Take your pick as UK Inflation rises via CPI and falls via RPI whilst staying the same via CPIH

The issue of UK inflation being above target is obviously troubling the UK establishment so much so that this morning HM Treasury has decided to tell us this.

Latest data from comes out today. Find out more about how the UK brought inflation under control:

There is a problem here as you see when we introduced inflation targeting in late 1992 the targeted measure called RPIX was below 4% and around 3.7% if the chart they use is any guide. It is currently 4% after 4.2% last month which is of course higher and not lower! So this is not the best time to herald the triumph of inflation targeting to say the least! Even worse if you look at the longer-term inflation charts in the release it is clear that the main fall in inflation happened before inflation targeting began. I will leave readers to mull whether the better phase was in fact the end of an economic mistake which was exchange-rate targeting.

The Forties problem

There will be a burst of inflationary pressure when we get the December inflation data from this issue. From the Financial Times.

The North Sea’s key Forties Pipeline System, which delivers the main crude oil underpinning the Brent benchmark, is likely to be shut for “weeks” to carry out repairs to an onshore section of the line, a spokesman for operator Ineos said on Monday. The move follows the worsening of a hairline crack in the 450,000 barrel-a-day pipe near Red Moss in Aberdeenshire over the weekend……..The FPS transports almost 40 per cent of the UK North Sea’s oil and gas production by connecting 85 fields to the British mainland.

If I was Ineos I would be crawling over the contract to buy the pipeline as they only did so in October and may have been sold something of a pup by BP. But in terms of the impact we have seen Brent Crude Oil move above US $65 per barrel in response to this. Also a cold snap in the UK is not the best time for gas supplies to be reduced as we wait to see how prices will respond. No doubt some of the production will get ashore in other ways but far from all. Also other news is not currently helping as this from @mhewson_CMC points out.

U.K. GAS FUTURES SURGE ON BAUMGARTEN EXPLOSION, NORWAY OUTAGE………front month futures jump about 20%.

Today’s data

This will have received a particularly frosty reception at the Bank of England this morning.

CPI inflation edged above 3% for the first time in nearly six years, with the price of computer games rising and airfares falling more slowly than this time last year. These upward pressures were partly offset by falling costs of computer equipment.

The annual reading of 3.1% means that Governor Mark Carney will have to write a letter to the Chancellor of Exchequer Phillip Hammond to explain why it is more than 1% over its target. I have sent via social media a suggested template.

Of course the official version could have been written by Shaggy.

I had tried to keep her from what
She was about to see
Why should she believe me
When I told her it wasn’t me?

We will not find out precisely until February as one of the improvements to the UK inflation targeting regime was to delay the publication of such a letter until it was likely to be no longer relevant.

How can we keep the recorded rate of inflation down?

This will have troubled the UK establishment and they came up with the idea of making a number up based on rents which are never paid. They rushed a proposal in last year as they noted that it was likely to be a downwards influence on inflation in 2017. How is that going? I have highlighted the relevant number.

The CPI rate is higher than the CPIH equivalent principally because the CPI excludes owner occupiers’ housing costs. These rose by 1.5% in the year to November 2017, less than the CPI rate of 3.1% and, as a result, they pulled the CPI rate down slightly, to CPIH.

That number which is a fiction as the Imputed Rents are never actually paid has a strong influence on CPIH.

Given that OOH accounts for around 17% of CPIH, it is the main driver for differences between the CPIH and CPI inflation rates.

This is like something straight out of Yes Prime Minister where a number which is never paid is used to reduce the answer. Just for clarity rents should be in the data for those who pay them but not for those who own their home and do not. Those who own their homes will be wondering why actual real numbers like the ones below are not used.

Average house prices in the UK have increased by 4.5% in the year to October 2017 (down from 4.8% in September 2017). The annual growth rate has slowed since mid-2016 but has remained broadly around 5% during 2017.

What do you think it is about a real number that would INCREASE the recorded inflation rate that led it to be rejected for a fake news one which DECREASES the recorded inflation rate?

House Prices

Tucked away in the release was this which may be a sign of a turn.

The average UK house price was £224,000 in October 2017. This is £10,000 higher than in October 2016 and £1,000 lower than last month.

A 0.5% monthly fall. As the series is erratic we will have to wait for further updates.

What is coming over the hill?

We are being affected by the higher oil price.

