

Motorists are being saddled with the fastest year-on-year rise in insurance premiums since records began five years ago, the industry has warned. Average car insurance premiums have gone up by 11% in the past year, according to the Association of British Insurers (ABI). The typical bill for an annual policy is now £484, it said.

One of my themes which is institutionalised inflation is on the march here.

The ABI says the change in the discount rate is the main reason behind the rise, but also blames the latest increase in insurance premium tax which went up from 10% to 12% on 1 June…….That is why the government reduced the discount rate to -0.75%.

I have included the discount rate as it is a consequence of the way Bank of England QE has driven real bond yields into negative territory. Oh what a tangled web, and that is before we get to the plague of false claims and deliberate accidents which mar this area and drive up premiums.

Buttering us up

An odd feature of the current phase is high butter prices which stretch well beyond the UK as this from @Welt indicates.

price has risen this week in Germany by another 30 Cent or 20% to 1.79€, highest price ever after WWII.

In France there are worries about rises in croissant prices and maybe even a shortage of them. The causes are in essence the farming boom/bust cycle combined with a rise in demand as the Financial Times explains.

 

The combination of falling milk output in key producing countries and adverse weather sent the international butter price to a record high in June, according to the UN Food and Agricultural Organization…..

 

Raphael Moreau, a food analyst at Euromonitor, says that butter consumption has been lifted by demand for “natural” products among shoppers as they move away from spreads such as margarine. “In the UK, butter consumption has also been supported by the home-baking boom,” he says.

So far this has yet to be fully reflected in consumer prices but as supply is inelastic or inflexible in the short-term this could carry on for the rest of 2017.

The other side of the coin

On the 13th of June I pointed out this about the trend for producer prices.

Fortunately we see that the main push is beginning to fade.

Also adding to this is that the UK Pound has been improving against the US Dollar. Friday’s surge that took it to US $1.31 is of course after today’s numbers were calculated but the lower UK Pound will be a decreasing effect as we go forwards.

Today’s Numbers

There was a very welcome change today.

The Consumer Prices Index (CPI) 12-month rate was 2.6% in June 2017, down from 2.9% in May 2017.

The drivers of this were as follows.

Fuel prices fell by 1.1% between May and June 2017, the fourth successive month of price decreases. This contrasts with the same period last year, when fuel prices rose by 2.2%. Taken together, these movements resulted in prices for motor fuels making a large downward contribution to the change in the rate………Recreational and cultural goods and services, with prices overall falling by 0.1% between May and June 2017, compared with a rise of 0.6% a year ago.

If we look at the pattern actually there was no inflation in the month itself.

The all items CPI is 103.3, unchanged from last month.

Oh and the period where the oil price drove goods prices lower is over as we see that goods and services inflation are now pretty much the same.

The CPI all goods index annual rate is 2.6%, down from 2.9% last month. ……..The CPI all services index annual rate is 2.7%, down from 2.8% last month.

Looking Ahead

As we noted last month the pressure coming from higher producer price inflation is looking like it is fading.

Factory gate prices (output prices) rose 3.3% on the year to June 2017 from 3.6% in May 2017, which is the slowest rate prices have increased since December 2016…….Input prices rose 9.9% on the year to June 2017 from 12.1% in May 2017, meaning the annual rate has fallen 10 percentage points since January 2017.

This is mostly about one thing.

Inputs of crude oil is the main driver of the recent slowing of input price inflation as annual price growth for crude oil fell from 88.9% in February 2017 to 9.1% in June 2017.

Two factors are at play here as we see the impact of the oil price no longer falling and the UK Pound/Dollar exchange rate which has risen from its lows of January.

Housing Inflation

We have an official measure that includes imputed rents as a way of measuring housing costs for owner-occupiers. As you can see they are in fact reducing the level of inflation measured.

The all items CPIH annual rate is 2.6%, down from 2.7% in May. …….The OOH component annual rate is 2.0%, down from 2.1% last month( OOH= Owner Occupied Housing Costs)……..Private rental prices paid by tenants in Great Britain rose by 1.8% in the 12 months to June 2017;

The problem for our official statisticians is that few people have bothered much with the change in its headline measure as this from Adam Parsons the Sky News business correspondent indicates.

