Good to see UK wage growth well above house price growth

Today brings the UK inflation picture into focus and for a while now it has been an improved one as the annual rates of consumer, producer and house price inflation have fallen. Some of this has been due to the fact that the UK Pound £ has been rising since early August which means that our consumer inflation reading should head towards that of the Euro area. As ever currency markets can be volatile as yesterdays drop of around 2 cents versus the US Dollar showed but we are around 12 cents higher than the lows of early August. The latter perspective was rather missing from the media reporting of this as “tanks” ( Reuters) and “tanking” ( Robin Wigglesworth of the FT) but for our purposes today the impact of the currency has and will be to push inflation lower.

The Oil Price

This is not as good for inflation prospects as it has been edging higher. Although it has lost a few cents today the price of a barrel of Brent Crude Oil is at just below US $66 has been rising since it was US $58 in early October. Whilst the US $70+ of the post Aramco attack soon subsided we then saw a gradual climb in the oil price. So it is around US $8 higher than this time last year.

If we look wider then other commodity prices have been rising too. For example the Thomson Reuters core commodity index was 167 in August but is 185 now. Switching to something which is getting a lot of media attention which is the impact of the swine fever epidemic in China ( and now elsewhere ) on pork prices it is not as clear cut as you might think. Yes the Thomson Reuters Lean Hogs index is 10% higher than a year ago but at 1.92 it is well below the year’a high of 2.31 seen in early April

Consumer Inflation

It was a case of steady as she goes this month.

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

This does not mean that there were no changes within it which included some bad news for chocoholics.

Food and non-alcoholic beverages, where prices overall rose by 0.8% between October and November 2019 compared with a smaller rise of 0.1% a year ago, especially for sugar, jam, syrups, chocolate and confectionery (which rose by 1.8% this year, compared with a rise of 0.1% last year). Within this group, boxes and cartons of chocolates, and chocolate covered ice cream bars drove the upward movement; and • Recreation and culture, where prices overall rose between October and November 2019 by more than between the same two months a year ago.

On the other side of the coin there was a downwards push from restaurants and hotels as well as from alcoholic beverages and tobacco due to this.

The 3.4% average price rise from October to November 2018 for tobacco products reflected an increase in duty on such products announced in the Budget last year.

Tucked away in the detail was something which confirms the current pattern I think.

The CPI all goods index annual rate is 0.6%, up from 0.5% last month……..The CPI all services index annual rate is 2.5%, down from 2.6% last month.

The higher Pound £ has helped pull good inflation lower but the “inflation nation” problem remains with services.

The pattern for the Retail Prices Index was slightly worse this month.

The all items RPI annual rate is 2.2%, up from 2.1% last month.

The goods/services inflation dichotomy is not as pronounced but is there too.

Housing Inflation ( Owner- Occupiers)

This is a story of many facets so let me open with some good news.

UK average house prices increased by 0.7% over the year to October 2019 to £233,000; this is the lowest growth since September 2012.

This is good because with UK wages rising at over 3% per annum we are finally seeing house prices become more affordable via wages growth. Also you night think that it would be pulling consumer inflation lower but the answer to that is yes for the RPI ( via the arcane method of using depreciation but it is there) but no and no for the measure the Bank of England targets ( CPI) and the one that our statistical office and regulators describes as shown below.

The Consumer Prices Index including owner occupiers’ housing costs (CPIH).

Those are weasel words because they use the concept of Rental Equivalence to claim that homeowners pay themselves rent when they do not. Even worse they have trouble measuring rents in the first place. Let me illustrate that by starting with the official numbers.

Private rental prices paid by tenants in the UK rose by 1.4% in the 12 months to November 2019, up from 1.3% in October 2019.

Those who believe that rents respond to wage growth and mostly real wages will already be wondering about how as wage growth has improved rental inflation has fallen? Well not everyone things that as this from HomeLet this morning suggests.

Newly agreed rents have continued to fall across most of the UK on a monthly basis despite above-inflation annual rises, HomeLet reveals.

Figures from the tenancy referencing firm show that average rents on new tenancies fell 0.6% on a monthly basis between October and November, with just Wales and the north-east of England registering a 1.1% and 0.4% increase respectively.

Both the north-west and east of England registered the biggest monthly falls at 0.8%.

Rents were, however, up 3.2% annually to £947 per month.

This is at more than double the 1.5% inflation rate for November.

As you can see in spite of a weak November they have annual rental inflation at more than double the official rate. This adds to the Zoopla numbers I noted on October 16th which had rental inflation 0.7% higher than the official reading at the time.

So there is doubt about the official numbers and part of it relates to an issue I have raised again with the Economic Affairs Committee of the House of Lords. This is that the rental index is not really November’s.

“The short answer is that the rental index is lagged and that lag may not be stable.I have asked ONS for the detail on the lag some while ago and they have yet to respond.”

Those are the words of the former Government statistician Arthur Barnett. As you can see we may well be getting the inflation data for 2018 rather than 2019.

The Outlook

We get a guide to this from the producer price data.

The headline rate of output inflation for goods leaving the factory gate was 0.5% on the year to November 2019, down from 0.8% in October 2019……..The growth rate of prices for materials and fuels used in the manufacturing process was negative 2.7% on the year to November 2019, up from negative 5.0% in October 2019.

So the outlook for the new few months is good but not as good as it was as we see that input price inflation is less negative now. We also see the driving force behind goods price inflation being so low via the low level of output price inflation.

