Mixed messages on deflationary/disinflationary pressures
November CPI inflation at 0.1% following October at -0.1% was in line exactly with the Bank of England forecast in their November Inflation Report. But it seems highly likely that their projected December figure of +0.4% will be wrong.
Global deflationary pressures are surely intensifying, given the resumed falls in oil and other commodity prices. These are seen coming through big time in the UK producer price figures, showing record falls in underlying input prices. On the other hand house price inflation across the UK is accelerating again.
The CPI release overall suggests a relaxation of deflationary pressures, with core inflation also rising to 1.2% from 1.1%. Across the 12 high-level published aggregates (‘divisions’) there is now quite a mixed story. Here I have averaged across months of the year, to get a feel for where disinflationary pressures are relaxing (boxed) and where they are intensifying. Though note just how low most of the actual inflation figures are: across October and November only education (student tuition) and communication show inflation of above 2%, three are between one 1% and 2%, four between 0% and 1%, and three categories are negative.
In terms of the latest month, the two stand-out pressures (at a more detailed level than on the above) were fuel pushing up (presumably because any price falls had not been passed to the consumer when the ONS took their measurements) and clothing and footwear pushing down (always erratic). The rest of the categories pretty much all show small upward movements between October and November.
On the other hand produce price figures show deflationary pressures intensifying. Oil prices are impacting here, with headline output figures showing a decline of -1.5 per cent on the year and input a decline of -13.1%. But on the basis of underlying figures (excluding food beverages, tobacco and petroleum, as with core figures for consumer inflation), while decline are less severe, they are more unprecedented. Underlying output inflation fell -1.5%, underlying input -8.3% – the latter figure according to the ONS ‘never lower’. The chart below shows the underlying figures, from the point data become available.
Underlying annual producer price inflation, per cent
Finally on housing, after a fairly sharp reduction in inflation from 10-12% in the middle of last year to 5-6% in the middle of this year, price inflation seems to have accelerated again. The headline figure showed inflation of 7% in October, up from 6.1% in September.
The story of rising asset prices against virtually no growth in consumer prices is no longer a new one. Of great interest next month will of course be the impact of fuel prices on consumer inflation. But into 2016 the questions must be about the real economy, not only domestically but globally. There are signs that economic growth has weakened a little, and only yesterday Minouche Shafik Deputy Governor of the Bank of England observed that wage inflation increases had reached a “plateau”. The world more generally is reeling from the impact of commodity price falls, and markets are taking fright at the prospect of the Federal Reserve raising interest rates for the first time since the crisis. From the point of view of the generalised suppression of demand under the fiscal consolidation policies pursued over much of the world for the past five years, these pressures are unsurprising . It is far from clear that the deflationary genie is back in the bottle.