The good news from lower UK inflation ( think real wages) may not last

Today brings the various UK inflation numbers into focus as we get the updates for consumer, producer and house prices. Already though the Bank of England has given its view on the general outlook.

Second, the most likely outlook is a further period of subdued growth, and hence a disinflationary backdrop
of a persistent – albeit modest – output gap.

That is from Michael Saunders who is giving a speech in Northern Ireland and we see him backing up the previously expressed view of UK inflation falling towards 1.25% in the early part of this year. It is sad though that he still uses the “output gap” that has worked so poorly even some ex-central bankers are being forced to admit it has been a failure. Here is the former Vice-President of the ECB ( European Central Bank) Vitor Constancio.

In “FED listens” events, they found that:..”there is more “slack” than the Fed had thought — more people who could still come into the labour force, particularly in poorer areas”. I am sure the same is true in Europe. Forget output gaps

If only those still in power would see the light and accept reality!

There is an irony in all of this as we note that whilst the Bank of England expects lower inflation it is presently trying to raise it and Micheal Saunders has another go.

Fourth, against this backdrop, it probably will be appropriate to maintain an expansionary monetary policy
stance and possibly to cut rates further, in order to reduce risks of a sustained undershoot of the 2% inflation
target. With limited monetary policy space, risk management considerations favour a relatively prompt and aggressive response to downside risks at present.

This is via the impact of their words on the value of the UK Pound £ and the way a lower value ( mostly via the role of the US Dollar in setting commodity prices) tends to raise subsequent inflation. You may note that the bi-polar view of monetary policy space continues to be in play as he joins Mark Carney’s statement that it is limited from last Wednesday which morphed into the equivalent of a Bank Rate cut of 2.5% as quickly as Thursday. What a difference a day made!

twenty four little hours
Brought the sun and the flowers where there use to be rain ( Dinah Washington )

If we complete the points made by Michael Saunders we see something of an obsession with output gap theory.

First, with softer global growth and high Brexit uncertainty, the UK economy has remained sluggish. The
slowdown has created a modest output gap, and there are signs that the labour market is turning.

Also something perhaps even sillier.

Third, the neutral level of interest rates may have fallen further over the last year or two, both in the UK and
externally.

Or, of course, it may not.

Consumer Inflation

The backdrop was worrying because US consumer inflation had risen yesterday and Euro area inflation had risen last week and that is before we get to this.

Also, Zimbabwe’s annual inflation rate (the one that is officially concealed) rose to 521% in December. ( Joseph Cotterill)

But the numbers were good possibly showing that a little knowledge is a dangerous thing.

The Consumer Prices Index (CPI) 12-month rate was 1.3% in December 2019, down from 1.5% in November 2019.

There were two main factors at play and I wonder if any of you spotted this one?

Restaurants and hotels, where prices for overnight hotel accommodation fell by 7.5% between November and December 2019, compared with a rise of 0.9% between November and December 2018;

Also the next one may have affects elsewhere because the last time we saw a burst of this as we saw retail sales rise in response ( thank you ladies) which is against the present consensus.

Clothing and footwear, where the largest individual downward contributions came from women’s casual jackets and cardigans, where prices fell between November and December 2019 but rose between the same two months in 2018. There were also small individual downward contributions from formal trousers and formal skirts

Also if we continue to look wider we see a possible impact from the slow down in car sales.

There was also a smaller downward contribution from the purchase of vehicles where prices overall were little changed in 2019 but increased by 0.7% in 2018.

Let us move on but not without noting that the impact of the UK Pound £ is for once zero compared to the Euro as we have the same inflation rate.

Euro area annual inflation is expected to be 1.3% in December 2019,

What Happens Next?

There is still a slight downwards push but the impetus has gone.

The growth rate of prices for materials and fuels used in the manufacturing process was negative 0.1% on the year to December 2019, up from negative 1.9% in November 2019.

Indeed if we switch to output prices we see that there are ongoing albeit small rises in play.

The headline rate of output inflation for goods leaving the factory gate was 0.9% on the year to December 2019, up from 0.5% in November 2019.

If we look to future influences we know that 70% of the input number comes from the £ and the oil price. As we stand at US $64.40 for a barrel of Brent Crude that is where it roughly was in mid-December so maybe not much influence. With the Bank of England engaging in open mouth operations against the £ it may come into play.

House Prices

There was a worrying change here.

UK average house prices increased by 2.2% over the year to November 2019, up from 1.3% in October 2019……Average house prices increased over the year in England to £251,000 (1.7%), Wales to £173,000 (7.8%), Scotland to £155,000 (3.5%) and Northern Ireland to £140,000 (4.0%).

This adds a little credibility to the Halifax 4% reading for December although we await the official December data. As to the breakdown we have observed parts of the Midlands leading the line in recent times.

The annual increase in England was driven by the West Midlands and North West…..The lowest annual growth rate was in the East of England (negative 0.7%) followed by London (positive 0.2%).

