After some mostly positive releases for the UK economy we find ourselves facing again this morning the economic problem of our time which is inflation.
The Consumer Prices Index (CPI) rose by 9.4% in the 12 months to June 2022, up from 9.1% in May.On a monthly basis, CPI rose by 0.8% in June 2022, compared with a rise of 0.5% in June 2021.
So the inflation measure targeted by the Bank of England has risen from 120.8 in May to 121.8 in June. Meaning that it is now some 7.4% over the target or 6.4% over the level that means Governor Andrew Bailey has to write an explanatory letter to the Chancellor. Indeed with all the political changes we seem somewhat ironically to have inflation in the number of Chancellors as well.
Last night we heard from the Governor in his annual Mansion House speech and he got his official denial in early.
From the perspective of monetary policy, these times are the largest challenge to the monetary policy regime of inflation targeting that we have seen in the quarter century since the MPC was created in 1997.
That emphatically does not mean the regime has failed. Far from it. The regime was set up for times exactly like these.
I wonder if he is even convinced himself? The next bit is like something from Yes Minister.
Let me be quite clear, there are no ifs or buts in our commitment to the 2% inflation target. That’s our job, and that’s what we will do.
Only a few paragraphs later he completely contradicts himself.
But we recognise a trade-off in a situation of high inflation and weakening growth. In my view this trade-off explains why we have raised Bank Rate progressively since last December in increments of 0.25% after the first rise.
In fact his position later crumbles even further with this.
In simple terms this means that a 50 basis point increase will be among the choices on the table when we next meet. 50 basis points is not locked in, and anyone who predicts that is doing so based on their own view.
He seems confused on several fronts. Firstly he seems to think of a 0.5% increase as a big deal or something of a bazooka. If we look at the targeted inflation measure of 9.4% then a rise from 1.25% to 1.75% shrinks appreciably in scale. That is before we note the US Federal Reserve moving by 0.75% and the Bank of Canada. Even worse the timing coincided with the ECB flying a kite about a 0.5% rise tomorrow.
Returning to the inflation number itself this gives it some more perspective.
the June figure was the highest annual CPI inflation rate in the National Statistic series, which began in January 1997. Indicative modelled consumer price inflation estimates suggest that the CPI rate would last have been higher around 1982, where estimates range from nearly 11% in January down to approximately 6.5% in December.
Care is needed with the modeled numbers and some are on a different basis to the prices collected back then because CPI did not exist.
In terms of sectors then it is much more in goods than in services although the latter is rising too.
The CPI all goods index annual rate is 12.7%, up from 12.4% last month….The CPI all services index annual rate is 5.2%, up from 4.9% last month.
Further details are provided here.
The rise in the annual CPI rate into June 2022 was driven by upward contributions to change from 5 of the 12 divisions, with the largest contribution of 0.16 percentage points coming from transport. Within transport, the main upward effect of 0.29 percentage points came from motor fuels, partially offset by a downward contribution of 0.13 percentage points from second-hand cars.
The main point is that it was petrol and diesel fuel in the van which is hardly a surprise. The used-car bubble seems to have popped now.
What is coming next?
The situation here has got worse just when one might have thought we have had enough.
Producer input prices rose by 24.0% in the year to June 2022, up from 22.4% in the year to May 2022; this is the highest the rate has been since records began in January 1985.
Producer output (factory gate) prices rose by 16.5% in the year to June 2022, up from 15.8% in the year to May 2022; this is the highest the rate has been since September 1977.
We do at least get some relief from the monthly numbers.
On the month, the rate of input inflation was 1.8% in June 2022, down from 2.4% in May 2022 (Table 3). The monthly rate has slowed for the third consecutive month following a record high of 5.0% in March 2022.
Whilst the monthly rate of increase has indeed been declining in a welcome trend that has so far only taken us to a number (1.8%) which in isolation would be considered to be high and in fact very high.
I thought I would change tack this month and present things from the point of view of the measure targeted by the Bank of England. As you can see it is way over target and in response the Bank of England has managed a peashooter like response with Bank Rate at 1.25% compared to inflation at 9.4%. Should they increase again even by 0.5% ( to 1.75%) it will be less than the monthly rise in prices.which was 0.8%.
In terms of the trend we can hope for relief in some areas as Dr.Copper is now some 21% lower than a year ago. But it is also true that whilst we did see a fail in oil prices below US $100 Brent Crude is US $105 as I type this. The rise in the US Dollar has faded but again may be a head fake.
The problem with the numbers above is that they exclude owner-occupied housing which is a large part of many people’s spending. Why is that? You will get a clue from the actual numbers.
UK average house prices increased by 12.8% over the year to May 2022, up from 11.9% in April 2022.
The average UK house price was £283,000 in May 2022, which is £32,000 higher than this time last year.
We have had sustained double-digit increases for a while now whereas overall inflation has only recently reached that sort of level. So by excluding them HM Treasury and the Bank of England keep recorded inflation lower, often much lower. This is why I have supported this measure for so long.
The all items RPI annual rate is 11.8%, up from 11.7% last month.
There are many arguments for this but let me concentrate on one that it is our only measure which aims to be one for the cost of living. Much media and “expert” coverage ignores this as for example you will see many examples of the CPI measure being described as “inflation” and some as the cost of living as this below shows.
As we’ve been reporting, the UK inflation rate has hit 9.4% in the year to June, with prices rises at their fastest rate in 40 years.
Off the back of this and as part of its Counting the Cost of Living series, BBC News will be asking people from towns and cities around the UK how they are coping – and revisiting them over the coming months.
Returning to the house price issue this is how our establishment reflect the rising cost of owner-occupied housing in their CPIH measure.
Private rental prices paid by tenants in the UK rose by 3.0% in the 12 months to June 2022, up from 2.8% in the 12 months to May 2022.
If you are thinking that owner-occupiers do not pay rent you are correct of course. But economic theory says that it gets to the same answer as house prices which faces a reality of 3% being nowhere near 12.8%.
Switching to an international perspective we have June numbers as follows.
Euro area 8.6%
US of around 9.7% ( once adjusted on the same basis)