The ONS has published new inflation data today. The news is not good, although there is no surprise about that. This is the summary chart:
The Consumer Prices Index (CPI) is the headline rate everyone but the government refers to. The Office for National Statistics, acting as the government's disinformation department, prefers CPIH, which adds in literally made up (I kid you not) owner-occupier's supposed housing costs, and tends to be lower - as the chart shows.
The CPIH breakdown over time is as follows:
The change in the month was:
Household energy caused the change. There is no surprise there.
Four things can be done about this, all of which make sense when the goal of the government is to keep inflation low and stop it being embedded in the economy.
First, taxes and duties included in domestic energy costs can be cut so that the sum collected is a fixed sum equivalent to that paid in April 2021, and not a variable as now. There is no reason why the government should profit from what is happening in energy markets now, but it is and is revelling in doing so as this makes it easier to balance its books. This has to stop.
Second, electricity can be priced on the average cost of production plus a fair profit margin rather than on the basis of the marginal cost of the most expensive form of production, as used now, which seriously hikes prices.
Third, we could have a windfall tax, but they have voted against that.
Fourth, we need to increase benefits, pensions and low pay now, but they are vehemently opposed to that.
So, this inflation is by choice. It is not necessary at the rate it is being suffered at. Nor is the suffering resulting from it necessary. But the government seemingly wants both the profiteering (including by itself) and the suffering.
No wonder people are angry.
And no wonder that I have seen reports that banks are preparing for civil unrest this summer.
You can't force a population to suffer without good reason and not expect a reaction.
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https://bylinetimes.com/2022/05/17/global-banks-privately-prepare-for-dangerous-levels-of-imminent-civil-unrest-in-western-homelands/
You dont get and stay rich unless you are prepared
Very good article. Thanks for posting. It does not discuss “the trigger” & I’d suggest this is likely to be a very long, very hot summer. In north west Europe there is already reduced water levels & these are expected to get worse as summer progresses. In turn this could lead to crop failures making an already bad situation worse. Most substantive rioting in the UK has taken place in the summer. It will be interesting to see what happens this year.
The last para of the article reflects many of Richards posts – those in power are clueless – they have no idea what to do and stick with systems/policies that demonstrably fail.
One example is electricity market regulation. The link is to my latest on the subject (& which reflects the paucity of institutional “thinking” (ha!).)
https://www.euractiv.com/section/electricity/opinion/acers-misguided-conclusions-on-wholesale-eu-electricity-markets/
Thanks Mike
THE question is this: If Government can’t do any of this for its people, then what the hell does it exist for, given that we vote for it?
Your list is a reasonable one.
“Second, electricity can be priced on the average cost of production plus a fair profit margin rather than on the basis of the marginal cost of the most expensive form of production, as used now, which seriously hikes prices.”
How would this work?
Basic economics (and common sense) tells us that if you force companies to sell at an average price, a lot of companies would now be producing energy at a loss.
Which means they would stop producing energy and the effect would be that the average price goes up.
Doesn’t sound very sensible.
Ordinary profit is treated as a cost
This is how regulation works
That’s not an answer and you know it. I think you are trying to avoid my question.
If you force companies to sell at a loss they are likely to either stop producing or go bankrupt.
Both of which will reduce the supply of what is being produced.
Now if that production is energy, which is in short supply, the price of that will go up. Certainly average prices will.
So rather than reducing prices, it will increase them.
Sounds like you just thought up your cunning plan Baldrick style.
That was an answer and I know it
It’s how regulated markets work
But you didn’t get that far in your Neoliberal Economics for Dummies book, I guess
No, that isn’t an answer and isn’t how regulated markets work.
You are saying that you should take the cost for each producer and average it, then force them to sell at that price. Which means some producers will be selling at a loss, so will stop producing.
Mike Parr is making slightly more sense, but he isn’t talking about averaging. He is just talking about fixed margins, which is very different. Otherwise he gets back to your ridiculous averaging position.