Although that is for just England so we should also look wider and whilst it looks an anomaly there was this.

House price growth in Wales increased by 7.8% over the year to November 2019, up from 3.6% in October 2019, with the average house price in Wales at £173,000.

Comment

There is some much needed good news in today’s report for real wage growth as we see inflation dip. However we need context because if we switch to the UK’s longest running measure of inflation there is a different story in play.

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

The difference neatly illustrates my major theme in this area.

Other housing components, which increased the RPI 12-month rate relative to the CPIH 12-month rate by 0.06 percentage points between November and December 2019. The effect came mainly from house depreciation.

As you can see our official statisticians are desperate to make everyone look at their widely ignored favourite measure called CPIH which I will cover in a moment. But for now we see that past house prices via depreciation are exerting an upwards pull on the RPI and November’s number suggests this may continue. Most will understand that for many house prices are a big deal but the fact that they usually pull inflation higher means the establishment has launched an increasingly desperate campaign to ignore them.

If we now cover the official CPIH measure it indulges in a fleet of fantasy by assuming that owners pay themselves rent and then includes this fantasy in its inflation reading. Even worse there have been problems in measuring rents so it may well be a fantasy squared should such a thing exist. Anyway the effort to reduce the inflation reading has backfired this month as CPIH is above CPI due to this.

In December 2019, the largest upward contribution to the CPIH 12-month inflation rate came from housing and household services. The division has provided the largest upward contribution since November 2018.

Oh well…..

The UK sees some welcome lower consumer,producer and even house price inflation

Today we complete a 3 day sweep which gives us most of the UK economic data with the update on inflation. Actually the concept of “theme days” has gone overboard with Monday for example giving us way too much information for it to be digested in one go. Of course the apocryphal civil servant Sir Humphrey Appleby from Yes Prime Minister would regard this as a job well done. Actually in this instance they may be setting a smokescreen over good news as the UK inflation outlook looks good although of course the establishment does not share my view of lower house price growth.

The Pound

This has been in a better phase with the Bank of England recording this in its Minutes last week.

The sterling exchange rate index had increased by around 3% since the previous MPC meeting

If they followed their own past rule of thumb they would know that this is equivalent to a 0.75% Bank Rate rise or at least used to be. Then they might revise this a little.

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

As you can see they have given the higher value of the UK Pound £ no credit at all for the projected fall in inflation which really is a case of wearing blinkers. The reality is that if we switch to the most significant rate for these purposes which is the US Dollar it has risen by around 8 cents to above US $1.28 since the beginning of September. Actually at the time of typing this it may be dragged lower by the Euro which is dicing with the 1.10 level versus the US Dollar but I doubt it will be reported like that.

For today’s purposes the stronger pound may not influence consumer inflation much but it should have an impact on the producer price series. This was already pulling things lower last month.

The growth rate of prices for materials and fuels used in the manufacturing process was negative 2.8% on the year to September 2019, down from negative 0.9% in August 2019.

Oil Price

The picture here is more complex. We saw quite a rally in the early part of the year which peaked at around US $75 for Brent Crude in May. Then there was the Aramco attack in mid=September which saw it briefly exceed US $70. But now we are a bit below US $62 so there is little pressure here and if we add in the £ rally there should be some downwards pressure.

HS2 and Crossrail

If you are looking for signs of inflation let me hand you over to the BBC.

A draft copy of a review into the HS2 high-speed railway linking London and the North of England says it should be built, despite its rising cost.

The government-commissioned review, launched in August, will not be published until after the election.

It says the project might cost even more than its current price of £88bn.

According to Richard Wellings of the IEA it started at £34 billion. Indeed there also seems to be some sort of shrinkflation going on.

These include reducing the number of trains per hour from 18 to 14, which is in line with other high-speed networks around the world.

Here is the Guardian on Crossrail.

Crossrail will not open until at least 2021, incurring a further cost overrun that will take the total price of the London rail link to more than £18bn, Transport for London (TfL) has announced.

According to the Guardian it was originally budgeted at £14.8 billion.

If we link this to a different sphere this poses a problem for using low Gilt yields to borrow for infrastructure purposes. Because the projects get ever more expensive and in the case of HS2 look rather out of control, How one squares that circle I am not sure.

Today’s Data

This has seen some welcome news.

The Consumer Prices Index (CPI) 12-month inflation rate was 1.5% in October 2019, down from 1.7% in September 2019.

Both consumers and workers will welcome a slower rate of inflation and in fact there were outright falls in good prices.

The CPI all goods index is 105.6, down from 106.0 in September

The official explanation is that it was driven by this.

Housing and household services, where gas and electricity prices fell by 8.7% and 2.2%, respectively, between September and October 2019. This month’s downward movement partially reflected the response from energy providers to Ofgem’s six-month energy price cap, which came into effect from 1 October 2019……Furniture, household equipment and maintenance, where prices overall fell by 1.1% between September and October this year compared with a fall of 0.1% a year ago.

