Showing posts with label Irish CPI. Show all posts
Showing posts with label Irish CPI. Show all posts

Thursday, January 26, 2012

26/1/2012: Rip-off Ireland - Sunday Times, 22 January 2012

This is an edited version of my Sunday Times column from January 22, 2012.




Back in 2004, with much fanfare, Fine Gael launched its ripoff.ie campaign that highlighted a large number of cases where policy-related or regulated price structures and practices have resulted in our cost of living falling well out of line with other Euro area economies. In 2009, Fine Gael launched a policy paper that was supposed to end Rip-off culture, including in state controlled sectors, once and for all.

Fast-forward to today. Since elections, having abandoned its pro-consumer agenda, Fine Gael has done marvellously in playing a ‘responsible’ possum to Irish vested interests.

According to the CSO, year on year, consumer prices in Ireland rose 2.5% through December 2011. The range of these price changes across sectors, however, was dramatic.

Clothing and footware prices were up 0.4% in 12 months through December, Furnishings, Household Equipment and Routine Household Maintenance prices fell 1.9%, Recreation and Culture deflated by 0.6% and Restaurants and Hotels costs fell 0.9%. Health costs rose 2.6%, Transport by 1.6%, Education by 8.9%.

Majority of these price hikes have nothing to do with private firms ‘profiteering’. Per Purchasing Manager Indices, tracking the changes in input and output prices for goods and services, Irish firms and MNCs have experienced sustained shrinking of the profit margins since the beginning of the crisis, as consistent with deflation. Instead, the largest price increases, and ever expanding profit margins, took place in the sectors that, in the past, Fine Gael have correctly identified as being state-controlled parts of the Rip-off Ireland.

Food and non-alcoholic beverages prices are up just 5.9% in the last 10 years, cumulatively. State-controlled Tobacco prices are up 69.6% and Alcohol 21.6%. Housing, Water, Electricity, Gas and Other Fuels – single largest category of consumer spending – is up 64.4% on December 2001, with 90% increase in Energy Products costs, 63.3% increase in Utilities and Local Charges, and 99.1% increase in Mortgage Interest costs. In the last five years, Rents have fallen 8%, while Mortgage Interest rose 11.3% despite the fact that ECB rates have dropped 2.5 percentage points over the period. Electricity prices are up 28.3% in 5 years and 11.5% in the last year alone, despite the fact that natural gas prices – the main generation source for Irish electricity – have declined worldwide.

While Fine Gael cannot be blamed for the full extent of price hikes since 2001 or 2006, the current Government bears responsibility for failing to address state-controlled inflation since taking the office.

The above sectors are indirectly controlled by the state via regulation, state ownership of banks and enterprises, and indirect tax measures. But what about those costs more directly set by the Government?

Health costs are up 56.5% on December 2001, Education is up 81.5%. In Health, the core drivers of inflation have been Hospital Services (up 40.2% since December 2001 and 9.8% in 2011), Dental Services (up 20.6% in 5 years, but down 0.3% in the last 12 months). Meanwhile, prescribed drugs prices are down 11.3% on 2006 and 4% in the last 12 months. Health insurance costs are up 75.7% and 22.9% since December 2006 and in the last 12 months, respectively. This in a country with younger population and well-established trends in terms of demand for healthcare. In contrast, vehicles insurance – privately provided and similar in predictability of total claims risks – inflation since December 2006 amounts to just 9% and 0.9% in the last 12 months.

Same story of the state-led rip-off is replicated in the Transport sector. Here, overall costs are up 9.3% in the last 5 years, but bus fares are up four times as much. Privately controlled costs of buying vehicles have declined 15.4%, while state-set motor tax rose 14.3%. Ditto in Communications, where telecoms services costs are up 5.8% in the last 5 years, but postal services up double that.

In two sub-sectors of education where the Government has least power to influence prices – Primary Education and Other education and training – inflation is the lowest. The highest price increases are in the third level education, with prices up 50.1% in just 5 years (13.4% in last 12 months alone).

The above clearly shows that the Government and the semi-state bodies and enterprises it owns, along with the banks are at the heart of the extortion racket that is our cost of living. Over the recent years, rapid deflation in prices and costs in the private economy has been offset by the rampant inflation in prices and costs in the state-controlled and regulated sectors. In majority of cases, this inflation was directly benefiting state and semi-state employment, management and Government coffers. In all cases, the costs were directly impacting Irish consumers who are left with no meaningful choice, but to comply with the pricing structures set in the markets.