CPIH – the stat that nobody wants, and nobody quotes

Oh and it is still not a national statistic which were the grounds for demoting RPI but seem to be ignored in the case of CPIH.

Meanwhile house price inflation is rather different to rental inflation.

Average house prices in the UK have increased by 4.7% in the year to May 2017.

This is why they put imputed rents into the new headline inflation measure! It was always likely to give a lower number because house prices can and indeed have been inflated by the way that mortgage costs have been driven lower by the Bank of England. As to troubles here we saw another sign last week. From whatmortgage.co.uk.

The Bank of England has warned mortgage lenders of the possible risks posed by the recent trend of longer loan terms………Woods highlighted the recent trend of mortgage terms rising from 25 years to 35 years or “even longer”.

Comment

First let me welcome the better inflation data which will help with the economic issue of the day which is real wage growth. Or to be more specific it is seems set to be less poor than it might have been. Good.

In terms of inflation I would like to draw your attention to a problem which the UK establishment does its best to try to sweep under the carpet. This is that the old inflation target called RPIX is at 3.8% but the newer CPI is at 2.6% with the gap now being 1.2% which is very significant. Also there is the issue that we pay things at RPI ( Retail Price Index) currently at 3.5% but only receive CPI currently at 2.6% which is quite an establishment scam. This particularly affects students who find that costs in their loans are escalating into the stratosphere with implications for matters such as mortgage affordability if not final repayment as so many of these will never be repaid.

Looking ahead we are certainly not out of the inflation woods as there are still dangers of higher numbers in the autumn as we note the butter and insurance effects discussed earlier. We do not know what the Pound £ and the oil price will do. As to comparisons with Euro area inflation at 1.3% we get a guide to how much the lower Pound £ has affected our inflation rate which has turned out to be pretty much along the lines I suggested back on the 19th of July last year.

I expect a larger impact on the annual rate of inflation than the Draghi Rule implies and estimate one of say 1%.

 

With UK inflation heading above target why are we getting more Bank of England QE?

Today we arrive at the latest UK inflation data series and the Bank of England will be facing a situation it has not been in for a while. This is that consumer inflation is now quite near to its official target as the CPI ( Consumer Prices Index) gets near to 2%. This poses yet another question about its policy as we see that the Bank of England is buying another £775 million of UK Gilts today. Even worse these are longs and ultra longs as it will be making offers out into the 2060s. So it will be creating a problem for our children and grandchildren all in the name of boosting an economy which has so far down well and boosting inflation which is now pretty much on target.

Of course the Bank of England thinks that inflation will rise further in 2016 as it explained at its Inflation Report earlier this month.

Beyond that, inflation is expected to increase further, peaking around 2.8% at the start of 2018, before falling gradually back to 2.4% in three years’ time. This overshoot is entirely because of sterling’s fall, which itself is the product of the market’s view of the consequences of Brexit.

The Sterling fall was exacerbated by the policy easing from the Bank of England which drove it lower when the UK economy was already getting a substantial boost. To be specific it was expectations of easing which drove it lower after Governor Carney’s rhetoric promised it and ignored the fact that there are 8 other voting members.

As an aside I await the views of the inflationolholics who want a 4% inflation target such as Professor Tony Yates and Professor Wren-Lewis. No doubt their Ivory Tower models love the inflation rise as their economic models tell them that wages will rise in response although of course the real world is apt to remain so inconvenient and inconsiderate. Of course I suppose Professor Yates has a model which shows he was right when he and I debated monetary policy last September on BBC Radio 4’s Moneybox whereas of course the real world shows exactly the reverse.

Today’s data

Let me first open with an alternative universe.

The annual rate for RPIX, the all items RPI excluding mortgage interest payments (MIPs) index, is 2.9%, up from 2.7% last month.

So this has gone even further above its old target of 2.5% and would now be signalling that it was time for the Bank of England to consider reducing all its monetary stimulus rather than adding to it. No wonder it was scrapped! However we do learn something by looking at the new measure.

The all items CPI annual rate is 1.8%, up from 1.6% in December.

So we immediately learn two things the first is that there is a gap of 1.1% between two measures which are supposed to both measure UK inflation. You will no doubt not be surprised that the lower number has got the official nod or we have seen an “improvement”. But there is the secondary issue of the fact that the target was only changed by 0.5% or less than half. So there was a monetary policy easing that gets little publicity. Some of the difference is that in spite of the fact that mortgage costs are excluded RPIX still has an influence from owner occupied housing costs which the official CPI turns its blind eye to.

