Good news for UK inflation comes with another attempt to mislead us

Yesterday saw quite a development in the UK inflation measurement saga as the Treasury Select Committee joined the fray by writing to the UK National Statistician John Pullinger.

As the Economic Affairs Committee presented in their report, the error caused the RPI to be artificially inflated by 0.3 percentage points in 2010……There was general agreement amongst the witnesses spoken to that the 0.3 percentage point increase was an error, and of course you yourself admitted this. Instead of fixing this however, you have designated RPI a “legacy measure”, making no further  improvements to the index. This is not a tenable position when the index remains in widespread use. The past RPI index-linked Gilt matures in 2068.

As I have already replied to the Financial Times on the subject there are some good parts to this but also problems.

Fair enough, except we have an immediate problem as the very bodies which have so failed us over the past 7 years such as the UK Statistics Authority are now supposed to fix a problem they are not only part of they have contributed to. When I gave evidence to it I felt it was simply going through the motions.

The National Statistician and the UK Statistics Authority have failed so comprehensively they cannot be part of the solution. Also as I have reflected on this there are two other problems. Firstly the approach above seems to want to turn the clock back to before 2010 when the RPI was affected by a change in the method of collecting prices for clothing which has turned out to especially impact fashion clothing. Whereas we need to go forwards with an improved model. Also they have come out with a 0.3% number out of thin air as I recall the evidence of Simon Briscoe who gave the most evidence in this area and he wanted further research to get a number rather than stating one, So this from the Treasury Select Committee is both unfounded and potentially misleading.

This has led to a £1 billion yearly windfall for index-linked gilt holders, at the expense of consumers, like students who have seen interest on their loans rise, or rail passengers affected by increasing fares.

You see students,consumers and rail passengers have been affected by a political choice which was to use the higher RPI for when we pay for things and the invariably lower CPI when the government pays for things. Former Chancellor George Osborne was responsible for this swerve which boosted the government;s finances via a type of stealth tax. So I can see why government MPs are keen to push this view but more surprised that opposition MPs have joined in, perhaps they were so busy looking good for the crowd they did not stop to think.

There is also another serious problem as I wrote to the FT.

Next we have the issue that official communiques seem to forget that there are problems with other inflation measures too. For example the House of Lords was very critical of a major part of the measure the UK Office for National Statistics has pushed hard.

 

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

 

Can anybody spot the mention of the flawed CPIH above? Those of a fair mind looking for balance would think it deserves it. You see it is always like that……

As you can see there are familiar issues here where the establishment takes evidence but then cherry picks it to come to an answer it wanted all along! A balanced report would recommend changes to both RPI and CPIH. After all the latter is supposed to be the new main inflation measure. Also the use of 0.3% seems to be answering a question before it has been properly asked! We were supposed to go forwards and measure the impact of the changes made in 2010 so if the MPs via their own expertise have calculated the answer at 0.3% they should explain their calculations and reasoning.

I will be writing to them challenging them on these issues. They seem to be unduly influenced by the work of the economics editor of the Financial Times Chris Giles who keeps claiming that index-linked Gilt holders who he called “the gnomes of Zurich” at the Royal Statistical Society. I have challenged him on that statement as after spending many years in that market I do not recall ever dealing with one of these creatures and we know that many UK pension funds including the Bank of England one invest in it instead. Until we do the proper research we cannot know if there has been a windfall let alone the size of it. Chris is much quieter these days past about his vigorous support of CPIH and rental equivalence.

Today’s Data

This brought some welcome good news.

The all items CPI annual rate is 1.8%, down from 2.1% in December.

This has various consequences as for example it has been quite a while since the Bank of England has been below its inflation target. Although as it was partly to do with the Ofgem price cap some of it will not last as it reversed it a few days ago.

The largest downward contribution to the change in the 12-month rate came from electricity, gas and other fuels, with prices overall falling between December 2018 and January 2019 compared with price rises the same time a year ago.

Actually just as I am typing this I see this on Sky News.

Energy supplier Npower says it will raise its standard gas and electricity prices by 10% from 1 April.

If we look further upstream for price trends we see that the pressure continues to be downwards.

The headline rate of output inflation for goods leaving the factory gate was 2.1% on the year to January 2019, down from 2.4% in December 2018…..The growth rate of prices for materials and fuels used in the manufacturing process slowed to 2.9% on the year to January 2019, down from 3.2% in December 2018.