That is a little awkward as the official explanation majors on services when in fact it was good prices which fell outright. Oh dear! On the other side of the coin have any of you spotted this?

The only two standout items were women’s formal trousers and branded trainers.

Perhaps more are buying those new Nike running shoes which I believe are around £230 a pair.

There was an even bigger move in the RPI as it fell by 0.3% to 2.1% driven also by these factors.

Other housing components, which decreased the RPI 12-month rate relative to the CPIH 12-month rate by 0.05 percentage points between September and October 2019. The effect mainly came from house depreciation………Mortgage interest payments, which decreased the RPI 12-month rate by 0.08 percentage points between September and October 2019 but are excluded from the CPIH

Regular readers will know via the way I follow Gilt yields that I was pointing out we would see lower interest-rates on fixed-rate mortgages for a time. Oh and if you look at that last sentence it shows how laughable CPIH is as an inflation measure as it blithely confesses it ignores what are for many their largest payment of all.

House Prices

There was more good news here as well.

UK average house prices increased by 1.3% over the year to September 2019, unchanged from August 2019.

So as you can see we are seeing real wage growth of the order of 2% per annum in this area which is to be welcomed. Not quite ideal as I would like 0% house price growth to maximise the rate of gain without hurting anyone but much better than we have previously seen. As ever there are wide regional variations.

Average house prices increased over the year in England to £251,000 (1.0%), Wales to £164,000 (2.6%), Scotland to £155,000 (2.4%) and Northern Ireland to £140,000 (4.0%).London experienced the lowest annual growth rate (negative 0.4%), followed by the East of England (negative 0.2%).

Comment

The “inflation nation” which is the UK has shifted into a better phase and I for one would welcome a little bit of “Turning Japanese” in this area. However the infrastructure projects above suggest this is unlikely. But for now we not only have a better phase more seems to be on the horizon.

The headline rate of output inflation for goods leaving the factory gate was 0.8% on the year to October 2019, down from 1.2% in September 2019…..The growth rate of prices for materials and fuels used in the manufacturing process was negative 5.1% on the year to October 2019, down from negative 3.0% in September 2019.

As I pointed out yesterday this will provide a boost for real wages and hence the economy. It seems a bit painful for our statisticians to admit a stronger £ is a factor but they do sort of get there eventually.

All else equal a stronger sterling effective exchange rate will lead to less expensive inputs of imported materials and fuels.

Meanwhile let me point out that inflation measurement is not easy as I note these which are from my local Tesco supermarket.

Box of 20 Jaffa Cakes £1

Box of 10 Jaffa Cakes £1.05

2 packets of Kettle Crisps £2

1 packet of Kettle Crisps £2.09

Other supermarkets are available…..

 

 

Good News on UK inflation but not on house prices or for those predicting Cauliflower inflation

This morning has opened with some bad news for the Office for National Statistics and the UK Statistics Authority. They have placed what little credibility they have left on what is called the Rental Equivalence method where you use fantasy imputed rents as a way of measuring owner-occupied inflation. Apart from the obvious theoretical flaws there have been all sorts of issues with actually measuring rents in the first place which led to one of the worst things you can have in statistics which is a “discontinuity” leading to a new method being required. It tells us that rental inflation is of the order of 1% per annum. So let me hand you over to a new report from Zoopla released today.

Average rents increased by 2% to stand at £876 in the 12 months to the end of September……..But despite the overall improvement in affordability, the rate at which rents are rising has accelerated from 1.3% a year earlier to reach a three-year high of 2%, although it still remains below the 10-year average of annual growth of 2.3%

Regular readers will be aware that I have posted research from the Royal Statistical Society website which argued that the official measure of rental inflation is around 1% per annum too low. The reason for this is an incorrect balance between new and old rents. Zoopla with their measure suggests that a rise in rental inflation has been missed by the official data. There is a logic to this for those of us who think that rents are influenced by wages growth as we have seen a rise in wages growth over this period.

Affordability

Whilst the official measure of rental inflation is in yet more disarray we should tale time to welcome this.

Our director of research and insights, Richard Donnell, said: “Renting is more affordable today than the 10-year average. This follows weak rental growth over the last three years, and an acceleration in the growth of average earnings.”………..As a result, the typical renter now spends 31.8% of their earnings on rent, down from a peak of 33.3% in 2016, according to our inaugural Rental Market Report, which records trends in the often-neglected private rented sector.

Propaganda

In a rather ironic twist the establishment has been trying to bolster its case. Here is Mike Hardie of the ONS in Prospect Magazine from earlier this month.

A recent House of Lords Economic Affairs Committee inquiry highlighted that the strategy was not working, with RPI use remaining widespread. In March, David Norgrove, chair of the UK Statistics Authority, wrote to the then chancellor of the exchequer requesting his consent to bring the methods of RPI into line with CPIH.