What are house prices doing?

Here are the numbers.

Average house prices in the UK have increased by 7.2% in the year to December 2016 (up from 6.1% in the year to November 2016), continuing the strong growth seen since the end of 2013.

Many of you will no doubt be having a wry smile at the way these were moved out of the headline inflation number (2003) just ahead of a boom in house prices. But the UK establishment is about to claim it is including them whilst not actually doing so. I explained in full detail on the 15th of November last year.

There is another issue which the National Statistician has attempted to fudge by writing “the inclusion of an element of owner occupiers’ housing costs”. How very Sir Humphey Appleby! I have noted that many people have reported that house prices are being included but you see they are not. Instead there is a statistical swerve based on the Imputed Rent methodology where they assume house owners receive a rent and then put growth in that in the numbers. The same rental growth measurement that according to their own missives  they need to “strengthen”.

Let us look at this month’s number.

The all items CPIH annual rate is 2.0%, up from 1.7% in December.

Lets is start with the good which is that when it becomes the first measure on the statistical bulletin next month it will give a higher number than the one it replaces. The bad is that if you look at  house prices it is still way behind them because the number it makes up or “imputes” tells us this about housing costs.

The OOH component annual rate is 2.5%, down from 2.6% last month.

Apologies to any first time buyers who are now choking on their coffee or tea. The ugly is that this made up number is not even a national statistic because of their failures in simply measuring rents. This has led to revisions and an abandonment of the past rental series.

I made these points to the UK National Statistician John Pullinger in late January as I reported on the 31st.

I was pleased to point out that his letter to the Guardian of a week ago made in my opinion a case for using real numbers for owner-occupied housing such as house prices and mortgage-rates as opposed to the intended use of an imputed number such as Rental Equivalence.

What drove things this month?

If we look at the detailed data then it was clothing and footwear which held inflation back.

Overall, prices fell by 4.2% between December 2016 and January 2017, compared with a smaller fall of 3.1% last year

That tugged it back by 0.1% on the annual rate and offset some of the 0.29% rise from transport costs.

What is coming over the hill?

I am sorry to say that our valiant professors will be pleased by this.

Factory gate prices (output prices) rose 3.5% on the year to January 2017, which is the seventh consecutive period of annual price increases and the highest they have been since December 2011.

So as you can see the heat is on and that is being pushed by prices further up the chain.

Prices for materials and fuels paid by UK manufacturers for processing (input prices) rose 20.5% on the year, which is the fastest rate of annual growth since September 2008.

These only impact on some of the numbers and so get filtered out as well as reaching consumer inflation but they will continue to nudge consumer inflation higher as we move into the spring of this year.

Comment

There is much to consider here as we note that under our old regime inflation would be above target rather than just below it. However where we are poses a serious question for the Bank of England as it is pushing inflation higher with its ongoing monetary easing which even the inflationistas must now question. Indeed even the CPIH measure which next month will be first in the statistical bulletin with its imputed rents would if it had a 2% annual target be on it. I do hope that Governor Carney and Chief Economist Andy Haldane will soon be available to explain why a solidly growing economy with inflation heading above target needs a “Sledgehammer” of monetary easing. Actually Andy has been quiet of late has he been put back in the cellar he has spent most of the last 28 years in? How can he build an Ivory Tower from there?

Meanwhile the rest of us face higher inflation and I fear we will see 3% inflation on the CPI measure and 4% on the RPI measure as 2017 develops. I can say that I will be having more contact with the UK statistics establishment on the subject of their planned changes and will express my views to the best of my ability.

Seer of the year

There are many candidates for this but to be so wrong in only 24 house deserves a special mention. So step forwards European Commissioner Pierre Moscovici only yesterday.

After returning to growth in 2016, economic activity in is expected to expand strongly in 2017-18.

And the Greek statistics authority today.

The available seasonally adjusted data1 indicate that in the 4 th quarter of 2016 the Gross Domestic Product (GDP) in volume terms decreased by 0.4% in comparison with the 3 rd quarter of 2016,

To coin a phrase Pierre is a specialist in failure. Still he does have a famous song to sing.