If we move to the RPI we see that it fell as well and also would have been on target in annual terms.

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

Comment

It is a welcome development that I can point out that UK real wages are now increasing against all our inflation measures. After a credit crunch that has been something of a nuclear winter for real wage growth it is nice to see and report on, but sadly we have a long way to go to get back to where we were. Some good news in what looks like an economic downturn.

Let me translate my views on inflation measurement above to a real life example. You see if you follow the establishment mantra you tell people they are better off than they are as the Resolution Foundation has done here.

 

Using the CPIH inflation measure understates the fall in real wages we have seen via its use of rents that are never paid ( Imputed Rent) as a measure of owner occupied housing costs. For newer readers CPIH assumes that people who own a house pay themselves rent and even worse these “estimates” are based on rental data which is dubious and suggested by some to be 1% too low via the wrong balance between new and old rents. In a nutshell this is why I have persisted in my long campaign about inflation measurement because the establishment is happy to produce numbers which to be polite are economical with the truth. I am not.

 

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Hard Times at the Bank of England on both Forward Guidance and inflation expertise

It is time for us to dip back into the data in the UK economy as we look at retail sales, But before we get there we have seen another development and it has come from UK Gilt yields which are the cost of borrowing for the UK government. I have been writing for some time that they have been very low due to the fear for some or expectation for others that the Bank of England will start a new phase of QE ( Quantitative Easing) bond purchases. At the nadir the UK ten-year yield dipped below 1.2% which still left plenty of margin as the Sledgehammer QE drove it down to 0.5%. I still consider that to be madness but it is something the media and other economists do not understand so any debate stalls. But the Gilt yield issue is that it has risen to 1.37% which if it goes a little further will have economic effects via fixed-rate mortgages and business borrowing.

In terms of context other bond yields have also risen but the UK has seen its rise faster. Even I cannot entirely avoid politics so let me add that there were roads this week when Brexit developments ,might have led to UK Gilt yields falling due to expectations of more Bank of England QE in spite of the international trend. Should fixed-rate mortgages rise in price then we can perhaps expect a little more of this.

The UK housing market ended 2018 on a weak note with uncertainty still biting, alongside continuing lack of stock and affordability issues, according to the December 2018 UK Residential Market Survey. ( Royal Institute of Chartered Surveyors or RICS)

Also they expect things to get worse.

Moving forward, however, over the next three months sales expectations are now either flat or negative across the UK. The headline net balance of -28% represents the poorest reading since the series was formed in 1999. The twelve-month outlook is a little more upbeat, suggesting that some of the near-term pessimism is linked to the lack of clarity around what form of departure the UK might make from the EU in March.

Worse for them I mean as lower house prices would benefit first time buyers who have seen house prices accelerate away from them in nominal and real terms in the credit crunch era.

Also they seem to have their doubts about the promised future supply.

Meanwhile it is hard to see developers stepping up the supply pipeline in this environment. Getting to the government’s 300,000 building target was never going to be easy but pushing up to anywhere near this figure will require significantly greater input from other delivery channels including local authorities taking advantage of their new-found freedom.

That of course would be a case of history on repeat or as the Four Tops put it.

Now it’s the same old song
But with a different meaning
Since you been gone

Ben Broadbent

The issues above will not make the Bank of England very happy and this will add to the dark cloud around Deputy Governor Broadbent otherwise known as the absent-minded professor. Here is an excerpt from something I posted on the Royal Statistics Society website in October.

” there are fewer than 10 million owner occupier mortgages. Is the cost of a house to someone who happens
already to have paid off his or her mortgage really zero?”

So we see that we cannot use something which is used around 10 million times but we can use the Imputed Rents which are used precisely zero times! I do not recall anyone arguing for mortgage costs to be used for those who do not have one, in the way he is calling for rents to be used for those who do not pay them. For example the RPI has mortgage costs, but also as a considerably larger component house prices  via  the use of depreciation.

The absent-minded professor spoke up strongly for the Rental Equivalence model which the House of Lords rejected this week. Also they were disappointed with other aspects of his performance.

Let me end by congratulating the Lords and Baroness Bowles on pressing the Deputy Governor responsible for the RPI on the issue of what Yes Prime Minster satirised as “Masterly Inaction”. As they point out there are changes which could have been made as opposed to the state of play during his tenure.

“That process seems to have stalled.”

Retail Sales

These were something of a journey and had a kicker that seems to have been missed in the melee so let me explain.

