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.

 

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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 is back on the rise

Today brings us the full panoply of official UK inflation data. But before we look domestically an international perspective has again emerged overnight. This has come from Governor Kuroda of the Bank of Japan.

JPY BoJ Kuroda: BOJ still wants to achieve 2% inflation target as soon as possible ( @DailyFXTeam )

*DJ BOJ GOV. KURODA: EXPECT PRICES TO GRADUALLY MOVE TOWARD 2% ( @DeltaOne)

In spite of an enormous monetary effort involving negative interest-rates and a bulging balance sheer Abenomics continues to fail to get consumer inflation to its target of 2% per annum. Whereas we in the UK pass it regularly and will today discover we are above 2% on the official measure and 3% on others. Abenomics has driven asset prices higher but not consumer inflation giving us a reminder that whilst there are similarities between Japan and ourselves there are also differences.

The Inflation Outlook

A factor providing some upwards pressure in 2018 has been the price of crude oil. The current price of US $79 for a barrel of Brent Crude replaces the US $56 of a year ago. The Russian energy minister has via Platts updated us on why this has happened.

“According to estimates by experts and companies, oil price will be at around $50/b in the long-term. That means that the current situation, when oil prices have risen to $70-80/b, is linked to the temporary situation on the market and includes a premium to the price linked to various risks associated with the introduction of sanctions and oil supply cuts,” Novak said, as reported by Russia’s Prime news agency.

The higher oil price has fed into the cost of petrol and diesel.

Fuel prices have risen for a 10th successive week. The average cost of a litre of unleaded stands at more than £1.30 at UK forecourts, with diesel exceeding £1.34, Government figures show. Fuel has not been more expensive than current levels since July 2014. Since April, the cost of filling up a typical 55-litre family car that runs on unleaded or diesel has risen by around £6. ( I News)

That trend continued in the latest data so it is now eleven weeks and the annual comparison is shown below.

The price of ULSP is 11.7p/litre higher and the price of ULSD is 14.0p/litre higher than the equivalent week in 2017.

It has also had an effect on domestic heating and lighting costs with this change included in this months numbers.

E.ON has announced that it is increasing its standard variable electricity and gas prices. On 16 August, the unit price of E.ON’s standard variable tariff will increase by an average of 4.8% or £55 for customers taking both fuels, 6.2% or £36 for electricity only customers and 3.3% or £19 for gas only customers

There are others already announced from EDF Energy which will be in the September numbers and British Gas which will be in October.

The UK Pound £

The recent performance has been quite good as shown below.

So far this month, GBP has been the best performing major vs. USD with +3.20% total-returns while JPY has been the worst with -1.66% ( @DailyFXTeam)

Sadly for the August numbers the turn came just about when the survey is made but it should help the September numbers. Looking backwards we were around 2.5% higher a year ago but the differences are now much smaller than the period after the EU Leave vote. I note that the recent Brexit report suggested that raised inflation by 1.7% which is slightly higher than my calculations (1.5%).

Another way of looking at the state of play here is to compare our inflation number with the Euro area one for August which was 2%.

Today’s data

We got confirmation that the rally in the Pound £ came too late for the August data from this.

The Consumer Prices Index (CPI) 12-month rate was 2.7% in August 2018, up from 2.5% in July 2018.

Some of that was confirmed by the detail as the number below was influenced by the price of package holidays.

Prices for recreation and culture rose by 3.6% between August 2017 and August 2018, the highest 12-month rate since January 2010.

Also there was this.

Transport continues to make the largest upward contribution to the rate, with prices rising by 6.0% in the year to August 2018, the highest 12-month rate since April 2017. The largest contribution within the transport group continues to come from motor fuels.

What is on the horizon?

There was some better news here which started with this.

The headline rate of output inflation for goods leaving the factory gate was 2.9% on the year to August 2018, down from 3.1% in July 2018.

So a weakening of pressure around the corner which was accompanied by a weakening further up the road.

The growth rate of prices for materials and fuels for manufacturing (input prices) slowed to 8.7% on the year to August 2018, down from 10.3% in July 2018.

