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.


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.


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?


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.


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.”


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

Central banker speak gets ever more Orwellian

Today sees the first of the main sets of economic data post the Brexit leave vote as we get both the numbers for consumer inflation and house prices for July. These will give us a snapshot of what was happening then but I explained the backdrop and hence future prospects using the “Draghi Rule” back on the 19th of July.

If we look at the way that the UK economy is relatively more open than the Euro area and the fact that our fall was more against the US Dollar in which many commodities are priced I expect a larger impact on the annual rate of inflation than the Draghi Rule implies and estimate one of say 1%.

As the UK Pound has weakened since then with the main measure for inflation purposes being  the US Dollar via its impact on commodity prices then the impact will be a little over 1% now assuming we remain around US $1.29.

Higher Inflation Targets

There are some who welcome higher inflation and the main members of this pack are usually central bankers who receive inflation linked pensions. John Williams of the San Francisco Federal Reserve warms us up for this by hoping we will forget that what he is describing below are policies which he told us would work!

As nature abhors a vacuum, so monetary policy abhors stasis

Although of course Mr.Williams is quick to point out that what is happening is nothing to do at all with him or policies he has supported. Very Orwellian ( The most effective way to destroy people is to deny and obliterate their own understanding of their history.)

Importantly, this future low-level of interest rates is not due to easy monetary policy;

Those who have had higher real wages as a result of the result phase of disinflation will be discomfited by these bits.

uncomfortably low inflation………the risks of unacceptably low inflation

I point this out regularly but for newer readers Mr. Williams says he wants “price stability” but when we have a phase as near to that as we have had for decades he then describes it as he has above. He has a suggestion.

First, the most direct attack on low r-star would be for central banks to pursue a somewhat higher inflation target.

Okay why?

This would imply a higher average level of interest rates and thereby give monetary policy more room to maneuver

So to have the weapons to make you better off he first has to make you worse off. Talk about being in an Ivory Tower lost in the clouds. Although briefly reality is a friend of John’s as the clouds clear and he realises that the losses from this are real but the benefits are in his mind’s eye.

Of course, this approach would need to balance the purported benefits against the costs and challenges of achieving and maintaining a somewhat higher inflation rate.

Up in the Ivory Tower Mr.Willaims has discovered an old file which is a higher inflation target by another name so he gives it a go.

inflation targeting could be replaced by a flexible price-level or nominal GDP targeting framework, where the central bank targets a steadily growing level of prices or nominal GDP, rather than the rate of inflation.

The problem is that this even according to a proponent like Mr. Williams has “potential advantages” whereas the problems are real as for example what would he do in response to the 21% GDP growth seen in Ireland in the first quarter of 2015. Way over target so interest-rates at 10%? Or is this like so many others just a theoretical framework constructed as a one-way bet to policy easing to infinity?

Of course Mr.Williams is welcome to pay higher prices personally for things  I wonder if he does so?

Today’s numbers

If you are a UK rail passenger then you will rue the numbers below.

The all items CPI annual rate is 0.6%, up from 0.5% in June…….The all items RPI annual rate is 1.9%, up from 1.6% last month.

For foreign readers it is the latter higher number that they pay. It might seem odd that the UK establishment has chosen what is for them a measure ” found not to meet the required standard for designation as National Statistics” until you realise that the government benefits from higher rail fares vis having to support the industry less. The rail passenger who sees for example income tax thresholds going up by the lower CPI is right to feel that this is a form of stealth taxation.

Next comes a technical point which is shown below.

The difference between the CPI and RPI unrounded annual rates in July 2016 was -1.26 percentage points,

The UK establishment has blamed what they call the “Formula Effect” for this forgetting that in the 2010 Technical Manual they estimated it at around 0,.1%. Actually it had half the impact this month of the “housing components” that the CPI lacks. The RPI has its flaws in the way it measures owner-occupied housing costs but at least it gives it a go. Can anybody think why the CPI measure excludes them?

UK average house prices have increased by 8.7% in the year to June 2016 (up from 8.5% in the year to May 2016), continuing the strong growth seen since the end of 2013…..The average UK house price was £214,000 in June 2016. This is £17,000 higher than in June 2015 and £2,100 higher than last month.