CHARTS:



Sources: CSO database and author own calculations

Meanwhile, Budget 2012 clearly shows that the Government is hell-bent on extracting ever-higher rents out of consumers through taxes and charges.

For example, the Government has introduced increased mortgage interest relief that amounts to €52 million in help for most indebted-households. But the very same Government refuses to intervene in the banks’ internecine policies of shifting the burden of losses from trackers onto the adjustable rate mortgagees. The households that the Government finds in the need of increased mortgage interest relief will be liable for the new Household Charge. And, if Minister Noonan has his way, mortgagees who default on their loans will pass into outright debt slavery to the banks.

There are more direct inflation-linked or inflation-raising taxes, such as VAT. Increase in the VAT rate simultaneously pushes up the overall tax component of all goods and services sold in the state that are taxable at the higher rate (an increase in inflation of some 9.5% for those items) and increases the costs of all goods and services that are dependent on intermediate inputs. Excise tax on tobacco comes against the Revenue Commissioners’ analysis showing that tobacco taxes have reached, even before Budget 2012 measures are factored in, the point where higher taxes harm receipts and fuel black markets. And Carbon Tax quadrupling from €5 per ton to €20 per ton has been responsible for some 2% rise in inflation in fuel and related activities. Motor tax increases, accounting for double the share in an average household expenditure that accrues to bus fares, are going to directly drive up the cost of transport.

Increases in State charges for hospital beds are expected to raise the cost of healthcare for middle class patients by some €268 million in full year terms. Health insurance levy hike further compounds this inflationary grab-and-run approach to policy. Secondary education ‘savings’ are likely to see parents being forced to cover much of the gap in funding out of their own pockets. Third level measures, while relatively modest in size, will compound massive inflation already accumulated in the sector over the last 5 years.

By the metrics of the Budget 2012, the current Government didn’t just mothball its pre-election ideas on reducing the reach of the State-sponsored Rip-off Ireland, it has actively moved to embrace the cost-of-living increases through indirect taxation and encouraging avarice of the semi-state commercial bodies and dominant near-monopolies. All of which means that the path to economic recovery we continue upon is the path of deflationary spiral in private sector economy, with mounting unemployment and businesses insolvencies, offset by the unabated cost increases when it comes to the meagre services the State does supply or control.


Box-out:
Following an almost 11% month on month decline in trade surplus in October, Irish exporters have posted a record-breaking return to health in November, bucking all expectations. The market consensus was for the Irish trade surplus (merchandise trade only) to decline marginally to ca €3.4 billion in November. Instead, the trade surplus rose – on seasonally adjusted basis – to €4.31 billion – the highest on record. In 11 months through November, cumulative merchandise trade surpluses now amount to €40.53 billion or 1.6% ahead of the same period in 2010. As before, the core drivers of trade surplus were exports increases in Organic Chemicals, and Medical and Pharmaceutical products, while indigenous exports rose significantly during the last year in Dairy products category. The latest data highlights the resilience of the Ireland-based MNCs’ exporting capabilities, providing continued contrast to the majority of our counterparts in the Euro area ‘periphery’ who have been posting dramatic slowdowns in exports and deepening trade deficits since the beginning of Q4 2011.

Thursday, January 19, 2012

19/1/2012: December Inflation - State's Fingerprints all Over the Crime Scene

There will be a much more detailed analysis of the state-sanctioned rip-off that is revealed in the latest data from CSO on Irish consumer prices in my sunday Times article this weekend, so stay tuned for that, but here are some numbers from today's release.

First off - changes yoy for 2010 and 2011:

And next, cumulated changes in prices for 2007-2011 period:
Lighter blue are categories that have either full or significant share of prices set or influenced directly by Government policies.

One thing to note: mortgage interest costs which, per CSO data have fallen 10.7% in 2007-2011. Of course, this conceals the fact that since the Irish State took over most of the Irish banking sector, in 2010-2011, mortgage interest costs are up cumulated 28.11%. Over the same period of time, ECB rates have moved from 1.0% in January 2010-March 2011, to 1.25% in April-June 2011, to 1.50% in July-October 2011, to 1.25% in November and 1.0% back in December 2011. In other words, the average rate has gone DOWN from 1.23% in 12 months pre-January 2010 to 1.13% in  24 months since then. And yet, mortgage interest keeps on climbing... up whooping 20.4% in 2011 alone.