When compared with the previous month, the quantity bought in December 2018 decreased by 0.9%, as all sectors except food stores and fuel stores declined on the month.

So down except we know the numbers are regularly erratic and are likely to be even more so with the advent of Black Friday in November. Let us therefore look for more perspective.

In the three months to December 2018, estimates in the quantity bought decreased by 0.2% with declines across all main sectors except fuel.

As to the wider impact Rupert Seggins has crunched some numbers.

UK retail sales fell -0.2%q/q in the final quarter of 2018, indicating that the retail sector took -0.01% off GDP growth in Q4.

If we move to the annual comparison though we get some relief as the volume figures were 3% higher if we return to the December numbers with fuel sales and 2.6% without or a 0.17% addition to GDP using Rupert’s calculator. But there has been a slowing even with such numbers.

Looking at annual growth rates, the whole of 2018 increased by 2.7% in the quantity bought; an annual slowdown in comparison with the peak of 4.7% experienced in 2016.

One of the things which bemuses me from time to time is that it is often those who support issues such as climate change who seem most unhappy about a decline in retail sales growth missing the logical link. But my main point here is that if we compare the volume and sales figures retail inflation is a mere 0.7% on an annual basis.

Comment

It was only last week that I suggested that the Bank of England was giving the wrong Forward Guidance about interest-rates as the economic outlook darkens. If the rough and ready calculator for retail inflation is in any way accurate then that is reinforced by today;s number and that adds to the lower consumer inflation numbers we saw earlier this week. Added to that the Bank of England has publicly backed the wrong horse in the inflation measurement stakes.

Even worse it has backed the establishment line driven by Her Majesty’s Treasury which is precisely the body it is supposed to be independent from. Perhaps that is something to do with the fact that the Deputy-Governors are HM Treasury alumni in a case of what in another form we call “regulatory capture”.

Podcast

 

 

Victory on the Retail Prices Index! And it feels good!

This morning I have some good news to report which is the result of the around 7 year campaign I have conducted in support of the Retail Price Index or RPI. I have given regular readers a sense of deja vu with the headline and let me add to that with something I wrote for Mindful Money back on the 10th of January 2013.

I am pleased to report that today’s update will be very upbeat and will contain sections which I hoped to be able to write but felt were certainly far from favourite to take place. Regular readers will be aware that the subject of inflation is a specialist subject for me and a sub-section is the official attempts to “improve” ( in my financial lexicon such an “improvement” equals a lower number). Accordingly when the National Statistician decided to have a consultation to “improve” the UK Retail Price Index I feared the worst. However I hoped and worked for the best as I not only attended the public meeting and explained my view but responded to the consultation both in my own name and as part of the RPI CPI User Group at the Royal Statistical Society.

Those who have followed the saga will recall that last summer I noted a new review of the Retail Prices Index this time by the House of Lords Economic Affairs Committee ( EAC). I feared another establishment stitch-up so I invited the EAC to a meeting on the subject at the Royal Statistical Society to expose them to other points of view, including mine as I was one of the speakers.

In case you are wondering what this is about I will go through the technical points below but it can be summarised in the theme that the establishment invariably finds reasons to object to inflation measures which give higher numbers and favour ones with lower numbers. In terms of UK inflation that means attacking the RPI (2.7%) and proposing the measure called CPIH (2%). From the point of view of HM Treasury such a gap if compounded over time on matters such as pensions and benefits saves it a lot of money, and the gap has usually been larger than that recently. Thus whilst I have battled the Office for National Statistics, the Office for Statistics Regulation and for long periods the economic editor of the Financial Times Chris Giles the main opponent in my opinion has been HM Treasury.

What has happened here?

The official campaign was publicly pushed as being due to what has been called the “Formula Effect” which is much of the gap between RPI and the various CPI variants. I have long thought that much of the force behind the argument came from the fact that the RPI has house prices in it as well, leading to usually higher readings. But there was a way of investigating and then (hopefully) fixing this Formula Effect.

We heard evidence that the Carli formula, as used in the RPI, produces an upward bias. But expert opinion on the shortcomings of the RPI differs……. There is however broad agreement that the widening of the range of clothing for which prices were collected has produced price data which, when combined with the Carli formula, have led to a substantial increase in the annual rate of growth of RPI.