Comment

In many respects the UK inflation position is pretty good. The fact that consumer inflation is now lower helps real wage growth to be positive. Also the fall in house price inflation means we have improved affordability. These will both be boosting the economy in what are difficult times. The overall trajectory looks lower too if we add in these elements described by the Bank of England.

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

However as I have described above these are bad times for the Office for National Statistics and the UK Statistics Authority. Not only are they using imaginary numbers for 17% of their headline index ( CPIH) the claims that these are based on some sort of reality ( actual rental inflation) is not only dubious it may well be based on last year data.

The Investing Channel

 

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

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

The Pound

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

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

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

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

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

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

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

Oil Price

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

HS2 and Crossrail

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

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

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

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

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

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

Here is the Guardian on Crossrail.

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

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

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

Today’s Data

This has seen some welcome news.

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

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

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

The official explanation is that it was driven by this.

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

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

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

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

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

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

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

House Prices

There was more good news here as well.

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

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

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

Comment

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

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

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

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

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

Box of 20 Jaffa Cakes £1

Box of 10 Jaffa Cakes £1.05

2 packets of Kettle Crisps £2

1 packet of Kettle Crisps £2.09

Other supermarkets are available…..

 

 

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

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

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

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

Affordability

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

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

Propaganda

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

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

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

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

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

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

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

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

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

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

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

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

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

Today’s Data

There was some good news as inflation did not rise.

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

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

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

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

An especially welcome development was this.

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

Especially as on the month prices actually fell.

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

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

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

The Trend Is Your Friend

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

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

Even better news comes further up the chain.

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

Here is the main factor at play.

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

Comment

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

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

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

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

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

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

Cauliflower

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

 

 

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

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

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

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

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

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

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

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

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

Today’s Data

The Trend

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

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

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

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

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

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

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

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

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

Consumer Inflation

The news here was welcome too.

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

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

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

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

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

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

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

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

games, toys and hobbies

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

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

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

House Prices

There was some really good news here.

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

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

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

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

Comment

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

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

 

The campaign against the UK Retail Price Index carries on

This week brought some disappointing news for the Bank of England. If we go back to Monday we were told this.

LONDON (Reuters) – British households’ expectations for inflation over the next 12 months rose to 2.8% in July from 2.6% in June, according to a survey from U.S. investment bank Citi and pollsters YouGov.

Longer-term inflation expectations rose to 3.4% from 3.3% in June, the Citi/YouGov survey of 2,011 adults showed.

“Rising inflation expectations should … support hawks at the (Bank of England),” Citi economists Christian Schulz and Ann O’Kelly said.

There are two problems there for the Bank of England. The first is that expectations imply that people think that inflation is above the 2% target and has been so. This is an implied defeat for the enormous effort that it and other parts of the UK establishment have put it getting our official statisticians have put into getting the Imputed Rent driven CPIH as the headline inflation measure.

Even worse the measure of future expectations has risen. This shows two factors at play. One is rhetoric as we are subjected to a media barrage about future falls in the UK Pound £ exchange rate. The other is the reality that the UK Pound £ has been in a weak phase and in inflation terms this is best represented by the rate against the US Dollar because it is the currency in which nearly all commodities are priced. Whilst it is relatively stable this morning at US $1.2060. Whereas if we go back a bit over 3 months to the early part of May we see that it was some 11 cents higher. Over the past year it is some 5.5% lower so we can see that there is some commodity price pressure on the cards so well done to the ordinary person surveyed for inflation expectations.

Producer Price Inflation

We can find out what is coming down the inflation pipeline from these numbers.

The headline rate of output inflation for goods leaving the factory gate was 1.8% on the year to July 2019, up from 1.6% in June 2019…….The growth rate of prices for materials and fuels used in the manufacturing process was 1.3% on the year to July 2019, up from 0.3% in June 2019.

This is a change as the previous overall trend was for both input and output inflation to be falling. The main area is a little awkward so let us look at it.

On the month, crude oil provided the largest positive contribution of 0.30 percentage points with monthly growth of 1.8%. This is a 9.3 percentage points increase following negative growth of 7.5% in June 2019.

This is because the lower UK Pound has been a constant influence but the oil price has been ebbing and flowing to some extent mirroring the tweets of President Trump on the trade war. For example yesterday it rose 3/4% as he announced delays in planned tariffs on China. So the outlook with Brent Crude around US $61 per barrel is for it to have a small disinflationary impact looking ahead but the trend may change with one tweet.

Also do any of you have thoughts on this? The subject is on my mind anyway after last Friday’s power cut in Battersea.

This growth was mainly driven by electricity production and distribution, which increased 20.1% on the year to July 2019, the highest the rate has been since records began in 2009.

Consumer Inflation

Here the situation looks calm on the surface but there are two serious problems below it.

The Consumer Prices Index (CPI) 12-month rate was 2.1% in July 2019, increasing from 2.0% in June 2019.

In a world where US President Trump describes a 0.3% monthly and 1.8% annual increase like this I am not sure where this puts us!

Prices not up, no inflation.

Anyway if we return to the UK we see that a problem I have warned about before is back.

The largest upward contribution (of 0.08 percentage points) to change in the CPIH 12-month rate came from recreation and culture. Within this group, the largest effect came from games, toys and hobbies (in particular from computer games and consoles) where prices overall rose by 8.4% between June and July 2019 compared with a rise of 4.1% between the same two months a year ago.