So much of this is driven by a factor we looked at earlier which is the price of crude oil.

The annual rate was driven by crude oil prices, which fell to 39.4% in August 2018 from 49.6% in July 2018, but maintains 26 months of positive annual inflation.

What about house prices?

Average house prices in the UK have increased by 3.1% in the year to July 2018 (down slightly from 3.2% in June 2018). This is the lowest UK annual rate since August 2013 when it was 3.0%. The annual growth rate has slowed since mid-2016 and has remained under 5%, with the exception of October 2017, throughout 2017 and into 2018.

The second sentence will echo around the corridors of the Bank of England as that is when the Funding for Lending Scheme began to push house prices higher. First-time buyers will be pleased to note that prices may still be increasing but are not doing so at past rates.

How is this reflected in the headline inflation data?

We get plenty of rhetoric from the Office for National Statistics.

The CPIH is the most comprehensive measure of inflation. It extends the CPI to include a measure of the costs associated with owning, maintaining and living in one’s own home, known as owner occupiers’ housing costs (OOH), along with Council Tax.

Sounds good doesn’t it? But really it is a heffalump trap which is a national embarrassment. The catch is that the measure used does not exist and is never paid. What happens is that it is assumed that if you own your own home you pay rent to yourself and it is that “rent” which is used. Why? Well if you take a look at the number you will get a powerful clue.

Private rental prices paid by tenants in Great Britain rose by 0.9% in the 12 months to August 2018, unchanged from the 12 months to July 2018.

As the owner occupied housing sector is around 17% of the CPIH measure you can see why it has consistently been below the other inflation measures. Even worse there are more than a few statisticians who think that via a poor balance between new and old rents the official rents data is too low anyway. That is to some extent backed up by the way the official rents series has weakened when we are told wage growth is rising.

So a series which is under serious question ( rents) is then used to measure inflation for those who by definition do not pay rent.

Comment

The establishment view was that inflation was in modern language, like so over. For example the NIESR published some new analysis last month suggesting it was heading straight back to its target. Yet today reminds us that unlike Japan we are an inflation nation as we are prone to it. To my mind that is one of the reasons why there has been such a campaign against the RPI because it produces numbers like this.

The all items RPI annual rate is 3.5%, up from 3.2% last month

Rather than engaging with people like me who support the RPI we have got rhetoric and propaganda. Just because I support it does not mean I think it is perfect but it is better than the woeful CPIH which the UK establishment has lined up behind.

Another example of establishment’s being economical with the truth has been provided today by Andy Haldane of the Bank of England in Estonia.

The first is so-called “forward guidance” about monetary policy………. By contrast, if you are a company or household considering whether to spend, a general idea
of the direction and destination of interest rates is likely to be sufficient.

The problem though is what he omits from the bit below.

The MPC first used the words “limited and gradual” in 2014 when describing the likely future course of
interest rates rises……….When the MPC did come to raise interest rates, in November 2017 and again in August 2018, it is interesting to see how well these were understood by companies and households.

This view presents matters as being well handled via the omission of the interest-rate cut and QE of August 2016 which punished those who acted on the original forward guidance. But apparently it is all part of this.

Central banks were put on earth to serve the public

 

The UK inflation picture is shifting again

After disappointing news on wage growth yesterday for the Bank of England the day ended with some good news for it on this front. From the Financial Times.

The chief executives of the UK’s biggest listed companies received an 11 per cent raise last year pushing their median pay up to £3.93m, according to a report which found that full-time workers received a 2 per cent rise over the same period. The figures for FTSE 100 bosses include base salary, bonuses and other incentives and have been revealed at a time of growing shareholder activism over big payouts. Shareholders at companies including BT, Royal Mail and WPP have rebelled against chief executive pay at stormy annual investor meetings this year.

So some at least are getting above inflation pay rises Actually you can make the number look even larger if you switch to an average rather than the median as this from the original CIPD report shows.

 If we divide this amount equally among all the CEOs covered by our report, they would each receive a mean annual package worth £5.7 million, 23% higher than the 2016 mean figure of £4.6 million.

Why is this so? Well a lot of it is due to a couple of outliers as this from the FT shows.

