The UK gets an inflation warning from producer prices (5.9%)

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by Shaun Richards

It was only last week we looked at some signs of future inflationary pressure from China as its producer price number rose to 4.4%. This morning we discovered what impact these pressures have had on the UK.

The annual rate of inflation for materials and fuels purchased by manufacturers (input prices) was 5.9% in March 2021, up from 3.3% in February 2021 . This is the fourth consecutive month the rate has been positive, following 10 consecutive months of negative annual inflation between February 2020 and November 2020.

The pattern is part of the story of the pandemic as we saw declines in demand driving lower prices and now the beginnings of recovery seeing higher ones. One point of note is that yesterday was the anniversary of the plunge in oil prices with futures on the West Texas Intermediate or WTI benchmark going as low as  minus 40 US Dollars. I shall return to that issue in a bit but the UK numbers have not reached April yet. We can see what has driven the move below.

Of the 10 product groups, six provided positive contributions to the input annual rate. The largest upward contribution came from metals and non-metallic minerals, which contributed 2.70 percentage points  and had positive annual price growth of 11.2% in March 2021. The last time the annual rate was higher was in April 2017 at 12.3%.

It is interesting that it had such a large move it managed to outshine the usual main player in the input prices section.

The second-largest upward contribution came from crude oil, which contributed 2.02 percentage points  and had positive annual price growth of 55.1% in March 2021. The last time the annual rate was higher was February 2017.

Much of this move is pandemic driven as highlighted below.

World Bank data show the barrel price of Brent crude oil as US $65 in March 2021, up from $62 in February 2021 (Figure 6). By contrast, the price per barrel was $33 in March 2020, down from $55 in February 2020.

The next area to see a push was chemicals which rose by 0.9% on the month and 4.9% on the year.The main piece of good news was that imported food got a little cheaper on both a monthly ( -0.2% inflation) and an annual basis ( -2.4%).

Bringing this together we see that more is on its way as this from Charlie Bilello shows.

Commodity prices over last year…

Lumber: +265%

WTI Crude: +210%

Gasoline: +182%

Brent Crude +163%

Heating Oil: +107%

Corn: +84%

Copper: +83%

Soybeans: +72%

Silver: +65%

Sugar: +59%

Cotton: +54%

Platinum: +52%

Natural Gas: +43%

Palladium: +32%

Wheat: +19%

Coffee: +13%

Gold: +3%

It makes me glad I gave up sugar in my tea,so I guess I should thank my dentist. Although I will have to wait for them to open to do it. Also those relying on Gold as an inflation hedge will be wondering what went wrong?

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In case you were wondering what was happening with lumber or if you prefer wood? CME Group explains.

Coupled with less timber availability, 2019 saw lumber prices so low that it cost sawmills more to produce and export boards than they could sell them for, which led to the closure of a number of sawmills.

You can guess what then took place.

Demand for lumber skyrocketed in the summer of 2020, bolstered mostly by demand for housing and DIY housing projects. The shutdowns that occurred as a result of the novel coronavirus meant people had nowhere to go and less places to spend their money, so they started to look for bigger homes or began to tackle home renovation projects.

We are by an unusual route back to house prices and the US statistics establishment must be high-fiving themselves as to the way they have avoided using them. First-Time buyers will be left wondering how houses are so expensive with so little inflation?

Output Producer Prices

It takes longer for the factors analysed above to be picked up here but as you can see from the numbers below it is starting.

The headline rate of output inflation for goods leaving the factory gate showed positive growth of 1.9% on the year to March 2021, up from positive growth of 0.9% in February 2021.

The Chain

The factors above are leading to price rises being faced by the consumer.

Procter & Gamble Co. this fall will start charging more for household staples from diapers to tampons, the latest and biggest consumer-products company to announce price increases.

The maker of Gillette razors and Tide detergent cited rising costs for raw materials, such as resin and pulp, and higher expenses to transport goods. ( Wall Street Journal)

This comes on the back of previous announcements.

Coca-Cola> will raise prices on its drinks to combat the impact of higher commodity costs, its CEO told CNBC on Monday.

The beverage company joins a number of other consumer giants, such as Kimberly-Clark and J.M. Smucker, in hiking prices. ( CNBC).

Whilst these are US developments I am sure the general trends will spread around the world.

House Prices

We got another reminder at 9:30 as to why HM Treasury and the Bank of England have gone to such extraordinary lengths to keep house prices out of any inflation measures.

UK average house prices increased by 8.6% over the year to February 2021, up from 8.0% in January 2021; this is the highest annual growth rate the UK has seen since October 2014.

The North-West seems to be leading the charge so maybe all that plugging of Manchester by the BBC has born fruit.

The North West was the English region to see the highest annual growth in average house prices (11.9%), while London saw the lowest (4.6%).

Of course there has been an extraordinary amount of house price friendly measures from the Bank of England ( lower interest-rates and QE bond buying) and the government ( suspension of Stamp Duty). Whilst the latter is on its way out it seems that they love a Queen sing-a-long.

(Don’t stop me now)
‘Cause I’m having a good time
(Don’t stop me now)
Yes, I’m havin’ a good time
I don’t want to stop at all

Only on Monday they had another chorus.

A new government-backed mortgage scheme to help people with 5% deposits get on to the housing ladder is available to lenders from today (19 April 2021).

First announced at the Budget, the scheme will help first time buyers or current homeowners secure a mortgage with just a 5% deposit to buy a house of up to £600,000 – providing an affordable route to home ownership for aspiring home-owners.

You have to laugh at the use of “affordable” because if houses were we would not require so much “Help” would we?

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There are signs of inflation around and let me add two other ones.

The annual rate for CPI excluding indirect taxes, CPIY, is 2.3%, up from 2.0% last month…………The annual rate for CPI at constant tax rates, CPI-CT, is 2.4%, up from 2.0% last month.

As you can see the tax cuts have reduced inflation because the headline CPI has risen as below.

The all items CPI annual rate is 0.7%, up from 0.4% in February.

The Bank of England and Adam Posen in particular used to be very keen on CPIY and other such measures but that was when they were convenient for their message. When they are signalling more inflationary pressure I expect the sound of silence.

Moving onto the issue of how we treat owner-occupied housing there is an obvious issue with CPI being at 0.7% and house prices at 8.6%! This goes further if we look at their claims that we can use Imputed Rents as a signal.

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

I wish those responsible for this could be made to sit in front of a panel of first-time buyers to explain why they need so much “Help” to buy houses when inflation is apparently so low. Also we get another reminder that for all the official mud thrown at the RPI it is doing a better job than its replacements.

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

Let me give Andy Verity of the BBC some credit as his Twitter feed suggests he is getting the issue.

Returning to the producer prices move some of it is a function of last year’s drop and there will be more of that in the April numbers. But some of it is not and as wages struggle to rise these days (yesterday’s average earnings figures are misleading as I explained then) any inflation is likely to reduce living-standards.


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