Here is the confession that we are blundering in the dark here.

Price movements for these items can often be relatively large depending on the composition of bestseller charts and the upward contribution between the latest two months follows a downward contribution, from computer games purchased online and games consoles, between May and June 2019.

This matters because it highlights a systemic problem. A similar problem is in play with fashion clothing. Rather than doing something about it the UK establishment has been using the latter problem as a tool for beating the Retail Price Index with. Rather than research and reflection we get rhetoric.

Retail Price Index

Speaking of the RPI the annual rate fell to 2.8% which is partially good news for rail passengers because the rate at which regulated fares rise will be that. At east it is below the rate of wages increases. But there is a problem here too.

An error has been identified in the Retail Prices Index (RPI) in 2019, caused by an issue with the 2017 to 2018 Living Costs and Food Survey (LCF)dataset, which is used to produce the weights underpinning the RPI.

Indicative estimates show that if the corrected LCF dataset had been used to calculate the 2019 RPI weights, it would have led to an upward revision of 0.1 percentage points to the published RPI annual growth rate in March 2019, from 2.4% as currently published to 2.5% and a downward revision of 0.1 percentage points to the June 2019 rate, from 2.9% as currently published to 2.8%. No other month’s annual growth rates have been affected.

It is a good job that large amounts of financial contracts do not depend on this, Oh wait! But these numbers also matter in themselves.

House Prices

There was some excellent news here.

Average house prices in the UK increased by 0.9% in the year to June 2019, unchanged from May 2019 . Over the past three years, there has been a general 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 2.7% over the year to June 2019, less than the 3.1% fall in May 2019. Average house prices in London have now been falling over the year each month since March 2018.

With wage growth at 3.7% finally houses are on average becoming more affordable. As the London numbers highlight there are regional disparities though. On the other side of the coin house prices in Wales rose by 4.4%.

Comment

I have a couple of serious points to make so let me start with some humour courtesy of The Guardian.

City economists had forecast CPI to fall to 1.9% – instead, it’s now over the Bank’s target of 2%.

The unexpected rise could pile pressure on Threadneedle Street to raise interest rates, even as economic growth falters…

Meanwhile the problems with how we measure inflation in the UK pile up as computer game are added to the problems with fashion clothing. Yet the UK Statistics Authority and the ONS have instead spent their time joining the establishment campaign against the RPI. Please do not misunderstand me as I have a lot of sympathy with the ordinary statisticians who in my experience are doing their best, but it was hard not to have a wry smile this morning at us getting the numbers wrong and creating their worst nightmare a “discontinuity”.

If we look wider we see that there are problems elsewhere as the changes to package holiday prices showed in Germany and in the wider Euro area inflation data. That will impact the GDP numbers via the deflator. Ironically with an RPI style inflation measure or perhaps based on the new HII/HCI the UK could be in good shape here.

Let me give another perspective by quoting Paul Johnson of the IFS in Prospect Magazine from February.

A version of it, CPIH, takes account of owner occupiers’ housing costs and is the one that the statisticians would like us to use. But it is of relatively recent vintage and hasn’t really caught on yet.

He seems to have forgotten that it was the Johnson Review ( yes him) that recommended this in 2016.

ONS should move towards making CPIH its main measure of inflation. In the meantime, the CPI should continue to be the main measure of inflation.

 

 

Good to see UK wages rising faster than house prices

After yesterday’s employment and wages data we advance on the latest UK inflation and house price data today. If that seems the wrong way around then yes it did used to be the other way around. But it was decided that getting the wages numbers at 9:30 on a Wednesday did not give our parliamentarians time to use them at Prime Ministers Questions later in the day.

Moving on from that let me set the scene by pointing out that with a few exceptions inflation seems to be in retreat. When we consider the world of low and negative interest-rates in which we live then this is another fail for economics 101. Inflation should have been higher as we observe another gap between theory and reality. Mostly the issue comes from putting the world consumer in front of inflation as those are the numbers used whereas the monetary easing went into asset prices. I noted someone pointing out that Germany had very little house price inflation before 2010 yesterday and had a wry smile. But with the US S&P 500 index above 3000 it is also true that money went into equity prices although of course some of that is genuine growth. Also bond markets have been pumped up to extraordinary levels making final salary pensions and annuities eye-wateringly expensive.

So as we note that it is a narrow measure of inflation we are pointed towards we also note that it looks like it has been trending lower.

The US looks to be below target, the Euro area has got further away from it in spite of all the actions and the line for Japan shows complete failure in the main Abenomics objective. Oh and they should have put the Europe line in the middle as they mean 0.9% not -0.9%.

The UK Pound £

There is some currency driven inflation in play for the UK however as we are in the midst of a weak run. The recent decline started on the 3rd of May when the effective or trade-weighted index was at 79.8 as opposed to the latest 75.6. The main player here is the US Dollar due to the vast majority of commodities being price in it. The fall here over the same time period is from US $1.317 to US $1.24 as I type this. So slightly worse.

If we switch to the oil price we see that things have changed since last month. Here are our official statisticians from back then.

Brent futures were down to $61.33 a barrel and U.S. West Texas Intermediate (WTI) crude futures were down to
$51.93.

Since then the decreases they were looking at have been increases with Brent Crude at US $64.60 and even more so with WTI at US $57.70. That will not feed into the  consumer inflation numbers today but will do so over time. So whilst there is not much inflation in the offing the UK is likely to see more mostly via a weak currency.