The highest-paid chief executive in 2017 was Jeff Fairburn at housebuilder Persimmon who received £47.1m, or 22 times his 2016 pay. Ranking second, Simon Peckham of turnround specialist Melrose Industries banked £42.8m, equal to 43 times his 2016 pay, according to the analysis.

The case of Mr.Fairburn at Persimmon is an especially awkward one for the establishment as he has personally benefited on an enormous scale from the house price friendly policies of the Bank of England and the UK government. As so often we face the irony of the government supposedly being on the case of executive pay which it has helped to drive higher.  Indeed I note this seems to be a wider trend as Persimmon is not alone amongst house builders according to the CIPD report.

Berkeley Group Holding plc’s Rob Perrins, whose total pay package rose from £10.9 million in 2016 to £27.9 million.

Inflation

If we step back for a moment and look at the trends we see that they have shifted in favour of higher inflation. A factor in this has been the US Dollar strength we have seen since the spring which was not helped by the unreliable boyfriend behaviour of Bank of England Governor Mark Carney back in April. So now we face as I type this an exchange rate a bit over US $1.27 meaning we will have to pay more for many commodities and oil.

Moving onto the oil price itself care is needed as whilst we have dropped back from the near US $80 for a barrel of Brent Crude seen at the end of May to US $72 we are up around 42% on a year ago. This time around the OPEC manoeuvering has worked for them but of course not us.

There are various ways these feed into our system and perhaps the clearest is the price of fuel at the pump where a 5 pence rise raises inflation by ~0.1%. We are also experiencing another impact as we see domestic energy costs rise as NPower raised on the 17th of June, SSE on the 11th of July, E.ON will raise them tomorrow and EDF Energy will raise them at the end of the month. These are of course not only the result of higher worldwide energy prices but also a form of administered inflation via changes in energy policy for which we foot the bill. People will have different views on types of green energy which are expensive but much fewer will support the expensive white elephant which is the smart meter roll out and further ahead is the Hinkley Point nuclear plant.

Today’s data

There was a small pick-up.

The all items CPI annual rate is 2.5%, up from 2.4% in June

Some of it was from the source described above.

Transport, with passenger transport fares seeing larger price rises between June and July 2018
compared with the same period a year ago. Motor fuels also made an upward contribution,

Another was from the area of computer games where we seem to have found another area that the statisticians are struggling with.

these are heavily dependent on the composition of bestseller charts, often resulting
in large overall price changes from month to month;

Let us hope that this clams down as we have plenty to deal with as it is! As to downwards influences we should say thank you ladies as we mull whether this is being driven by the problems in the bricks and mortar part of the retail sector.

Clothing and footwear, with prices falling by 3.7% between June and July 2018, compared with a smaller fall of 2.9% between the same two months a year ago. The effect came mainly from women’s clothing and footwear.

If we look further down the inflation food chain we see a hint of what seems set to come from the lower Pound £.

Prices for materials and fuels (input prices) rose 10.9% on the year to July 2018, up from 10.3% in June 2018.

In essence it was driven by this.

 The annual rate was driven by crude oil prices, which increased to 51.9% on the year in July 2018, up from 50.2% in June 2018.

However in a quirk of the data this did not feed into output producer price inflation which dipped from 3.3% to 3.1%. Whilst welcome I suspect that this is a quirk and it will be under upwards pressure in the months ahead if we see the Pound £ remain where it is and oil ditto.

House Prices

Here we saw what might be summarised as a continuation of the trend we have seen.

Average house prices in the UK have increased by 3.0% in the year to June 2018 (down from 3.5% in May 2018). This is its lowest annual rate since August 2013 when it was also 3.0%. The annual growth rate has slowed since mid-2016.

However there is a catch because even at this new lower level it is still considerably above what we are officially told is inflation in this area.

Private rental prices paid by tenants in Great Britain rose by 0.9% in the 12 months to July 2018, down from 1.0% in the 12 months to June 2018.