Meanwhile back in reality here is the actual point the EAC made.

We disagree with the UK Statistics Authority that RPI does not have the potential to become a good measure of inflation.

The truth is that out official statisticians have deliberately not updated the RPI and then blamed it. Next from the EAC came something that was incredibly damning for the official approach.

We are not convinced by the use of rental equivalence in CPIH to impute owner-occupier housing costs.

Returning to the official view in Prospect Magazine there seems to have been an outbreak of amnesia on this subject.

Our headline consumer prices measures, which include the Consumer Prices Index (CPI) and CPI plus owner occupiers’ housing costs (CPIH), for the most part reflect the change in price of acquiring goods and services—in other words, we record the advertised price for an apple or a new car.

Also that explanation is exactly what they do not do with owner occupied housing costs! In a further twist you may note that even their example backfires. Because of the proliferation of rental and leasing deals in the car market it is one area where you probably should now use a rental model and even a small imputed bit.

Regular readers will know I have been a fan of the new Household Cost Indices suggested by John Astin and Jill Leyland. However I note from the Prospect Magazine article that the development process that is taking ages is neutering them.

we also capture mortgage interest costs, which are excluded from other measures of inflation, such as CPI and CPIH.

No mention of house prices which were in the original prospectus and were one of the strengths of the measure? Also take a guess as to which inflation measure right now does have mortgage costs? It is the officially villified RPI.

I am afraid this could not be much more transparent. I have contacted both Prospect Magazine and its editor on Twitter to request a right of reply but so far nether have responded.

Today’s Data

There was some good news as inflation did not rise.

The all items CPI annual rate is 1.7%, unchanged from last month.

As it happens the CPIH measure comes to the same answer in spite of 17% representing a lot lower number that does not exist in CPI.

The OOH component annual rate is 1.1%, unchanged from last month…..Private rental prices paid by tenants in the UK rose by 1.3% in the 12 months to September 2019, unchanged since May 2019.

I will leave explaining that to the official number-crunchers but we have returned to my original point that as well as the theoretical problems in using fantasy imputed rents they do not seem able to measure rents properly. If they had the data they could delve into it but in another error they do not.

An especially welcome development was this.

The all items RPI annual rate is 2.4%, down from 2.6% last month.

Especially as on the month prices actually fell.

The all items RPI is 291.0, down from 291.7 in August.

It might be best to keep that quiet or the deflationistas will be back spinning along with Kylie.

I’m spinning around
Move outta my way
I know you’re feeling me
‘Cause you like it like this
I’m breaking it down
I’m not the same
I know you’re feeling me
‘Cause you like it like this

The Trend Is Your Friend

If we look at the producer price output data the future is bright.

The headline rate of output inflation for goods leaving the factory gate was 1.2% on the year to September 2019, down from 1.7% in August 2019.

Even better news comes further up the chain.

The growth rate of prices for materials and fuels used in the manufacturing process was negative 2.8% on the year to September 2019, down from negative 0.9% in August 2019.

Here is the main factor at play.

Crude oil provided the largest downward contribution to the annual rate of input inflation.

Comment

If we start with today’s figures we have received some welcome news as inflation was expected to rise. Indeed those who follow the RPI have just seen a fall which changes the real wages picture positively although of course we await the wages data for September. Should the UK Pound £ remain in a stronger phase ( it is over US $1.27 as I type this) then it and the lower oil price we looked at above will give UK inflation a welcome downwards push. Mind you as we observe those factors it is hard to avoid wondering how the economists surveyed thought inflation would be higher!

As we step back we are reminded of the utter shambles created by the use of rental equivalence and today it has come from an unusual source. If we look into the detail of the RPI we see this.

Mortgage interest payments, where average charges rose this year but fell a year ago; and  House depreciation, with the smoothed house price index used to calculate this
component rising this year by more than a year ago.

As it happens not much difference to the rental measure but to get imputed rents into CPIH at a weight of 17% other things had to be reduced and RPI fell because it does not have this effect amongst other things.

Other differences including weights, which decreased the RPI 12-month rate relative to the CPIH 12-month rate by 0.28 percentage points between August and September 2019. The effect came mainly from air fares; sea fares; second-hand cars; games, toys and hobbies and equipment for sport and open-air recreation; food and non-alcoholic
beverages; and fuels and lubricants. This was partially offset by a widening effect from furniture and furnishings, carpets and household textiles.

You see another flaw in the CPI style methodology is that via the way better off people spend more it represents people about two-thirds of the way up the income stream as opposed to the median.

Cauliflower

Remember when the lack of UK Cauliflowers was going to make us have to pay much more for ropey ones? Below is the one I bought for 59 pence last week.

