Wednesday, June 21, 2006
7-1 at the MPC
Posted by David Smith at 09:45 AM
Category: Thoughts and responses

The June minutes of the Bank of England monetary policy committee meeting have been released and, as expected, showed a 7-1 vote in favour of no change, with David Walton as the sole hiker. The minutes reflected quite a lot of uncertainty among committee members, with plenty of "It remains to be seen" and "It is not clear that", and do not suggest any urgency to hike rates. Read the minutes here.

Comments

There seems to be an uneasy current of "see no evil hear no evil" in the minuted discussions there.

The statement "Alternatively, household spending growth may have been supported by sales of financial assets or by faster income growth" is then followed by the completely contradictory "Wage inflation remained subdued" and "There had continued to be little evidence of any pickup in wage pressures."

I sense flip-flopping. What the MPC is refusing to acknowledge (but no doubt Mervyn King would have tried to underline) is that the UK consumer is spending by further leveraging secured assets, exposing consumption and therefore the economy further to impending interest rate shocks. They temper this with vague statements about falls in asset values but don't quantify them - principally because they haven't actually transpired according to UK housing data.*

The aim I think is to prevent interest rises at (nearly) all costs. I doubt it'll work, and we've been here before but there's a lot to lose including MPC credibility and Gordon Brown's re-election/ career chances.

* This is an interesting point too - Nationwide, Halifax and other "independent sources" seem to be getting it both ways right now. Begging letters about housing instability near rate decision time are always answered and mid-month tall stories of rampant house price growth are being ignored by the MPC. As Mervyn King has remarked "house price growth is a matter of opinion, but debt is a reality".

Posted by: Terry at June 21, 2006 12:33 PM

Hi

FWIW income and wages not the same, your income is the total amount of money you receive from all sources, and wages are the amount of money paid for labour

Posted by: Kingofnowhere at June 21, 2006 01:20 PM

I think the recent surveys of perceived inflation have been very telling. Real people, if the field work is to be believed, believe prices are going up by around 5% per year. Where I spend most of my year, in SE Asia, you have the same phenomenon at the moment. The consumer price index where I am is heading north at around 3.6% a year according to the official figures. However the CPI is produced by assessing the price of a basket of items many of which have their prices fixed by the government, for instance fish, chicken and rice. So he inflation figures are clearly open to a degree of manipulation. There is a limited corollary with the UK where the process is far more transparent and subject to far more scrutiny. Nevertheless people have been questioning the extent to which falling prices of manufactured goods imported from the Far East are really keeping down the real cost of living.

On the other side of the equation there’s also the tendency for the key house price figures to come from vested interests. Stockbrokers only generally worry so much about volatility – after all panic selling does generate money for them. They fear a stagnant market with low volumes. Estate Agents on the other hand don’t do that well from a falling market. You can’t short housing (more’s the pity). It tends to kill sales and that’s when we tend to see estate agents lining up to try to find other jobs (and of course when the general public forms a queue to offer their commiserations ;-) ). So there’s a degree to which both inflationary and counter inflationary forces can be exaggerated for different reasons and to suit the interests of different parties.

I’m sceptical about whether the deflationary influence of China can continue indefinitely. Firstly the US sees the Yuan as overvalued, however the dollars decline may counteract that to some extent and in turn the price of imported goods to the US will rise. The UK and the Eurozone aren’t following suit. That means their goods will also become more expensive in the US and while the US enjoys an export boost and a boost to domestic consumption of domestic produced goods to offset that inflation Europe won’t. At the same time there are inflationary pressures in the Chinese economy. Labour is becoming scarcer – skilled and managerial labour in particular. Raw materials prices are increasing. And at some point prices may well stop falling. The argument is that the flood of imported Asian goods has already been factored into current inflation figures and in the years to come those prices will not fall any further and so not offset other inflationary influences.

Lastly I’m sceptical about house price figures – at east outside the capital. Mine wasn’t a large or a scientific survey but in the South East the estate agents I spoke to recently reported very little business. More worrying still lettings agents claimed (and they have reason to encourage people to let not buy of course) that rental yields on properties stands at between 3-5%. If that’s true once you’ve paid tax, agency fees and maintenance you’re looking at much less return on your capital that you’d get selling up and putting the money in an offshore savings account.

The only rationale at current house price levels to stay in the market is that you make on the increased value of the property. If the balloon stops rising – and more importantly when people (especially in the buy to let game) believe it ain’t going up any more – there’s a heck of a lot of stored momentum for a sharp downward correction.

So make of that what you will – but I warn you now that if anyone uses the phrase ‘new paradigm’ I will feel sorely provoked.

Posted by: Jonathan at June 21, 2006 03:22 PM

As it happens, the Bank of England has just released its new survey of inflation attitudes. It shows a median belief that inflation has been 2.7% over the past year and will be 2.5% over the next 12 months. The China effect on prices won't last forever, I agree, but it has a long way to run.

On house prices, I'd encourage you to take a look at the long "Housing market bears in retreat" thread in our discussion forum. Click on the menu on the left.

Posted by: David Smith at June 21, 2006 03:51 PM

Kingofnowhere, for the overhelming majority of economically active people, regular income is in the form of wages, therefore they are comparable.

Posted by: Terry at June 22, 2006 09:11 AM