The Formula Effect has been driven by a problem in the clothing sector and particularly fashion clothing triggered by a change made in 2010. My argument all along has been let’s fix that as the Formula Effect would then be much smaller. The estimates are that the Formula Effect would be halved and maybe a bit more. We do not of course absolutely know this although there was some official research ( which was rather suspiciously abandoned) back in 2012 which gives some clues. If we get the Formula Effect more than halved then this can return to one for statistical purists rather than being at the forefront of the UK inflation debate.

given the properties of the Carli formula that may lead to upward bias have long been evident, yet expert opinion still differs, it may be a perpetual debate.

Putting it another way a major influence in this has been price collection on women’s strappy tops. The statistician Simon Briscoe was very powerful on this point.

We have to bear in mind that strappy tops are one-thirtieth of one per cent of the RPI. I can think of no other area of life or public policy where if one three-thousandth of something was wrong, we would discard the whole lot. We would simply mend it.

Housing Costs

Those who have followed my work on this subject will know that I can only type, yes yes yes! To this next bit.

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

This has been a long battle against the UK establishment and for most of this period against the Financial Times as well. For example the Paul Johnson Inflation Review of 2015 supported the use of the inflation measure CPIH which uses rental equivalence or imputed rents. These do not exist in real life and are an entirely fictional concept as opposed to the house prices ( via a depreciation component) and mortgage interest-rates which not only exist but are widely understood that the RPI uses.

If it was left to me I would improve the RPI by having an explicit house price component rather than the implicit depreciation one. Maybe the EAC will get around to that.

Comment

There is much to welcome here from the EAC as if its recommendations are implemented two major problems with UK inflation measurement will be improved at worst and fixed at best.However the statistics establishment comprising the Office for National Statistics and the Office for Statistics Regulation have seen their reputation badly damaged by the frankly spiteful decision to do this and then for the latter to rubber stamp it.

given its widespread use, it is surprising that the UK Statistics Authority is treating RPI as a ‘legacy measure’. The programme of periodic methodological improvements should be resumed.

I gave evidence to the OSR and frankly I was left with the view that it is the equivalent of a chocolate teapot and should be scrapped. Just to be clear the EAC does not go that far.

Also it is welcome that other areas have come round to more like my point of view as I see that the Financial Times and Paul Johnson have been willing to look to correct past mistakes. It is never easy to do that so we should welcome it.

On the downside I see two main problems with the Review.

In future there should be one measure of general inflation that is used by the government for all purposes. This would be simpler and easier for the public to understand.

I see the point of trying to stop the government from “inflation shopping” but the truth is that we need different measures for different purposes. For example a cost of living index for wage negotiations is not the same as one for the national accounts.

The idea that we should use CPI for now and then later use a new number that includes owner occupied housing later has various problems.

The government should begin to issue CPI-linked gilts and stop issuing RPI-linked gilts. We heard evidence to suggest there was sufficient demand to make a viable market

That seems silly as we would end up with 3 types of index-linked Gilts ( RPI, CPI, and the new measure likely to be the improved RPI). Also we were supposed to put owner occupied housing in CPI back in 2003 but somehow it got “forgotten” for over a decade.

So my suggestion is to get on with improving the RPI and give the work a twelve month deadline. Then in a year’s time we could issue index-linked Gilts based on the new measure. We might be able to update some of the existing Gilts on the new basis as well but that is a matter for the Bank of England but some we would not as there were explicit rules in their documentation.

Me on The Investing Channel

 

Lower UK inflation provides some welcome good news for real wages

This morning allows us to take a deep breath and move from last night’s excitement which rapidly turned to apparent stalemate to a whole raft of UK inflation data. As we stand the UK Pound has rallied a bit to US $1.288 and 1.129 versus the Euro but in inflation terms that represents a drop as it was around 7% higher versus the US Dollar a year ago. So that is what is around the corner as today the influence will be a bit more than that as the UK Pound was weaker in December versus the Dollar which is the currency in which commodities are priced.

Moving to the price of crude oil there will be a downwards influence on today’s numbers from it as we note a March futures price which peaked at US $84.58 and was more like US $56 around the time the UK numbers are collected. If we look at the weekly fuel prices we see that petrol prices dropped from being around 12 pence per litre dearer than a year before to more like 2 pence. However this gain has been offset to some extent by the way that diesel has become much more expensive than petrol with the gap between the two being around 4 pence in December 2017 but more like 10 pence in December 2018. Does anybody have a good reason for this?