 

 

Good news for the UK economy as inflation and house price growth both fall

Today the UK economic data flow coincides with the news story of the week which is the oil price. After yesterday’s press conference from the Saudi oil minister things are now much calmer. From sharjah24.ae

He added that this interruption represents about half of the Kingdom’s production of crude oil, equivalent to about 6% of global production. However, he stated that over the past two days, “the damage has been contained and more than half of the production which was disrupted as a result of this blatant sabotage has been recovered.”

The Kingdom’s production capacity will return to 11 million barrels per day by the end of September, he said, and to 12 million barrels per day by the end of November. Production of dry gas, ethane and gas liquids will gradually return to pre-aggression levels by the end of this month.

A lot of this seemed targeted at the Aramco IPO but the price of a barrel of Brent Crude Oil has fallen back to US $64.50. So the inflation impact has been considerably reduced since Sunday night. I did warn that things got overheated on Monday.

 It then fell back to more like US $68 quite quickly. For those unaware this is a familiar pattern in such circumstances as some will have lost so much money they have to close their position and everybody knows that. It is a cruel and harsh world….

On the other side of the coin a welcome rebound in the value of the UK Pound £. It is only a little more than a fortnight after so many reports of its demise were written when it went below US $1.20 for a while whereas it is just below US $1.25 as I type this. That gave us another reminder to always be very nervous about crowded trades. Of course the picture ahead is unclear and may well be volatile although it was yet another bad move by Bank of England Governor Mark Carney to say this. From MorningStar.

Bank of England Governor Mark Carney says that sterling’s recent volatility means it is behaving more like an emerging market currency than one of a leading global economy.

Sometimes his ego makes his forget his responsibilities. Returning to our inflation theme should the stronger level for the UK Pound versus the US Dollar be maintained it will help with inflation prospects due to the way so many commodities are priced in dollars.

Today’s Data

The Trend

This turned out to be quite welcome as the lower value for the UK Pound £ was more than offset by the lower price for crude oil ( this was August).

The growth rate of prices for materials and fuels used in the manufacturing process was negative 0.8% on the year to August 2019, down from 0.9% in July 2019.

If you want the exact impact here they are and they give a clue as to how volatile the impact of the crude oil price can be.

The largest downward contribution to the annual rate in August 2019 came from crude oil, which contributed 2.09 percentage points  and had negative annual price growth of 11.6% . This compares to an annual price growth of 41% this time last year.

So there is a downwards push for later in the year and a nearer impact is also downwards for the level of inflation.

The headline rate of output inflation for goods leaving the factory gate was 1.6% on the year to August 2019, down from 1.9% in July 2019.

In the welcome news was something that David Bowie might have described as a Space Oddity.

Transport equipment provided the largest upward contribution of 0.32 percentage points to the annual rate , with price growth of 2.8% on the year to August 2019 . This is the highest the annual rate has been within this industry since September 2017 and is driven by motor vehicles, trailers and semi-trailers.

The only thing I can think of is that I believe there was a change in the subsidy for some types of electric vehicles.

Consumer Inflation

The news here was welcome too.

The Consumer Prices Index (CPI) 12-month rate was 1.7% in August 2019, down from 2.1% in July 2019.

This has a range of beneficial impacts because if we look at the wages data for the month of July it showed annual growth of 4.2% meaning real wages rose by 2.5% using this measure.

The good news has some flies in the ointment however. The first is that an inflation measure which ignores owner-occupied housing is therefore not that appropriate as a wages deflator. Also two areas which have been troubled drove the inflation fall.

Recreation and culture, where within the group, the largest effect (of 0.09 percentage points) came from games, toys and hobbies (particularly computer games including
downloads), with prices overall falling by 5.0% between July and August 2019 compared with a smaller fall of 0.1% between the same two months a year ago.

Regular readers will be aware that our statisticians have problems dealing with games which get discounted and if we look at fashion clothing there is the same problem. Ahem.

Clothing and footwear, where prices rose by 1.8% this year compared with a larger rise of 3.1% a year ago. The main effect came from clothing, particularly children’s clothing. Prices of clothing and footwear usually rise between July and August as autumn ranges start to enter the shops following the summer sales season. The rise was smaller this year and may have been influenced by the proportion of items on sale, which fell by less between July and August this year than between the same two months a year ago.

Apologies for the raft of technical detail but these are important points. Not only for themselves but the latter came up in the debate over the RPI as there were arguments it made up around 0.3% of the gap ( presently 0.9%), But in a shameful act the UK Statistics Authority decided to use the three wise monkeys as its role model going forwards. No doubt the research is finding its way to the recycling bin.

If we switch to the RPI we see a sign that will send a chill down the spine of our official statisticians and statistics authority.

games, toys and hobbies

Are one of the reasons it fell by less and thus there is a hint it may be dealing with the issues here in a better fashion.

The all items RPI annual rate is 2.6%, down from 2.8% last month.

As you can see it only fell by half the amount.

House Prices

There was some really good news here.

Average house prices in the UK increased by 0.7% in the year to July 2019, down from 1.4% in June 2019. This is the lowest annual rate since September 2012, when it was 0.4%.

