Of UK Retail Sales and a 5% cut in real interest-rates

A feature of my career and time working with and analysing finance and economics has been the fall in interest-rates and yields. This of course has ended up with us now facing a period where more than a few interest-rates and bond yields are in fact in negative territory. My subject of yesterday France has a central bank ( ECB) with a deposit and current account of -0.4% and its 2 year bond yield is -0.5%. But let me give you some perspective from the Bank Underground blog of the Bank of England.

Real interest rates have fallen by around 5 percentage points since the 1980s.

Eye-catching is it not? Just to break this down they were 0% in the 1970s, 4.7% in the 1980s, then 1.9% up to the credit crunch and since 2009 have been -1.3%, Oh and that is 6% and not 5% by the way. For clarity this is for the United States one year yield minus how inflation turned out to be in that year.

So in the period since the 1980s we have seen, as I have pointed out quite a few times before quite a stimulus applied to the world economy and of course a fair bit of this has come in the credit crunch era. We then face a rather awkward conundrum because the supposed cure of lower interest-rates and yields is in response at least in part to the problems created by lower interest-rates and yields! A sort of doubling the dose response to an addiction. How does that usually work out?

Of course some want ever more as I note individuals like Kenneth Rogoff who want to ban as much cash as they can as they fear that they will not be able to repeat the “cure” next time around. This plainly means interest-rates going even more negative and more places seeing them. For example the UK now has a Bank Rate of 0.25% after over 3 years of pretty solid economic growth so what happens when the next recession turns up? Such thoughts have the problem of why a cure needs to be repeated so often at ever higher dosages and with ever more side-effects?

As to the causes of this the Bank Underground tries to dismiss fears over secular stagnation by pointing out this.

In the late 1930s, Alvin Hansen developed the term “secular stagnation” to describe his concerns that structural factors such as stagnant technological development and weaker population growth prospects would weigh on growth permanently.  We know now that these concerns over secular trends proved misplaced, and played little role in weaker growth.

Rather ominously that was really only changed by the second world war which is hardly a hopeful precedent! The author hopes that things will get better so lets join him in that but the truth is we are much less sure and there is a sort of unmentioned sword of Damocles hanging all over this which is Japan where the lost decade has become the lost decades.

Although the author would not put it like this there is quite a critique of current Bank of England policy tucked away in the blog.

When agents assign a low probability to the central bank remaining hawkish towards inflation, real rates must rise by a significantly larger amount in response to a given shock to stabilise inflation.  The required response decreases as credibility improves.

So as the credibility of Forward Guidance is only for the credulous now and the Bank of England plans to “look through” rising inflation then the logic applied there suggests real rates will have to rise substantially. Awkward.

Retail Sales

Speaking of rising inflation there was this in the data released this morning.

Average store prices (including fuel) increased by 1.9% on the year, the largest contribution to this increase came from petrol stations, where year-on-year average prices were estimated to have risen by 16.1%.

Regular readers will be aware that I was ahead of the pick-up in retail sales in the UK and quite a few other places by explaining that the lower inflation driven mostly be lower crude oil prices would raise consumption via a boost to real wages. So we are now beginning to see the mirror image of that relationship. It was only on Wednesday that I pointed out the real wage growth was fading and on some inflation measures had now gone negative. The price rise was just not from fuel as this from the food sector shows.

In January 2017, prices increased by 0.5% compared with December 2016, the largest month-on-month rise since April 2013, while the year-on-year increase of 0.2% is the highest since June 2014,

Thus the numbers today are not the surprise they have been presented as.

Month-on-month the quantity bought is estimated to have fallen by 0.3%.

If we look for more perspective we see this.

The underlying pattern as suggested by the 3 month on 3 month movement decreased by 0.4%; the first fall since December 2013.

In annual terms there is still growth but it has faded substantially for the heady days of late 2016.

In January 2017, the quantity bought in the retail industry is estimated to have increased by 1.5% compared with January 2016, the lowest growth since November 2013.

Actually so much of the change can be found in the sector where prices have risen the most.

The year-on-year increase in fuel stores is the largest rise since September 2011, contributing to the strong growth seen in the amount spent in fuel stores on the year. However, the quantity bought has decreased following the rise in fuel prices, suggesting that consumers are more cautious with spending in this sector.

Have readers noticed less traffic on the roads?