This is what feeds into what is the inflation measure that the Office for National Statistics has been pushing hard for the last 18 months or so. But there also is the nub of its problem. Actually they have problems measuring rents in the first place which affects the process of measuring inflation for those who do rent but then fantasising that someone who owns a property rents it to themselves has led to quite a mess.

Comment

As we look forwards we see the prospect of inflation nudging higher again. However there are two grounds for optimism. One is short-term in that the next two monthly increases for comparison are rises of 0.6 and then 0.3 in the underlying index for CPI .The other is that I do not think that the all the prices which rose back in late 2016 early 2017 went back down again so we may see a lesser impact this time around.

Meanwhile the issue around the RPI has arisen again. Some of it has been driven by Chris Grayling suggesting the use of CPI for rail fares. Ed Conway of Sky News has been joining in the campaign against the RPI this morning on Twitter.

Don’t let anyone tell you RPI is better/different because it includes housing. First, these days CPI does include a housing element.

To the first bit I will and to the second I am waiting for a reply to my point that CPI excludes owner-occupied housing. As it happens RPI moved downwards this month which will be welcomed by rail travellers as it is the number used to set many of the annual increases.

The all items RPI annual rate is 3.2%, down from 3.4% last month.

 

 

Lower house price inflation adds to the headache at the Bank of England

Today is inflation day in the UK where we receive the latest data but before we get to that there were some developments on the issue of how we measure it. This took place at the Economic Affairs Committee of the House of Lords where its ongoing enquiry into the Retail Price Index  or RPI continued and took evidence from the National Statistician John Pullinger. Regular readers will be aware that I have been making the case for the RPI for more than six years now as the UK establishment set a plan to try to get rid of it and more recently attempting to let it wither under a policy of neglect where they do not update it even if the changes required are ones which are easy to do because the data is already collected for other indices. Actually they have not even been consistent in that policy as they did make a change last year to bring in a new house price index as the previous one had been discovered to be incorrect.

For newer readers this matters because put simply it is the indices that give the higher readings for inflation which seem to come under official challenge. The pensioners index went about five years ago and the RPI has been under fire for most of this decade. The measure they would like to replace it with called CPIH has in its relatively short life consistently given the lowest reading. The latest numbers go RPI ( 3.4%) which of course was replaced by the CPI ( 2.4%) and then CPI (2.3%). I am sure you can see the trend for yourself but in case you think this is arcane it mattered a lot yesterday as with total wage growth being 2.5% then we get quite different answers for real wage growth. Another impact is on GDP growth where the statistician Mark Courtney has estimated that the use of CPI rather than RPI has raised recorded growth by something of the order of 0.5%. At times of low growth like now that gets even more significant.

Moving to yesterday John Pullinger said this.

The RPI is not a good measure of inflation ( slight delay) as captured by prices that capture the impact on the consumption of goods and services, it is not a good measure of inflation if you look at the impact of prices on households.

Even this opening salvo represents a change as the previous position was the bit before the slight delay whereas now room for manoeuvre is being created. As the meeting developed there was a shift to this as reported by the Financial Times.

Mr Pullinger had previously refused to consider reforms to the RPI, saying it was a legacy index that could not be changed.But in response to insistent questions by committee members, he said the statistics agency had now changed its mind, but needed to get the Treasury and the Bank of England on board before it would act.

So just like the Financial Times itself where the economics editor Chris Giles argued for some years against the RPI before mellowing recently. Let me cut to the two main issues here which are owner-occupied housing costs and the formula effect. The UK establishment have campaigned in favour of inflation measures which exclude owner occupied housing costs ( CPI) or use fantasy rents which are never paid in reality to do so ( CPIH). In some ways I think the latter is worse as it flies under a false flag as cursory readers may only read the headlines which say it covers housing costs. In reality it has been an embarrassment which I have covered many times.

The “formula effect” is more complex and many of you will have read the eloquent arguments in  favour of what was called RPIJ  by Andrew Baldwin in the comments section here which in essence is RPI without it. The UK establishment took that line for a few years then dropped it as you have to calculate it yourself now ( or wait for Andrew to do it for you). The bone of contention here is that some of it at least is due to changes in the way clothing prices were measured in 2010 which caused as Taylor Swift would put it “trouble,trouble,trouble”. You see until then there were arguments CPI under measured inflation not RPI being over. If I was in charge there would be a major project into investigating and reforming this area as before then the formula effect was smaller. It is a matter for the UK authorities as to why such work began but then stopped. Research was replaced by rhetoric.