A fair proportion of the Student Loan book has its interest-rate set with respect to the RPI as we return to the subject of hard times for millennials and those even younger. I analysed the many problems here on the first of the month.


Producer Prices

The fall in the value of the UK Pound £ is having an impact here.

Factory gate prices (output prices) for goods produced by UK manufacturers rose 0.3% in the year to July 2016, compared with a fall of 0.2% in the year to June 2016.

This is the first time that factory gate prices have increased on the year since June 2014.

Actually the situation was turning anyway – I explained a few months ago that I expected inflation to pick-up as we move into the latter part of 2016 – but the post Brexit lower UK Pound has given it a further push. This is shown even more clearly by the input numbers.

The overall price of materials and fuels bought by UK manufacturers for processing (total input prices) rose 4.3% in the year to July 2016, compared with a fall of 0.5% in the year to June 2016.


We see that the UK inflation outlook has darkened further. This is a particular shame as the phase of lower inflation which the President of the San Francisco Fed calls “uncomfortably low” boosted the economy via higher real wages. No doubt one of the equations in his Ivory Tower tells him that wages will surge higher just like it has been telling him for the last 8 years. Why change a losing formula?

Meanwhile the ordinary person faces a future of rising inflation and indeed above target inflation as we seem set for UK CPI to head towards 3% per annum whilst RPI will head for 4%. This of course will be an economic nirvana for all those who want higher inflation except when they get it be prepared for all the excuses under the category of “counterfactual” as they find themselves watching the TV series “Surprise! Surprise!”. Even worse the ordinary person might want to buy a house and note that prices are rising at an annual rate of 8.7% and forget that according to the Bank of England’s Chief Economist Andy Haldane this is a victory.

Over recent years, there have been fairly rapid rises in UK asset prices — houses, shares and bonds. These have increased measured national wealth by as much as £2.7 trillion since 2009.

As George Orwell so presciently put it.

War is peace.
Freedom is slavery.
Ignorance is strength.

The inflation picture for the UK is about to shift into a higher gear

The UK finds itself facing quite a few economic changes as it moves forward. One of the most immediate has been the change in the value of the UK Pound £ as it fell heavily as the result of the Brexit referendum emerged. This will have an inflationary impact on the economy as we wonder how much? The Bank of England rule for currency changes does not help much here but we do have one provided by Mario Draghi of the ECB.  Back on the 3rd of May I reminded us of it.

A couple of years ago we did get a “Draghi Rule” for measuring the impact of all this…….Now, as a rule of thumb, each 10% permanent effective exchange rate appreciation lowers inflation by around 40 to 50 basis points.

How much of a fall have we had? If we keep to round numbers then in terms of the trade weighted or effective exchange rate the UK Pound £ has fallen by 8% since the referendum result emerged. Applying the Draghi Rule would see an increase in inflation of 0.3% to 0.4%. If we look at the way that the UK economy is relatively more open than the Euro area and the fact that our fall was more against the US Dollar in which many commodities are priced I expect a larger impact on the annual rate of inflation than the Draghi Rule implies and estimate one of say 1%.

What is the commodity background?

We also need to look at the commodity price background to see if it will reinforce the upwards trend or weaken it. Some good news comes from the price of crude oil which was rising in the spring but has lost momentum in the summer. So whilst it is up in 2016 so far by 23% it is also some 18% lower than this time last year as we note it has fallen by 8% in July so far. So should Brent Crude Oil remain at US $47 or so it will not be reinforcing the inflationary burst.

The other commodity price news is less good as the CRB index has risen from 375 to 415 so far in 2016. This means that it is pretty much where it was this time last year. If we look for what has driven the change then the metals sub index has risen from 556 to 702 so far this year. Other pictures are more mixed as for example a popcorn consumer will cheer lower corn prices but be less happy about rises in the price of the oils it is cooked in. Prices for meats were rising but this year has seen record pork production in the US so pork prices have dipped recently.

What about wages?

This is of course the dog that has not barked so far in the UK economic recovery. Accordingly fears of a 1970s style wages and prices spiral seem like from another world if not universe. As I discussed yesterday this has been a very different type of recovery and wages were struggling to grow pre credit crunch.

