Yesterday we heard from Bank of England Chief Economist Andy Haldane.
On 3 November, I visited Greater Manchester on the latest of my Townhall tours.
He makes himself sound like a rock band doesn’t he? It is good to see him get out and about after years and indeed decades of being stuck in a bunker in the depths of the Bank of England. Although sadly for him the hopes of becoming Governor via a “man of the people” approach seem to be just hopes. I do hope that he takes the message below back to his colleagues as not only would some humility be welcome but the reality encapsulated in it would be too.
For most of the people I spoke with, small adjustments in the cost of borrowing were unlikely to have a significant impact on their daily lives. The borrowing costs they faced for access to consumer credit were largely unaffected by changes in Bank Rate
The latter point was one of my earliest themes when I started this website which had its 7th anniversary over the weekend so you can see that our Andy is not the quickest to pick things up.
Moving to today’s theme of inflation Andy did have some thoughts for us.
It is well-known that increases in the cost of living hit hardest those on lowest incomes. Rising inflation worsens the well-known “poverty premium” the poorest in society already face in the higher costs they pay for the everyday goods and services they buy.
I hope that Andy thought hard about the role his “Sledgehammer QE” and “muscular” monetary easing in August 2016 had in making the lot of these people worse by contributing to the fall of the UK Pound and raising UK inflation prospects. Speaking of inflation prospects what does he think now?
Price rises across the whole economy are currently running well above the 2% inflation target and are expected to remain above-target for the next few years.
That is not cheerful stuff from Andy but there are several problems with it. Firstly you cannot forecast inflation ahead like that in the credit crunch era as for example you would have been left with egg on your face when oil prices dropped a couple of years ago. In addition Andy’s own record on forecasting or if you like Forward Guidance is poor as in his role of Chief Economist he forecasts an increase in wage inflation every year and has yet to be correct. Of course when you take out a lottery ticket like that you will eventually be correct but that ignores the years of failure.
This mornings data set seems to indicate a clear trend although there is a lack of detail as to why Swedish inflation fell so much.
The inflation rate according to the Harmonised Index of Consumer Prices (HICP) was 1.7 percent in October 2017, down from 2.2 percent in September.
Germany saw a smaller decline but a decline nonetheless.
Consumer prices in Germany were 1.6% higher in October 2017 than in October 2016. The unflation rate, as measured by the consumer price index, was +1.8% in both September and August 2017.
This will be received in mixed fashion at the Bank of England.
The all items CPI annual rate is 3.0%, unchanged from last month.
The Governor Mark Carney will be pleased that his quill pen and foolscap paper will not be required for an explanatory letter to the Chancellor of the Exchequer whereas Andy Haldane will mull that his Forward Guidance has not started well as a rise was forecast this month.
The MPC still expects inflation to peak above 3.0% in October, as the past depreciation of sterling and recent increases in energy prices continue to pass through to consumer prices.
The factors keeping inflation up were as shown below/
In October 2017, the food category, which grew by 4.2% since October 2016, contributed 0.3 percentage points to the overall 12-month growth rate……Recreation and culture, with prices rising by 0.5% between September and October 2017, compared with a smaller rise of 0.2% a year earlier.
There was also a rise in electricity prices. On the other side of the coin we saw transport and furniture and household services pulling in a downwards fashion on the annual inflation rate.
The additional factor in CPIH which is the addition of rents which are never paid to the owner occupied housing sector did its planed job one more time in October.
Housing and household services, where owner occupiers’ housing costs had the largest downward effect, with prices remaining unchanged between September 2017 and October 2017, having seen a particularly large increase of 0.4% in the same period a year ago.
This is essentially driven by this.
Private rental prices paid by tenants in Great Britain rose by 1.5% in the 12 months to October 2017; this is down from 1.6% in September 2017.
I would be interested to know if those who rent are seeing lower inflation but also you can see how this pulls down the annual inflation rate. Fair enough ( if accurate as our statisticians have had problems here) for those who rent but the impact is magnified by the use of Imputed Rent for those who own their property so the measure of inflation is pulled down even more.
The OOH component annual rate is 1.6%, down from 1.9% last month.
This means that what our official statisticians call our “most comprehensive” measure tells us this.
The all items CPIH annual rate is 2.8%, unchanged from last month.
Now let me take you to a place “far,far away” where instead of fictitious prices you use real ones like those below. What do you think the effect would be?
Average house prices in the UK have increased by 5.4% in the year to September 2017 (up from 4.8% in August 2017). The annual growth rate has slowed since mid-2016 but has remained broadly around 5% during 2017.
Thus the inflation measure would be higher with the only caveat being the numbers are a month behind the others. As owner occupied housing costs are 17.4% of the measure you can see that it would have a big effect. Up is the new down that sort of thing.
The whole episode here has reflected badly on the UK statistics establishment as this new measure is mostly being ignored and CPI is used instead as this from the BBC demonstrates.
The UK’s key inflation rate remained steady at a five-and-a-half-year high of 3% in October, according to official figures.
The use of the word “key” is a dagger to the heart of the plans of the Office for National Statistics.
This mornings producer price dataset suggested that the inflation peak has passed.
The input Producer Prices Index (input PPI) grew by 4.6% in the 12 months to October 2017, down from 8.1% in the 12 months to September 2017. The output Producer Prices Index (output PPI) grew by 2.8% in the 12 months to October 2017, down from 3.3% in the 12 months to September 2017.
So there is good news there for us although awkward again for Andy Haldane. On the other side of the coin there has been around an US $5 rise in the price of Brent Crude Oil since October so that will impact the November data if it stays there. Also more political crises could weaken the Pound like they did only on Monday.
We find ourselves in the peak zone for UK inflation as we may get a nudge higher but the bulk effect of the fall in the UK Pound £ has pretty much completed now. Back in late summer 2016 I suggested that its impact would be over 1% and if we look at the numbers for Germany and Sweden today that looks to be confirmed. Last year saw monthly CPI rise by 0.2% in November and 0.5% in December as inflation rose so the threshold is higher.
However we remain in a mess as to how we calculate inflation as the Retail Price Index measure has it at 4% as opposed to 3% and of course the newer effort CPIH is at 2.8%. So a few more goes and they may record it at 0% and we could have an “unflation rate”!
I have argued against CPIH for five years now for the reasons explained today and warned the National Statistician John Pullinger of the dangers of using it earlier this year. Meanwhile former supporters such as the economics editor of the Financial Times Chris Giles ( who was on the committee which proposed CPIH) now longer seem to be keeping the faith as this indicates.
CPIH is (probably) better since it has a big proxy for housing services of owner occupiers, but with hindsight I worry occasionally that it doesn’t proxy security of tenure well. And security of tenure is a big service you acquire when buying not renting.