The one-month rate for materials and fuels rose 1.8% in November 2017 (Table 3), which is a 0.8 percentage points increase from 1.0% in October 2017, driven by inputs of crude oil, which was up 7.6% on the month.

This meant that producer price inflation rose on the month.

The headline rate of inflation for goods leaving the factory gate (output prices) rose 3.0% on the year to November 2017, up from 2.8% in October 2017. Prices for materials and fuels (input prices) rose 7.3% on the year to November 2017, up from 4.8% in October 2017.

This is more than a UK issue as this from Sweden Statistics earlier indicates.

The rise in the CPI from October to November 2017 was mainly due to a price increase of vehicle fuels and lubricants (4.5 percent),

Comment

There is a lot to consider here as headlines will be generated by the fact that Bank of England Governor Mark Carney will have to write an explanatory letter about the way CPI inflation has risen to more than 1% above its annual target. He might briefly wish that the old target of RPIX was still in use.

The annual rate for RPIX, the all items RPI excluding mortgage interest payments (MIPs), is 4.0%, down from 4.2% last month.

Although actually he would soon realise that he would have had to have written a formal letter a while ago for it. For the thoughtful there is interest in one measure rising as another falls and here are the main reasons.

Other differences including weights, which decreased the RPI 12-month rate relative to the CPI 12-month rate by 0.15 percentage points between October and November 2017.

Ironically putting house prices into the inflation measure would have reduced it last month.

Other housing components excluded from the CPI, which decreased the RPI 12-month rate relative to the CPI 12-month rate by 0.06 percentage points between October and
November 2017. The effect came mainly from house depreciation.

Will the UK establishment do another u-turn and suddenly decide that house prices are fit for use ( now they may be falling) in the same way they abandoned aligning us with Europe by not using them or the way they dropped RPIJ?

The trend now sees two forces at play. The trend towards higher inflation from the lower UK Pound £ is not far off over. However we are seeing a higher oil price offset that for the time being and I am including the likely data for December in this. So we will have to wait for 2018 for clearer signs of a turn although the Retail Price Index may already be signalling it.

Meanwhile the “most comprehensive measure of inflation” and the Office for National Statistics favourite CPIH continues to be pretty much ignored. The punch may need fortifying for this years Christmas party.

Meanwhile I guess it could be (much) worse.

The Financial Times said Avondale Pharmaceuticals bought the rights to Niacor from Upsher Smith, a division of Japan’s Sawai Pharmaceutical, earlier this year. The company also bought the rights to a drug used to treat respiratory ailments, known as SSKI, and increased the price by 2,469 per cent, raising the cost of a 30ml bottle from $11.48 to $295.

 

 

UK Inflation rises again but more hopefully the UK pound follows it

I was not expecting to publish an article today but my knee operation planned for today was cancelled with an hour’s notice. Let me wish the trauma patients who came into Chelsea and Westminster Hospital overnight well. Returning to the economics there is a link between today’s subject of inflation and that of yesterday because inflation will be over target and of course the Bank of England choose to ease policy into an inflation rise.

The impact of higher prices on the poor

One of the issues faced by the poor is that they pay a different set of prices to the rest of us. The Joseph Rowntree Federation has looked at this and intriguingly opens with something which could have been written by me.

Reducing the cost of essential goods and services is as important as increasing incomes for reducing poverty in the UK.  The less people must spend on meeting their needs, the more cash in their pocket.

The Bank of England will be annoyed on two counts. Firstly it aims for inflation of 2% per annum and secondly the idea that what it calls non core items are important.

The JRF moves onto the problem.

New research by Bristol University has laid bare the scale of the poverty premium for the first time.  They estimate that on average the poverty premium is costing low-income households £490 per year.

We get some more details.

Some premiums seem inconsequential, such as paying an extra £5 per year for a paper copy of an electric bill because you’re not online, or find it easier to keep on top of your budget with a paper copy. Others are eye watering, such as paying £540 over the odds for a doorstep loan because you can’t access mainstream credit or an additional £120 for a payday loan.

There are various factors at play here but we know that those that are poorer tend to pay more for many products. These comes from an inability to shop around both physically and online as well as being unable to use direct debits. Some of these represent a type of exploitation but it is also true that sometimes the problems create higher costs for businesses which need to be passed on.

