The rate is staying fixed for now, but three of the nine members wanted an increase, apparently thinking that inflation caused by oil price increases, in turn caused by war, represent excess demand in the UK economy that they must stamp out with an interest rate rise, when the exact opposite is true: the inflation is a sign of shrinking demand in the eocnomy as spending power is shifting to oil and we need a rate cut as a result.
By simply ignoring everything about a subject.
The policy relevant inflation rate is the core one, the one without fuel prices. Therefore the MPC looks at inflation *without* fuel prices to see whether they should change rates and in which direction. They specifically, and deliberately, exclude the very thing Spud is wibbling about.
Sigh.
I have long suspected that, other than vermine, a seat on the mpc is something he has long coveted and thinks his genius deserves
He’s just a pub bore deprived of his natural habitat.
Q – Sir Timothy
Assuming that fuel prices increase the cost of other things like groceries, do they somehow strip out that impact or just ignore the cost of fuel itself?
This is why I think Spud and Tim are both right.
Fucking around with interest rates here is going to do nothing about the increased cost of fossil fuels caused by a war over which we have no influence, but given that a modern industrial economy runs largely on fossil fuels, their price and availability are going to influence everything else in the economy.
In this instance I think Spud wins. Raising interest rates because Hormuz is going to be as effectual and productive as raising electricity costs because windmills. Whether rates should be cut (to provide “stimulus”) is another matter. Far better and more effective to cut the cost of the State, in every way.
“Fucking around with interest rates here is going to do nothing about the increased cost of fossil fuels caused by a war over which we have no influence, but given that a modern industrial economy runs largely on fossil fuels, their price and availability are going to influence everything else in the economy.”
Yes but if you do nothing then pay will start to rise as workers demand inflation matching (or higher) pay rises. So if for example, fuel price rises lift inflation to 4-5%, and pay rises start to match that, and then fuel prices drop back to their original level (or even lower), all that extra pay remains in the economy, chasing the same amount of goods and services. You also get welfare and pension payments uprated by inflation too. State employees will demand (and get) inflation matching rises.
If you could ensure that pay stayed the same as fuel prices rose, then you could indeed ignore a short term rise in inflation as people would be forced to swap non-fuel expenditures to fuel consumption and that would naturally cool the rest of the economy. But thats not the world we live in. Headline inflation rises caused by exterior shocks will feed into wage rises and eventually into the rest of the economy, feeding on themselves. You have to stop it as early as possible as the longer you wait the worse the medicine gets.
Oh, I don’t think they’ll be that restrained.
I agree that interest rates can’t reduce the price of oil. They’re aimed at preventing 2nd-round effects like wages and inflation expectations becoming embedded. But shouldn’t the same logic apply to assets? If sustained wage growth and loose monetary policy push excess money into housing and financial markets, won’t ignoring asset-price inflation simply shift the inflationary pressure from consumer goods into assets instead?
I’ve never understood why housing costs are not a massive part of inflation calculations. Its a huge part of the cost of living but gets ignored entirely. The government would never be able to play the games it does with the rental market if rents went straight into CPI.
Rent is in CPI. A major difference with CPI and RPI is that RPI also includes mortgage repayments, so is more sensitive to interest rate changes.
No CPI does not include rents:
https://www.incomesdataresearch.co.uk/resources/insights/what-are-the-three-main-measures-of-inflation
CPIH includes housing costs, CPI doesn’t.
Edit: actually scratch that, CPIH doesn’t include rents either. It includes ‘owner occupier housing costs’ but not rents. RPI on the other hand does include rent and mortgage costs.
Your source is wrong. CPI includes rents. CPIH includes owner occupied housing costs.