Today’s data

This was something to put a smile on the face of Bank of England Governor Mark Carney as he whiles away the time waiting for a phone call from the IMF.

The Consumer Prices Index (CPI) 12-month rate was 2.0% in June 2019, unchanged from May 2019.

So dead on target although the superficial theme of a type of summer lull ignores a fair bit of action under the surface.

The largest downward contributions to change in the 12-month rate between May and June 2019 came from motor fuels, accommodation services and electricity, gas and other fuels, with prices in each category falling between May and June 2019 compared with price rises between the same two months a year ago………The largest offsetting upward contributions to change came from clothing and food.

Just for clarity utility prices were unchanged as opposed to last year when gas and electricity prices were raised. The clothing picture is also more complex than presented as prices there still hint at trouble on the high street.

Clothing and footwear was the only broad group producing a downward contribution in June 2019, reflecting a fall in prices of 0.4% on the year.

Prices fell by less than earlier in the year.

Prospects

The immediate prospects are downwards.

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

So goods inflation should trend lower and that may hold sway for a bit.

The growth rate of prices for materials and fuels used in the manufacturing process fell 0.3% on the year to June 2019, down from 1.4% in May 2019…….The annual rate of input inflation was negative for the first time since June 2016, driven by a large downward contribution from crude oil.

Thus we see the broad sweep of lower inflation that we looked at earlier via lower inflation expectations. The cautionary note is that due to the lower UK Pound we will see more inflation than elsewhere and in this instance also a higher oil price will affect us. We have a rough rule of thumb for how this is playing out if we look at the Euro area.

The euro area annual inflation rate was 1.3% in June 2019, up from 1.2% in May.

So 0.7% it is then…..

House Prices

Here is something that on national emoji day should be represented with a thumbs up and a smile.

Average house prices in the UK increased by 1.2% in the year to May 2019, down from 1.5% in April 2019 . Over the past three years, there has been a general 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 4.4% over the year to May 2019, down from a fall of 1.7% in April 2019 and the lowest annual rate in London since August 2009 when it was negative 7.0%.

We see that real wages are increasing by around 2% per annum compared to house prices which is very different to the general picture in the credit crunch era as Rupert Seggins reminds us.

The longer term picture. Average London house prices up 53% on January 2008 vs a UK average of 24%.

Also the house price falls in London which seem to be creating quite a scare on social media amongst the journalist fraternity are welcome. Prices in London are too high for the vast majority.

There is an irony in that for once, by fluke the woeful use of imputed rents does not affect the situation too much.

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

Although we have another conceptual problem with it. That is the issue of rents usually rising with wages as the rise in both nominal and real wages are not impacting. This may be because the rent numbers are heavily lagged, I suspect that any impact takes around nine months and the full impact 18 but that is my opinion as we are not told.

Comment

We have had a couple of days of good data from the UK economy giving us a summer tinge. A fall in inflation would have been better but actually RPI fans did get one.

The all items RPI annual rate is 2.9%, down from 3.0% last month.

The gap between it and the other measures may trim a little over the next few months as the house price measure it uses ( depreciation) is lagged too. One clear improvement that could be made to it would be to put house prices in directly and I would look to increase the weight of it in the basket. Why? Well if we take the broad sweep using rent has owner occupied housing with a weight of around 17% in the basket whereas house prices in the two versions of it are weighted at 7-8%. So your average brick or window has twice the impact using rents which have lower inflation than house prices which generally have higher inflation.

 

 

 

The Bank of England reveals it is an inflation creator rather than targeter

Yesterday Bank of England Governor Mark Carney spoke at the ECB summer conference in sunny Sintra Portugal. Tucked away in a speech mostly about the Euro was a reference to the problems the Bank of England has had with inflation as you can see below.

While the euro area has continued to experience ‘divine
coincidence’ the UK has not (Chart 1). In the euro area, inflation has averaged half a point below target,
reflecting in part the drag from persistent slack in the labour market. In contrast, UK inflation has been above
target, averaging 2.3%, during a period where the economy was operating well below potential.

Over such a period that is quite a difference and for the moment I will simply point out that he has no idea about the “potential” of the UK economy as his speech later inadvertently reveals. But let us move on to his explanation.

That reflects the inflationary impacts of two large exchange rate depreciations and weak productivity that have
offset a major positive shock to labour supply. This has created tensions between short-term output and
inflation stabilisation in the UK that have not been evident in other major economic regions.

Missing from his explanation is the way that expectations of easier policy from the Bank of England helped drive both “large exchange rate depreciations”. The 2007/08 one pre dates his tenure at the Bank of England but the post EU Leave vote one was on his watch. I still come across people who think he pumped £500 billion into the UK economy on the following morning rather than getting the ammunition locker ready. But he did cut interest-rates ( after promising to raise them) and pour money into the UK Gilt Market with £60 billion of Sledgehammer QE purchases.

So rather than something which just happened he and the Bank of England gave it a good shove and that is before we add in that he planned even more including a cut to a Bank Rate of 0.1% that November. That did not happen because it rapidly became apparent that the Bank of England had completely misread the UK economic situation. But by then the damage had been done to the UK Pound which was pushed lower than it would otherwise have done.

We get an implicit confirmation of that from this.

Since 2013, the MPC’s remit has explicitly recognised that there are circumstances in which bringing inflation
back to target too quickly could cause undesirable volatility in output and employment.