There have been calls at times for different inflation measures to represent different groups. What we do know is that the establishment’s choice the Consumer Price Index performs badly in this regard. This is because it is weighted and based on total spending where of course the better off are more highly represented and so this means that rather than representing the median person it tends to represent those more like two-thirds of the way up the income scale. The much maligned Retail Price Index excludes the top 4% in terms of income so performs better in this regard although it does exclude some pensioner households.

The UK establishment’s view on measuring inflation

We can see this from simply looking at the progression of UK inflation targets. First the original one.

The annual rate for RPIX, the all items RPI excluding mortgage interest payments (MIPs), is 4.1%, up from 3.9% last month.

As we note an annual inflation measure that has passed 4% we move onto the current measure.

The all items CPI annual rate is 2.9%, up from 2.6% in July.

The clear trend is downwards and let us now look at the UK statistical establishment’s favourite measure.

The all items CPIH annual rate is 2.7%, up from 2.6% in July.

Of course the reality of price rises and inflation does not change but at the current rate the inflation reality of now will perhaps be accompanied by an official inflation measure at 0% in a few decades.

A major factor

Treatment of the housing market and particularly owner-occupied housing costs is at the heart of the matter. If we look at house prices we are told this by the Office for National Statistics.

Average house prices in the UK have increased by 5.1% in the year to July 2017 (unchanged from June 2017). The annual growth rate has slowed since mid-2016 but has remained broadly around 5% during 2017.

Those buying houses in the UK have seen a considerable amount of house price inflation in recent times.

The average UK house price was £226,000 in July 2017. This is £11,000 higher than in July 2016 and £2,000 higher than last month.

This compares to a pre credit crunch peak of just over £190,000 and a nadir of just under £155,000.

We are told by the UK statistics establishment that the best method in their opinion of measuring the impact of inflation on owner-occupiers of property is to use imputed rents which leads to this.

The OOH component annual rate is 1.9%, down from 2.0% last month.  ( OOH is Owner Occupiers Housing Costs).

As you can see there is something familiar at play a much lower number which is driven by the fact that rental inflation is much lower than house price inflation.

Private rental prices paid by tenants in Great Britain rose by 1.6% in the 12 months to August 2017; this is down from 1.8% in July 2017.

So yet again we find that the lower number has been selected! A particular issue here is that it is based on something which does not actually exist. Yes rents are paid by those who rent and they should go into the inflation numbers proportionately. But owner occupiers do not actually receive rent except in the calculations for the national accounts and so a statistical and economic concept replaces what is actually paid which is either the house price or the monthly mortgage repayment.

Oh and if London is a leading indicator ( which it often is) there is this to consider.

The growth rate for London (1.2%) in the 12 months to August 2017 is 0.4 percentage points below that of Great Britain.

Inflation Trends

This month saw a rise in UK inflation across the various measures and was driven by this.

Clothing and footwear, with average prices rising by 2.4% between July and August 2017 compared with a smaller rise of 1.0% between the same two months a year ago. Prices of clothing and footwear usually rise between July and August as autumn ranges start to enter the shops following the summer sales season.

So there was less of a summer sale in clothing this year and we have seen the numbers be erratic before as we move into autumn so we need to tread carefully. Also there was this.

Fuel prices rose by 1.6% between July and August 2017. This contrasts with the same period last year, when fuel prices fell by 1.3%.

Producer Prices

These give us an idea of what is coming down the inflation chain and there was a rise here too reversing recent trends.

Factory gate prices (output prices) rose 3.4% on the year to August 2017, up from 3.2% in July 2017, with the change in the rate being driven mainly by petroleum products. Prices for materials and fuels (input prices) rose 7.6% on the year to August 2017, up from 6.2% in July 2017, with the change in the rate being driven mainly by crude oil.

Comment

Today’s reversal on the inflation front follows a month were there was better news. Not only were the annual consumer inflation  numbers higher today but the producer ones were too. Some care is needed however as it was issue with the measurement of clothing prices and inflation back in 2010 which kicked off a lot of the debate around UK inflation methodology. Actually the issues there are still in dispute!

As to the trends there is something which may help out as we go forwards.

As many commodities including crude oil are priced in US Dollars the rise in the UK Pound £ will help us going forwards. Although of course currency movements do not always last and can turn out to be a figment of our Imagination.

Could it be that it’s just an illusion
Putting me back in all this confusion?
Could it be that it’s just an illusion now?
Could it be that it’s just an illusion
Putting me back in all this confusion?
Could it be that it’s just an illusion now?