Today is one which us likely to have provoked a smile from the outgoing Governor of the Bank of England Mervyn King and something of a frown from the new incumbent Mark Carney. Whilst Governor Carney’s inheritance has generally been benign as illustrated by last week’s report from the National Institute for Economic and Social Research last week.
Our monthly estimates of GDP suggest that output grew by 0.6 per cent in the three months ending in June after growth of 0.6 per cent in the three months ending in May 2013. These estimates suggest that economic growth accelerated from 0.3 per cent per quarter in 2013Q1 to 0.6 per cent in 2013Q2, largely due to the performance of the private service sector.
Unfortunately for Governor Carney his worry is based on the performance of UK inflation and in particular on the exact numbers for June. This is because is we go back to June 2012 the level of the Consumer Price Index actually fell by 0.4% and so it was always likely to rise this month meaning that his first month would see a rise in inflation. Actually even unchanged prices on the month would have seen inflation rise to 3.1% which would trigger this.
If the target is missed by more than 1 percentage point on either side – i.e. if the annual rate of CPI inflation is more than 3% or less than 1% – the Governor of the Bank must write an open letter to the Chancellor explaining the reasons why inflation has increased or fallen to such an extent and what the Bank proposes to do to ensure inflation comes back to the target.
At least in spirit Mark Carney’s response should this eventually happen might like to invoke Shaggy’s biggest hit.
It wasn’t me
Although in a change in remit he does get more time – the figures are released 24 hours earlier to a select list – than in the past which may help too.
If inflation moves away from the target by more than 1 percentage point in either direction, I shall expect you to send an open letter to me, alongside the minutes of the Monetary Policy Committee meeting that followed the publication of the CPI data and referring as necessary to the Bank’s latest Inflation Report and forecasts.
Perhaps even the Chancellor of the Exchequer had become frustrated by and weary of Mervyn King’s efforts in this regard.
Given this, any future open letters should result in a more meaningful exchange between us about the Committee’s strategy than has been possible before now.
As it happens an audible sigh of relief might have been heard yesterday morning when Mark Carney received the numbers as they told him this.
The Consumer Prices Index (CPI) grew by 2.9% in the year to June 2013, up from 2.7% in May.
So he escapes for a month at least because prices fell again in June overall with falls (air transport being the largest) more than offsetting rises in motor fuels and and clothing. Indeed the falls in airfares were apparently substantial.
Air fares fell by 2.8% on the month this year compared with a rise of 7.4% in 2012.
If only that were true of my flight to Milan and back! But that was in July…
The Retail Price Index fell on the month too and inflation as measured by it is now running at an annual rate of 3.3%.
The outlook for inflation
Even the Bank of England has finally admitted that there is an ongoing problem here. From the May 2013 Inflation Report.
CPI inflation remains above the 2% target and is set to edge higher over coming months. Inflation is likely to stay above the target for much of the next two years, bolstered by external price pressures and administered and regulated prices.
So the targeted measure of inflation has exceeded its target since December 2009 and even the Bank of England does not think that there is likely to be a change in this situation anytime soon. Instead it is making “administered and regulated prices” something of a scapegoat conveniently forgetting that they have been a feature of UK economic life for years if not decades.
Producer Price Inflation
If we look further down the UK inflation chain we see that the situation is bubbling under again.
In the year to June the output price index for goods produced by UK manufacturers (factory gate prices) rose 2.0%, compared with a rise of 1.2% in the year to May
So whilst this is below headline inflation there is a worrying surge on the month. Also it was driven by what I consider to be the ”core” items of food and fuel, which distinguishes me from many other economists who are apparently able to live without them! Looking further down the chain we see that this looks likely to continue and maybe even increase.
In the year to June the overall price of materials and fuels bought by UK manufacturers for processing, known as total input prices, rose 4.2%, compared with a rise of 1.8% in the year to May.
The rise in June in input prices was driven by Home Food Materials (who makes these categories up?) which soared by 7.2%. As we had not had the recent hot weather by then that leaves the wet weather of 2012 and early in 2013 to take the blame.
But on a more fundamental point if you feel that food purchases have become noticeably more expensive then at least one component of the UK inflation measuring system is agreeing with you as Home Food Materials annual inflation is now running at 14.3%.
As an aside the fall in precious metals has had an impact too but in the other direction.
The index for imported metals fell 1.7% between May and June and fell 4.0% in the year to June. The monthly decrease was mainly due to imported platinum and silver prices.
Apparently gas prices fell by 4.9% in June. I wish mine had! They have been going regularly in the opposite direction.
Looking further afield
The oil price has been on a rising trend recently and a barrel of Brent Crude is now priced at over US $109 and is up just under 6% on a year ago. This presents a quite different picture to when it dipped into the high-90s in early April. Also its rise is being exacerbated by the fact that the pound sterling seems to have entered a weaker phase again and at US $1.505 as I type this is down just under 4% on a year ago. Add the two together and we have the beginnings of some oil price pressure on the UK economy.
Energy Price Pressure
If we look forwards to future years it is also true that it is government policy to raise domestic energy prices. This is of course in stark contrasts to their denials reminding me of “Never believe anything until it is officially denied” one more time.
NPower has weighed into the debate today with this.
By 2020, the relative influence of Government policy and regulation costs on energy will have increased by almost 340%. These policy and regulation costs are predominantly increased charges on the electricity bill rather than the gas bill.
That is particularly unfortunate for those whose domestic fuel bills are for an all-electric property. In case you were wondering the actual effect on an average bill is expected to rise from £185 this year to £329 in 2020.
This is a complicated subject but for now if we stick to today’s subject we remain under inflationary pressure via this route.
Does Inflation Matter?
Many economists are to be found somewhere between ‘it does not matter’ to ‘it is of minor importance’. However let me give you an area where it clearly has been a contractionary influence on the UK economy.
These continue to fall and the new inflation (CPI) numbers mean that if we adjust wages for them they are now falling at an annual rate of 1.6%. For those who feel that the Retail Price Index is more realistic then real wages are falling at an annual rate of 2%.
How likely is it that people will spend more when not only their level of real wages is falling but that it has fallen by 8% so far in the credit crunch era?
The UK economy remains one which cannot shake off the problems caused by its episode of above target inflation. Worryingly there are currently signs as I have discussed today that problems may be building again on that front. If we look to the latest official fuel price numbers released earlier the price of a litre of unleaded petrol is now 134.9 pence. Not only is this 1.2 pence up on the previous weekly report but it is now higher than the number in the June inflation report.
So Mark Carney may not have escaped writing an explanatory letter to the Chancellor for now at least but more importantly the UK is in danger of an economic boost leaking into inflation one more time. It is as if we have that locked on repeat on our economic I-Pad.
First Time Buyers
I also remain troubled by the way that Help to Buy is inflating prices in our housing market one more time. It is often badged as helping first time buyers but how does the statement below help them?
In May 2013, prices paid by first-time buyers were 4.1% higher on average than in May 2012. For owner-occupiers (existing owners) prices increased by 2.5% for the same period.
Is that a bubble I see? It all seems worryingly familiar and evokes echoes of how we got into this mess….