Now, it doesn’t take a genius to work out what would happen if half of producers are forced to sell at a loss. They either won’t produce or will sell but not to the domestic market. You can regulate for an average price, but you can’t force people to participate in that market.
Clearly though, you are hardly a genius.
Here’s one for you as well Mike – if you want to lower energy prices, why not cut the massive subsidies renewables are getting? After all Richard Murphy says “Those green programmes existed and were viable before this profiteering happened. Those programmes can pass all the required hurdle interest rates to ensure rational investment at rates of return sufficient to keep shareholders happy using readily available borrowed funds.” so those subsidies are not needed.
I did not say that
Read what Mike Parr said
I said the regulator should price at the average price for the basket of energy produced rather than price the whole bundle at highest marginal cost including margin
I’ll leave Mike to laugh at you on renewables
“I said the regulator should price at the average price for the basket of energy produced rather than price the whole bundle at highest marginal cost including margin”
Firstly, on the averaging side this is exactly the same as what you have already said. Take the average price. Which means those producing at above the average price will lose money and stop producing, or sell elsewhere. Meaning prices will go up.
Oh, and not to forget. How are you going to work out that average price in a realtime basis without a market? Because that’s how every production works – costs vary all the time, as do sold prices.
Secondly, you have made the assumption that all energy is being sold at the highest marginal cost including margin. This is simply not true. A large number of factors go into the price, and often market prices are lower than the fixed cost of generation and supply.
Happy to ask Mike about the profit margins of renewables, but Ofgem (the regulator) seems to think that they have the highest pure profit margins by far.
https://www.ofgem.gov.uk/energy-data-and-research/data-portal/wholesale-market-indicators
So why not remove the subsidies for them? If you want energy prices to drop, you should be targeting the producers with the highest profit margins surely?
Bob
I wonder, did you ever find your teachers despaired of your questions at school? I am can imagine so
The regulator would not pay each producer the same price. They would pay them their cost of production and then sell on at the average cost of the bundle put together each half hour. And the system exist to do that
Of course right now renewables have a high margin – they are being paid the price for producing with gas when they are not doing so. But that’s not their fault – it is the regulators. That is the problem I am addressing, but which you are too daft to notice
I suggest you don’t call again.
Richard
Well, at least my teachers weren’t fraudulently claiming to be economic experts and Professors.
ED NOTE: THE REST OF THIS COMMENT HAS BEEN DELETED
Bob
If you go to the University of Sheffield website you will find I am a professor
That’s how you become one: a university appoints you
If you can’t work that out you really don’t belong here. I was right to presume you a troll
Richard
Richard,
The University of Sheffield state you are a Professor of Practice. In accounting, not economics.
To be a Professor you must hold tenure as well as post-graduate qualifications. None of which you have.
Professor of practice is an honorific, but does not make you a Professor. In reality it tends to be given to part-time lecturers from outside a University, and in pay and seniority terms is typically between lecturer and senior lecturer.
I wouldn’t try claiming you are a full Professor. It really does look a bit silly when your title clearly says “of Practice”, you hold no post-grad qualifications, no tenure and are clearly not full time staff at Sheffield (by your own admission).
What’s really bizarre is that you write this stuff when it’s entirely wrong – literally, all of it
You must be very sad
https://www.sheffield.ac.uk/management/people/academic-staff/richard-murphy
I assume this is you.
It clearly states you are a Professor of Accounting practice.
It also states that you have no post-grad qualifications. Which by default rules out you being a Professor, given that is a requirement in UK universities.
I am also assuming you do not have tenure and can see no assigned teaching roles or modules.
Which is surprising given that most Professors must gain extensive experience in both research and teaching to earn a Professorship, typically through working as a researcher/lecturer in a university or other academic setting. You don’t have this experience, having principally been a blogger and self-appointed tax expert and campaigner.
I find it remarkable that you and only you have managed to leapfrog the whole long and arduous process and gone from nothing to Professor, skipping every step along the way.
I am happy to check these details with the University itself or through UCU and verify your standing.