Today’s numbers

We dodged a little bit of a bullet I think.

The all items CPI annual rate is 2.4%, unchanged from last month

What I mean by that is that there were upwards pressure as three utilities raised domestic energy costs and the comparison for petrol prices was with 115.3 pence last year. Having written what I have above it was hard not to have a wry smile at what held inflation down.

where prices of clothing fell by 2.3% between May and June this year compared with a fall of 1.1% between the same two months a year ago. Prices usually fall between May and June as the summer sales season begins but the fall in 2018 is the largest since 2012.

Fortunately in some ways this was not the reason why the RPI went the other way.

The all items RPI annual rate is 3.4%, up from 3.3% last month.

Looking Ahead

There continues to be a tug higher from the producer price numbers.

The headline rate of inflation for goods leaving the factory gate (output prices) was 3.1% on the year to June 2018, up from 3.0% in May 2018. Prices for materials and fuels (input prices) rose 10.2% on the year to June 2018, up from 9.6% in May 2018.

These do not impact on a one for one basis by any means as the effect weakens from input prices to output prices and even more so to consumer inflation. The input number is mostly ( ~70%) the impact of the oil price and changes in the value of the UK pound £.

House Prices

Finally the official data series is catching up with the other measures that we look at.

Average house prices in the UK have increased by 3.0% in the year to May 2018 (down from 3.5% in April 2018). This is its lowest annual rate since August 2013 when it was also 3.0%.

This means that the other measures seem to be working well as a leading indicator although it is also true that there remain challenges to the new series ( there is still some debate about its treatment of new builds)

Comment

There is good news today in that inflation at least on the official measures did not rise and there is hope for something of an official rethink on how it is measured. Let me give some credit to the Economic Affairs Committee which did challenge the National Statistician yesterday. For purposes of transparency I did contact them last month to point out they should widen their evidence base and to invite them to the Royal Statistical Society meeting on the RPI at which I was one of the speakers. Sadly their Lordships were otherwise engaged but staff members did attend I am told. I note that they were also willing to reflect evidence that the CPI measure has under recorded inflation ( housing costs for a start).

Moving to today’s numbers we see that upwards pressure remains on consumer inflation but that there is plenty for the Bank of England to consider. We saw yesterday that wage growth has dipped albeit only by a small amount and now inflation has remained static. Some may consider that its eyes will be on the fall in house price inflation especially should its mood be of behaving like an unreliable boyfriend.

But even so let me compare house price growth’s 3% with this which is a basis of the CPIH housing costs section.

Private rental prices paid by tenants in Great Britain rose by 1.0% in the 12 months to June 2018; unchanged since April 2018.

Putting rents which do not exist in a consumer inflation measure is a disgrace

Yesterday the Economic Affairs Committee took a look at the Retail Price Index measure of consumer inflation in the UK. An excellent idea except as I have contacted them to point out.

Accordingly I am making contact for two reasons. Attending the event would give your members exposure to a much wider range of expertise on the subject of the RPI than the limited group you have today. Also it will help you with the subject of balance as the four speakers you will be listening too today are all against the RPI with some being very strongly so. This gives a very unbalanced view of the ongoing debate on the subject.

The event I refer too is this evening at the Royal Statistical Society at which I will be one of those who reply to the National Statistician John Pullinger.

I intend to point out that the RPI does indeed have strengths and it relates to my letter to Bank of England Governor Mark Carney from February.

“. I am not sure what is a step up from known error but I can say that ignoring something as important to the UK as that sector when UK  house prices have risen by over 29% in your term as Governor when the targeted CPI has only risen by more like 7% is exactly that.”

This is because it makes an effort to reflect this.

This is because the RPI does include owner occupied housing and does so using house prices and mortgage interest-rates. If we look at house prices we see that admittedly on a convoluted route via the depreciation section they make up some 8.3% of the index.