Yesterday all my troubles seemed so far away.
Now it looks as though they’re here to stay.
Oh, I believe in yesterday.

 

Mark Carney plans to do nothing about rising UK inflation

Today is inflation day in the UK where we receive the full raft of data from producer to consumer inflation topped off with the official house price index. We already know that December saw gains elsewhere in the world such as Chinese producer prices and consumer inflation in the Czech Republic and some German provinces so we advance with a little trepidation. That of course is the theme we were expecting for the UK anyway as the oil price was unlikely to repeat the falls of late 2015 ( in fact it rose) and this has been added to by the fall in the value of the UK Pound £ after the EU leave vote last June.

The Bank of England

Governor Mark Carney updated us in a speech yesterday about how he intends to deal with rising inflation. But first of course we need to cover his Bank Rate cut and £70 billion of extra QE ( Quantitative Easing) including Corporate Bond purchases from August as tucked away in the speech was a confession of yet another Forward Guidance failure.

Over the autumn, demand growth remained more resilient than had been expected, particularly consumer spending.

Yet at the same time we were expected to believe that by being wrong the Bank of England was in fact a combination of Superman and Wonder Woman as look what it achieved.

but an output gap of some 1½%, implying around 1/4 million lost jobs

So Mark why did you not cut Bank Rate by a further 1.5% and do an extra £350 billion of QE because then you would have pretty much eliminated unemployment? If only life were that simple! For a start it is rather poor to see a theory (the output gap) which I pointed out was failing in 2010 and did fail in 2011 having a rave from a well deserved grave. I guess any port is  welcome when you are in a storm of your own mistakes.

As to his intention to deal with inflation I summarised that last night as he spoke at the LSE.

Here is the Mark Carney speech explaining how and why he will miss his inflation target http://www.bankofengland.co.uk/publications/Pages/speeches/2017/954.aspx 

It was nice to get a mention on the BBC putting the other side of the debate.

http://bbc.in/2jsktij

You see with his discussion of algebra and “lambda,lambda,lambda” we are given an impression of intellectual rigour but the real message was here.

the UK’s monetary policy framework is grounded in society’s choice of the desired end.

What is that Mark?

monetary policymaking will at times involve striking short-term trade-offs between stabilising inflation and supporting growth and employment

As you see we are being shuffled away from inflation targeting as we wonder how long the “short-term” can last? As we do we see a familiar friend from my financial lexicon for these times.

inflation may deviate temporarily from the
target on account of shocks

So “temporarily” is back and a change in the remit will allow him to extend his definition of it towards the end of time if necessary.

Since 2013, the remit has explicitly recognised that in these
circumstances, bringing inflation back to target too rapidly could cause volatility in output and employment
that is undesirable.

Of course with his Forward Guidance being wrong on pretty much a permanent basis Governor Carney can claim to be in a state of shock nearly always. A point of note is that this is a policy set by the previous Chancellor George Osborne not the current one.

The fundamental problem is that as inflation rises it will reduce real wages ( although maybe not in the Ivory Tower simulations) and thereby act as a brake on the economy just like in did in 2011/12.

Today’s data

We are not surprised on here although I see many messages online saying they were.

The all items CPI annual rate is 1.6%, up from 1.2% in November.

In terms of detail the rise was driven by these factors.

Within transport, the largest upward effect came from air fares, with prices rising by 49% between November and December 2016, compared with a smaller rise of 46% a year earlier.

So a sign of how air travellers get singed at Christmas and also this.

Food and non-alcoholic beverages, where prices overall, increased by 0.8% between November and December 2016, having fallen by 0.2% last year

So Mark Carney and the central banking ilk will be pleased as if we throw in motor fuel rises the inflation is in food and fuel or what they call “non-core”. Of course the rest of us will note that it is essential items which are driving the inflation rise.

Target alert

I have been pointing out over the past year or so the divergence between our old inflation target and the current one. Well take a look at this.

The annual rate for RPIX, the all items RPI excluding mortgage interest payments (MIPs) index, is 2.7%, up from 2.5% last month.

It is above target and whilst there are dangers in using one month’s data we see that this month implies that our inflation target was loosened in 2002/03 by around 0.6%. Good job nothing went wrong later……Oh hang on.

