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Insights into UK manufacturing

CPI falls back down to 1.6%

Felicity Burch August 19, 2014 11:07

Statistics released this morning confirmed that last month’s increase in CPI to 1.9% was a blip rather than a trend, as the inflation rate fell back down to 1.6% in the year to July 2014. CPI inflation has now been below the Bank of England’s target rate of 2.0% for seven months. 

  • Looking at what’s happened over the month, the largest contribution to the fall in the inflation rate was clothing and footwear, where prices fell 5.7% between June and July, a larger-than-normal fall for this time of year, due to later timing of summer sales.  Other downward contributions to inflation came from alcohol and tobacco; miscellaneous goods and services (particularly financial services); and food and non-alcoholic beverages.
  • There was some upward pressure on inflation from transport prices, particularly the price of second-hand cars and sea transport.

As we reported last month, a range of factors should continue to keep inflation subdued, including the stronger pound; limited inflationary pressure from commodities; and spare capacity, which is likely to continue to bear down on margins and wages.

The strong pound has certainly had a bearing on input prices for manufacturers, as today’s producer price figures highlight. The overall price of inputs bought by UK manufacturers for processing fell 7.3% in the year to July, linked to a falling prices for crude oil and imported materials. The only area where input prices increased was home-produced materials, with prices of some construction products rising, reflecting capacity constraints in that sector.


The falls in input prices have also fed through to output prices: the output price index for goods produced by UK manufacturers (factory gate prices) fell 0.1% in the year to July.

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Inflation — Key points

Neil Prothero June 17, 2014 10:51

Recent comments by the Governor of the Bank of England may have added to the confusion over the outlook for monetary policy, but as far as inflation is concerned the picture remains benign, with official data showing subdued price pressures across the economy.

Annual consumer price inflation eased in May to a 55-month low of 1.5%, down from 1.8% in April and below the Bank of England’s 2% target for a fifth successive month. The headline CPI rate has followed a gradual downward trend since the middle of last year, despite the period of robust economic activity. We forecast inflation to average 1.7% in 2014.

CPI inflation down to 1.5%
(annual rate; %)

Source: Office for National Statistics.

Key points

  • Lowest CPI inflation rate since October 2009.
  • Largest contribution to the fall came from lower air fares, following Easter spike.
  • Other downward price effects from food, clothing and footwear.
  • Modest upward contributions from higher prices for motor fuels, recreation and culture, and alcohol.
  • RPI inflation measure at 2.4% y/y.
  • CPIH measure (includes owner-occupiers’ housing costs) up 1.4% y/y.

Little evidence of supply chain price pressures

Our latest Pay Bulletin showed a continuation of the broadly stable trend in above-inflation manufacturing wage growth in May. While some business surveys have indicated a recent modest firming of pay pressures in parts of the wider economy, the degree of underlying slack in the labour market is expected to keep overall wage growth in check, prolonging the weak trend in real disposable incomes. The current period of softer emerging market demand and the relative strength of sterling will continue to weigh on global commodity costs, not least energy and food prices, with the latter also dampened by an ongoing price war among the main UK supermarkets.

Output (factory gate) prices edged down slightly on a monthly basis in May, and were up just 0.5% compared with a year earlier. Reflecting the subdued trend in commodity markets, input prices of materials and fuels bought by UK manufacturers for processing declined for a fifth successive month in May, and were down 5% compared with a year earlier. This may not be sustained in June, however, given rising uncertainty over developments in Ukraine and Iraq, which could push up near-term energy prices. 

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That was then.. this is now

Lee Hopley June 13, 2014 09:26

When the Governor of the Bank of England speaks you can read about it on the front page of most newspapers (whatever he says). Last night's Mansion House speech is no exception - and for good reason. The inclusion of a line pointing to the possibility of interest rate rises 'sooner than markets currently expect' is what has sparked the interest.

The dial has been gradually moving towards MPC action, almost as soon as the Bank set out its forward guidance some ten months ago. This was a necessary and balanced reaction to the surprisingly strong pick up in growth and in the labour market. 

A quick review of the Bank's messaging in recent Inflation Reports shows that we've moved from February's continuing warning of 'significant headwinds — both at home and from abroad' and spare capacity concentrated in the labour market meaning 'Bank Rate may need to remain at low levels for some time to come' to the view in May, which set out that when Bank Rate does start to go up, it would do so only gradually. Most recently, the May MPC minutes hinted that the debate inside the Committee was likely to start heating up in the months ahead given that there was now a 'variety of views on the appropriate path of monetary policy'.