Yet another useful comparative that is concealed by the above data is that while mortgage interest costs might be down 11.7% on December 2007, they are up 7.7% on December 2006. Now, in December 2006, ECB rate was 3.5% or 2.5 percentage points above where it was in December 2011.

So let's take a look at slightly longer horizons. Chart below show cumulated price changes between December 2001 and present and December 2006 and present also courtesy of the good folks of CSO.

Again, the same story - the higher the price increases, the more likely we are dealing with directly regulated or state owned enterprises-dominated or state-controlled sector. 

More detailed analysis in my forthcoming Sunday Times piece this week.

Thursday, October 13, 2011

13/10/2011: CPI for Ireland: September 2011

Consumer prices inflation is now running above 2.5% in Ireland and the usual culprits are to be blamed.


Consumer Prices in September rose +0.3% mom against a decrease of 0.1% recorded in September 2010. As a result, per CSO, "the annual rate of inflation increased to 2.6%, up from 2.2% in August 2011". Annual inflation is now running above 2% target every month since January 2011.

The EU Harmonised Index of Consumer Prices (HICP) for Ireland rose +0.1% in the month, compared to a decrease of 0.2% recorded in September 2011. The annual rate of HICP was 1.3% higher in September compared with September 2010. Annual HICP was running at 1% increases in July and August - the lowest rate of HICP in Europe.

Chart below illustrates:
All Items CPI is now in annual expansion since August 2010. Moderate rates of under 1.7% CPI were exhausted in January 2011 and since then we have entered the period of excessive inflation, especially compared with the overall stagnant domestic demand activity. This means that accelerating price increases are no longer acting to support economic growth, but are compressing already strained household budgets and increasing future pressure on interest rates. It is worth noting that ECB decisions on rates are based on HICP, not CPI, which means that with Euro area HICP at 2.5% in August and July, against HICP rates at or above 2.5% every month since April 2011, the rates direction should be up.

Pert CSO, the most notable changes in the year were:
  • Increases in Housing, Water, Electricity, Gas &Other Fuels (+8.9% in September 2011 which comes on top of 8.5% rise in a year to September 2010), Miscellaneous Goods &Services (+6.5%), Transport (+4.2%) and Health (+3.4% - unchanged mom but up yoy in September, against an annual rise of 0.5% in September 2010).
  • Decreases in Furnishings, Household Equipment & Routine Household Maintenance (-2.3%) and Education (-1.6%).
  • The annual rate of inflation for Services was 3.6% in the year to September, while Goods increased by 1.3%.
The most significant monthly price changes were:
  • Increases in Clothing & Footwear (+5.4% - mostly due to seasonal effects) and Housing, Water, Electricity, Gas&Other Fuels (+1.7% - mostly due to mortgages interest costs rising +3.1%mom, liquid fuels (i.e. home heating oil) costs up +1.7%, electricity (+1.6%)).
  • Decrease in Transport (-0.7% - primarily due to decreases in airfares which fell 16.9%. Increases were recorded in bus fares (+8.8%), bicycles (+0.4%) and petrol (+0.3%)).

Charts below illustrate:


Charts below detail the rising gap between state-controlled prices and overall CPI as well as the gap between state-controlled prices and private sector prices:


Thursday, August 11, 2011

11/08/2011: CPI for July 2011


CSO reported Consumer Prices for July today. Here are some headline numbers and updated charts:
  • As measured by the CPI, remained unchanged in the month of July relative to June. There was also no mom change in July of last year. CPI index stood at 103.9 in June and July 2011 relative to December 2006 base and 122.7-122.7 relative to December 2001 base. This compares to index readings of 101.2 in June and July 2010 (2006 base) and 119.4 (2001 base).
  • As a result of the above monthly movements, the annual rate of inflation remained unchanged at 2.7%.
  • The EU Harmonised Index of Consumer Prices (HICP) decreased by 0.2% in the month, compared to a decrease of 0.1% recorded in July of last year. July 2011 HICP index stood at 106.5, down from 106.7 in June, while July 2010 index was 105.4, down from June 2010 reading of 105.5.
  • The annual HICP inflation was 1.0% in July 2011 relative to July 2010.
  • All items CPI, therefore is now running at 2.7% for the third month in a row, down from 3.2% in April 2011. A year ago, All items CPI was showing deflation of -0.1% and July 2010 was the last month of annual deflation in the current crisis period.