Inflation Targeting

Bank of England Governor Mark Carney answered some online questions on the 9th of this month at what is called the Future Forum. Let me open with a point of agreement.

On your question about the level of the inflation target, long and varied experience has shown that price stability is the best contribution monetary policy can make to the public good.

The problem is that whilst I mean price stability he is being somewhat disingenuous as that is not what he means. Let me highlight with this.

There are good reasons why central banks around the world, including the Bank of England, target a low, positive rate of inflation not no inflation.

As you can see he talks the talk but does not walk the walk and here is his explanation.

 A little inflation ‘greases the wheels’ of the economy, for example by helping inflation-adjusted wages adjust more smoothly to changes in companies’ demand for labour and facilitating shifts in resources between sectors in response to changes in supply and demand. Moreover, a positive inflation rate gives monetary policy space to deliver better outcomes for jobs and growth

So it helps him to look like a master of the universe and helps wages adjust. Seeing as wages have adjusted downwards I hope he was challenged on that point. But there is more.

From a more technical point of view, the official rate of inflation might also over-estimate the true rate at which prices are rising because it is hard to strip out increases that reflect improvements in the quality of goods and services on offer. Aiming for a 0% inflation target would risk forcing the economy into deflation in the medium term.

That is really rather breathtaking! Let me explain why by comparing his “might” by the reality that UK consumer inflation has since the change to CPI as the inflation target in 2003 consistently under recorded inflation via the way that owner occupied housing is ignored completely. They always meant to get around to it but somehow forget until they managed to find a way ( imputed rent) of having one of the fastest areas of inflation recorded as one of the slowest in the new “comprehensive” CPIH measure.

At least he has dropped the effort to claim that relative prices could not move with a 0% inflation target. This is because I kept pointing out that when we had around 0% around 3 years ago there was a big relative price shift via the much lower price of crude oil which had driven it. So it is good that this particular fantasy had its bubble burst but not so good that the Ivory Towers responsible carry on regardless.

Also if we return to the quality issue a powerful point was made by the statistician Simon Briscoe who stood up and stated that each time he bought a new I-Pad it cost him more than a thousand pounds. But whilst he realised each one was better how does that work if he neither needs nor uses the additions or only uses a few of them?

Inflation

As we had been expecting the consumer inflation numbers provided some good news this morning.

The all items CPI annual rate is 2.1%, down from 2.3% in November……..The all items RPI annual rate is 2.7%, down from 3.2% last month.

The main driver here was transport costs as we expected because if we throw in the whole sector then annual inflation was cut by a bit more than 0.2% due to it. Actually slightly more for the RPI as it has a higher weight for air fares. Also the RPI was affected by something a little embarrassing for a Bank of England which had raised Bank Rate in November by 0.25%.

Mortgage interest payments, which decreased the RPI 12-month rate by 0.09 percentage points between November and December 2018 but are excluded from the CPIH.

Of course they are excluded from the woeful CPIH which essentially only includes things which do not exist in its calculations about owner occupied housing and ignores things which are paid. Here is its major player.

Private rental prices paid by tenants in the UK rose by 1.0% in the 12 months to December 2018, up from 0.9% in November 2018.

As you can see even at the new overall lower trend for house price growth (which was previously around 5% per annum ) it way undershoots the number.

Average house prices in the UK increased by 2.8% in the year to November 2018, up slightly from 2.7% in October 2018 (Figure 1). Over the past two years, there has been a slowdown in UK house price growth, driven mainly by a slowdown in the south and east of England.

The lowest annual growth was in London, where prices fell by 0.7% over the year to November 2018, unchanged from October 2018.

 

Comment

There are two entwined elements of good news here as we note first the fact that the annual rate of inflation has fallen and done so quite sharply if we look at RPI. The next is that it has helped UK real wage growth into positive territory on a little more clear-cut basis. Should total pay growth continue to exceed 3% ( it was last 3.3%) then it is hardly a boom but hopefully we will see a sustained rise. At a time when the economic outlook has plenty of dark clouds this is welcome especially as the outlook seems set fair.

The headline rate of output inflation for goods leaving the factory gate was 2.5% on the year to December 2018, down from 3.0% in November 2018. The growth rate of prices for materials and fuels used in the manufacturing process slowed to 3.7% on the year to December 2018, down from 5.3% in November 2018.

Inflationary pressure in the system has slowed.

Moving to measurement I have some hopes for this from the House of Lords Economic Affairs Committee.