This compares for example with the Consumer Price Index which completely ignores the whole subject singing “la,la,la” when it comes up. There has been a newer attempt to reflect this issue which I look at below.

Also it means that the influence is much stronger that on the only other inflation measure we have which includes house prices which is CPI (NA). In it they only have a weighting of 6.8%. So the RPI is already ahead in my view and that is before you allow for the 2.4% weighting of mortgage interest-rates.

As you can see the new effort at least acknowledges the issue but comes up with a lower weighting. This is because they decided that they only wanted to measure the rise in house prices and not the land. This is what they mean by Net Acquisitions or NA.

Now with 8.3% ( 10.7%) and 6,8% in your mind look what happens with the new preferred measure CPIH.

Now let me bring in the alternative about which the National Statistician John Pullinger and the ONS are so keen. This is where rather than using house prices and mortgages of which there are many measures we see regularly in the media and elsewhere, they use fantasy rents which are never actually paid. Even worse there are all sorts of problems measuring actual rents which may mean that this is a fantasy squared if that was possible.

But this fantasy finds itself with a weight of 16.8% or at least it was last time I checked as it is very unstable. Has our owner-occupied housing sector just doubled in size?

As you can see whilst you cannot count the (usually fast rising ) value of land it would appear that you can count the ( usually much slower rising) rent on it. That is the road that leads to where we are today where the officially approved CPIH gives a lower measure than the alternatives. Just think for a moment, if there is a sector in the UK with fast rising inflation over time it has been housing. So when you put it in the measure you can tell people it is there but it gives a lower number. Genius! Well if you do not have a conscience it is.

Yet the ordinary man or woman is not fooled and Bank of England Governor Mark Carney must have scowled when he got the results of his latest inflation survey on Friday.

After all when asked ( by the Bank of England) they come up with at 3.1% a number for inflation that is closer to the RPI then the alternatives.

Just because people think a thing does not make it right but it does mean you need a very strong case to change it . Fantasy rents are not that and even worse they come from a weak base as illustrated below.

The whole situation gets even odder when you note that from 2017 to this year the weighting for actual rents went from 5.6% to 6.9%.

Who knew that over the past year there was a tsunami of new renters? More probably but nothing like a 23% rise. This brings me back to the evidence I gave to the UK Statistics Regulator which was about Imputed Rents which relies on essentially the same set of numbers. I explained the basis for this was unstable due to the large revisions in this area which in my opinion left them singing along to Fleetwood Mac.

I’m over my head (over my head)
Oh, but it sure feels nice

Today’s data

Let me start with the number which was much the closest to what people think inflation is according to the Bank of England.

The all items RPI annual rate is 3.3%, down from 3.4% last month. The all items RPI is 280.7, up from 279.7 in April.

So reasonably close to the 3.1% people think it is as opposed to.

The all items CPI annual rate is 2.4%, unchanged from last month. The all items CPI is 105.8, up from 105.4 in April

When we ask why? We see that a major factor is the one I have been addressing above.

Average house prices in the UK have increased by 3.9% in the year to April 2018 (down from 4.2% in March 2018). This is its lowest annual rate since March 2017 when it was 3.7%.

In spite of the slow down in house price inflation it remains an upward pull on inflation measures. You will not be surprised to see what is slowing it up.

The lowest annual growth was in London, where prices increased by 1.0% over the year.

Now let me switch to what our official statisticians,regulators and the economics editor of the Financial Times keep telling us is an “improvement” in measuring the above.

The OOH component annual rate is 1.1%, down from 1.2% last month.

Which is essentially driven by this.

Private rental prices paid by tenants in Great Britain rose by 1.0% in the 12 months to May 2018; unchanged from April 2018.

So they take rents ( which they have had all sorts of trouble measuring and maybe underestimating by 1% per annum) and imagine that those who do not pay rent actually do and hey presto!

The all items CPIH annual rate is 2.3%, up from 2.2% in April.

I often criticise the media but in this instance they deserve praise as in general they ignore this woeful effort.