The most notable changes in the year were increases in
  • Housing, Water, Electricity, Gas &Other Fuels (+10.3%) - with significant (over 10%) weight in household spending basket. Increases in this category were led by mortgage interest cost hikes which are now 25.2 up on last year and were 2.3% higher than a month ago (please note, our Financial Regulator and the Gov are not making any concerned statements about mortgages interest costs, while talking about the need to restore lending to the corporate sector). In addition, Electricity is up 4.6% annual, while liquid fuels are up 20.1%. Once again, no concern from the Government, whatsoever, on the issue of these costs increases.
  • Miscellaneous Goods &Services (+7.2%), driven primarily by hikes in Health Insurance (+21.4% yoy and 0.1% mom). Overall Insurance services costs are now 14.5% up yoy, but down 0.3% mom.
  • Transport (+3.5%) - also with >10% weight in expenditure basket. Transport costs were primarily driven by 12.8 annual inflation in Fuels & lubricants sub-category (led by 12.6% annual hike in Petrol and 13.7% hike in Diesel), and Transport services (+7.7% yoy and 3.8% mom) where Air transport prices were up 25.0% yoy (+11.8% mom) and Sea transport (+12.5% yoy and 13.3% mom)
  • Health (+3.4% annual, although there was a decline of 0.1% mom). In this category, Medical products, appliance and equipment sub-category was up 1.4% yoy and down 0.2% mom, while Outpatient services declined 1.1% yoy and 0.1 mom. The real inflation here comes from the Hospital services, where costs are up a massive 9.8% yoy although there was no change mom. Again, I am yet to hear any real concern from the Government on this matter.
There were decreases in:
  • Furnishings, Household Equipment & Routine Household Maintenance (-2.9% - marking 43rd month of annual decreases in prices in this category, starting from January 2008)
  • Education (-1.3% - 10th consecutive monthly negative annual reading, by no change in mom inflation), although Primary education costs were up 1.3% yoy, while Secondary education costs were up 0.8% yoy
  • Clothing & Footware (-0.7% - marking 43rd month of annual decreases in prices in this category, starting from January 2008) and
  • Restaurants and Hotels (-0.7% - 26th consecutive monthly negative reading).

Inflation in the state-controlled sectors (sectors with either significant presence of regulated semi-state companies and/or state providers - e.g. education - or with significant shares of taxation measures relative to prices of goods and services - e.g. Alcohol Beverages & Tobacco) was running still ahead of private sectors inflation, with state-controlled inflation running at 1.02% annually, against private sectors inflation running at 0.53% in July. Both measures are down on June readings of 1.04% and 0.57% respectively.

Per CSO, "The annual rate of inflation for Services was 4.0% in the year to July, while Goods increased by 1.0%."

Thursday, June 9, 2011

09/06/2011: CPI data for May

Consumer Price Inflation data for May is out today. Recall that a month ago, higher mortgage costs and oil prices pushed inflation to a 30-month high, with prices in April up 0.4% mom and 3.2% yoy. This was the second highest rate of annual inflation since 2008. This time around, the catalyst for inflationary pressures was supposed to be mortgages costs, as ECB hike of 25bps in April was expected to feed through to retail rates. CSO is very careful about this aspect of inflation, having issued in the latest release an explanatory note (see below). Market expectation, consistent with my view expressed in December-January issue of Business & Finance magazine, is for inflation to average around 2.8-3.1% in 2011.

