As the Office for National Statistics has reported this morning, inflation fell in June, as expected, but the fall remains smaller than expected.
Their summary was:
- The Consumer Prices Index (CPI) rose by 7.9% in the 12 months to June 2023, down from 8.7% in May.
- On a monthly basis, CPI rose by 0.1% in June 2023, compared with a rise of 0.8% in June 2022.
- Falling prices for motor fuel led to the largest downward contribution to the monthly change in CPIH and CPI annual rates, while food prices rose in June 2023 but by less than in June 2022, also leading to an easing in the rates.
- There were no large offsetting upward contributions to the change in the rate.
- Core CPI (excluding energy, food, alcohol and tobacco) rose by 6.9% in the 12 months to June 2023, down from 7.1% in May, which was the highes rate since March 1992; the CPI goods annual rate slowed from 9.7% to 8.5%, while the CPI services annual rate eased from 7.4% to 7.2%.
As they note, most sectors made a contribution to the fall in inflation or were stagnant. Transport costs are now in negative territory i.e. they are deflating:
Food clearly remains problematic. The only possible blame is Brexit:
What to make of all this?
The Bank of England will highlight this comment:
- On a monthly basis, CPI rose by 0.1% in June 2023, compared with a rise of 0.8% in June 2022.
To do so would, however, be absurd for three reasons.
Firstly, inflation is an annual and not a monthly measure.
Second, 0.1% is within the range of statistical error.
Third, annually the rates are declining.
There can, on this basis, be no justification for an increase in interest rates when the Bank of England monetary policy committee next meet in early August. There should instead be no change, or even a fall in rates as it is now obvious that the heat is going out of UK inflation.
But I am not optimistic: the Bank of England does not have a mission to control inflation. It thinks it has a mission to maintain high interest rates and any excuse will do for it in pursuit of that goal.
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The worlds second biggest economy is teetering on the edge of deflation.
To much property and a population forecast to decline rapidly, not to mention US reshoring industry (or at least closer in Mexico) and throttling certain tech, the problem isnt getting better any time soon.
Japan still battles deflation 30 years on after its property crash.
Global implications? Commodity Prices plunge?
Washington Post article
https://www.washingtonpost.com/business/2023/07/17/why-china-s-economy-is-slowing-and-why-it-matters/5ee42f6e-2519-11ee-9201-826e5bb78fa1_story.html
Hi Richard.
What is the BoE’s reason(s) for its pursuit of high interest rates?
Thanks
They are, in my opinion, seeking to restore the interests of wealth or capital
“ They are, in my opinion, seeking to restore the interests of wealth or capital”
How can this be? When interest rates rise all the assets wealthy own fall in value, namely equities, bonds and property. I think QE and the suppression of interest rates created mass inequity though inflating these assets. The reversal of interest rates across the curve is partially eliminating this.
Ultimately inc ome from capital is the aim – and interest has traditionally provided it to the Emglish wealth classes
That is why I think they are doing this
The annual rate of inflation, measured over a year is a lagging indicator. The lag is 6 months. So today’s annual inflation figures provide an estimate of inflation 6 months ago rather than today.
It is clear from the data that today’s inflation, as opposed that 6 months ago, is negative. We’re currently in deflation, even if prices are higher than a year ago.
So, of course, the BoE should reduce rates. But, as you say, they will increase them instead.
As I have said before, the current high base rate is not sustainable, and so will not be sustained.
So what will happen? Absent further external shocks (no more wars please), the current deflation will continue and the CPI will follow with a six month lag. Around the end of the year annual inflation will be low. The government will have met their commitment to halving inflation, although they have taken no active steps to do so. GDP growth will be low, or perhaps the economy may be contracting. The BoE will then have to rapidly back track on interest rates and restore them to a sustainable rate near zero (1 or 2%). Since interest rates are themselves responsible for some of the inflation, as you have pointed out, and which is why it hasn’t declined faster, inflation will decrease further ( positive feedback, or pro cyclical).
By early next year the economic environment will look very different, with low interest rates and an incipient, or actual, recession.
But huge damage will have been done by the insane policies of the BoE and the government.