Next Thursday 17 January we will publish “Measuring Inflation”, our report on the use of RPI.

It did appear that something of a stitch-up was underway but efforts were made to provide an alternative view as for example I invited them to a debate at the Royal Statistical Society on the subject. They then became quite critical of the way that our official statistician have refused to update the RPI even for changes which would be simple. So fingers crossed! Although of course the establishment is a many-headed hydra.

Sticking with the RPI I referred yesterday to an article in the Financial Times about index-linked Gilts and here is the most relevant sentence.

 This implies inflation of about 3.2 per cent — well above current levels and the Bank of England’s 2 per cent target.

So it implies inflation of 3.2% which was well above the 3.2% the RPI was at the time the piece was written?!

 

 

UK Inflation starts to head lower and help real wage growth

Today brings the latest UK official inflation data into focus. However the last 24 hours have brought another shift in the environment because the crude oil price had another of those days when it took something of a dive. Here is Oilprice.com on the subject.

Crude prices fell 4 percent on Monday and about 7 percent on Tuesday. WTI dropped below $47 per barrel and Brent fell to the $56 handle.

Moving onto the likely causes they tell us this.

Oil prices crashed to new one-year lows on Tuesday, dragged down by a deepening sense of global economic gloom as well as fears of oversupply in the oil market itself.

The reasons for the sudden meltdown were multiple. Rising crude oil inventories and expected increases in shale production weighed on oil prices, but the price crash was accentuated by the broader selloff in financials.

Genscape said that inventories are rising, which has raised fears of tepid demand amid soaring supply growth.

We are back to mulling an increase in shale oil production at a time when demand is weakening. As ever there is an undercut as we wonder if the shale oil producers will be so enthusiastic if the oil price remains at these new lower levels. If we switch to the impact on the inflation outlook then we now have an oil price that is around 10% lower than a year ago if we use the Brent Crude benchmark and more than that using West Texas Intermediate as the gap between the two has approached US $10.

The impact of this should be felt to some extent in the input version of the producer price data for November and maybe via fuel prices at the pump in a much more minor way on the consumer price inflation number. By the time we get the December data there will be a stronger influence and this will be accompanied by other commodity prices falls. For example Dr. Copper is at US $2.68 as I type this or 14% lower than a year ago. The CRB Commodity Index has not fallen as much but is still some 6% lower than a year ago.

Central Banks

The news above will be debated at the US Federal Reserve as it decides US interest-rates and the subject of QT today. Of course central bankers ignore what they call non-core factors such as energy and food in their favourite inflation measures but the ordinary person cannot and the picture has changed. Also as @fwred reminds us central banks are no longer using their balance sheets to raise inflation.

From an economic perspective, we’ll be debating the impact of QE for years looking at the counterfactual and the complementary effects of other policy tools, including negative rates. ECB’s estimate: ~2% boost both to real GDP and inflation, or +40bp per year.

Well apart from the Bank of Japan anyway, but it has failed to do much about inflation at all in spite of the size of its actions which now exceed annual economic output or GDP.

Today’s data

Having emphasised the impact of lower oil prices let us get straight to the impact.

The annual rate of inflation for materials and fuels purchased by manufacturers (input prices) slowed to 5.6% in November 2018, down 4.7 percentage points from October 2018 . The 12-month rate of input inflation has been positive since July 2016. The annual rate was driven predominantly by crude oil prices, which showed growth of 15.5% in November 2018, although this was down from 40.4% in October 2018. The one-month rate for materials and fuels fell 3.1 percentage points to a negative 2.3% in November 2018.

As you can see there was quite a change in the trajectory in November and as the annual rate remained positive there is more to come. There was also the beginning of an effect on the output number.

The annual rate of inflation for goods leaving the factory gate (output prices) fell by 0.2 percentage points to 3.1% in November 2018 . The 12-month rate of output inflation has remained positive since July 2016. On the month, output inflation also slowed, falling 0.1 percentage points to 0.2%.

Actually there was a larger impact from the lower oil price than this but it got offset by this.

This increase reflects the rise in Tobacco Duty introduced in November 2018 and is the highest the rate has been since March 2014.

So not the best of months for Oasis fans.

But all I need are cigarettes and alcohol!

Consumer Inflation

Here we also saw a marginal nudge lower in the main two measures.

The all items CPI annual rate is 2.3%, down from 2.4% in October…….The all items RPI annual rate is 3.2%, down from 3.3% last month

This was driven by lower rates of inflation for recreation and culture and this.