There was some good news here albeit with an odd kicker.

Overseas residents made 9.2 million visits to the UK in the 3 months to December 2016. This was 6% higher than the same 3 months in 2015. The amount spent on these visits was unchanged at £5.3 billion.

It is no great surprise that the lower UK Pound £ has led to more visitors but I am curious that they spent no more. For a start how do we know? Does someone follow them into every shop? Also this goes against the argument made by some that past retail sales growth in the UK was added to by foreign purchasers using lower price for them.

Whatever the state of play there we do seem to be seeing more US tourists as we wonder if Trump fears are higher than Brexit ones?

Visits from North America increased by 15% in the 3 months to December 2016, when compared with the same 3 months in 2015.


We see that we have been living our lives in an extraordinarily favourable interest-rate environment. Many reading this will have lived their whole lives in it. The catch is that it has ended up being associated with trouble on two fronts. Firstly it did not avert a credit crunch and in fact ended up contributing to it and secondly if it was a cure we would not be where we are. Although care is needed as there were plenty of economic gains back in the day. As for now well some old fears have reappeared.

More Americans fell behind on their car loan payments in the fourth quarter, bringing auto delinquencies to their highest since the height of the financial crisis, Federal Reserve Bank of New York data released on Thursday showed…….

In the fourth quarter, $142 billion in car loans were generated, giving 2016 the most auto loan originations in the 18-year history of the data, the New York Fed said.

Auto debt hit $1.16 trillion, with a $93 billion rise over the year.

Sub-prime car loans anyone?

If we move to the UK then the consumer surge is fading. The numbers are erratic and influenced by the rise in the price of fuel but even taking that out annual growth fell to 2.6%. It remains a shame that the Bank of England last summer contributed to the inflation rise via the way that their rhetoric and Bank Rate cut and QE pushed the UK Pound £ lower. Before this is over I expect what was badged as a stimulus to turn out to be the reverse via its impact on real wages.


The inflation tectonic plates are showing signs of a shift

The last 18 months or so has seen a proliferation of countries reporting first falling rates of inflation and then negative annual rates. The commentariat got themselves into something of a mess on this front invoking “its the end of the world as we know it” before having to U-Turn like they are Mark Carney. We knew better here but I note that for the argument I have satirised as being for the “deflation nutters” there has been some interesting developments this week. This morning produced one from the British Retail Consortium.

Another fall in shop prices was seen in February, down 2.0 per cent compared with a year ago and a further fall on the numbers we saw in January as competition in the industry continues apace. This now marks the 34th consecutive month of price drops and 35th for non-food prices.

So the beat goes on and it was joined by a small drop in food prices. Actually for once the word deflation may be appropriate if we look at their longer-term view of the retail climate.

These effects could mean there are as many as 900,000 fewer jobs in retail by 2025 but those that remain will be more productive and higher earning.

However some care is needed here as a fair bit of this is the shift to the online/digital world and wages will be pushed higher by the National Living Wage. If we return to prices then petrol and diesel prices are at their cheapest for 6 years according to official data. here let me particularly welcome the end of a feature of rip-off Britain where diesel car drivers pay more for fuel as both fuels now cost £1.014 per litre.

The Euro area

We were told this only on Monday.

Euro area annual inflation is expected to be -0.2% in February 2016, down from 0.3% in January, according to a flash estimate from Eurostat, the statistical office of the European Union.

Again we saw a barrage of knee-jerk responses to this which for its own reasons – to justify its planned easing next week – the European Central Bank (ECB) has joined in with this morning. From @livesquawk

Villeroy: Sees Negative Inflation For ‘Several Months’

As you can see this feeds right into the “deflation nutter” zone although of course we are dealing with past trends as the data and the forecast are on the back of what has happened whereas we want to know what happens next and I am increasingly thinking that Florence may be right.

It’s always darkest before the dawn

It is always nice to support someone else who grew up in Camberwell and here lyrics also provide something of a critique for central bankers.

And I’ve been a fool and I’ve been blind
I can never leave the past behind
I can see no way, I can see no way
I’m always dragging that horse around

The oil price

There are various levels here and the superficial level is simply note that even at US $37 or so per barrel it is down 38% on a year ago. Now I do not know whether the forecasts of a fall to US $16 per barrel will happen but they do sound a bit like the ones projecting a rise to US $200 when the price was above US $100. Or “The only way is up” has been replaced by “down down” on the airwaves.