What happens next?

We get a strong clue from the producer prices numbers which tell us this.

Factory gate prices (output prices) rose 2.7% on the year to December 2016 and 0.1% on the month,

As you see they are pulling inflation higher and if we look further upstream then the heat is on.

Prices for materials and fuels paid by UK manufacturers for processing (input prices) rose 15.8% on the year to December 2016 and 1.8% on the month.

The relationship between these numbers and consumer inflation is of the order of the one in ten sung about by the bank UB40 so our rule of thumb looks at CPI inflation doubling at least.

House Prices

What we see is something to make Mark Carney cheer but first time buyers shiver.

Average house prices in the UK have increased by 6.7% in the year to November 2016 (up from 6.4% in the year to October 2016), continuing the strong growth seen since the end of 2013.

So whilst I expect a slow down in 2017 the surge continues or at least it did in November. Surely this will have been picked up by the UK’s new inflation measure which we are told includes owner-occupied housing costs?

The all items CPIH annual rate is 1.7%, up from 1.4% in November……The OOH component annual rate is 2.6%, unchanged from last month.

So no as we see a flightless bird try to fly and just simply crash. That is what happens when you use Imputed Rent methodology which after all is there to convince us we have economic growth and therefore needs a low inflation reading.

As an aside we got an idea of the boom and then bust in Northern Ireland as the average house price rose to £225,000 pre credit crunch but is now only £124,000. Is that a factor in its current crisis?

Comment

Last night saw a real toadying introduction to the speech by Mark Carney at the LSE.

He is someone who thinks very deeply about the big responsibilities he has, and he has that very rare talent of being able to think and act at the same time

The introducer must exist in different circles to me as I know lot’s of people like that and of course the last time Governor Carney acted the thinking was wrong. I did have a wry smile as this definition of the distributional problems that the extra QE has and will create.

He has been thinking very hard about distributional issues

What we actually got was a restatement of Bank of England policy which involves talking about the inflation target as if they mean it and then shifting like sand to in fact giving the reasons why they will in fact look the other way. Last time they did this the growth trajectory of the UK economy fell ( with real wages) rather than rose as claimed. The only ch-ch-changes in the meantime are that the current inflation remit will make it even easier to do.

 

 

 

 

UK inflation begins its rise whilst the Bank of England looks away

Today is in terms of statistics inflation day in the UK as we receive pretty much all of our inflation data in one burst. It did not use to be that way but the powers that be decided that it was better to have all the bad news in one go rather than have several days of high inflation being reported. As ever their sense of timing saw inflation actually go below target! However we will see the seeds of change today as I forecast back on the 2nd of March.

There is also the issue of the UK Pound £ which has been falling in 2016 against the US Dollar which is the currency the majority of commodities are priced in. It is down just over 9% on a year ago……….Also UK services inflation has been more persistent than in the Euro area and currently it matters little which measure you use.

I was expecting these two more domestic factors to add to the end of the impact of lower oil prices.

But whatever happens we are now unlikely to see a continuation of this reported by Eurostat in its consumer prices release….energy (annual rate) -8.0%, compared with -5.4% in January.

It fell to -3% on an annual basis yesterday and rose by 1% on a monthly basis.

Thus I was expecting this.

However from now they need to look a year or two ahead and after a few months of continued oil price disinflationary pressure we see an increasing chance of inflation rising.

Ch-ch-changes

What has happened since then has been the further fall in the UK Pound £ post the EU leave vote which will put more pressure on inflation. Regular readers will be aware that I expect a boost to inflation of the order of 1.5% from this impact although we do not know yet where the value of the UK Pound will settle. Many prices will take some time to change so we will not see their impact until 2017 but the area which changes quickly is petrol prices which have had a double whammy. Firstly the oil price has risen to US $52 per barrel and secondly the exchange-rate of the UK Pound has fallen quite a bit against the US Dollar and is now 20% lower than a year ago. So we see this.

The price of ULSP is 3.4p/litre higher, with the price of ULSD 3.6p/litre higher than the equivalent week in 2015.

Today’s numbers

As you can see from the points made above it was no great surprise when this was reported today.

The all items CPI annual rate is 1.0%, up from 0.6% in August…….The all items CPI is 101.1, up from 100.9 in August.