As of last month, most forecasters were still expecting no rate hikes this year (see HMT survey here). Since those forecasts were made there has been little substantive change in the economic picture - recent trends of positive activity across the main economic sectors continues, inflation remains below target, wage growth is subdued and unemployment has edged down further. But as we highlighted in our Monthly Briefing things aren't normal - GDP per head is far below pre-crisis levels, export growth is struggling to recover and substantial public spending cuts are still to kick in - to name a few issues still facing the UK. 

This all leaves the decision in finely balanced territory for the time being. The minutes of the June MPC meeting should shed more light on which view is starting to win out - we'll be blogging on the key points, as usual, next Wednesday. However, in the meantime, the prospect of rate rises isn't too much of a concern for the manufacturers we've been speaking to recently. Some have limited borrowing and others (SMEs) have seen elevated spreads on lending which shouldn't be impacted significantly by modest small increases in Bank Rate. Perhaps more of an issue to some is the impact on Sterling, which notched up further gains following last night's speech.

      

 

CPI inflation rate ticks up in April

Felicity Burch May 20, 2014 10:12

ONS figures released this morning show the CPI inflation rate in the UK ticked up to 1.8% in the year to April, from 1.6% in the year to March.

The timing of Easter (which was in March last year and April this year) will have played a part in the rise in inflation, with transport costs such as air fares having increased between March and April 2014, compared with a fall between the same two months a year earlier.

Some other upward contributions to the rate of inflation were clothing and footwear; food and non-alcoholic beverages; and alcohol and tobacco.

Despite this month’s rise in CPI, headline inflation is likely to remain relatively subdued for a number of reasons:

Strength of sterling - this reduces the price of imports, which should push down inflationary pressures. Import prices fell 5.9% in the year to April, the seventh consecutive month to show a fall in the annual rate.

Linked to this, the price of producer inputs has been falling. Producers’ input prices fell 5.5% in the year to April. Prices for most inputs were falling over the 12-month period.

 

Wage growth remains relatively subdued. Although manufacturing pay growth was up 2.9% year on year in the three months to March, for the economy as a whole average weekly earnings only rose 1.7%.

CPI - Key points

Neil Prothero April 15, 2014 10:52

Annual consumer price inflation eased in March to a 53-month low of 1.6%, down from 1.7% in February and below the Bank of England’s 2% target for a third successive month. This maintains the downward trend in the headline CPI rate since the middle of last year. We forecast inflation to average 1.7% in 2014.

CPI inflation down to 1.6%
(annual rate; %)

Source: Office for National Statistics.

Key points

  • Largest contribution to the fall came from transport costs, particularly motor fuels.
  • Other downward price effects from clothing, furniture and household goods.
  • Modest upward contributions from higher prices for alcohol and in restaurants and hotels.
  • RPI measure up 2.5% year on year in March.
  • CPIH measure (includes owner-occupiers’ housing costs) up 1.6% year on year in March.

Inflationary pressures expected to remain subdued over 2014

After falling for six successive months—the longest consecutive decline in inflation since modern records began, according to the ONS—the March reading could mark a low point for CPI inflation. The impact of base effects from the timing of this year’s Easter holidays implies a modest up-tick in inflation next month.

But price pressures should remain modest. Although earnings growth will strengthen gradually in response to firming activity, the degree of slack in the labour market is likely to keep overall wage growth in check. Meanwhile, a period of weaker emerging market demand and the relative strength of sterling will continue to weigh on global commodity costs, not least energy and food prices.

Negligible price pressures in supply chains

Output (factory gate) prices fell slightly on a monthly basis in March, and were up just 0.5% compared with a year earlier. Highlighting the weaker trend in international commodity markets, input prices of materials and fuels bought by UK manufacturers for processing declined sharply, by 6.5% in the year to March.

Bubbling nicely? 

The broad inflation environment may be benign, but the same cannot be said for the housing market. According to ONS data, average UK house prices increased by 9.1% in the year to February, with prices in London surging higher by 17.7%. We think there is still little prospect of the Bank of England raising interest rates anytime soon, but with housing supply constrained, some form of policy intervention by the central bank to try to cool the housing market is possible this year.

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Subdued inflation

Neil Prothero February 18, 2014 10:03

Annual consumer price inflation continued to edge down in January, easing to a 50-month low of 1.9%. Following a period in 2010-12 of high and often volatile inflation, the CPI rate has followed a downward trend from mid-2013 and the January reading marks the first time since late 2009 that headline inflation has come in below the Bank of England’s 2% target. However, UK inflation still remains quite a bit higher than average inflation in the euro zone (0.7%).