Comment

Today has been a case of me putting forwards my views on the subject of inflation measurement which I hold very strongly. This has been an ongoing issue since 2012 and regular readers will recall my successful battle to save the RPI back then. I take comfort in that because over time I have seen my arguments succeed and more and more join my cause. This is because my arguments have fitted the events. To give a clear example I warned back in 2012 that the measure of rents used was a disaster waiting to happen whereas the official view was that it was fine. Two or three years later it was scrapped and of course we saw that the Imputed Rent numbers had a “discontinuity”. The saddest part of the ongoing shambles is even worse than the same sorry crew being treated as authorities about a subject they are consistently wrong about it is that we could have spent the last 6 years improving the measure as whilst it has strengths it is by no means perfect.

Let me give credit to the Royal Statistical Society as it has allowed alternative views an airing (me) and maybe there is a glimmer from the House of Lords who have speedily replied to me.

Staff to the Committee will be in attendance this evening, and we have emailed the details to the members: the unfortunate short notice and the busy parliamentary schedule currently means it may be unlikely for them to attend. We will report back to them on the event nevertheless.

I hope the event goes well for you.

Returning to today’s we now face the risk that this is a bottom for UK inflation as signalled by the producer price numbers.

The headline rate of inflation for goods leaving the factory gate (output prices) was 2.9% on the year to May 2018, up from 2.5% in April 2018.Prices for materials and fuels (input prices) rose 9.2% on the year to May 2018, up from 5.6% in April 2018.

This has been driven by the rise in the price of oil where Brent Crude Oil is up 56% on a year ago as I type this and the recent decline in the UK Pound £. This will put dark clouds over the Bank of England as the wages numbers were a long way from what it thought and now it may have talked the Pound £ down into an inflation rise. Yet its Chief Economist concentrates on matters like this.

Multiversities ‘hold key to next leap forward’ says ⁦⁩ Chief Economist Andy Haldane ( @jkaonline)

Isn’t that something from one of the Vin Diesel Riddick films?

 

 

 

 

 

House price rises are nothing to do with us says the Bank of England

Today brings inflation and in particular UK inflation data into focus and I would like to draw your attention to yesterday’s events. That is because the evidence given by Mark Carney and other members of the Bank of England to Parliament covered pretty much everything but that subject! Food for though for those who still believe it targets an inflation rate of 2% per annum as a priority. Indeed the whole process seemed to coin a phrase to be from an Ivory Tower “far,far,away” as we note one of the written questions.

What is your current estimate of the size of the output gap, the potential rate of productivity growth, the natural unemployment rate, and the equilibrium rate of
interest?

It wouldn’t take me long to point out that the evidence is that they are concepts which mislead rather than help. Moving back to the formal reply from Gertjan Vlieghe we did get an implied view.

 so that the economy will move into excess
demand over the forecast period and domestic inflationary pressure are likely to rise even as the fading contribution from past import price rises leads to a fall in headline
inflation this year.

Gertjan followed this up by suggesting this.

I think policy rates are likely to rise, in my central view, by 25bp to 50bp per year over the forecast period.

The problem for him is that he is like tumbleweed in the wind looking at negative interest-rates then swinging round saying they will rise to 2% so far managing to be something of a reverse indicator.

The UK Pound £

This has been in a weaker phase since the Unreliable Boyfriend Mark Carney did his public U-Turn on a May Bank Rate rise. In terms of the most important currency for inflation trends the US Dollar we are now at US $1.335 some ten cents below the previous peak. Thus we are back in a phase where this will add to inflation. Not all of the move is Mark Carney’s fault because there has also been a phase of what we might call “King Dollar” but he did give it a push down the hill. This means he has operated in the opposite direction to his inflation target.

The Oil Price

Whilst the overnight news is that we have seen a dip back in the price of crude oil the trend since late June has been higher and higher. Thus we face US $79 for a barrel of Brent Crude Oil as opposed to more like US $45 when this move began. Or if you prefer it is some 47% higher than a year ago. So we face some energy price inflation.

Today’s data

If we look we see the clearest example of the two factors above below.

Prices for materials and fuels (input prices) rose 5.3% on the year to April 2018, up from 4.4% in March 2018.

