11th January 2010 by Shaun Richards
Friday was a day which saw economic updates in several areas. In the morning the Office of National Statistics informed us that the UK’s Producer Price indices were rising by a worrying amount. These indices measure the price changes of goods bought and sold by UK manufacturers.
On an annual basis the output measure (manufacturing factory gate prices) rose by 3.5% in December 2009. This compares with 2.9% in November Of this rise 1.28% of the 3.5% was contributed by petroleum products.
On an annual basis the input measure rose by 6.9%. This compares with 4.0% in November.
These numbers are concerning in several ways.For those economists who look at demand-pull inflation or analyse inflation in output gap terms there is a conceptual problem with these numbers. For their analysis should lead to inflation being low or even negative as in 2009 UK Gross Domestic Product fell by around 4.75%. This is because demand has fallen and so demand pull inflation does not seem likely on one hand and on the other hand any output gap type of analysis must currently conclude with the economy having a substantial output gap which leads to few inflationary pressures in the system by their analysis. Plainly this type of economic analysis is not working well.
Earlier in 2009 from late spring to summer both of the price measures above went negative. This seemed to fit well with conventional economic analysis. However since then the UK’s Producer Price indices have picked up. Now they seem to be accelerating as well. Adding this to our Consumer Price Index (CPI) figure of 1.9% means we are beginning to have a more serious problem than many have thought. As we move into 2010 it was already likely that CPI would move above target so much that the Governor of the Bank of England would be forced to write an explanatory letter to the Chancellor of the Exchequer. Now with these numbers adding to existing inflationary pressures it is conceivable that CPI might rise considerably above 3% as we move into spring 2010.
In addition to this the Financial Times house price index rose for the eight month in a row recording a measure of a 4.2% year on year increase. I place a low credence on measures of UK house prices because there is so little actual trade going on that there is a danger of recorded prices being misleading, but it does fit in with the patterns demonstrated by other prices in the UK.
After the recent good figures on US unemployment for November 2009 (a situation shared with the UK) it was always likely that December’s would disappoint. In the event a fall in non-farm payrolls ( jobs) of 85,000 was disappointing but not a disaster unless of course you were one of the 85,000. However as you know I am a man cautious about economic statistics particularly in their first incarnation and these numbers are regularly subject to considerable revisions. As they are seasonally adjusted and last years figures showed considerable rises in unemployment the numbers are likely to be more than usually unreliable.The unemployment rate remained at 10%.
These figures are likely to have scotched hopes that the US economy was improving quickly and made it unlikely that there would be upgrades to GDP figures. Also stock markets took them with remarkable equanimity with the Dow Jones Industrial Average closing in positive territory. Another factor influencing them is that some Americans seem to have simply left the jobs market and this cannot be a good thing.
US Consumer Credit
In some ways more disturbing was the fall in US Consumer Credit. This fell by 8.5% on a year on year basis in November 2009 with credit card use cut by 20%. Since the peak in 2008 household consumer credit has fallen by $112 billion.According to the Wall Street Journal it fell by the largest amount since the Fed started keeping records (1943).It reminded me of a statement earlier in the week from a governor of the Federal Reserve Elizabeth Duke that better access to credit for consumers will only boost the economy if they are still willing to take on the debt. One of the quandaries of the current economic situation is that it is plain that households need to deleverage but if they do it now it will slow the recovery. In essence you are choosing between the short-term and the long-term. Policymakers on both sides of the Atlantic are obsessed with the short-term whereas I feel that it is time we adopted a longer time horizon.