CPI inflation back below 2% target
(annual rate; %)

 

Source: Office for National Statistics.

UK consumer prices declined by an average of 0.6% over the month. According to the ONS, the largest contributions to the fall came from lower prices for recreational goods, cultural services, furniture and household equipment—an indication of ongoing retailer discounting.

There was little overall impact on the annual inflation rate from gas and electricity prices, as the recent tariff rises implemented by the "big six" energy companies were of a similar level to those a year ago.

Output (factory gate) prices edged higher in January, but only by a modest 0.9% year on year. The weaker trend in international commodity markets was evident in data showing a further decline in input prices. The overall price of materials and fuels bought by UK manufacturers for processing declined by 3.1% in the year to January 2014, the sharpest contraction in more than four years.

The Bank of England’s latest inflation forecast published last week was benign and we expect consumer price inflation to hover just below 2% over the coming months.

Underlying price pressures remain subdued, against a backdrop of still weak nominal wage growth (real incomes are still being squeezed), limited consumer purchasing power and relatively soft global commodity price trends. Import price pressures will also be contained by the strengthening of the sterling exchange rate over recent months.

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Guiding light?

Neil Prothero February 11, 2014 08:00

It came as no surprise that the Bank of England left its monetary policy stance unchanged at its latest Monetary Policy Committee meeting last week. The nine MPC members voted to hold the policy interest rate at its record-low level of 0.5% for the 59th consecutive month, while also maintaining the Bank’s stock of asset purchases (via quantitative easing) at £375bn.

Nothing to see here? Well, not necessarily. Tomorrow the Bank of England will publish its quarterly Inflation Report, and alongside its revised forecasts for growth and inflation there is likely to be considerable market interest in what the central bank has to say about its much-maligned policy of "forward guidance".

Introduced by the new Bank governor, Mark Carney, just seven months ago, forward guidance followed the lead of the US Federal Reserve by linking future changes in UK monetary policy to conditions in the domestic labour market. Mr Carney stated last August that the Bank would not consider tightening its current policy stance until the unemployment rate fell below 7% (subject to caveats relating to financial stability). At the time the Bank believed that this threshold wouldn’t be met until the second half of 2016. The aim of forward guidance was therefore to reassure the private sector that short-term interest rates would remain at 0.5% for at least another three years, reducing uncertainty and encouraging households and businesses to borrow and spend.

Good intentions

That was the plan. However, since mid-2013 the rapid improvement in a range of UK economic indicators—including a sharp fall in unemployment from 7.8% to 7.1%—has prompted increasing debate, and no little confusion, over the Bank’s monetary stance, rather than the greater clarity that Mr Carney had intended. Bond investors have been pricing in policy rate hikes occurring much sooner than the BoE’s current forecasts suggest, prompting considerable media interest in when UK interest rates may start to rise.

When forward guidance was launched, the Bank of England’s own analysis implied that it viewed the unemployment rate to be the best available indicator of spare capacity, and thus inflationary pressures, in the UK economy. However, as the jobless rate has declined at the same time as headline inflation has eased back to target, Mr Carney and his colleagues have been forced to backtrack from their original guidance message. Indeed, last month in Davos the governor implicitly acknowledged that the unemployment threshold had to all intents and purposes been dropped.

"Members saw no immediate need to raise Bank Rate even if the 7% unemployment threshold were to be reached in the near future" – MPC minutes, January 2014

Although the economy has rebounded unexpectedly strongly over the past year—annual real GDP growth of 1.9% in 2013 was the fastest since 2007—the overall period since the global crisis has seen the UK recovery lag well behind that of most other G7 economies. This latter point is one that the Bank governor, Mark Carney, and some of his MPC colleagues have been keen to stress in an effort to refocus attention away from the simple 7% threshold. Noting that the pick-up in economic activity has come from a very low base and that the level of UK GDP still remains some way below its pre-crisis level, the governor has also highlighted the still subdued trends in real wage growth, on-target inflation and falling long-term unemployment as evidence that there is still considerable slack in the economy. This supports Mr Carney’s recent statement that "the recovery has some way to run before it would be appropriate to consider moving away from the emergency setting of monetary policy".

The debate over spare capacity is not clear-cut, however. A number of economic commentators have noted that a range of labour market indicators—not just the jobless rate—have tightened over the past six months, that productivity trends remain very weak, and that recent survey data point to constraints on capacity and recruitment returning close to pre-crisis levels in some areas of the economy.