Now, on to today's data:
  • May CPI rose 0.1% mom - below the markets expectations and below 0.6% mom rise in May 2010. Yoy inflation was at 2.7% in May 2011, again below expectations in the market.
  • HICP - omitting, among others, cost of mortgages, car and home insurance, car taxes etc (see CSO note on this in the main release) - posted 0% change mom against 0.3% increase mom in May 2010. Annual HICP rose 1.2% relative to May 2010.
Charts to illustrate - first CPI, then two indices of prices:
In annual terms, largest increases were posted in
  • Housing, Water, Electricity, Gas & Other Fuels - up 8.5% after posting 11.8% rise in April and 12.5% in March. Within the category, Rents posted a 1.0% decline yoy and 0.1% increase mom, while mortgages interest costs posted a 0.6% mom rise and 20.1% increase yoy. Electricity, gas & other fuels sub-category posted a 1.0% decline mom and 6.6% rise yoy with Liquid fuels falling 3.8% mom and rising 17.9% yoy.
  • Miscellaneous Goods & Services posted a 8.4% increase yoy primarily driven by Insurance (+15.9% yoy) of which Health Insurance (+21.6% yoy, but -0.6% mom) was the biggest culprit. Motor car insurance was up 7.6% yoy and 0.7% mom.
  • Communications were up 4.1% yoy - driven solely by 4.3% rise yoy in Telephone & communication services.
  • Health was up 4.0% yoy - hospital services up 11.4% yoy (no change mom) followed by Pharmaceutical products (+2.5% yoy and 0% change mom)

Deflation was recorded in
  • Furnishings, Household Equipment & Routine Household Maintenance (-1.9% yoy and -0.1% mom) with strong deflationary momentum in Furniture & furnishings (-5.7%), and Major household appliances (-4.0%)
  • Education - down -1.3%- driven by 1,8% yoy decline in Other education and training and -1.4% drop in Third level education. On the opposite side of the spectrum, Primary education costs rose 1.3% yoy and Second level education costs were up 0.8% yoy.

Charts to illustrate these trends:

As usual - an imperfect measure of state v private sector controlled prices - first straight forward state-controlled or dominated or influenced sectors:

Next - an index of prices in two broadly defined sectors:
One point worth making - the above chart clearly shows that inflation has moderated in state-controlled sectors. It remains to be seen if this welcome change mom will translate into a longer term trend.

Finally, a point, as promised above, on the issue of mortgages costs. CSO provides a handy explanation of their terminology on page 10 of the main release, from which I quote here:

"... current approach to measuring mortgage interest in the CPI reflects the situation in the base reference period December 2006 when the standard variable rate was dominant. Subsequently, tracker mortgages have become more popular. This did not give rise to any difficulties while the standard variable and tracker mortgage interest rates moved broadly in line with one another, which would be the normal expectation. However, the decoupling that has taken place since August 2009 has resulted in dramatically different trends emerging. For example, between September 2009 and September 2010 the standard variable rate increased from 2.93% to 3.66% whereas the tracker rate did not change. The Mortgage Interest component of the CPI, which is largely determined by the trend in the standard variable rate, increased by 25.1% as a result and contributed +1.25% to the overall change in the All Items index. It is crudely estimated that the latter impact would have been reduced by between 0.2% and 0.5% had the Mortgage Interest component been calculated on a current weighting basis."

So what CSO are saying is that current mortgages costs metric overstates the overall impact of mortgages costs increases on CPI because more mortgages, since 2006, were issued in the form of tracker mortgages. That's fine, but there is also a sticky problem of the weights assigned to all spending categories, which are all based on December 2006. If since December 2006 the following changes took place:
  1. Overall costs of mortgages rose relative to other costs,
  2. Home ownership proportion in population rose (which could have been due to emigration out of the country selecting predominantly non-homeowners, for example),
  3. There have been significant exits from tracker mortgages and fixed-rate mortgages since 2006 (perhaps due to either selection bias in defaults or due to bias in favor of fixed rate mortgages in maturing mortgages, for example)
Then the weights used for this sub-category of spending might be below their current levels, off-setting the above effects of tracker mortgages.

Saturday, March 19, 2011

19/03/2011: Retail sales & Consumer confidence



In the previous post I suggested that the latest inflation figures do not bode well for 'growth-linked inflation, but signal instead the worst kind of inflation - inflation that is driven by either imports or regulatory factors. Here's more evidence - consumer confidence and retail sales figures:
Larger markers in the above chart show February values - clearly, no sign of demand drivers for price increases anywhere in sight here. Same holds for consumer confidence as a driver.

19/03/2011: CPI update for February 2011

Some belated data charts updates. Irish CPI:
The chart above shows the uptick in February CPI (up 0.9%mom and 2.2% yoy) and HICP (up 0.9% mom and 0.9% yoy).