If the above is all true (and I would bet it is) then you would be the first and only non-tenured Professor with no Masters, PhD or equivalent in the UK. Given that some post-grad academic study is mandatory for a Professorship. You would also be the only full Professor in the UK to be termed a Professor of Practice.
Nobody in academia would claim that a Professor of Practice and a full Professorship are equivalent. Nobody.
That you do is frankly a reflection on yourself.
You must be very sad.
It is their website
They wrote it
Note the title they have given me
It is ‘Professor’
Why ‘of practice’? Because unlike most U.K. professors of accounting I have been, and am in practice. I hold an ICAEW practicing certificate since 1985 – which is why it was thought to be an appropriate title
And again, unlike most accounting profs I am a qualified accountant
But please feel free to ask them. They’ll tell you I am a full professor on full professorial (pro rata) salary
Then post your full apology, including an apology for the absurd claims about tenure (we have no such thing) or the required qualifications to be a prof
And until then, I suggest you stop wasting my time
I will ensure that by deleting your comments until the apology arrives
I just checked. Tenure ceased in the U.K. in 1988. That sure as check leaves your argument in trouble
“How would this work” – Good question.
The cost of electricity (known as the Levelised Cost of Electtricity – which includes funding costs and margin) from every renewable project in the Uk is known & the output is metered in real time.
The cost of fossil fuel production is known & in the case of gas & combined cycle gas turbines is cost of gas x 2 plus carbon. (and is metered in real time)
Nuclear – known. etc.
Said costs will include margins.
Mash it all together and you get an average price. This is nothing to do with “forcing companies to sell at an average price” & everything to do with paying companies their real costs of production plus a margin. One thing power companies love is predictability – they like things to be steady and stable. That is what average pricing delivers.
Common sense really. 🙂
(oh & for the avoidance of doubt – I work in the power sector – renewables – the above in not an opinion it is a reality).
Thanks Mike
In response to this from Bob: ………” if you want to lower energy prices, why not cut the massive subsidies renewables are getting? After all Richard Murphy says “Those green programmes existed and were viable before this profiteering happened. Those programmes can pass all the required hurdle interest rates to ensure rational investment at rates of return sufficient to keep shareholders happy using readily available borrowed funds.” so those subsidies are not needed.”…………
Renewable projects have been around for +/- 22 years. Most subsidy programmes run for anything between 10 and 20 years – Uk usually favour 15. The Cam-moron gov banned on-shore wind – but kept off-shore. By about 2019, most NEW off-shore wind projects were at parity with Uk wholesale prices = +/- no subsidy. However, projects commission pre-2019 (PV, on-shore wind pre-2016 and off-shore) were done so under various subsidy regimes – basically contracts between Uk gov and companies. Although Mendacious Fatberg the Uk PM seems to favour tearing up agreements with e.g. the EU – if the UK gov tried to do the same with respect to historic renewables the court cases would be “interesting”.
As of right now, on-shore & off-shore wind and PV @ utility scale can more or less stand on their own two commercial feet. That said, the cost of debt is going up, as are the cost of materials. So things might change. However, whilst you may feel that historic subsidies could be/should be reduced, my suggestion is to turn your attention to another element in your bil: network charges (circa 25 – 30% of your bill) – think of them as a form of extortion given that the network for the most part is fully depreciated.
Thanks
The ONS also publishes an RPI number which comes in at 11.1%. Housing, taxes and energy are biggies.
The way to bring prices down in a way that meaningfully affects the index number is more permits for housing to go upwards and outwards, and more permits for energy. And yet . . . no-one wants to talk about putting onshore wind turbines in the places that they will be most productive which is National Parks, yet the same people insist that onshore wind is the cheapest energy we can get now.
Richard, am I right in thinking inflation doesn’t destroy wealth directly, it just moves it?
Yes
There is some evidence that the majority of the inflation is caused by increased corporate profits both in the US and UK. The inflation is not driven by workers pay. Capital is having a field day.