“The Consumer Prices Index including owner occupiers’ housing costs (CPIH) is the same as the Consumer Prices Index (CPI) but with the added measure of owner occupiers’ housing costs (OOH). OOH reflects the housing services associated with owning, maintaining and living in one’s home. Households that are not owner-occupiers will pay for housing through rental payments to a private landlord, registered social landlord, or local authority. Unlike OOH, actual rentals are included in both CPIH and CPI.”
https://www.ons.gov.uk/economy/inflationandpriceindices/methodologies/privaterentsandowneroccupierhousingaggregatesinconsumerprices
Well they must be doing some super spiffy statistical trickery to hide the rapid rise in private rents over the last few years. They’ve virtually doubled around here, one of the biggest costs people have and yet ‘inflation’ is 2-3%. I call BS on that one.
Look at some of the crap they include in the CPI index. Watersports equipment. Boats. Dating agency fees. Television rentals (who the f*ck rents a TV these days?). I mean its all stuff that people just have to buy all the time, they’re always popping to the shops for a boat or a canoe. Granny just has to have her Tinder account she’d be lost without it.
https://www.ons.gov.uk/economy/inflationandpriceindices/methodologies/consumerpriceinflationincludesall3indicescpihcpiandrpiqmi
Its crap. Designed to make it look like inflation is ‘under control’.
I’ve never understood why the cost of government isn’t included in inflation calculations, but that’s me.
We could measure it using what it spends, or use MMT and measure it in what it costs in tax to restrain the inflation resulting from primary spending, but either way government isn’t in the ONS basket of goods and services afaik.
It’s because turkeys don’t vote for Christmas, Bongo.
The fuel price itself is part of CPI and not of Core CPI. But all the run on effects from a fuel price change are in Co9re CPI. As they should be – that’s inflation.
Note the same is also true of food.
We know that food and fuel can change drastically and, also, both up and down. So, a measure which removes those two is going to give us a – perhaps – better idea of the devaluation of money which is the sensible descsription of inflation.
Since being economically aware (such as it is) I’ve always felt that the term “inflation” should be limited to describing the effects of government inflation of the money supply, and that another term be used for price rises due to market forces (basically shortages created by changing supply and demand).
Don’t think governments would like that.
Agree. Inflation is a most convenient word to hide behind.
The issue is an empirical one: what measure of past inflation available today, best ‘predicts’ total inflation (including fuel, food and everything else) from today to some future date, say one or two years’ time?
If moves in the price of a category are volatile and often reverse themselves, it works best to exclude that category from the measure of core inflation. Oil is topical, but the same argument might apply to eg coffee.
Surely how substitutable a category is also counts. You can quite drinking expensive coffee and drink water instead, but it’s hard to quit using energy unless you want to be cold (or fried) and hungry.
“it’s hard to quit using energy”
But we must have had so much solar recently that our electricity bills ought to be virtually nil. After all, solar is free.
Not at night it isn’t.
Well, technically it is free at night, it’s just that there isn’t any available……
My question is similar to Norman’s comment:
Since fuel feeds into so many things, how do you tell the difference between general inflation (currency devaluation caused by increasing the money supply) and increases in fuel costs leaching through into everything else?
Is there a way of comparing price rises between products that are fuel-intensive and those that aren’t? And if so, is anyone doing it and what’s it telling us at the moment?
My own view is that we do have general inflation, caused by the huge (electronic) money printing during lockdown (inflation was already kicking in before the current stuff in the Gulf), but the rise in fuel prices is sucking up a lot of that excess money (basically acting sort of like an interest rate rise).
But I can’t see what’s really going on from the interest rate data.
I think it’s easier to forget money. For various artificial reasons the foundational commodity of our society is being made more scarce. Therefore, we’re obliged to bid more of our other output for it, try to use less of it, or both. However much money you print, raise interest rates, or raise monetary incomes, you’re still back to trading goods.
Yes.
Before the crisis, Oil is 4% of world GDP, and Non-oil 96%.
We lose one quarter of the oil. We now have 3 units of Oil and 96 of Non.
The short-term price elasticity of demand for oil is -0.25, and there is no quick way to increase supply of either Oil or Non.
The price of Oil has to double relative to Non, to get oil demand down to 3.