In other words in a world where inflation is lower than before  it is no longer an inflation targeter and instead mostly targets GDP. Actually we get a confession of this and a confirmation of a point I have made many times on here as we note this bit.

Indeed, on the basis of this past behaviour in the great moderation, the MPC would have raised interest rates by 2 to 3 percentage points between August 2013 and the end of 2014.

Due to the international environment with the Euro area heading for negative interest-rates that would have been to much, But we could have say moved from 0.5% to 1.5% as I have regularly argued and would have put ourselves on a better path. Oh and I did say that Governor Carney has no idea of the potential of the UK economy, so here that is in his own words.

What we – and others – learnt as the recovery progressed was that the UK economy had substantially more
spare capacity than previously thought.

UK Inflation

It is hard not to have a wry smile at UK inflation being bang on target after noting the above.

The Consumer Prices Index (CPI) 12-month rate was 2.0% in May 2019, down from 2.1% in April 2019.

Tucked away in the detail was something which should be no surprise if we note the state of play in the car industry.

there were also smaller downward contributions from the purchase of vehicles (second-hand and new cars).

The other factor was lower transport costs as air fares fell mostly due to the Easter timing effect and the cost of diesel in particular rose more slowly than last year. On the other side of the coin was something which has become very volatile and thus a problem for our statisticians.

Price movements for computer games can often be relatively large depending on the composition of bestseller charts.

Looking for future trend we see what looks like a relatively benign situation.

The headline rate of output inflation for goods leaving the factory gate was 1.8% on the year to May 2019, down from 2.1% in April 2019.

There had been worries about the input inflation rate which picked up last time around but the oil price seems to have come to the rescue for now at least.

Petroleum provided the largest downward contribution to the change in the annual rate of output inflation. The annual rate of input inflation fell 3.2 percentage points in May 2019, driven by a large downward contribution to the change in the rate from crude oil.

Welcome news from house prices

If we switch to this area we see that the slow down in the annual rate of growth continues.

Average house prices in the UK increased by 1.4% in the year to April 2019, down from 1.6% in March 2019 . Over the past three years, there has been a general 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 1.2% over the year to April 2019, up from a fall of 2.5% in March 2019.

I am pleased to see that as the best form of help for prospective buyers is for wage growth ( currently around 3%) to exceed house price growth. There is a lot of ground to be gained but at least we are making a start.

There is an irony here as I note that for once this will be similar to the number for rents that are being imputed as the inflation measure for owner-occupiers. Yes for newer readers you do have that right as the official CPIH inflation measure assumes that those who by definition do not pay rent rush out and act as if they do.

Private rental prices paid by tenants in the UK rose by 1.3% in the 12 months to May 2019, up from 1.2% in April 2019.

The problem for CPIH is that we have had an extraordinary house price boom without it picking anything up, so this is an anomaly and is unlikely to last.

Comment

There is a sort of irony in UK inflation being on target in spite of the fact that the Bank of England has mostly lost interest in it. The credit crunch era has seen other examples of this sort of thing which echoes when the Belgian economy did rather well when it had no government. We might well be better off if we sent the Monetary Policy Committee on a long holiday.

At the moment there have been quite a few welcome developments in this area. Because wage growth is positive compared to both CPI inflation and house prices after sustained periods of falls. Some caution is required as the RPI is still running at an annual rate of growth of 3% but we are in sunnier climes.There are troubles in other areas as the lower car prices highlight so we need to grab what we can.

Let me finish with a thank you to the Guardian for quoting me in their business live blog and for providing some humour.

Today’s drop in inflation means there’s no chance of the Bank of England raising interest rates on Thursday, say City economists.

Where have those people been in the credit crunch era?

 

 

 

Good to see UK wages rising much faster than house prices at last

Today feels like spring has sprung and I hope it is doing the same for you, or at least those of you also in the Northern Hemisphere. The economic situation looks that way too at least initially as China has reported annual GDP growth of 6.4% for the first quarter of 2019. However the industrial production data has gone in terms of annual rates 5.8%,5.9%,5.4%,5.7%, 5.3% and now 8.7% in March which is the highest rate for four and a half years. Or as C+C Music Factory put it.

Things that make you go, hmm
Things that make you go, hmm
Things that make you go, hmm, hey
Things that make you go, hmm, hmm, hmm

In the UK we await the latest inflation data and we do so after another in a sequence of better wage growth figures. In its Minutes from the 20th of March the Bank of England looked at prospects like this.

Twelve-month CPI inflation had risen slightly in February to 1.9%, in line with Bank staff’s expectations
immediately prior to the release, and slightly above the February Inflation Report forecast. The near-term path
for CPI inflation was expected to be a touch higher than at the time of the Committee’s previous meeting,
though remaining close to the 2% target over the coming months. This partly reflected a 6% increase in sterling
spot oil prices, and the announcement by Ofgem on 7 February of an increase in the caps for standard variable
and pre-payment tariffs, from April, which had been somewhat larger than expected.

I do like the idea of claiming you got things right just before the release, oh dear! Also it is not their fault but the price cap for domestic energy rather backfired and frankly looks a bit of a mess. It will impact on the figures we will get in a month.

Prospects

Let us open with the oil prices mentioned by the Bank of England as the price of a barrel of Brent Crude Oil has reached US $72 this morning. So a higher oil price has arrived although we need context as it was here this time last year. The rise has been taking place since it nearly touched US $50 pre-Christmas. Putting this into context we see that petrol prices rose by around 2 pence per litre in March and diesel by around 1.5. So this will be compared with this from last year.