Petrol prices fell by 2.6 pence per litre between October and November 2018, compared with a rise of 1.8 pence per litre between October and November 2017.

Actually I noted this mention about recreation and culture.

Price movements for both
computer games and live music events can often be relatively large depending on the composition of
bestseller charts and the bands that are touring at the time of price collection.

This was on my mind due to the fact that Ringo Starr and Ronnie Wood joined Paul McCartney on stage at the O2 in London on Sunday night. My point is that you can measure the ticket price but what is your quality measure? From the excitement on social media that changed by Ringo’s presence in the crowd before we get to having the only surviving Beatles playing on stage and to top it off being joined by a Rolling Stone.

How to measure inflation

We can move onto the widely ignored official measure called CPIH.

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

It is widely ignored because of the way it uses Imputed Rents to get to this.

The OOH component annual rate is 1.1%, unchanged from last month ( OOH = Owner Occupied Housing).

House Prices

A couple of weekends ago when the economics editor of the Financial Times was presumably otherwise engaged I noted this.

The original consumer price index included house prices. But they were removed in 1983 and replaced with “non-market rents” — an estimate of how much owners could charge to let their homes…….
Including house prices in the new index would not guarantee a higher rate of inflation as high house price inflation might be offset by smaller increases, if not a decline, in rents or offset by price changes in other components. But large and persistent acceleration in this new economy-wide index would be a sign of more general inflation.

This was about the US and written by Joseph Carson but it applies to the UK as well. I note it got widespread support in the comments, although we cannot make a comparison to the pro Imputed Rent articles as they seem to have suspended the comments system for those.

The rate of UK house price inflation has slowed and I welcome that but it remains a much better guide to inflation than any rental fantasies.

Average house prices in the UK increased by 2.7% in the year to October 2018, down from 3.0% in September 2018. This is the lowest annual rate since July 2013 when it was 2.3%. Over the past two years, there has been a slowdown in UK house price growth, driven mainly by a slowdown in the south and east of England.

Comment

There is some pre-Christmas cheer in the UK inflation data today as we see the new lower oil price start to have an impact on the numbers. If it is true that the New Year Sales have started early then that too may impact on the December data although of course it will wash out to some extent in January.

But for the moment the trend for consumer and indeed asset inflation is down and we should welcome the way that will benefit real wages and indeed first time buyers in the property market. Also as someone who has spent the last 6 years or so arguing about inflation measurement with official bodies being operated like puppets by HM Treasury I had a wry smile at this tweet which ignores the measure it has pressed for.

The fall in the price of crude oil is a welcome development for UK inflation

One of the problems of official statistics is that we have to wait to get them. Of course numbers have to be collected, collated and checked and in the case of inflation data it does not take that long. After all we receive October’s data today. But yesterday saw some ch-ch-changes which will impact heavily on future producer price trends as you can see below.

Oil traders’ worries over record supplies arriving in Asia just as the outlook for its key growth economies weakens have pulled down global crude benchmarks by a quarter since early October. Ship-tracking data shows a record of more than 22 million barrels per day (bpd) of crude oil hitting Asia’s main markets in November, up around 15 percent since January 2017, and an increase of nearly 5 percent since the start of this year.

Not only is supply higher but there are issues over likely demand.

China, Asia’s biggest economy, may see its first fall in car sales on record in 2018 as consumption is stifled amid a trade war between Washington and Beijing.

In Japan, the economy contracted in the third quarter, hit by natural disasters but also by a decline in exports amid the rising protectionism that is starting to take its toll on global trade.

And in India, a plunging rupee has resulted in surging import costs, including for oil, stifling purchases in one of Asia’s biggest emerging markets. India’s car sales are also set to register a fall this year.

You may note along the way that this is a bad year for the car industry as we add India to the list of countries with lower demand. But as we now look forwards supply seems to be higher partly because the restrictions on Iran are nor as severe as expected and demand lower. Does that add up to the around 7% fall in crude oil benchmarks yesterday? Well it does if we allow for the fact that it seems the market has been manipulated again.

Hedge funds and other speculative money have swiftly changed from the long to the short side.

When the bank trading desks mostly withdrew from punting this market it would seem all they did was replace others. Of course OPEC is the official rigger of this market but its effort last weekend did not cut any mustard. So we advance with Brent Crude Oil around US $66 per barrel and before we move on let us take a moment for some humour.