The old value of Oil was 4% of GDP. The new value is 3 x 2 = 6. Non is still 96.
The central bank sets the money supply. If it wants to leave the nominal value of Non unchanged, then it should increase the level of the money supply by 2%. This will let nominal GDP rise by 2% to 102, of which Oil will be 6 and Non 96.
This is a one-off change in the level of the money supply, not a continuing acceleration.
What does increasing the money supply have to do with restoring the availability of energy? Only removing artificial constraints and/or commissioning new supplies and supply routes can do that.
Money’s irrelevant if the North Sea is plugged up, pits are closed, hydrocarbon power stations demolished, fracking banned and Hormuz shut.
You’re right, the money supply has nothing at all to do with restoring the supply of energy. Money doesn’t change the real constraints, and the things that you list could.
My example was just: if nothing else changes, and if the central bank wants to leave (average) nominal prices of Non unchanged – which it might think was the least disruptive option – this is what it should do.
We look at the change in fuel prices itself. Then take that out. The second order effects of fuel prices changing stay in.
That’s just the way.
Thank you. That’s what I suspected. Probably OK usually, but it doesn’t sound terribly helpful when there’s a big fuel price increase.
Inflation isn’t caused by price rises, inflation *IS* price rises. Next Tuesday: my age is not a result of how long I have been alive.
To add some empirical data, this is how much I’ve spent on food over the last 13 years. Single person, UK resident.
2013-2014 £26.11pw
2014-2015 £17.52pw
2015-2016 £20.42pw
2016-2017 £26.13pw
2017-2018 £20.28pw
2018-2019 £24.50pw
2019-2020 £24.73pw
2020-2021 £21.18pw
2021-2022 £23.32pw
2022-2023 £28.16pw
2023-2024 £26.80pw
2024-2025 £30.25pw
2025-2026 £41.20pw
Wow, that is pretty startling! Assuming your eating habits haven’t suddenly gone from beans on toast to fillet steak thats a c. 82% rise from the 2013-2022 average in 4 years.
I can assure you that farmgate prices haven’t risen anything like as much in the last 4 years. So someone is making out like a bandit, but its not the farmer. Ex farm milk prices are currently roughly where they were in 2021 (30p/litre), wheat prices are roughly where they were pre invasion of Ukraine (£190/tonne ish). The only things that have gone up significantly are beef and lamb – they have risen c. 50% in the same period. Mainly due to the UK government’s Net Zero war on food production and a subsequent reduction in national livestock numbers. If you see a beef or sheep farmer, ask him where his new Maserati is, he can probably afford one now.
And yet, after tax, UK supermarket chain profit margins are around 2%, so whoever the bandits are it ain’t them.
I suspect HMRC, one way or another, after vastly increased energy costs.
The bandits are other capitalists. Back 25 years Tesco net margins werre 6%. Today they’re 3%. Lidl and Aldi arrived to get them some of that 6%.
Competition works, see?
If supermarket margins have halved and it ain’t going to producers, that extra food cost is going somewhere else, and I reckon it’s in operating and logistics costs, staff wages, NI, and green levies.
Correct, which are largely driven by government. Regulations, higher minimum wages, higher taxes and higher energy prices from net zero to name but a few. The reason everything costs so much in this country is government, pure and simple.
There was a big spike in 2022 due to the Ukraine war cutting off grain supplies to the Middle East which drew in food from elsewhere, and the gas supply issues raising the price of fertilisers.
That’s on top of employer NI rises, minimum wage rises (both of which disproportionately hit low-paid ‘crop-picker’ type jobs), EU export paperwork, the new packaging tax (to reduce plastic wrapping going to landfill), transport fuel costs, and weather in various places. (Dry weather in Ghana and Ivory Coast hit cocoa production, for example.)