When considering the price of petrol between February and March 2019, it may be useful to note that the average price of petrol fell by 1.6 pence per litre between February and March 2018, to stand at 119.2 pence per litre as measured in the CPIH.

Just for context the price now is a penny or so higher but the monthly picture is of past falls now being replaced by a rise. Also just in case you had wondered about the impact here it is.

A 1 pence change on average in the cost of a litre of motor fuel contributes approximately 0.02 percentage points to the 1-month change in the CPIH.

If we now switch to the US Dollar exchange rate ( as the vast majority of commodities are priced in dollars) we see several different patterns. Recently not much has changed as I think traders just yawn at Brexit news although we have seen a rise since it dipped below US $1.25 in the middle of December. Although if we look back we are around 9% lower than a year ago because if I recall correctly that was the period when Bank of England Governor Mark Carney was busy U-Turning and talking down the pound.

So in summary we can expect some upwards nudges on producer prices which will in subsequent months feed onto the consumer price data. Added to that is if we look East a potential impact from what has been happening in China to pig farming.

Chinese pork prices are expected to jump more than 70 percent from the previous year in the second half of 2019, an agriculture ministry official said on Wednesday………China, which accounts for about half of global pork output, is struggling to contain an outbreak of deadly African swine fever, which has spread rapidly through the country’s hog herd.

That is likely to have an impact here as China offers higher prices for alternative sources of supply. So bad news for us in inflation terms but good news for pig farmers.

Today’s Data

I would like to start with something very welcome and indeed something we have been waiting for on here for ages.

Average house prices in the UK increased by 0.6% in the year to February 2019, down from 1.7% in January 2019 . This is the lowest annual rate since September 2012 when it was 0.4%. 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.

This means that if we look at yesterday’s wage growth data then any continuation of this will mean that real wages in housing terms are rising at around 3% per annum. There is a very long way to go but at least we are on our way.

The driving force is this and on behalf of three of my friends in particular let me welcome it.

The lowest annual growth was in London, where prices fell by 3.8% over the year to February 2019, down from a decrease of 2.2% in January 2019. This was followed by the South East where prices fell 1.8% over the year.

As they try to make their way in the Battersea area prices are way out of reach of even what would be regarded as good salaries such that they are looking at a 25% shared appreciation deal as the peak. Hopefully if we get some more falls they will be able to average down by raising  to 50% and so on but that is as Paul Simon would say.

Everybody loves the sound of a train in the distance
Everybody thinks it’s true

One development which raises a wry smile is that house price inflation is now below rental inflation.

Private rental prices paid by tenants in the UK rose by 1.2% in the 12 months to March 2019, up from 1.1% in February 2019……..London private rental prices rose by 0.5% in the 12 months to March 2019, up from 0.2% in February 2019.

What that tells us is not as clear as you might think because the numbers are lagged. Our statisticians keep the exact lag a secret but I believe it to be around nine months. So whilst we would expect rents to be pulled higher by the better nominal and real wage data the official rental series will not be showing that until the end of the year

Comment

The development of real wages in housing terms is very welcome. Of course the Bank of England will be in a tizzy about wealth effects but like so often they are mostly for the few who actually sell or look to add to their mortgage as opposed to the many who might like to buy but are presently priced out. Also existing owners have in general had a long good run. Those who can think back as far as last Thursday might like to mull how house price targeting would be going right now?

Moving to consumer inflation then not a lot happened with the only move of note being RPI inflation nudging down to 2.4%. The effects I described above were in there but an erratic item popped up and the emphasis is mine.

Within this group, the largest downward effect came from games, toys and hobbies, particularly computer games

If a new game or two comes in we will swing the other way.

Looking further up the line I have to confess this was a surprise with the higher oil price in play.

The growth rate of prices for materials and fuels used in the manufacturing process was 3.7% on the year to March 2019, down from 4.0% in February 2019.

So again a swing the other way seems likely to be in play for this month.

Meanwhile,what does the ordinary person think? It is not the best of news for either the Bank of England or our official statisticians.

Question 1: Asked to give the current rate of inflation, respondents gave a median answer of 2.9%, compared to 3.1% in November.

Question 2a: Median expectations of the rate of inflation over the coming year were 3.2%, remaining the same as in November.

Could the UK target house price inflation and should we?

Yesterday brought news of a policy initiative from the Labour party on a subject close to my heart and was a subject which occupied much of my afternoon and evening. It also reminded me of the way that social media can have more than a few different but similar strands ongoing at the same time. So if I missed anyone out apologies but I did my best and did better at least that the respondent who seemed to think my name was Tom.

Here from The Guardian is the basis of the proposal.

The Bank of England could be set a target for house price inflation under plans being explored by the Labour party, with tougher powers to restrict mortgage lending to close the gap between property prices and average incomes.

The shadow housing secretary, John Healey, is considering whether, under a Labour government, the Bank should be set an explicit target following a decade of runaway growth in the property market, with the aim of tackling the housing crisis.

The author of the idea is Grace Blakeley and I replied to her that there are various problems with this but let us set out her idea properly from her paper for the think tank the IPPR.

This would be equivalent to the remit the Monetary Policy
Committee has to control consumer price inflation. Under such a target the Bank of England should aim to keep nominal house price inflation at (say) zero per cent for an initial period – perhaps five years – to reset expectations,
and allow affordability to improve.