Annualized rates below:
Should we read this as a welcome catch up of prices due to demand changes or due to factory gates tightness? Not really. Take a look at components:

Housing, Water, Electricity, Gas & Other Fuels up +9.5% yoy, Miscellaneous Goods & Services +4.8%, Health +4.1% and Transport +3.5%. Deflation continued in Clothing & Footwear -4.6%, Education -2.9% and Furnishings, Household Equipment& Routine Household Maintenance -2.6%.

Food & Non-Alcoholic Beverages prices were up +0.7% mom and +1.2% yoy to February 2011. This compares to deflation of -8.0% yoy in February 2010. Mom, food prices increased by 0.7% while non-alcoholic beverages prices increased by 2.0%. So we know it wasn't the commodities prices inflation that drove our food prices. Especially since commodities-linked prices of bread&cereals deflated by -3.8%, other milk products -0.9%, other cereals -0.7%, cheese -0.6% and margarine & low fat spreads -0.5%, while butter rose +3.8%, preserves by +15.3%, as sweets and chocolate fell 1.3%. And so on... all over the place, really.

Housing, Water, Electricity, Gas & Other Fuels costs increased by 0.5% mom and by 9.5% yoy. There was a decrease of 10.6% yoy to February 2010. Mom, prices rose for liquid fuels (i.e.
home heating oil) +2.7%, materials for maintenance & repair of dwelling +1.5%, rents +1.0% and bottled gas +0.5%. A price decrease was recorded for mortgage interest -0.1%. But wait, yoy rents rose 0% and mortgage interest rose 20.3%. Clearly, credit crunch is raging for homeowners. One of the core remaining construction-related sub-sectors still standing is maintenance & repair of dwelling. This was down 0.1% yoy in terms of materials, but a significant -5.5% in terms of services - so work wages are down, but inputs on materials side is basically flat. Materials were up 1.5% mom and services were flat in February 2011. Given we import much of the former and retain domestically much of the latter, the news of overall monthly inflation in this category is really not good for Irish economy. We got the wrong end of inflation, folks - inflation that undermines our real incomes without supporting new jobs!

Electricity, gas and other fuels were up 10.5% yoy as a category, electricity up 3.2%, natural gas double that at 6.4%, liquid gas up 37.3% yoy. Again, wrong inflation for growth and much of it is due to changes in taxation structures, state companies surcharges and so on.

Health is a standout in the above chart. Down 0.6% mom but up 4.1% yoy. No need to explain why the cost of hospital services rose 11.5% - say 'Thanks' to our semi-state insurance company policies and the Budget, but not for the insurance prices increases - those are in the Miscellaneous Goods & Services where health insurance rose a massive 17.6% yoy and 14.4% mom.

Now - my exclusive - as usual, the breakdown of inflation by state v private sectors:
Or cumulative Rip-Off Government Policies effects:
Yet another legacy of the Social Partnership folks - as the Big Domestic Business (aka semi-states), State Quangonoids and Unions - the Real Golden Circle - take another bite at the economy's pie. The real economy is still on the edge of continued deflation (+0.1% mom), while the surreal Social Partnership-controlled economy is roaring ahead with 1.04% mom inflation, to 2011 fat bonuses. Happy times, as Borat would put it.

Thursday, October 14, 2010

Economics 14/10/10: Rip-off Ireland is roaring its ugly head

CPI for September is out... kinda out... it was sent out yesterday without an embargo, by mistake, and now it was re-released again.

So the headline figure is: +0.5% yoy gain in CPI and -1.0% yoy loss in HICP. Mixed bag, you'd say. By one measure (CPI) it looks like things are getting back to a (positive) normal, while by HICP reading we are still in the (crisis) normal.

But let's take a closer look at decomposition of price changes. Per CSO, the most notable changes in the year were:
  • increases in Education (+9.5%),
  • increases in Housing, Water, Electricity, Gas & Other Fuels (+8.5%) and Communications (+2.9%) [Note: monthly CPI ex mortgage interest decreased by 0.2% in the month and was down by 0.9% in the year], and
  • decreases in Clothing & Footwear (-7.4%), Furnishings, Household Equipment & Routine Household Maintenance (-3.7%) and Alcoholic Beverages & Tobacco (-3.1%).
The annual rate of inflation for Services was 2.1% in the year to September, while Goods experienced continued deflation of -1.6%.