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.

We may see monthly flickers of this because this time last year the oil price saw a bounce which saw it rise to nearly US $70 on the Brent Crude benchmark in early May 2015 but as we move through summer we will be comparing to lower levels. Once the oil price impact begins to fade we will be concentrating on other aspects of inflation.

services is expected to have the highest annual rate in February (1.0%, compared with 1.2% in January),

This would hardly be a surge but it would change the emphasis as we see Euro area inflation rise towards its target.

If we move to the United States then they have an inflation linked bond market called TIPS. The St.Louis Federal Reserve has done some calculations about what oil prices would have to do to justify the current pricing structure. Thank you to Macro Man for the heads up and the emphasis is mine.

According to our calculations, oil prices would need to fall to $0 per barrel by mid-2019 in order to validate current inflation expectations. After that, there is no oil price that would allow our model to predict a CPI path consistent with December 2015 breakeven inflation expectations. This implied path of oil prices is very different from the path of oil prices implied by futures contracts, which rises to more than $50 per barrel by mid-2019.

There are issues with their assumptions but I think you get the gist of their argument in that quote.

Oil and commodity prices

These have been rising recently. Since the 20th of January the price of a barrel of Brent Crude has risen by US $10 per barrel.  As you can see from the chart below then Dr.Copper has for now stopped falling.

The UK

There are other issues here of which one relates to tax. As there are problems with the public finances the temptation to apply something like the old fuel price escalator may prove irresistible. It can ever be presented as helping the Bank of England with its mandate! Although of course it would be punishment for the UK worker and consumer via a reduction in real wages. Whilst a tendency to institutionalised inflation has a British theme a need for tax revenue appears elsewhere so it may not be alone in having such taxing thoughts.

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 with the fall beginning in the late summer of 2015 and picking up speed in 2016.

Also UK services inflation has been more persistent than in the Euro area and currently it matters little which measure you use. Sadly the new ONS website is telling us that the new data will be released on the 16th of February so it is good news that I recall the numbers being 2.3% (CPI) and 2.4% (RPI). So as the oil price effect wears off we will see the UK return to a more normal inflation position.

Also the UK methodology looks in need of a rethink to me. After all services are an ever bigger part of the economy as we have “rebalanced” towards them and I wonder if thus has been fully picked up. The inflation numbers should be better than the 2012 78.6% of GDP that is used for economic growth but may still be inaccurate.

RPI versus CPI

On this subject which many will tell you is a simple issue let me add something from the Royal Statistical Society website where Gareth Jones has posted this.

From 2011 to 2014,  the figures based on CPI indices are quite different to those based on RPI indices.  The CPI based volume shares continue to rise, while the RPI based figures fall.

Given that this period was one of falling real incomes, One would expect a fall in volume share for clothing, as it is to a large extent a form of deferrable capital expenditure.  On this basis, the RPI based figures are more plausible than the CPI based ones.  This adds support to the RPI price indices rather than the CPI price indices.

There are caveats but my argument has been that the debate is one where there are issues on both sides and not just the lazy RPI is bad produced by organisations such as the Financial Times. It was a change to clothing which produced a lot of the debate on UK inflation measurement and the establishment push for a lower number. The more of a case for RPI of whatever variant the more we move away from negative inflation.


The disinflation picture is one which has carried on for longer than expected. The ECB in particular embarrassed itself by missing the trend and then ended up in hot pursuit without catching up a bit like the Sheriff in the Smokey and the Bandit films. 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. As I pointed out back on the 3rd of December then central banks should be beginning to adjust policy in response. Except as we have seen from the ECB and Bank of Japan and expect from the ECB next week they have already eased again and more is expected. The Bank of England could easily join in.

Meanwhile if we added asset prices such as housing to consumer inflation measures we would see a different picture again. There is a Eurostat measure for this where the UK owner occupied housing sector would be registering inflation of 1.9%. It is dreadfully flawed but much better than nothing!

Meanwhile if you prefer to listen rather than read here are some of my thoughts in that format from Share Radio earlier.

trends in the UK – Shaun Richards after another month of shop price


As a last point once you start to think that inflation will stop falling and then rise well where does that leave both low and especially negative bond yields?