💵 UK Inflation - The Wrong Type Of Snow

UK inflation came in higher than expected again today. The 'cost of living' crisis continues. Inflation is expected to fall dramatically in the months ahead & The Veteran's here to add some context 👇

The phrase the wrong type of snow became something of a cliché after rail operators tried to explain to James Naughtie, on Radio 4’s Today program, just why their rolling stock had been stymied by snowfall in December 1991.

As Naughtie put it to British Rails Director of Operations Terry Worral

"Oh, I see, it was the wrong kind of snow"

One could be forgiven for thinking that history is repeating itself. In this instance not in meteorological terms but in terms of the cost of living because the UK seems to have the wrong kind of inflation, one that isn't going down.

Before you start to think that this is just me bitching about paying £7.00 for a pint of lager (SEVEN POUNDS) in a central London pub, something that working remotely for several years tends to insulate you from, let's look at some data.

Starting with CPI or inflation Rate

Now let's compare CPI or consumer inflation with that being experienced by the industry in the shape of PPI or producer prices.

These have fallen to their lowest level for two years, well below forecast and the figure from the prior month, that had itself been revised downward.

Given that manufacturers often consume raw materials and components imported from abroad, one is forced to ask where the upward pressure on consumer prices is coming from. Because based on that logic it wouldn't appear to be the supply chain.

That appears to be borne out in the charts of container freight rates...

Nor this chart from the NY Fed that tracks levels of stress within the global supply chains

Now one might argue that high energy prices are partly to blame and there would be some truth to that. However, UK manufacturers are as exposed as anyone to UK power prices, yet PPI continues to fall sharply.

UK Spot Power Price versus CPI

UK Spot Power Price versus PPI

All of this suggests that we need to look elsewhere within the economy to find what's making UK inflation sticky.

Cut to the labour market, and a chart that plots UK inflation against

• Unemployment rates

• Job vacancies and

• Average UK weekly wages over the last 10 years

The obvious standout here is wages which have been growing and continue to move higher even as job vacancies and inflation have started to dip.

Unemployment has continued to move lower after a covid induced spike.

But wages can't be the whole story, can they?

No, we have to do some more digging. And we start to shed some light on the matter thanks to a breakdown of contributing factors such as the one below.

That pesky orange line that seems to be a major and consistent high contributor to CPI in recent months - that my friends is the innocuously labelled... 'other'.

A catch-all term that conceals what we might think of as the nub of the matter.

You see “other” contains the cost of a host of services such as communications, housing and household services (whatever they are). Oh and let’s not forget recreation and culture and the cost of restaurants and hotels.

So if we stop eating, having a beer or a glass of wine, turn off the internet and our mobile phones en-masse - basically if we stop enjoying ourselves for a year or two it will all turn out OK...

What this exercise highlights is how ineffective raising interest rates has been at targeting the areas in CPI that have caused it to become sticky.

Some of this was hard-wired into the economy. 

For example, broadband providers having the legal right to raise prices by inflation+ which means that BT customers will pay an additional 14.4% this year and O2 customer as much as +17.3% more.

The truth is we all have our own rate of inflation but it seems that we will never really know what that is, leaving us with a sort of personal finance version of Heisenberg's uncertainty principle.

Or, in this case, an economy...

One thing we can look forward to is lower energy bills as David mentioned here

And potentially more besides... 👇