This morning some chickens have come home to roost in the UK. Something that I have warning about since the Bank of England started to pump up the money supply is now really hitting both workers and consumers. I warned about the consequences back on the 29th of May last year.
As well as some hoped for economic growth there is a clear and present danger which is inflation. We seem likely to be singing along with BB King.
BB King sang this.
Hey, Mr. President
All your congressmen too
You got me frustrated
And I don’t know what to do
I’m trying to make a living
I can’t save a cent
It takes all of my money
Just to eat and pay my rent
I got the blues
Got those inflation blues
Let me give BB some extra credit as he gets to the heart of the argument by focusing on food and housing. Whereas if we switch to our central banking overlords they describe food inflation as non-core and go to enormous efforts to keep housing costs out of the inflation measures.
There will have been frowns all round at the Bank of England this morning as it saw this on its screens. After all it is supposed to target it at 2%.
The Consumer Prices Index (CPI) rose by 5.1% in the 12 months to November 2021, up from 4.2% in October……..On a monthly basis, CPI increased by 0.7% in November 2021, compared with a fall of 0.1% in November 2020.
As you can see one line of defence or “base effects” falls at the first hurdle as the monthly rise of 0.7% suggests an even faster annual rise.Let us look at what has been especially driving the move. One factor is hardly a surprise.
Within transport, the movements have mainly been caused by changes in the price of motor fuels. Motor fuels made a downward contribution to the 12-month rate between March 2020 and February 2021, before the contribution turned positive in March 2021 and subsequently increased to 0.58 percentage points in November 2021.
Average petrol prices stood at 145.8 pence per litre in November 2021, compared with 112.6 pence per litre a year earlier. The November 2021 price is the highest recorded…….The price of petrol rose by 7.2 pence per litre between October and November 2021, the largest monthly rise on record (since 1990).
The petrol crisis led eventually to higher fuel prices which have fed into the inflation numbers, We can stay with this area because the beat goes on for used or second-hand car prices.
Used car prices increased by 3.1% on the month to November 2021, leading to a cumulative increase of 31.3% since April 2021. By comparison, in 2020, used car prices fell by 0.4% on the month to November, but grew by 3.5% between April and November……….
The chart is simply extraordinary.
Recreation and culture saw rises too.
Within recreation and culture, the upward contributions came from a variety of classes in November, the largest from games, toys and hobbies.
As well as clothing.
Clothing and footwear also provided a large upward contribution (of 0.21 percentage points) to the change in the headline rate. Prices rose this year by 1.1% but fell a year ago by 2.6%.
There is a problem for the numbers above though as we note a different inflation measure the Retail Prices Index.
The all items RPI annual rate is 7.1%, up from 6.0% last month.
Actually the version of it that the Bank of England used to target was even higher.
The annual rate for RPIX, the all items RPI excluding mortgage interest payments (MIPs), is 7.2%, up from 6.1% last month.
That would be 7.2% compared to a target of 2.5% which would mean it was nearing treble the targeted rate.
If we now look at why the RPI is some 2% higher than the CPI there is the issue of owner-occupied housing. The CPI is simple on this as it ignores it. Quite extraordinary really when you note how much so many spend on this area. By contrast the RPI covers it by using depreciation ( essentially house prices).
Large upward effect. The smoothed house price index used to calculate this component rose this year by more than a year ago.
In fact this component rose by 1.3% in November alone. So the RPI is in fact in the game in terms of representing what is going on here.
UK average house prices increased by 10.2% over the year to October 2021, down from 12.3% in September 2021……..The average UK house price was £268,000 in October 2021, which is £24,000 higher than this time last year.
So there has been quite a push here as we note that September was revised up which makes the monthly change harder to interpret.
This trend continued into 2021; the UK average house price for October 2021 was £268,000, down from the record level of £271,000 in September 2021.
The monthly changes are difficult to interpret as we see sometimes quite wild swings but as to the rises over the past year it looks as though we can be increasingly sure.
The total number of processed transactions feeding into this month’s release (including those from previous months, which are incorporated in line with our revisions policy) is the highest number since before the coronavirus pandemic started.
We can contrast this effort with what the Office for National Statistics has tried to promote.
The Consumer Prices Index including owner occupiers’ housing costs (CPIH) rose by 4.6% in the 12 months to November 2021, up from 3.8% in the 12 months to October.
This variant of CPI has responded to the surge in house prices and hence many housing costs by managing to reduce the annual inflation rate by 0.5% compared to CPI. Putting it another way it seems to have trouble finding any.
The OOH component annual rate is 2.1%, up from 1.9% last month. ( OOH = Owner Occupied Housing costs)
As you can see their use of fantasy rents ( as by definition home owners do not pay rent) has chopped around 8% off this area compared to house prices. This is why it is such a woeful measure although to be fair many places have the sense to ignore it.
If we try to gauge what is on the inflation horizon I am afraid there is little relief in sight.
The annual rate of output inflation increased by 0.5 percentage points from 8.6% in October 2021 to 9.1% in November 2021; this is the highest the annual rate of output inflation has been since September 2008.
This was repeated by the input category.
The annual input inflation rate increased by 0.6 percentage points from 13.7% in October 2021 to 14.3% in November 2021. This is the highest the rate has been since August 2008.
There was maybe a little relief in the monthly changes though.
On the month, the rate of output inflation was 0.9% in November 2021, down from 1.5% in October 2021……On the month, the rate of input inflation was 1.0% in November 2021, down from 1.6% in October 2021.
The saddest part of this is that it is the poorest who will be affected most by the rise in inflation. They will have the least ability to pay out more for higher energy and food costs. We see that even if you believe the latest wages figures from yesterday then real wages are falling. I fear they are falling more than it shows. Those on fixed incomes are punished heavily too. This is one of the reasons why I am a fan of setting policy to control inflation because its consequences affect those least able to deal with it the most. As I so often point out the rich have been compensated by higher asset prices.
Next comes the issue of the way that official statistics have been changed to avoid recording as much as the inflation rise as possible. First this came through “forgetting” to put owner-occupied housing in the CPI measure. Next iy came by claiming to include it but instead using fantasy rents to manufacture an even lower number.
We have seen a campaign against the Retail Prices Index or RPI but this phase has shown its strengths. For example in the arena of housing inflation. No measure is perfect butt let me take you back to the debate and let is remind ourselves that the arguments were it was 0.5% too high.Well at 6.6% it would be our best inflation measure I think. Another way of improving things would be to produce it with and without fashion clothing which is a contentious and difficult area due to the price swings. Why has the establishment spent more than a decade avoiding this?
Also the Bank of England votes on interest-rates tonight. They will be reviewing a period of failure. But also take care as from then some may be more equal than others.