Meat supply is also a significant factor, although I’ve not nailed down exactly why. Apparently a lot of farmers are getting out of the business due to ‘low profitability’, selling up instead of breeding, and the amount of beef produced has dropped. Considering the high prices, this explanation doesn’t make much sense, so there is something else going on. It brings to mind that Dutch plan to meet EU targets on nitrogen run-off by cutting their cattle herd 30% and seizing the farms to sell off for immigrant housing that triggered the farmer’s protests. I’ve not heard of that lately, so maybe it’s still going on but they’re being more subtle about it now.
They’ll make us all go Vegan by *pricing* us out of eating meat.
“Meat supply is also a significant factor, although I’ve not nailed down exactly why. Apparently a lot of farmers are getting out of the business due to ‘low profitability’, selling up instead of breeding, and the amount of beef produced has dropped. Considering the high prices, this explanation doesn’t make much sense, so there is something else going on. “
Yes, its called UK government policy. All the subsidies available to farmers now are purely environmental ones. And its virtually impossible to incorporate actually producing food (particularly livestock) with claiming the subsidies. The way the system works means you can make a relatively decent return from the subsidies IF you stop producing any food, but if you try to continue producing the subsidies are a fraction of what you used to get in land area based subsidies under the old CAP system (which continued largely the same for nearly a decade after Brexit).
So what has been done is a) move marginal producers away from food to environmental – if you have 100 acres of marginal ground you’ll make more money from maxxing out the environmental payments than from working really hard to breed and maintain livestock, and you won’t be allowed to do both. b) some charities and large institutional landowners (National Trust for example) have thrown working farmers off their land in order to ‘rewild’ it. If you can afford to employ the right eco-consultants there is big money in putting together large rewilding projects. c) Private equity has been buying up land to do rewilding projects, partly for the subsidies, partly to gain carbon credits and partly to be able to sell Bio Net Gain rights to house builders and developers. We are talking serious money for BNG land. If you can create the right sort of habitat you could be selling land for many times what it cost as farmland. Its PE so they be doing a half arsed job and disappearing to the Cayman islands with the loot so the actual gain to the environment will be zero, but the PE guys bank accounts will see some serious gains.
All of which means marginal producers, particularly of livestock are leaving the market. As this marginal production leaves, the market gets tighter. Hence the higher prices for beef and lamb. Its actual government policy. They want to drive livestock production out of the UK, they are not exactly hiding this fact. Its in all the papers on the subject.
Why are food prices up so much then if the competition is ‘working’?
Jim, it would be interesting to look through the supermarket accounts and see which costs have gone up.
Is it their cost of buying stuff in (which, you say, isn’t going to the farmers, but could be going to the processors), or is it staff costs (although I’d have thought the self-service tills would counteract the government-mandated increases in staff costs), or is it overheads (heat, light, chillers, logistics)?
If I could be arsed, I’d trawl through a few years for Tesco.
The cost of self-service tills is higher than what the cost of manned tills used to be, but is less than they are now. Otherwise self-service would have been rolled out more aggressively earlier on. So self-service is reducing the increase in cost of tilling, not offsetting anything. And it does absolutely nothing to decrease the number of people stacking shelves, warehousing or driving lorries.
Yes. I recently realised that for a couple of years I’d been wandering around supermakets, picking up produce, seeing the price and thinking “wtf???” and putting it back, subcounciously thinking “I’ll come back when it’s back to 45p” or something. Month after month after month, and I suddenly realise that that tin of sardines is never going to be 45p again.
Mixed up with that has also been buying things on automatic and not realised that that 98p bottle of milk is now one pound bloody fifty!!!! and I hadn’t noticed. Though I had noticed that my normal basket of shopping wasn’t the £10-£15 mark, and annoyingly wondering what I’d been splashing out on. Twenty-two quid? I’m sure that was just over a tenner a couple of weeks ago.
It wasn’t until I did my accounts a couple of months ago that I realised just how much food had gone up. I don’t know how to describe it other than it feel *sinful* that I’m spending double on food than I was just a couple of years go, and without the benefit of splashing out in restaurants or anything.
Suspect I originally found this bloke via comments in here, but always a good read on inflation:
https://notayesmanseconomics.wordpress.com/