Sunday, 22 July 2018

Taking the core temperature

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Anthony Peters on the serendipity of CPI.

Yes we have no inflation. The UK finally joined the big boys with the Office for National Statistics reporting yesterday that YoY CPI for February had fallen to zero.

This made headlines but not big ones as all but the most economically illiterate acknowledge the strong cyclical effects of low energy and food prices. Core inflation was, however, also lower than expected but at 1.2% (vs forecast of 1.3%) leaves quite some room before the country finds itself in proper deflation.

The price of Brent peaked on June 19 last year at US$115.06 pbb since when it was in more or less steady decline until it hit its low in January at US$46.59. Last night it closed at US$55.08. This is a very different development of prices than that of the New York traded WTI which didn’t bottom out until last week and which now, at US$47.33 pbb is less than US$4.00 off its low. For one day and one day only in November, Brent traded through WTI but the basis has widened again to US$7.76.

Although oil “over here” might be higher than oil “over there”, it is, nevertheless, a lot lower than it was – no prizes for knowing that – but we must remain cognisant of the fact that in three months from now the positive effect it has had on the inflation numbers will begin to fade. That does not mean that oil prices are rising again. When they do, they will play the same tricks with headline inflation that they will have done on the way down.

Thus I am happy to dismiss the zero inflation number as nice but not really relevant. The fall in core inflation – far more important – most probably has its roots in the relative strength of sterling against the euro and its subsequent effect on import prices. The UK’s recovery is still primarily consumption and credit led which is in its very nature inflationary so I might be prone to believe that even that core, ex-food and energy, inflation number is in itself distorted.

I suppose inflation has always been a tricky customer which has eluded statisticians best efforts and who can but do their best. The number is hugely important to governments – everything they touch, including the politicians’ pay deals, is linked to reported inflation – and as long as they apply the same errors on the way up as they do on the way down, everything should come out in the wash. As long as they don’t fiddle around with the methodology too much, all will be for the best. Anyone who has a problem with that should just briefly consider how the most important metric in the bond business, yield to maturity, relates to the real world (or not, as the case may be) and shut up.

The Bank of England’s MPC won’t be too scared by the 0.0% but the fall in core inflation from 1.4% to 1.2% might have it thinking, although I doubt either will be causing anyone sleepless nights yet. Mark “The Magician” Carney will have fun though as he can now fairly safely offer forward guidance that UK rates are going nowhere in a hurry.

Well, even central bankers have to make hay while the sun is shining.

Greek silver bullet?

Hard to get away without Greece, isn’t it? The ECB has now intervened and banned Greek banks from exposing themselves to further holdings of government T-bills which apparently currently stand at €11bn. It is, however, going to be voting today on an increase of the ELA (Emergency Liquidity Assistance) limit for Greek banks to €68.3bn. This is all very much back-to-the-wall and by-the-seat-of-their-pants stuff but the ECB is fighting a rear-guard action while faced with a bevy of politicians on both sides who are playing a high stakes game of chicken in which Stavros SixPack end up the loser, whatever the outcome. As ever, the first cut would have been the cheapest. Too late.

I am amused though to read that an economist at Linz University – could that be one Prof.Dr.Dr.hc.mult.Friedrich Schneider? – has opined that a tax deal between Greece and Switzerland could yield supplementary income of €10bn-15bn. Great in theory but firstly that will not help to pay the bills after April 8th, the date when the treasury is slated to run out of money and, secondly, the UK already tried that trick…and failed.

As early as 2011, Chancellor George Osbourne decided to raid Swiss banks for undeclared and unpaid tax on British residents’ offshore holdings. The number being bandied about was £5bn which was going to save the country. In the event, the recovered cash has amounted to just a fraction of the expected bonanza and things have gone very quiet, other that the recent red faces at HSBC. If the mighty UK was expecting €6bn, how could Greece expect to find €10-15bn? There is no silver bullet, I’m afraid, other than the one which should but most probably won’t be put to the head of Greece’s membership of the euro.

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