This morning has been one for team inflation. As ever the situation was one where the expectations were caught out although not if you had listened to this week’s podcast. So let us get straight to it.
The Consumer Prices Index (CPI) rose by 3.2% in the 12 months to August 2021, up from 2.0% in July: the increase of 1.2 percentage points is the largest ever recorded increase in the CPI National Statistic 12-month inflation rate series, which began in January 1997; this is likely to be a temporary change.
The first point of note is that this is quite a surge which is a record for the time that the Bank of England has been in charge of targeting inflation which began in 1997. This is far from a record if we look further back in time with the Retail Prices Index having been above 20% and seeing some real surges. But for now we have an issue and staying with the Bank of England we are now in the zone where it will have to write a letter to the Chancellor Rishi Sunak.
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…….I shall expect a letter within seven days of the publication of the data.
Framing the letter will not be easy because I doubt a “it was us that did it” would be entirely welcome. But the fiscal stimulus combined with a 0.1% Bank Rate and the other monetary easing such as QE bond purchases have contributed. This is important because they may be tempted to forget that this consequent inflation makes workers and consumers poorer when they tell us we are better off. Also this afternoon the Bank of England will buy another £1.15 billion of UK bonds to raise inflation which is awkward to say the least when it is well above target.
Also it looks like someone from the Bank of England is on temporary secondment at the ONS.
this is likely to be a temporary change.
The Movers and Shakers
They are described thus.
Restaurants and hotels, recreation and culture, and food and non-alcoholic beverages made the largest upward contributions
On a monthly basis food prices rose by 1% in August and drinks rose by 2% so we see a suggestion that the supply issues have raised prices. The recreation category rose by 1.2% driven by a move of 2,2% in the category that includes gardens and pets. This may be something of a shambles as those who recall how the lock down surge in puppy prices was ignored ( too difficult to measure apparently although everyone else seemed to notice it) in favour of hamster and gerbils. Are they now rising in price?
The Restaurants and Hotels category rose by 1.3% meaning that if we put in the end of the impact of Eat Out to Help Out this happened.
The contribution from restaurants and hotels increased to 0.65 percentage points in August 2021. This is the largest contribution that this division has ever made to the CPIH annual rate.
Actually the furniture section rose by 1.3% on the month as well but for some reason they do not mention this.
Housing Costs
These continue to be quite a challenge to the credibility of the UK inflation structure. Most people will be aware via the news and media that house prices have been rising across the world as well as in the UK. The problem is that CPI inflation ignores owner-occupied housing costs and gets to 3.2%. So let us now use the measure which in theory includes them.
The Consumer Prices Index including owner occupiers’ housing costs (CPIH) rose by 3.0% in the 12 months to August 2021,
Yes the surging housing costs have in fact REDUCED inflation according to the official measure. This is because they use this.
Private rental prices paid by tenants in the UK rose by 1.3% in the 12 months to August 2021, unchanged since July 2021.
This is a problem on two fronts. The simplest is that Zoopla recently reported rental inflation of 2.1% so the official numbers look understated and remember they have all been recalculated once before ( the official term was discontinuity). Also they think growth is picking up.
Average rents in Manchester Local Authority have risen by 1.4% in the last three months alone. Over the same time period rents in Birmingham LA are up 2.5%, Leeds up 1.9% and Edinburgh up 2.2%.
Next comes the fact that rents are also used for those who are owners and thus do not pay rent. So they use 1.2% as a proxy for this.
UK average house prices increased by 8.0% over the year to July 2021, down from 13.1% in June 2021….The average UK house price was £256,000 in July 2021, which is £19,000 higher than this time last year, following the record high of £265,000 in June 2021.
The house price series is being affected by swings driven by the Stamp Duty changes but as you can see they have been surging which has been completely missed by the official series.
Retail Prices Index or RPI
I have been making the case for it for at least a decade now facing down the official propaganda. It is not perfect ( no inflation measure is) but right now via its depreciation component it is covering the house price boom.
The all items RPI annual rate is 4.8%, up from 3.8% last month.
So as a measure it is better than the CPI one which replaced it and it is also better than the “housing costs” version called CPIH. Right now there is an extraordinary gap between the two and let me remind you that one has actual costs and the other has fantasy ones.
The difference between the CPIH and RPI unrounded annual rates in August 2021 was -1.80 percentage points, widening from -1.74 percentage points in July.
The Trend
The producer price series gives us a guide in terms of industrial costs.
The headline rate of output prices showed positive growth of 5.9% on the year to August 2021, up from 5.1% in July 2021.
The headline rate of input prices showed positive growth of 11.0% on the year to August 2021, up from 10.4% in July 2021.
So the annual rate continues to rise and the output monthly push was similar.
On the month, the rate of output inflation was 0.7% in August 2021, down from 0.8% in July 2021……
Although we finally got a bit of relief on the input side which slowed.
On the month, the rate of input inflation was 0.4% in August 2021, down from 1.3% in July 2021
Comment
The issue of inflation is back on the table and let break down what I think it really is and what happens next. We can put house prices into CPI and if you do so at the weights used in CPIH you would get a number over 4% but in reality they would change them so we would get roughly 3.7%. The dispute over the RPI has been over the formula effect but in fact it uses the Carli formula less than many think these days but let me give some ground and say 4.5% there. But if we start taking an average we end up with a number over 4% as opposed to the official 3%. That is a big deal compared to the official 3% and you compound that over time.
For example let me bring in another factor as with 4% inflation real wages with a few exceptions are probably still falling as opposed to the official number below.
In real terms (adjusted for inflation), total and regular pay are now growing at a faster rate than inflation, at 6.0% for total pay and 4.5% for regular pay.
That is an embarrassing level of error.
Next comes the trend which according to the ONS is down due to temporary factors. Let me give you a factor I hope is temporary going the other way.
UK, France power cable to be halted until Oct 13th. ( @MichaelHewson_CMC )
Regular readers will be aware of the UK energy crisis of this summer which has by contrast to a cable fire look rather permanent. How is that going?
UK natural gas wholesale prices are ***jumping ~20% today*** to fresh record high as trades brace for more UK gas-fired power station demand after the loss of a key electricity interconnector between UK and France (among other issues) ( @JavierBlas )
There is already a rise in domestic energy costs baked in for the beginning of next month and another looks to be on its way……..
Oh and we were told that that domestic energy costs fell by 0.1% in August.
Finally the cost of UK inflation linked bonds ( Gilts) is about to surge with the RPI at 4.8% so UK debt costs will be on the rise.