As recently as September and October, leading oil traders and analysts were forecasting oil prices of $90 or even $100 a barrel by year-end.

Leading or lagging?

The UK Pound £

This can be and indeed often is a powerful influence except right now as the film Snatch put it, “All bets are off!” This is because it will be bounced around in the short-term ( and who knows about the long-term) by what we might call Brexit Bingo Bongo. Personally I think the deal was done weeks and maybe months ago and that in Yes Prime Minister style the Armistice celebrations gave a perfect opportunity to settle how it would be presented to us plebs. For those who have not seen Yes Prime Minister its point was such meetings are perfect because everybody thinks you are doing something else. The issue was whether it could be got through Parliament which for now is unknown hence the likely volatility.

Producer Prices

These are the official guide to what is coming down the inflation pipeline.

The headline rate of output inflation for goods leaving the factory gate was 3.3% on the year to October 2018, up from 3.1% in September 2018. The growth rate of prices for materials and fuels used in the manufacturing process slowed to 10.0% on the year to October 2018, from 10.5% in September 2018.

Except if we now bring in what we discussed above you can see the issue at play.

Petroleum and crude oil provided the largest contribution to both the annual and monthly rates of inflation for output and input inflation respectively.

They bounce the input number around and also impact on the output series.

The monthly rate of output inflation was 0.3%, with the largest upward contribution from petroleum products (0.14 percentage points). The monthly growth for petroleum products rose by 0.5 percentage points to 2.0% in October 2018.

Actually the impact is higher than that because if we look at another influence which is chemical and pharmaceutical products they too are influenced by energy costs and the price of oil. So next month will see quite a swing the other way if oil price remain where they are. We have had a 2018 where oil prices have been well above their 2017 equivalent whereas now they are not far from level ( ~3% higher).

Inflation now

We saw a series of the same old song.

The all items CPI annual rate is 2.4%, unchanged from last month……..The all items RPI annual rate is 3.3%, unchanged from last month.

This was helped by something especially welcome to all but central bankers who of course do not partake in any non-core activities.

Food prices remain little changed since the start of 2018 and fell by 0.1% between September and October 2018 compared with a rise of 0.5% between the same
two months a year ago.

Happy days in particular if you are a fan of yoghurt and cheese. The other factor was something which an inflation geek like me will be zeroing in on.

Clothing and footwear, where prices fell between September and October 2018 but rose between
the same two months a year ago.

There is an issue of timing as we are in the Taylor Swift zone of “trouble,trouble,trouble” on that front but this area is a big issue in the inflation measurement debate. Let me look at this from a new perspective presented by Sarah O’Connor of the FT.

Online fast-fashion brands have enjoyed success catering to what Boohoo calls the “aspirational thrift” of young millennials. They sell clothes that are often made close to home so that they can be produced more quickly in response to customer trends. “Our recent evidence hearing raised alarm bells about the fast-growing online-only retail sector,” said Mary Creagh, the committee’s chair. “Low-quality £5 dresses aimed at young people are said to be made by workers on illegally low wages and are discarded almost instantly, causing mountains of non-recycled waste to pile up.”

This is a direct view on the area of fast and often disposable fashion which is one of the problem areas of UK inflation measurement. There are issues here of poverty wages and recycling. But the inability of our official statisticians to keep up with this area is a large component of the gap between CPI and RPI, otherwise known as the “formula effect”.

Comment

The fall in the price of crude oil is a very welcome development for the trajectory of UK inflation. Should it be sustained then we may yet see UK inflation fall back to its target of 2% per annum. For example the price of fuel at the pump is some 10 pence per litre higher than a year ago for petrol and 14 pence per litre higher than a year ago for diesel, so the drop is not in the price yet. That may rule out an influence for November’s figures but we could see an impact in December. Other prices will be influenced too although probably not domestic energy costs which for other reasons only seem to go up. But as we looked at yesterday the development would be good for real wages where we scrabble for every decimal point.

Meanwhile I have left the “most comprehensive” measure of inflation to last which is what it deserves. This is because the CPIH measure ignores a well understood and real price – what you pay for a house – which is rising at an annual rate of 3.5% and replaces it with Imputed Rents which are never paid to get this.

The OOH component annual rate is 1.1%, up from 1.0% last month.

But I do not need to go on because the body that has pushed for this which is Her Majesty’s Treasury which plans to save a fortune by using it may be having second thoughts if it’s media output is any guide.

 

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.