As we look into the detail we get more conformation of this.

 This was driven by crude oil prices, which have increased on the year at a rate of 19.9% in April 2018, 6.4 percentage points higher than in March 2018.

As to the second factor I am sorry to have to tell you that our official statisticians are looking in the wrong place.

The sterling effective exchange rate index (ERI) rose to 80.3 in April 2018. This is a 1.4% increase from March 2018 and is the largest monthly growth since September 2017 when it rose 2.1%……..All else equal, a stronger sterling effective exchange rate will lead to cheaper inputs of imported materials and fuels.

Anyway the month on month figures confirm my theme as well.

 On the month, inflation for imported materials and fuels was up 0.5%, after prices were flat in March 2018.

So we are seeing a turn in the inflation chain from lower to higher which has not yet reached the output data but will do so in the months ahead.

The annual rate of inflation for goods leaving the factory gate (output prices) remained at 2.7% in April 2018 . On the month, output inflation was 0.3%, unchanged from March 2018.

Consumer Inflation

There was better news on this front.

The Consumer Prices Index (CPI) 12-month rate was 2.4% in April 2018, down from 2.5% in March 2018.

Where this particularly impacts on the economy is when we compare it with wage growth. This has been given a lot o media attention and we can now say that real wages have finally stopped falling on this indicator although I am more cautious about saying they are now rising unlike the Bank of England.

wage growth improves somewhat
due to reduced labour market slack, ( Vlieghe)

Perhaps they have found this from talking with Billy Bragg or from areas such as Spotify play lists. So let me help out by saying I have been playing Hold Me by Carly Rae Jepsen at the Fleetwood Mac Festival a couple of years or so ago a lot recently. Sadly the recording quality is not top-notch so if the Bank could help out I would appreciate it.

Moving to the factors giving us lower annual inflation we saw this.

The largest downward contribution to the change in the rate came from air fares, which were influenced by the timing of Easter.

Also the price of men’s clothing fell which provides a bit of gender equality as usually news from this area if from women’s clothing. Against that as I am sure many of you are aware the price of diesel and petrol at the pump rose as the factors I discussed earlier begin to impact.

House prices

We have a familiar drum beat and bass line here.

Average house prices in the UK have increased by 4.2% in the year to March 2018 (unchanged from February 2018).

Although we did get another in my series of updates on never believing anything until it is officially denied. From the Guardian.

Gertjan Vlieghe also denies that QE has fuelled Britain’s housing market.

He points out that many countries have used quantitative easing to stimulate their economies since the financial crisis – but Britain is the only one to have seen such as house price boom.

Ireland?Spain?Germany? Well anyway we could of course simply look at the impact of the Funding for Lending Scheme on mortgage rates which the Bank of England estimated at up to 2%.

Comment

The good news is that UK inflation has been moderating in 2018 so far but the not so good news is that the winds of change are now blowing in the opposite direction. We got a hint of this from the much maligned Retail Price Index today as well as a reminder of a blind spot in UK inflation measurement.

The all items RPI annual rate is 3.4%, up from 3.3% last month.

The blind spot it highlights is illustrated below.

Other housing components excluded from the CPI, which increased the RPI 12-month rate relative to the CPI 12-month rate by 0.11 percentage points between March and April 2018. The effect came mainly from house depreciation and council tax.

House depreciation is an odd way of doing it but t has house prices in it as well as mortgage rates whereas the CPI has neither. When our establishment felt that they could get away with this no longer they chose to ignore this and assume that owner occupiers pay themselves rent when they do not. That is what an Imputed Rent is and the numbers are based on this.

Private rental prices paid by tenants in Great Britain rose by 1.0% in the 12 months to April 2018; down from 1.1% in March 2018.

I hope to have the opportunity to explain this at the Royal Statistical Society next month at their public meeting. You reduce inflation by excluding things which exist and not only can be measured but are paid and replace then with ones you make up, Many have doubts that they can measure existing rental trends and suggest the numbers are too low by around 1% per annum. So let me credit the UK media who in general have roundly ignored the CPIH inflation measure as they have done exactly the right thing.