No doubt you and many of your readers have already seen Marina Hyde’s marvelous – but oh so accurate – demolition of the Tory response to the cost of living crisis, Richard. If not it’s here and should not be missed.
https://www.theguardian.com/commentisfree/2022/may/17/martin-lewis-queue-tory-mps-solve-cost-of-living-crisis
I agree with her
And have total sympathy with Martin Lewis getting angry
I am on Radio 2 at 12 noon today with the IEA – and will need to stay calm
“Electricity can be priced on the average cost of production plus a fair profit margin”. It would be good if that would work, but a few weeks ago when I commented suggesting a system that specified a fair profit as a percentage of turnover you said it wouldn’t be viable. Is there some accountancy issue with such an approach?
What is infuriating about the current situation is that you don’t even have to argue about the function of taxation; when one part of the population (the less affluent end) finds their living costs impossibly squeezed through no fault of their own, while another group (company executives and share owners, so a more wealthy group) are suddenly doing rather well for reasons they can’t claim any credit for, there ought to be a fiscally neutral solution that transfers some of those impacts to soften the blow on those that most feel it.
Getting money to those who would spend it but can’t currently would presumably reduce the risk of recession as well.
I suspect there was more to my past comment than you imply
“Electricity can be priced on the average cost of production plus a fair profit margin”.
Although a socialist, I recognise the value that markets & the possibiliteis for price discovery & price optimisation that they can deliver. Taking the UK’s off-shore wind regime or indeed, the way Spain develops on-shore wind and utlility-scale solar – both countries use auctions to define “the …………cost of production plus a fair profit margin”. This sorts out the sheep from the non-sheep and with regular auctions also allows tech developments and cost reductions to be incorporated – via the market mech’ of auctions.
The auction strike price then defines what the owners of the renewable asset get paid over some period of time – usually between 10 and 15 years. This price incorporates: capital costs, financing costs and profit. Keen pricing is guaranteed because most auctions (both Spain and Uk) tend to be somewhat oversubscribed. What I have stated so far are matters of fact – not opinion.
The average cost of production for the total generation “parc” is then the aggregate of the cost of production x output for a given generator over e.g. 1 hour divided by the total production in that hour for all generators. You will notice in all this that we don’t need concepts such as “fair profit margin” (who defines that?) – instead we have sharp elbows amongst developers at the time of the auction. I trust “sharp elbows” (and, frankly, greed) to deliver the a price optimum & thus profit optimum.
Thanks
When Liz Truss was asked on Radio 4 Today programme about how can we reduce domestic energy bills, after a lot of waffle all she could come up with was increase investment in nuclear power! Doesnt she know that nuclear generation is the most expensive form and that it will take at least 10 years to come on stream, let alone the impossibility of dealing with the mounting quantities of nuclear waste. Rachel Reeves when asked the same question was no better, though she did mention windfall tax but her main argument was to increase economic growth at all costs, never mind the environmental consequences.
Both fairly desperate
Both clearly inadequate.
The economic stupidity and incompetence of both parties is incredible. Having said that though, the Tories are much, much worse.
“Doesnt she know” …..you could have stopped there Bill.
I’m afraid Lisa Nandy, Shadow Secretary of State for Levelling Up, Housing and Communities (of whom I confess I know little), sounds deeply confused on economics and central banking, given her muddled, muddy performance on C4 News tonight. Is that really the best Labour can make of this crisis?
If you read it rather than watched it, and removed the routine anti-Government flourishes, this position could almost have been spoken by a soft-right, Conservative politician, hazily uninformed about economics.
I agree
It was a disappointing performance
I also heard someone on Today program from Labour who at least talked about the importance of Green investment and when harried somewhat by the interviewer for where the money was coming from ( the usual Thatcher govt is like house metaphors ) she surprised me by talking about the importance of Govt investment and avoided saying she would “borrow” which is what the establishment wants to hear. Of course as we all know, don’t we, govts don’t depend on taxpayers to invest in an intelligent way
Nigel
the gobernment has rejected a call for a windfall tax on energy profits. In the current edition of the Eye:Shell promises £20 billion investment over 10 years in low carbon AND £21 billion in divis over 1 and quarter years.Vide BG also