ONS July 23 Inflation data - Bank of England interest hike looks certain

 Today the Office for National Statistics released the UK inflation data for the year to July 23.

On the surface the headline news is positive - inflation is being tamed and it fell from 7.3% for the year to June 23 to 6.4% to July 23.  That's a 0.9% drop. Although it's never a good idea to do percentages of percentages but I will anyway!  It's an impressive 12.3% drop !

Sadly the Bank of England will almost definitely increase interest rates again.  6.4% is still higher than their target of 2% and the unemployment increase from yesterdays data wasn't big enough. They want to punish us naughty people that are causing inflation.

They will prescribe more bad medicine. Rate hikes - here they come.

The reality remains this inflation is supply side inflation not demand side inflation.

The reality remains that food inflation is high and the UK imports >50% of food so we are importing inflation.

The reality is the bond yield curve has inverted - a clear signal we are entering recession.

It is clear to me that the Bank of England's actions are not improving the situation - there is no  cause an effect.  The correlation is one they are inventing to pat themselves on the back.

The good news may be lost on Andrew Bailey, governor of the Bank of England however it is not lost on Jeremy Hunt and Rishi Sunak who have jumped on it.

Rishi said “the plan is working”....“If we stick to the plan I’ve set out, we’ll get it done.”

Chancellor of the Exchequer Jeremy Hunt added: “The decisive action we’ve taken to tackle inflation is working, and the rate now stands at its lowest level since February last year."

Well what exactly is the government plan?  The Bank of England is supposedly independent from government so Rishi and Jeremy can't claim interest rate rises is his plan.  

His pledge - which is not a plan - is to halve inflation. So what has he actually promised?

On the 4th Jan 2024 he pledged to halve inflation.  At this date the published inflation number was 10.7% for November 2022 and this was the number he will say was the baseline for inflation on the 4th Jan.  The actual number for Jan turned out to be 10.1% so he's already achieved 0.6% by stealth.  He is also referring to CPI inflation.  If it was RPI inflation it will be a bit more tricky - all the Bank of England rate hikes force RPI to increase.  CPI excludes real world costs like mortgages, rent etc - RPI does not. 

So in reality he has "pledged" for inflation to be 5.35% by the end of the year.   Since today's number is 6.4% there's a reasonable chance his "pledge" will be achieved.

A pledge implies he is going to do something about it. Andrew Bailey is busy following monetary policy and raising interest rates.  Rishi & Jeremy therefore have fiscal policy to control inflation. So what have they done?  

• Increased minimum wage in April 23 from £9.18 to £10.18 (+10.89%) and the national living wage increased from £9.50 to £10.42 (+9.68%).  At the time CPI inflation was 8.7%.

• Issued one-off payments of between £900 and £1190 to 1.7 Million NHS staff costing £1.53 Billion
• Allowed retired civil servant pension increases of 10.1% on 6th April 2023. At the time CPI inflation was 8.7%.
• Allowed public expenditure to increase 10.9% and allowing for inflation to increase 4.1%
• Allowed public expenditure relative to the whole economy to grow from 44.5% to 45.6% in just one year.  In other words half of us for works for the government and the other half are paying for it.

Jeremy Hunt has effectively increased duty on alcohol from August 23 by around 5%.  Expect this to be reflected in future inflation numbers. 

In the meantime government bonds or gilts are costing more (ie tax payers money to pay the interest) is increasing with every rate hike.

I am struggling to see what Rishi or Jeremy have done to help. Clearly they want to take the "glory" for the inflation fall but the reality is they have done nothing to help - only make things worse.

So let's look at the inflation data.  The fall was largely due to energy price falls and food price inflation  - in particular milk, cheese, eggs, bread and cereals which have all fallen.

So what exactly has Messrs Bailey, Hunt and Sunak done to cause energy prices falls or make these food products cheaper (or rather get more expensive less quicker) ?  Pretty much nothing. 

UK energy prices are roughly double those in Europe and the USA - mostly due to the price cap allowing energy companies to charge more.  Energy companies have increased standing charges significantly in excess of inflation - looks like profiteering to me. Definitely not a positive contribution to reducing UK inflation.   The government hasnt done anything to stop the energy prices doing this.  If I cut my consumption my bill should fall - sadly not since I have to pay for the privilege of being connected to them in order to consume their product and this cost is rising.

Fuel prices at the pump has fallen - that's probably the real gain here. Again global prices have fallen so none of our illustrious friends can claim they did this.

Have farmer's costs fallen?  The price of fertiliser - which is created using natural gas - has dramatically fallen as wholesale gas prices have fallen.  In Jan 23 fertiliser was $1,300 per tonne and has fallen to around $850 per tonne by June 23.  OK this is clear supply side inflation of a commodity  which is thankfully  falling. 

So not a surprise that cereals are cheaper.  Cheese is a pretty energy intensive so falling energy prices help reduce cheese price inflation.

The UK imports around $2.3Billion worth of cereals - mostly from Europe. The UK market for cereals is estimated to be $4.8Billion so we roughly import 50% of cereals. 

Food inflation in Germany and France is falling faster than the UK.  Given we import >50% of our food this is good news.  So far we have been importing inflation.  With prices falling in Europe we are importing falling inflation.

Does Messrs Bailey, Hunt and Sunak think we are stupid?