Inflation is back on the menu as well as on the horizon

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by Shaun Richards

The issue of inflation has returned as we have begun 2021 and it comes in various guises. The simplest is that as recently as yesterday we got an official denial.

Fed’s Daly: – “Too-high inflation” not a risk to think about at the moment

– Don’t see “unwanted inflation” around the corner

– Pressures on inflation are downward.

Rather inconveniently for Mary Daly of the San Francisco Federal Reserve it was accompanied on the news wires by this.

CHICAGO (Reuters) – Kraft Heinz Co and Conagra Brands Inc said they may choose to raise prices this year on some products that use wheat, sugar and other commodities that are becoming increasingly expensive due to high demand.

Perhaps Mary Daly has been imputing prices from her model rather than looking at the real world. Of course central bankers famously look at core inflation measures which exclude food and energy.

U.S. consumers on average paid 3.7% more for food consumed at home in January than they did a year earlier, according to the Bureau of Labor Statistics Consumer Price Index. Year-over-year increases in food prices have topped 3.5% each month since last April, the longest such stretch in nearly a decade. ( Reuters)

There is an additional nuance here in that this change will be under weighted in the numbers because they change slowly whereas the economy recently has changed quickly. If we stay with the issue of commodity inflation we also need to note this.

An oil rally since then to a 13-month high to almost $64 per barrel ( Reuters)

There are also these.

Lumber closes at an all-time high for the 7th day in a row, prices up 115% over the last year. $LUMBER…..Agriculture commodity ETF (top holdings: corn, soybeans, sugar, coffee, live cattle) closes at its highest level in over 2 years. $DBA ( @charliebiello)

The latter feed into the Heinz and Conagra issue. If we look wider we see that the Dow Jones Commodity Index is up nearly 34% over the past year at 808.

If you really want to see some inflation then there is of course Texas.

(Reuters) – The spot price of wholesale electricity on the Texas power grid spiked more than 10,000% on Monday amid a deep freeze across the state and rolling outages among power producers, according to data on the grid operator’s website.

Real-time wholesale market prices on the power grid operated by the Electric Reliability Council of Texas (ERCOT) were more than $9,000 per megawatt hour late Monday morning, compared with pre-storm prices of less than $50 per megawatt hour, according to ERCOT data.

This particular phase in Texas will pass but the input prices are so high that Texas consumers may be facing higher prices for a while.

The problem for Mary Daly is that having expanded the Federal Reserve balance sheet to US $7.44 trillion there were always going to be consequences. Also with bond yields rising ( the US ten-year is now 1.29%) the Fed will be under pressure from the US government to do something as in “More! More! More!”. I guess she will be grateful that 24.53% of the US CPI is imputed so that they can put in 2.7% for fantasy rents for owner-occupiers rather than the 9%-10% that house prices are actually rising. Otherwise they would be recording CPI inflation above 3% and would be under pressure to reverse course.

The UK Perspective

The increases in commodity prices will be impacting the UK and we got an idea of this earlier from the producer price numbers.

The price for materials and fuels used in the manufacturing process showed positive growth of 1.3% on the year to January 2021, up from positive growth of 0.6% in December 2020……….whilst metals and non-metallic minerals provided the largest upward contribution to the annual rate of input inflation.

As you can see there is the beginnings of an impact ay the beginning of the inflation price chain and this will have built up during February. For example the price of a barrel of Brent Crude Oil was in general between US $50 and $55 in January as opposed to the just below US $64 as I type this.

The UK Pound

The difference between the UK experience and the international one will be based on the value of the UK Pound £ and conveniently the Office for National Statistics has updated us a bit on the producer price numbers this month.

Input producer price inflation is made up of roughly 78% domestic inputs and 22% imported inputs, which are sensitive to exchange rate movements.

Sadly their own analysis fails to realise that the main player is the exchange-rate versus the US Dollar.

The sterling effective exchange rate index (ERI) displayed a positive growth of 1.3% on the month in January 2021. On the year, the ERI displayed negative growth of 1.5% in January 2021, which is up 1.6 percentage points from negative 3.1% in December 2020.

If we switch to the exchange-rate versus the US Dollar we see that at last night’s close of US $1.39 we are up a bit under 7% over the past year of which 2-3% has come in the last month or so. So it will be providing something of a brake on the inflationary push.

Today’s Numbers

Looked at from the Bank of England perspective they can claim things are under control.

The Consumer Prices Index (CPI) rose 0.7% in the 12 months to January 2021, up from 0.6% to December 2020; on a monthly basis, CPI fell by 0.2% in January 2021, following a 0.3% rise in December 2020.

However there is quite a swerve in the present numbers and it is the tax cuts.

The annual rate for CPI excluding indirect taxes, CPIY, is 2.3%, up from 2.2% last month.

That measure assumes that all of the tax cuts are passed on whereas in reality not all will be. If we discount for that as best we can and say the rate is 1.7% then we have a very different answer.

We also see why there has been such a campaign against the Retail Prices Index which is as usual producing a higher number.

The annual rate for RPIX, the all items RPI excluding mortgage interest payments (MIPs), is 1.6%, up from 1.4% last month.

So our old inflation target is producing a higher number which of course is why it was scrapped. We find a major issue in the cost of housing.

Housing Costs

We can break this down quite simply and the only weakness is that the house price numbers are a month delayed.

UK average house prices increased by 8.5% over the year to December 2020, up from 7.1% in November 2020, to stand at a record high of £252,000; this is the highest annual growth rate the UK has seen since October 2014…….Average house prices increased over the year in England to £269,000 (8.5%), in Wales to £184,000 (10.7%), in Scotland to £163,000 (8.4%) and in Northern Ireland to £148,000 (5.3%).

Whereas what is officially described as “The Consumer Prices Index including owner occupiers’ housing costs (CPIH)” only adds 0.2% to CPI to read 0.9%. What machination is used to achieve that?

Private rental prices paid by tenants in the UK rose by 1.3% in the 12 months to January 2021, down from 1.4% in the 12 months to December 2020.

Actually claiming they are the rents paid in the last year is simply untrue as after a barrage of evasions it was finally admitted that the numbers for January for example are smoothed over 16 months. But the more important points are that 8.5% has become 1.3% as an actual price paid is replaced by one which does not exist as owners by definition do not pay rent. It is amazing how many are willing to support that and the intellectual ( I am being polite) contortions they are willing to make to do so.

Comment

There are clear signs of inflation in the offing which we can see both by commodity prices and by the official denials. There are also more than a few problems with the numbers right now.

for the January 2021 price collection (which took place on or around 12 January 2021), we collected a weighted total of 88.2% of comparable coverage collected before the first lockdown (excluding unavailable items).

That is not the fault of our statisticians but this bit is.

The basket is now a really serious problem in these statistics. We are buying completely different things. How can we compare prices sensibly? ( @neiljeffares)

The process for updating weights has been shown to be completely inadequate in a pandemic. I have no issue with the early stages as there was much which was uncertain then. Although to be fair they are now at least trying.

For 2021, we compare prices now with 2020 prices and 2020 spending patterns. We’ve made changes to the expenditure weights to account for spending in the pandemic during 2020. ( @jathers_ONS)

Also the idea that there is little or no inflation really rather crumbles with the approach taken in the GDP data.

Compared with the same quarter a year ago, the implied GDP deflator increased by 6.1%.

Care is needed as it measures inflation in a different area and is not for January, but you cannot get away for long with claiming it is effectively surging in two areas  id we include house prices but pretty much non-existent elsewhere.

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