Todays numbers

Here are the headlines.

The all items CPI annual rate is 0.5%, up from 0.3% in May.

This was higher than economist expectations and the cause was especially embarrassing as higher air fares for the Euro 2016 tournament would surprise almost nobody else.

Within transport, the largest upward effect came from air fares which rose by more than a year ago, with the main contribution coming from European routes. The 10.9% rise in fares this year was the largest May to June movement on record although it is important to note that air fares are highly variable.

There was also something that has become rather familiar.

The CPI all services index annual rate is 2.8%, up from 2.6% last month………The CPI all goods index annual rate is -1.6%, up from -1.8% last month.

The services sector has seen inflation above the target for some time now and this is also an international theme as I see it elsewhere ( most recently in the US CPI release). However the continuing good price disinflation is keeping overall inflation low and still close to zero.

What is the outlook?

If we move to the producer price series then the effect of past oil price falls and indeed other commodiities is fading and some of the commodity price rises I discuss above are coming into play.

Factory gate prices (output prices) for goods produced by UK manufacturers fell 0.4% in the year to June 2016, compared with a fall of 0.6% in the year to May 2016.

This was seen even more at the input level.

The overall price of materials and fuels bought by UK manufacturers for processing (total input prices) fell 0.5% in the year to June 2016, up from a fall of 4.4% in the year to May 2016.

There were various factors at play here. firstly the consequence of the rise in the price of crude oil in 2016 ( as the more recent fall was yet to happen) and more expensive food both from the UK and abroad.

Home-produced food prices increased 6.7% in the year to June 2016, compared with a rise of 3.0% last month…… The main contribution to this movement was from crop and animal production which increased 6.1% in the year to June 2016 and 0.1% between May and June 2016.

I am loath to blame the weather but will those with more knowledge of agriculture please let me know if the wet weather was a factor here?

House Prices

These seem to have completely ignored the expectations of a dip as the buy to let surge ( to escape a Stamp Duty Tax rise) faded and ended.

UK average house prices have increased by 8.1% in the year to May 2016 (unchanged from the year to April 2016), continuing the strong growth seen since the end of 2013.

Ah yes! Since the Funding for Lending Scheme came into full force. As ever we see very different swings in prices as well as extraordinary differences. Let us start with a quite extraordinary difference.

In May 2016, the most expensive borough to live in was Kensington and Chelsea, where the cost of an average house was £1.27 million. In contrast, the cheapest area to purchase a property was Burnley, where an average house cost £69,000.

Just the 18.4 times higher! Also very different rates of change.

The local authority showing the largest annual growth in the year to May 2016 was Slough, where prices increased by 23.3% to stand at £287,000. The lowest annual growth was recorded in the City of London, where prices fell by 9.2% to stand at £692,000.

Perhaps there are fans of the TV series The Office are buying and people have forgotten the words of Ali G and indeed John Betjeman. It is interesting to see prices fall in the City of London and I will scan the data later to see if we can glean any news on the area around Nine Elms.

Of course this is all pre Brexit but if you want some post Brexit views well here is one via Ed Conway of Sky.

Whoa. SocGen: house prices in London’s most expensive areas could halve in the wake of Brexit

I did point out that a lot of people (first time buyers for example) would welcome that.


If we now look to bring everything together we see that the UK looks set to see a rise in inflation as 2016 progresses. Regular readers will be aware that I expected a rise in the annual rate in the autumn anyway as past goods disinflation fades and services inflation carries on. That theme has now seen a boost of the order of 1% per annum from the initial Brexit leave vote effect. That of course is an initial estimate as we do not know what if any second order effects there will be. Also I am assuming that the UK Pound £ remains at its current level and whilst it seems more stable now that could easily change. Rises in its value would weaken the effect and falls strengthen it.

That will feed into a reduction in real wage growth which returns me to my theme of yesterday. Meanwhile of course if you put house prices into the inflation numbers you would argue that it was not so low in the first place. You can argue about weights but a proper UK CPI would be of the order of 1.5% right now if you put house prices in. As that happens the indicator which takes a lot of official scorn seems to be in the right area!

The all items RPI annual rate is 1.6%, up from 1.4% last month.