I have long argued that UK house prices have become unaffordable and we see that in the year to July they fell by 3.5% relative to wage growth. More of this please as it is the best way of deflating the bubble. As ever this conceals regional differences which opened with a surprise.

The lowest annual growth was in the North East, where prices fell by 2.9% over the year to July 2019. This was followed by the South East, where prices fell by 2.0% over the year…….House price growth in Wales increased by 4.2% in the year to July 2019, down slightly from 4.3% in June 2019, with the average house price at £165,000.

With LSL Acadata reporting earlier this week that annual house price growth in the year to August was 0% we seem to be coming out of the house price boom phase in terms of increases if not price levels.

Comment

Pretty much all of the trends here are welcome as we see lower consumer, producer price and house price inflation. As I have already pointed out this boosts real wages and let me add that over time I expect that to boost economic output and GDP. Although of course there are plenty of other factors in play in the latter. As to the detail it looks as though the monthly fall may have been exacerbated by the problems with the measurement of inflation in items which have a fashion component. Let me give you an example of this which is that we spotted a pair of Nike running shoes which retail at £209.95 at Battersea Park Running Track yet my friend managed to get the previous model for £28 at a sale outlet. Put that in the inflation numbers….

This leads more egg on the face of the UK inflation establishment as it would appear that in the latest data the RPI handled such matters in a superior fashion. Also let me just remind you that whilst the fantasy imputed rent driven CPIH looks more on the ball because of the decline in house price growth this is a fluke along the lines of the fact that even a stopped watch is right twice a day.

 

Inflation reality is increasingly different to the “preferred” measure of the UK

Today brings us a raft of UK data on inflation as we get the consumer, producer and house price numbers. After dipping my toe a little into the energy issue yesterday it is clear that plenty of inflation is on its way from that sector over time. I have a particular fear for still days in winter should the establishment succeed in persuading everyone to have a Smart Meter. Let us face it – and in a refreshing change even the official adverts now do – the only real benefit they offer is for power companies who wish to charge more at certain times. The “something wonderful” from the film 2001 would be an ability to store energy on a large scale or a green consistent source of it. The confirmation that it will be more expensive came here. From the BBC quoting Scottish Power.

We are leaving carbon generation behind for a renewable future powered by cheaper green energy.

We will likely find that it is only cheaper if you use Hinkley B as your benchmark.

Inflation Trends

We find that of our two indicators one has gone rather quiet and the other has been active. The quiet one has been the level of the UK Pound £ against the US Dollar as this influences the price we pay for oil and commodities. It has changed by a mere 0.5% (lower) over the past year after spells where we have seen much larger moves. This has been followed by another development which is that UK inflation has largely converged with inflation trends elsewhere. For example Euro area inflation is expected to be announced at 2.1% later and using a slightly different measure the US declared this around a week ago.

The all items index rose 2.3 percent for the 12 months ending September, a smaller increase than the 2.7-percent increase for the 12 months ending August.

There has been a familiar consequence of this as the Congressional Budget Office explains.

To account for inflation, the Treasury Department
adjusts the principal of its inflation-protected securities each month by using the change in the consumer price index for all urban consumers that was recorded two months earlier. That adjustment was $33 billion in fiscal year 2017 but $60 billion in the current fiscal
year.

The UK was hit by this last year and if there is much more of this worldwide perhaps we can expect central banks to indulge in QE for inflation linked bonds. Also in terms of inflation measurement whilst I still have reservations about the use of imputed rents the US handles it better than the UK.

The shelter index continued to rise and accounted for over half of the seasonally adjusted monthly increase in the all items index.

As you can see it does to some extent work by sometimes adding to inflation whereas in the UK it is a pretty consistent brake on it, even in housing booms.

Crude Oil

The pattern here is rather different as the price of a barrel of Brent Crude Oil has risen by 41% over the past year meaning it has been a major factor in pushing inflation higher. Some this is recent as a push higher started in the middle of August which as we stand added about ten dollars. Although in a startling development OPEC will now be avoiding mentioning it. From Reuters.

OPEC has urged its members not to mention oil prices when discussing policy in a break from the past, as the oil producing group seeks to avoid the risk of U.S. legal action for manipulating the market, sources close to OPEC said.

Seeing as the whole purpose of OPEC is to manipulate the oil price I wonder what they will discuss?

Today’s data

After the copy and pasting of the establishment line yesterday on the subject of wages let us open with the official preferred measure.

The Consumer Prices Index including owner occupiers’ housing costs (CPIH) 12-month inflation rate was 2.2% in September 2018, down from 2.4% in August 2018.

For newer readers the reason why it is the preferred measure can be expressed in a short version or a ore complete one. The short version is that it gives a lower number the longer version is because it includes Imputed Rents where homeowners are assumed to pay rent to themselves which of course they do not.

The OOH component annual rate is 1.0%, unchanged from last month.