As I replied to Grace I am a fan of that in spirit but there are issues including one from the next sentence which I have just spotted.

It should then be increased to the same
rate as the consumer price inflation target of 2 per cent per year, meaning zero real-terms house price growth.

Er no that is not zero in real terms because if you are aiming for “affordability to improve” your objective must be for wage growth to exceed house price growth yet it does not apparently merit a mention there. If for example both consumer and house price inflation were on this target at 2% per annum you would be losing ground if wage growth was below that level.

How would this be enacted?

The target should be implemented using
macroprudential tools such as capital requirements, loan-to-value, and debt to-income ratios.

The first question is whether you could do this? Mostly a new policy regime could as we already have some moves in this direction from the Bank of England as pointed out in the paper.

The FPC recently implemented a
loan-to-income ratio of 4.5 per cent for 15 per cent of new mortgages,

The two catches as that this area is one where the truth can be and sometimes is hidden as those who recall the  “liar loans” era will know. Next is the concept of shadow banking or if I may be permitted a long word the concept of disintermediation where you restrict the banks so people borrow form elsewhere such as offshore or overseas.

These problems would be especially evident if you tried to implement this.

Since house price inflation is different in parts of the country, the FPC’s guidance should be regionally specific.

That recognition is welcome but the scale of the issue troubles me. Let me give you some examples from right now where house prices are rising in much of the Midlands and Yorkshire as well as Northern Ireland whilst falling in and around London. Also as @HenryPryor pointed what the situation in Northern Ireland is very different to elsewhere.

Confirmation from that despite enjoying robust inflation in recent months, house prices in Northern Ireland remain some 41% 𝐥𝐨𝐰𝐞𝐫 than they were just prior to the start of the financial crisis in 2007.

Perhaps you could define Northern Ireland but is even it homogenous? A clear danger is that you end up with a bureaucratic nightmare with loads of different definitions and all sorts of border issues as well as increasing the likelihood of another form of disintermediation.

The relationship between the Bank of England and the government

A clear issue is that whilst the Bank of England can influence house prices it does not control them and the paper sets out areas where it is not in control.

House prices are also determined by other factors, not least the supply of housing, and therefore adoption of the target would need to be accompanied by a much more active housing policy. This might include public housebuilding, changes to planning policy, and curbs on overseas purchases of UK homes (Ryan-Collins et al 2017). The FPC should be able to request that the government do more with housing policy if it judges that it will be unable to meet its target through macroprudential tools alone.

The supply of housing is something we have discussed on here pretty much since I began writing articles and the theme has been that government’s of many hues have serially disappointed. The Ebbsfleet saga has been the headline in this respect. Also I have to say that the idea of the Financial Planning Committee needing to “request” help from government policy is welcome in one way but problematic in another. First it is a confession that macroprudential policies are far from a holy grail in this area. Second I can see many scenarios of which the main one would be an upcoming election when the government would simply pay lip service or worse ignore the “request”. Thus we would likely find ourselves singing along to Taylor Swift.

I knew you were trouble when you walked in
So shame on me now
Flew me to places I’d never been
Now I’m lying on the cold hard ground
Oh, oh, trouble, trouble, trouble
Oh, oh, trouble, trouble, trouble

I do mostly agree with this part though and so does the Bank of England as otherwise it would not have introduced the Funding for Lending Scheme back in the summer of 2012.

It is also worth noting, however, that recent research has shown that the level of mortgage lending is the primary determinant of house prices (Ryan-Collins et
al 2017).

Comment

There is a lot to consider here and let me again say that as regular readers will be aware I think that economic policy does need to take account of asset price booms and busts. The catch is in the latter part though because the very same Bank of England that you would be asking to reduce house price growth has been explicitly ramping it since the summer of 2012 and implicitly before then with the Bank Rate cuts and QE bond purchases that preceded it. So the current poachers would have to turn into gamekeepers. Would they? I have my doubts because as we look around the world central banks seem to fold like deck chairs when asset prices fall.

Next comes the issue of could this be done? To which the answer is definitely maybe as you could start on this road and at first your theories would apply. But if we look back to the past history of macroprudential policies there was a reason why they were abandoned and it is because they themselves lead to a boom and bust cycle and bringing things up to date I have doubts on these lines as well as I tweeted to Grace.

One of the problems of central banks in the modern era is that they have often ended up operating in a pro-cyclical fashion. How can you be sure with their poor Forward Guidance record that they can be counter cyclical?

It is easy to spot cycles in hindsight but looking ahead it is far harder as otherwise the aphorism that central banks have never predicted a recession would not keep doing the rounds.

Can we fix it? Yes we can make a start as I hinted at here.

Whilst I support the spirit of this in terms of including house prices. I would point out that the UK could change things by simply going back to the Retail Prices Index as an inflation target because it includes house prices.

Personally I would update the RPI ( using the RPIX version to exclude mortgage costs) so that it explicitly has house prices rather than reply on them implicitly via depreciation and as a stop-gap we could drop out fashion clothing to trim the formula effect. So in effect we would be reversing the changes made by Gordon Brown in the early part of the 2000s. Then off we go although something else would have to be changed as well as basically a clear out of current Bank of England policy makers.

you have the issue of it these days also supporting the economy as defined by GDP

Me on The Investing Channel

Are UK house prices finally falling? It is very good news if so

One of the reasons that inflation measurement matters was highlighted yesterday mostly unwittingly I think, If we look at the subject of real wages in the UK we were told this.