Perhaps one lesson for economists to learn is the effects of lags in a dynamic feedback system. This is something well known and understood by electronic engineers and control engineers for many decades (else amplifiers would howl round and chemical plants would explode). Please, please, will the establishment institutions stop implementing damaging pro-cyclical, positive feedback policies. It is these that are causing large, damaging, swings in the economy.
I am sorry to say there is much to disagree with there
Only fuel prices are falling right now – we ate not seeing widespread deflation
And your lag factor is wrong too
I think you need to do some rethinking
Please help me out with re-thinking.
Why do you think my lag factor is wrong?
The way I see it is that instantaneous inflation, the differential of prices w.r.t. time, is a property of the economy. But we can’t measure instantaneous inflation directly. What we do is use an estimator. Typically we average over the preceding year. That is, we use a “top hat” finite impulse response filter. And that filter has a lag (group delay) of 6 months (at, and around, zero frequency). What we would ideally like to do is to average 6 months before and 6 months after today’s date but, of course, we don’t have future values for inflation.
Paul Krugman has discussed this at some length in his NY Times column. Whilst I don’t always agree with him, I think he is right in this instance. He discusses how the contributions of rental prices, in the US of course, exhibit a long lag and so distort the current inflation figures. His preference is for something he calls “supercore inflation” which tries to minimise the lag. Whilst one might reasonably argue with his choice of inflation metric, clearly there is wider concern about the lag inherent in our annual measures.
Perhaps it is just that we have a slightly different definition of inflation? Maybe your definition is the change in prices over the past year. In that case, by definition, there is no lag. I’m discussing instantaneous (current) inflation. Maybe that’s where we differ?
Happy to hear your perspective 🙂
Of course there are some long lags – and they will continue
But the ONS dayta does provide a one month view as well
Aren’t you ignoring that?
We could, of course, use one month statistics. But they are notoriously noisy.
I must admit to making a mistake. I erroneously thought that a negative contribution to inflation, from the figures in your post, implied a price reduction. They don’t, of course, only that the rate of increase is less than last year. Sorry for that error.
My point was that there are long lags in the system, both in measuring inflation and in the response to increases in interest rates. It seems to me that these lag are not given enough consideration. This is certainly the case with BoE base rates which take up to 18 months to feed through.
Thanks for your post.
We agree on Karachi some degree
It is why the BoE need do nothing now
I’d quite forgotten this, but Helen Thompson reminded me (link below).
In the early 2010s the hike in the oil price – which began with a massive spike in 2008 – was, unsurprisingly, causing inflation (5% or so). Osborne, while publicly maintaining that 2% was the right target, waived that temporarily and the BOE did not raise interest rates. In 2012 he then pumped £50 billion into the economy via QE.
What a stark contrast to today!
https://podcasts.apple.com/au/podcast/these-times/id1685475850?i=1000618418049
Also https://www.reuters.com/article/uk-britain-osborne-boe-idUKTRE71J18O20110220 and https://www.reuters.com/article/uk-britain-boe-osborne-idUKLNE81802F20120209
The two key numbers here are that CPI rose just 0.1% in June (mainly due to falling transport costs) and core CPI (which excludes volatile fuel/food) rose 0.2%.
So, on a “one month view” inflation is roughly “on target”. Now, one month is not a trend but it does but the current base rate (5%) in some sort of perspective. Real rates are 3%.
Agreed
I’m more concerned that the belief is still that the fall will return prices to what they were and they will not.
True
Meanwhile
https://www.cityam.com/bank-of-england-dishes-out-25m-in-bonuses-despite-andrew-bailey-demanding-wage-restraint/
“the fall remains smaller than expected”.
It was being reported on BBC Radio Scotland News that the fall was 0.2% better than expected. I do not know the source (perhaps I missed it). I have not tracked all the forecasts, so cannot comment further.
It is smaller than I expected given the pattern of data
Inflation statistics are based on averages. Many years ago when negotiating my employer we would argue inflation is higher for those on low pay. Thats is because less well off folk are forced to buy the basics which always seem to rise in price first. Yesterday ,I did my usual weekly shop at Aldi. I buy pore or less the same items each week. What I found was my bill was up on last week . Only by a relatively small amount but an increase nevertheless. Would it be possible for statistics to be produced showing the different effects?
This is what the food data is produced to show
Food prices are still rising faster than anything else