As you can see these fantasy rents which comprise around 17% of the index pull it lower and we can see the impact by looking at our previous preferred measure.

The Consumer Prices Index (CPI) 12-month rate was 2.4% in September 2018, down from 2.7% in August 2018.

This trend seems likely to continue as Generation Rent explains.

The experience of the past 14 years suggests rents are most closely linked to wages – i.e. what renters can afford to pay.

With wage growth weak in historical terms then rent growth is likely to be so also and thus from an establishment point of view this is perfect for an inflation measure. This certainly proved to be the case after the credit crunch hit as Generation Rent explains.

As the credit crunch hit in 2008, mortgage lenders tightened lending criteria and the number of first-time buyers halved, boosting demand for private renting – the sector grew by an extra 135,000 per year between 2007 and 2010 compared with 2005-07.  According to the property industry’s logic, the sharp increase in demand should have caused rents to rise – yet inflation-adjusted (real) rent fell by 6.7% in the three years to January 2011.

Meanwhile if we switch to house prices which just as a reminder are actually paid by home owners we see this.

UK average house prices increased by 3.2% in the year to August 2018, with strong growth in the East Midlands and West Midlands.

As you can see 3.2% which is actually paid finds itself replaced with 1% which is not paid by home owners and the recorded inflation rate drops. This is one of the reasons why such a campaign has been launched against the RPI which includes house prices via the use of depreciation.

The all items RPI annual rate is 3.3%, down from 3.5% last month.

There you have it as we go 3.3% as a measure which was replaced by a measure showing 2.4% which was replaced by one showing 2.2%. Thus at the current rate of “improvements” the inflation rate right now will be recorded as 0% somewhere around 2050.

The Trend

This is pretty much a reflection of the oil price we looked at above as its bounce has led to this.

The headline rate of output inflation for goods leaving the factory gate was 3.1% on the year to September 2018, up from 2.9% in August 2018….The growth rate of prices for materials and fuels used in the manufacturing process rose to 10.3% on the year to September 2018, up from 9.4% in August 2018.

So we have an upwards shift in the trend but it is back to energy and oil again.

The largest contribution to both the annual and monthly rate for output inflation came from petroleum products.

Comment

It is indeed welcome to see an inflation dip across all of our measures. It was driven by these factors.

The largest downward contribution came from food and non-alcoholic beverages where prices fell between August and September 2018 but rose between the same two months a year ago…..Other large downward contributions came from transport, recreation and culture, and clothing.

Although on the other side of the coin came a familiar factor.

Partially offsetting upward contributions came from increases to electricity and gas prices.

Are those the cheaper prices promised? I also note that the numbers are swinging around a bit ( bad last month, better this) which has as at least a partial driver, transport costs.

Returning to the issue of inflation measurement I am sorry to see places like the Resolution Foundation using the government’s preferred measures on inflation and wages as it otherwise does some good work. At the moment it is the difference between claiming real wages are rising and the much more likely reality that they are at best flatlining and perhaps still falling. Mind you even officialdom may not be keeping the faith as I note this announcement from the government just now.

Yes that is the same HM Treasury which via exerting its influence on the Office for National Statistics have driven the use of imputed rents in CPIH has apparently got cold feet and is tweeting CPI.

UK Inflation looks set to fall as 2018 progresses

Today brings us face to face with the UK context on what many are telling us has been the cause of the recent troubled patch for world equity markets. This is because a whole raft of inflation data from the consumer producer and housing sector is due. The narrative that inflation has affected equities markets has got an airing in today’s Financial Times.

The inflation threat has simmered for months, but the missing link had been wage growth, which made the rise in the US jobs figures for January so important, fund managers say. Indeed, the yield on the 10-year Treasury is 40 basis points higher this year, driven almost entirely by inflation expectations. Strong global economic data, coupled with sweeping tax cuts and the recent expansionary budget deal in Washington, should stir price pressures.

Actually that argument seems to be one fitted after the events rather than before as the rise in bond yields could simply be seen as a response to the expansionary fiscal policy in the US combined with interest-rate increases and a reduction albeit small in the size of the Federal Reserve balance sheet. Actually as the FT admits inflation is often considered to be good for equities!

While faster inflation would typically be good for stocks, lifting companies’ pricing power and suggesting economic growth is accelerating.

Wages

There is also a theme doing the rounds about wage inflation. Yesterday Gertjan Vlieghe of the Bank of England joined this particular party according to Reuters.

 a pick-up in wages ……..signs of a pick-up in wages

The problem for the Bank of England on this front is two-fold. Firstly it has been like the boy ( and in some cases) girl who has cried wolf on this front and the second is that the official data has picked up no such thing so far. Thus we are left essentially with one higher wages print of 2.9% for average hourly earnings in the United States. So the case is still rather weak as we wonder if even the current economic recovery can boost wages in any meaningful sense.