Easy does it

Mr Carney has so far appeared to adopt a more dovish stance than some other members of the MPC, although it is clear that a majority of the Committee still see little prospect of a rise in the policy interest rate anytime soon (in line with most independent forecasters, we don’t anticipate any policy tightening until at least early 2015). But with the positive near-term economic outlook expected to support a further reduction in the jobless rate to below the 7% threshold in the coming months, the Bank of England now has little option but to revise its forward guidance policy.

What form this could take is open to debate—options include:

  • lowering the unemployment rate threshold
  • announcing another form of "state-contingent" guidance linked to different indicators
  • revealing individual MPC members’ views on future rates; or
  • specifying an explicit period during which interest rates will remain on hold.

Whatever is decided, Mr Carney for one will hope that it proves to be a more effective and more enduring policy than the Bank’s initial effort.

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CPI - key points

Felicity Burch January 14, 2014 09:35

The Consumer Price Index fell to 2.0% in December, in line with the Bank of England’s target for the first time since November 2009. This continues the downwards trend we have seen in inflation since June 2013.

According to ONS, the largest contributions to the fall in the rate came from prices for food & non-alcoholic beverages and recreational goods & services.

There was a small upward contribution to inflation from energy bills, as the increase in gas and electricity prices in December 2013 was slightly larger than the increases a year earlier.

Looking ahead to 2014, although energy prices should keep CPI around the 2.0% mark for the time being,  inflation is likely to dip below-target over the course of the year as spare capacity in the economy makes itself felt. We expect inflation to average 1.7% over the year.

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CPI falls again

Rachel Pettigrew December 17, 2013 10:43

The Consumer Price Index (CPI) fell once again in November, coming in at 2.1%. This is below the consensus forecast that CPI would remain at the 2.2% level of last month.

CPI has been on a downward trend since June, where it had peaked at a 14 month high. Since then we have seen CPI fall 0.8 percentage points over a period of five months to reach the lowest level of CPI growth since November 2009.

Over the past year, pressure from the basket of goods that make up CPI have not been consistent, as shown in the table below. However, downward pressure on prices outweighed the upward pressure.

Downward pressure  

 Upward pressure

  • Food and non-alcoholic beverages, especially fruit 
  • Transport sector prices, especially motor fuels 
  • Housing and household services, most pressure coming from gas and electricity 
  • Recreation and culture, mainly from prices of games, toys and hobbies, and data processing equipment 
  • Restaurants and hotels 
 

We expect CPI to remain low in 2014 at 1.8%.

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Forward Guidance – Carney and the Select Committee

Felicity Burch September 12, 2013 11:35

This morning Mark Carney was in front of the Treasury Select Committee to answer questions on the latest Inflation Report and Forward Guidance.  Here’s a quick summary of the key discussion points:

 

1. Is Forward Guidance Good for Growth?

Carney’s view was that Forward Guidance was supporting growth, arguing that it made monetary policy clearer and therefore more effective.
This seems to be the case, in the Bank’s quarterly survey of households’ inflation expectations following the announcement they found:
 

The treasury select committee expressed some concern that long-term interest rates had risen as a result of the Forward Guidance policy, as this might hit complanies looking to take out long term loans. Carney said he knew this might happen, but said that about the majority of loans that were important for short term growth were linked to the Bank Rate.

 

2. Does Forward Guidance risk too much inflation?

Although the Forward Guidance implies that rates won’t rise until ILO unemployment falls to 7%, there are caveats in case inflation starts to pick up. In fact, there are three “knock outs” with regard to inflation, which could cause the committee to reconsider interest rates.

The first “knock out” comes into play if: "In the MPC’s view CPI inflation will be more than 0.5 percentage points above or below the target in 18-24 months’ time".

There was some discussion about whether this was a reasonable knock out – it was raised that the MPC’s forecasts had underestimated inflation in 29 out of 32 quarters – but MPC members explained that this was why the other two knock out clauses were in place (see our previous blog for more information on these).

And while the MPC’s forecasts may have underestimated inflation in the past, their current forecasts are not out of kilter with others. The highest forecast in the Treasury’s compilation is for CPI to be at 2.8% (Schroders) in 2015. The average forecast is 2.2%.


In addition, Carney argued that inflation expectations actually came down after Forward Guidance was announced. The Bank’s survey found the following:


 

3. Where next for the UK economy?

Carney said that we had seen some welcome improvement in the UK economy but that the early momentum would need reinforcing. “We have a recovery and recent data is consistent with some strengthening and broadening of this. But it is early days.”

 

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