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
Or, of course, it may not.
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.
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.
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.