Trends

The first trend which should first show in the producer price numbers is the strength of the UK Pound versus the US Dollar over the past year. It was if we look back about 14 cents lower than the current US $1.388. Also the price of crude oil has dipped back from the rally which took it up to US $70 in terms of the Brent benchmark to US $62.47 as I type this. This drop happened quite quickly after this.

Goldman Sachs has held one of the most optimistic views on the rebalancing of the oil market and oil prices in the near term, and the investment bank is now growing even more bullish, predicting that the oil market has likely balanced, and that Brent Crude will reach $82.50 a barrel within six months. ( OilPrice.com)

The Vampire Squid is building up quite a track record of calling the market in the wrong direction as back in the day it called for US $200 a barrel and when prices fell for a US dollar price in the teens. I will let readers decide for themselves whether it is simply incompetent or is taking us all for “muppets”.

Today’s data

The good news was that the trends discussed above are beginning to have an impact.

The headline rate of inflation for goods leaving the factory gate (output prices) rose 2.8% on the year to January 2018, down from 3.3% in December 2017…….Prices for materials and fuels (input prices) rose 4.7% on the year to January 2018, down from 5.4% in December 2017.

Tucked away was the news that the worst seems to be passing us as this is well below the 20.2% peak of this time last year.

The annual rate of inflation for imported materials and fuels was 3.5% in January 2018 (Table 2), down 1.7 percentage points from December 2017 and the lowest it has been since June 2016.

It is a little disappointing to see the Office for National Statistics repeat a mistake made by the Bank of England concentrating on the wrong exchange rate.

The sterling effective exchange rate index (ERI) rose to 79.0 in January 2018. On the year, the ERI was up 2.6% in January 2018 and was the fourth consecutive month where the ERI has shown positive growth.

Commodities are priced in US Dollars in the main.

Consumer Inflation

This showed an example of inflation being sticky.

The all items CPI annual rate is 3.0%, unchanged from last month.

However prices did fall on the month due to the January sales season mostly.

The all items CPI is 104.4, down from 104.9 in December

The inflation rate was unaffected because they fell at the same rate last year.

There was something unusual in what kept annual inflation at 3%.

The main upward contribution came from admission prices for attractions such as zoos and gardens, with prices falling by less than they did last year.

I will put in a complaint when I pass Battersea Park Childrens Zoo later! More hopeful for hard pressed budgets was this turn in food prices.

This effect came from prices for a wide range of types of food and drink, with the largest contribution coming from a fall in meat prices.

My friend who has gone vegan may be guilty of bad timing.

An ongoing disaster

The issue of how to deal with owner-occupied housing remains a scar on the UK inflation numbers. This is the way they are treated in the preferred establishment measure.

The OOH component annual rate is 1.2%, down from 1.3% last month. ( OOH = Owner Occupied Housing).

Not much is it, so how do they get to it? Well this is the major player.

Private rental prices paid by tenants in Great Britain rose by 1.1% in the 12 months to January 2018; this is down from 1.2% in December 2017.

If you are thinking that owner occupiers do not pay rent as they own it you are right. Sadly our official statisticians prefer a fantasy world that could be in an episode of The Outer Limits. They have had a lot of trouble measuring rents which means their fantasies diverge even more from ordinary reality.

If they had used something real then the numbers would look very different.

UK house prices rose 5.2% in the year to December 2017, up from 5.0% in November 2017.

This makes inflation look much lower than it really is and is the true purpose in my opinion. A powerful response to this at one of the public meetings pointed out that due to the popularity of leasing using rents for the car sector would be realistic ( they do not) but using it for owner-occupied housing is unrealistic ( they do).

If you want a lower inflation reading thought it does the trick.

The all items CPIH annual rate is 2.7%, unchanged from last month.

Comment

The underlying theme is that UK consumer inflation looks set to trend lower as 2018 progresses which is good news for both consumers and workers. The initial driving force of this was the rally of the UK Pound £ against the US Dollar and as it has faded back a little we have seen lower oil prices. We also get a sign that prices can fall combined with annual inflation.

The all items CPI is 104.4, down from 104.9 in December…..The all items RPI is 276.0, down from 278.1 in December…….The all items CPIH is 104.5, down from 105.0 in December.

One issue that continues to dog the numbers is the treatment of housing and for all the criticisms levelled at it a strength of the RPI is that it does have house prices ( via depreciation).

The all items RPI annual rate is 4.0%, down from 4.1% last month.

Meanwhile the Bank of England seems lost in its own land of confusion. It cut interest-rates into an inflation rise and then raised them into an expected fall! This is of course the wrong way round for a supposed inflation targeter. Now they seem to be trying to ramp up the rhetoric for more increases forgetting that they need to look 18 months ahead rather than in front of their nose. Perhaps they should take some time out and listen to Bananarama.

I thought I was smart but I soon found out
I didn’t know what life was all about
But then I learnt I must confess
That life is like a game of chess

 

 

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.

 

 

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%.