Actually it could have been more as I note that something I have been flagging all year had a slight dip.

The CPI all services index annual rate is 2.6%, down from 2.8% last month.

Interestingly a lot of the move was in clothing and footwear and I would be interested in readers views on this.

the upward effect came primarily from garments (in particular women’s outerwear), for which prices rose by 6.0% between August and September 2016, compared with a rise of 3.3% a year ago.

The only article which got cheaper for women was coats,everything else got more expensive.

What is in prospect?

We see that the producer price numbers are also suggesting a rise in inflation going forwards.

Factory gate prices (output prices) for goods produced by UK manufacturers rose 1.2% in the year to September 2016, compared with a rise of 0.9% in the year to August 2016.

This is the third month of rises in this indicator which previously registered a couple of years of declines. In turn it will be pushed higher by this.

The overall price of materials and fuels bought by UK manufacturers for processing (total input prices) rose 7.2% in the year to September 2016, compared with a rise of 7.8% in the year to August 2016.

So input prices will put upwards pressure on output prices and the largest riser was the price of imported metals which rose by over 19% on a year before. Also at this stage of the chain the value of the UK Pound is a major factor.

In trade weighted-terms, sterling depreciated by 14.4% in the year to September 2016.

Actually the main driver is of course the US Dollar but in this instance it had a similar decline.

What about the RPI?

Our old inflation measure which is still used for index-linked Gilts amongst other things did this in September.

Annual rate +2.0%, up from +1.8% last month

The version we used for inflation targeting edged quite close to its old target of 2.2%.

Annual rate +2.2%, up from +1.9% last month

This meant that the wide divergence between it and out new official measure of inflation continues.

The difference between the CPI and RPI unrounded annual rates in September 2016 was -1.08 percentage points, narrowing from -1.11 percentage points in August 2016.

In other words changing the inflation target by only 0.5% back in 2003 was a loosening of policy which many places which should know better simply ignore.

What about housing costs and house prices?

The main way the official UK inflation measure is kept low is by its exclusion of owner-occupied housing costs. This means that the numbers reported today are ignored.

Average house prices in the UK have increased by 8.4% in the year to August 2016 (up from 8.0% in the year to July 2016), continuing the strong growth seen since the end of 2013.

There is an official version which includes such costs but as I argued from the beginning it is the equivalent of a chocolate teapot. This is because it uses rents and thereby end up with this.

The OOH component annual rate is 2.4%, unchanged from last month. ( OOH is Owner Occupied Housing )

The plan is for this to be our main measure of inflation although frankly such a recommendation did a lot of damage to the soon to be Sir Paul Johnson of the Institute for Fiscal Studies. Let me highlight yet another problem with the series which begs belief in many ways.

OOH currently accounts for 16.5% of the expenditure weight of CPIH. This compares with a weight of 19.5% in 2005.

There have been a lot of revising of such numbers which applies also to the imputed rent numbers which mean that no-one can even be sure what the past was from one year to the next. The Alice In Wonderland critique applies.

“How puzzling all these changes are! I’m never sure what I’m going to be, from one minute to another.”

Comment

We see that as pointed out in the spring UK consumer inflation is heading on an upwards path. There is statistical noise in the exact monthly numbers but the trend was already clear back then although we know now that it will go higher and be more sustained because of the additional impact of the lower UK Pound £. We will head towards 3% on the CPI and 4% on the RPI if things remain as they are.

The Bank of England should of course respond to this for two reasons. It is supposed to target annual CPI inflation of 2% and also because higher inflation will reduce and perhaps eliminate real wage growth and thus have a contractionary impact on the economy. In response to this we have been told this by Governor Carney. From the BBC.

Earlier, Mr Carney said that the Bank of England was willing to see an “overshoot” of its 2% inflation target if it meant supporting economic growth and protecting jobs.

Perhaps our dedicated follower of fashion has been listening to Janet Yellen of the US Federal Reserve. From MarketWatch.

Fed’s Yellen sees benefits in letting inflation exceed central bank’s 2% target

Benefits for who exactly? Certainly not workers or consumers….

Women’s Coats

Lucy Meakin of Bloomberg has given us a hint of a quality change here.

Possibly because this season most of them don’t have lining for some reason