Including bonuses, average weekly earnings for employees in Great Britain were estimated to have increased by 3.4%, before adjusting for inflation, and by 1.5%, after adjusting for inflation, compared with a year earlier.

Whereas Andrew Baldwin kindly crunched the numbers using other inflation measures for us.

Using any other deflator one gets lower real wage growth: 1.3% with the CPI, 1.2% with the RPIJ, 0.6% with the RPI

So we have growth but there is a lot of debate about how much? As it happens CPI and RPIJ have moved more in line with the official CPIH measure but we have seen spells where it has been much wider. This issue does change how you see the credit crunch which I can illustrate with a tweet from former Bank of England policymaker Danny Blanchflower.

and still real wage growth 5% below feb 2008 levels….

That is from the official data series which has been switched to CPIH which makes real wage growth look better than it really is. Intriguingly as I pointed out the way the influence of Imputed Rents the former Bank of England policymaker replied with this.

Ok but doesn’t the harmonized E.U. measure do what you want?

To which I replied.

Nope as the inflation measure you used to target ignores owner occupied housing entirely. They are usually just around the corner from putting it in…..

Perhaps he had forgotten. But it does reveal how this importance of this matter gets overlooked. Also Danny was keen to emphasise the role of hedonics which reminded me of this report from the annual review of US consumer inflation.

From February 2018 to February 2019, the price of lettuce increased 14.5 percent while television prices decreased 16.8 percent. This compared to an increase of 1.5 percent for all consumer items over that period.

Anybody else reminded of this famous phrase.?

I cannot eat an I-Pad

 

Inflation Trends

If we look back a year the UK trade weighted index for the Pound £ is little changed however that hides a fall followed by a rally. Thus from the low of mid-December at 76 it has risen to 79.5 putting a brake on the economy equivalent to more than a 0.75% Bank Rate rise. Makes you think doesn’t it about all the hand wringing from the Bank of England over any 0.25% rise. However if we switch to the US Dollar whilst we have been rallying over a similar time frame we are nearly 9 cents lower than the US $1.41 of this time last year.

We find also that the oil price is not far from where it was a year ago with the current US $ 66/67 for Brent Crude being a couple of dollars lower than a year ago. However we did see a fall followed by a rise from just over fifty dollars on Christmas Eve so there will be some upwards pressure as this is reflected first in producer and next in consumer prices.

Today’s Data

Let me change my usual pattern and start with something I have been hoping for and doing so for a while.

Average house prices in the UK increased by 1.7% in the year to January 2019, down from 2.2% in December 2018 . This is the lowest annual rate since June 2013 when it was 1.5%. Over the past two and a half years, there has been a slowdown in UK house price growth, driven mainly by a slowdown in the south and east of England.

Maybe it’s because I’m Londoner that I especially welcome this bit.

The lowest annual growth was in London, where prices fell by 1.6% over the year to January 2019, down from a decrease of 0.7% in December 2018. This was followed by the East of England where prices fell 0.2% over the year.

I have some friends trying to buy at the moment and wish then well. It is symbolic of the times that a couple who both have professional jobs can only afford a shared appreciation property ( for readers from abroad they only “own” say 2/3rds). Switching back to the national numbers we see that with wage growth in January at 3.7% then over the past year there has been real wage growth of 2% in this area. This is a welcome move after many years of losses.

Also the more up to date numbers from LSL Acadata hint at more good news to come.

Prices edged up for the third consecutive month in February, rising 0.5% to take the average value of a home in England and Wales to £302,435. A spike in prices early last year, however, means prices are down 0.5% compared to this time last year.

 

Producer Prices

These numbers are beginning to pick-up the higher oil price.

The growth rate of prices for materials and fuels used in the manufacturing process increased to 3.7% on the year to February 2019, up from 2.6% in January 2019…..Crude oil provided the largest upward contribution to the change in the annual rate of input inflation.

Over the next month or too this will also give the output number a push albeit a smaller one.

The headline rate of output inflation for goods leaving the factory gate was 2.2% on the year to February 2019, up from 2.1% in January 2019.

 

Consumer Inflation

This was a mixed month for our measures as shown below.

The all items CPI annual rate is 1.9%, up from 1.8% in January…….The all items RPI annual rate is 2.5%, unchanged from last month……The all items CPIH annual rate is 1.8%, unchanged from last month.

The drivers were an upwards pull from apparel and transport offset by rises in recreation and culture mostly computer games and food and drink. Intriguingly one of the falls came from an area which has proved very difficult to measure.

The effect came from a
range of products but most noticeably from footwear, particularly women’s footwear.

Have any readers noticed this?

As to why CPIH continues to be the lowest measure it is because of the impact of Imputed Rents via the use of Rental Equivalence.

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

This is very different to the United States where the official inflation measure shows that it is such matters ( they call it OER) which has pulled the inflation numbers higher.

Comment

It is genuinely pleasing to be able to report that real wages are outpacing house prices by a decent amount and even more so that this may increase, if we move from slower house price inflation to actual falls. I have been hoping for a long time that first-time buyers might get some actual help from this route rather than being helped to borrow ever more.

Of course this will not be welcome in Threadneedle Street where at the emergency COBRA meeting Bank of England Governor Mark Carney will be ruing the negative wealth effects and chewing his fingernails. I would not want to be the underling bringing him these numbers. But returning to happier news we may for once be seeing the beginning of an actual positive rebalancing of the UK economy as real wages make house prices ( a little) more affordable.