Today is the day that the UK updates on its inflation numbers. This has been a troubling series to say the least as inflation has exceeded its 2% official target on the Consumer Price Index for 38 months in a row now! This has made me somewhat sanguine about the media furore which has surrounded incoming Bank of England Governor Mark Carney’s use of the phrase “flexible inflation targeting” as after all that it what we have had for more than three years now. Also we may well note that there is an asymmetry here as there is plenty of “flexibility” in an upwards direction but panic should the inflation rate be expected to fall below its target. Indeed the “flexibility” was such that even when the CPI hit an annual rate of 5.2% or comfortably over double its target the Bank of England was engaging in more Quantitative Easing purchases designed according to its website to do this.
a further monetary stimulus to the economy
It is in many ways still hard to believe that they increased their planned QE operations by £75 billion in October 2011 just as inflation was so high. The “excuse” that it was in danger of falling below target has not gone well since has it? Also the objective of more economic growth has not gone well either as the UK economy has pretty much flat-lined.
The UK economy
We have ended up in the UK with a high level of inflation when you consider how poor our economic growth has been. Indeed the numbers are a critique of UK economic policies such as QE. Because if we give a policy starting in the summer of 2009 some time to bed in and say look at our performance in 2011 and 2012 we had inflation under the official measure of 7% and economic growth of just 0.5%. Perhaps that is what the current Governor of the Bank of England Mervyn King meant by the word “rebalancing”! I consider it to be a clear sign of policy failure.
Why? The problem that is real wages
As I have discussed many times in the past the overshoot of inflation has had a contractionary influence on the UK economy as it has exceeded wage growth meaning that in real terms wages have fallen. From the January review of the Office for National Statistics.
Over the past five years, real earnings have therefore fallen by more than 7 per cent.
And even they are now pointing out the inevitable consequence of this.
Rising prices relative to wage growth has a negative impact on household consumption as it reduces the physical quantity of goods and services that people can buy with the same level of income.
which means this is the consequence
The squeeze on household spending can be seen in the latest retail sales statistics. Sales volumes in December 2012 are a mere 1.4 per cent higher than they were in January 2008.
Problems for savers are mounting too
The way that the Bank of England’s Funding for Lending Scheme operates is that it offers the prospect of cheap funding for banks,which means that they have less incentive to compete for deposits and savings. If you look online the best rates have dropped from circa 3% to 2% which if you have to pay tax on it gets even thinner compared to the 2.7% CPI and 3.3% RPI.
So whilst the media cheers at lower mortgage rates for borrowers the effect of lower savings rates on savers who are consumers too gets forgotten too often in my view.
The Consumer Prices Index (CPI) annual inflation grew by 2.7% in January 2013, unchanged for the fourth month in a row.
Actually prices fell in January as the January sales had an impact and the underlying index fell from 125 to 124.4. The British Retail Consortium had suggested that retail inflation on the high street had fallen in January. However food price inflation is still 4% according to even them.
However in spite of the claims from vested interests I note that the Retail Price Index which I fought so hard to preserve unchanged tells us a somewhat different story.
The Retail Prices Index annual inflation stands at 3.3% in January 2013, up from 3.1% in December.
It is obviously very upsetting for our authorities to have an inflation measure rising so they rush to tell us this about the RPI.
does not meet international standards
To which I would respond with.
The RPI is the most long standing measure of inflation in the UK
Since its inception in 1947 it has been doing the job. It is by no means perfect but we do get perspective due to the length of the time it has been in use. Also “international standards” is defined in my financial lexicon as an attempt to mislead. Anyway it must have slipped their minds to point out that the Royal Statistical Society believes that there are problems with the CPI too.
The RPI stands at 245.8 in January 2013 based on January 1987= 100
Also the much maligned formula effect was only a small part of the difference between the gap between CPI and RPI this month which for the “experts” pushing for a change to RPI can use this twitter hashtag #backtothedrawingboard.
What can we expect next?
Whilst output prices were reasonably stable in January we did see a push higher in input prices.
U.K. input prices surged 1.3 percent in January from the previous month
When we look why we see a familiar issue
The monthly increase in raw- material costs was led by crude oil, which jumped 3.1 percent
What about now?
We see that the oil price has continued to rise in February. As I type this the price of a barrel of Brent Crude Oil is at US $118.14 which is up by over 6% in 2013 so far. So we see that price pressure remains here.
Also for UK consumers there is another problem which has been a declining pound. Back last November the Governor of the Bank of England Mervyn King called a rise in the pound’s exchange rate “unwelcome” in a broad hint that he would like it to fall. In 2013 he has got his wish as we have dipped to below US $1.56 today making a fall of just over 4% so far. In itself this may not sound much but add it to the rise in the oil price and we get to see why my brother asked me to explain why petrol prices rose on two occassions last week.
Here are the official numbers on this subject
On Monday 11th February 2013, the price of ULSP (unleaded petrol) was 135.6p/litre, this is 1.2p/litre higher than the previous week. The price for ULSD (diesel) was 143.0p/litre, this is 1.1p/litre higher than the previous week.
The price of ULSP is 0.7p/litre higher, with the price of ULSD 0.2p/litre higher than the equivalent week in 2012
In fact diesel prices are very near to the levels that caused a furore last year as the peak on this series was 144.36 pence. I have something of a vested interest as I have a diesel car but would be interested in readers thoughts about us being encouraged to buy diesels -more economical, save the planet etc- and then diesel pump prices surging relative to petrol ones!
If we move on from the oil price to other inputs into our economy we know that the falling pound will have an inflationary effect here too as most commodities remain priced in US dollars. Should we wish to buy anything in Euros the position is even worse,so that apparent staple of the UK food industry, imported horsemeat, must be getting rather expensive now!
We see a very familiar picture in the UK of inflation above target accompanied by trends which look likely to push it even higher. We do not know how far the oil price will rise or if the pound will continue to fall but we do know that these have happened so far this year. Institutionalised inflation will kick in too as the Eon energy price rise will affect next month figures and in the spring higher water charges will impact as well.
What bothers me is that these in charge of such polices of a falling pound and feeding in inflation must know that it is not working! So what is their true objective? My opinion is that the crucial number is real wage growth which is now running at an annual rate of -1.8% if you use the RPI and -1.2% if you use the CPI. This breaks the link that they might claim that debts are becoming more affordable, so to me official policy looks at best a shambles.