The most significant monthly price changes were:
  • decreases in Transport (-1.6%) - driven by airfares drop (not by the state-controlled bus and train fares, mind you) and
  • decreases in Miscellaneous Goods &Services (-0.4%) - primarily due to cuts in health insurance charges;
  • increase in Clothing & Footwear (+4.5%).
Per CSO: "The CPI excluding tobacco index for September decreased by 0.2% in the month and was up by 0.4% in the year. The CPI excluding energy products fell by 0.2% in the month and decreased by 0.2% in the year. "

So good news then is that:
  1. State services, such as Education (+9.5% ! in 12 months);
  2. Banks payback to consumers for propping them up (CPI is up +0.5% yoy and ex-mortgages CPI is down -0.9% over the same period. So far, we have had, courtesy of our banks rescue plans: in a year to September 2009 mortgages costs fell 48%, in a year to September 2010 they rose 25.1%. All despite the fact that Irish banks are no longer facing higher costs of funding - instead they are simply borrowing from ECB using our bonds, for which you, me and our kids will be liable);
  3. State-set charges on energy (+8% yoy);
  4. State set health costs (+0.5%);
  5. Largely state-set or influenced transport costs (+1.4%)
are all signaling that we are living in a public sector boom times, as the Government seemingly pushes forward with the agenda of beefing up semi-states revenues at our expense.

Clearly, we've turned another corner, folks, and it's the 'Ugly Boulevard' ahead of us, consumers.

Thursday, August 12, 2010

Economics 12/8/10: Irish July CPI: Deflation is over, for the State sectors

“Consumer Prices in July, as measured by the CPI, remained unchanged in the month,” says CSO. Hurrah, the end of deflation then? “This compares to a decrease of 0.8% recorded in July of last year. As a result, prices on average, as measured by the CPI, were 0.1% lower in July compared with July 2009.”
Sounds like the good news. But… “The EU Harmonised Index of Consumer Prices (HICP) decreased by 0.1% in the month, compared to a decrease of 0.8% recorded in July of last year. As a result, prices on average, as measured by the HICP, were 1.2% lower in July compared with July 2009.”

Err, of course, HICP excludes the cost of housing. And the cost of housing has been going up in Ireland courtesy of the banks. So let me see:
  • Deflation is bad, because it signals lower returns for businesses, induces consumers to save excessively and stops investment;
  • Inflation is ok, then, as long as it reverses the three ‘bads’ caused by deflation.

So our ‘good news’ of the ending of deflation isn’t good at all, then. Why? Because, per CSO: most notable changes in the year were decreases in (see charts below)
  • Clothing & Footwear (-8.5%) - competitive sector;
  • Food & Non-Alcoholic Beverages (-3.8%) - relatively competitive sector; and
  • Furnishings, Household Equipment & Routine Household Maintenance (-3.4%) - buyers' market.
There were increases in
  • Education (+9.2%) - state controlled,
  • Housing, Water, Electricity, Gas & Other Fuels (+5.5%) - state- and banks-controlled, and
  • Transport (+2.7%) - state-controlled in terms of costs and charges.

Which of course means that prices have risen primarily in state- and banks- controlled sectors. These sectors inflation does not induce businesses to invest (as they are forced to pay higher costs and do not see increased revenue in their core activities), it does not induce people to consume (as they continue to save even more in anticipation of banks coming for their money through mortgages increases) and it does not result in increased returns to productive business activity (as higher costs shrink margins). The CPI excluding mortgage interest showed no change in the month and was down by 1.0% in the year.

Let’s plot that relationship between state-controlled prices and private sector prices, weighted by their respective weights in overall CPI basket:

No further comment needed, I presume.

Thursday, June 10, 2010

Economics 10/06/2010: CPI & Industrial Production

Host of stats released today point to continued recessionary dynamics in the Irish economy and no turnaround in sight.

First, on consumer prices side. While the usual cheerleaders' squad of 'in-house' economists are singing the swan song of 'deflation is almost over', take a closer look at the composition of CPI changes and you can see that contrary to their claims, prices in categories that represent leading indicators for an uptick are still falling, month on month.

Per CSO: the most significant monthly price changes were
  • increases in Housing, Water, Electricity, Gas & Other Fuels (+2.9%), Transport (+0.8%) and Food & Non-Alcoholic Beverages (+0.4%); and
  • decreases in Clothing & Footwear (-1.1%) and Furnishings, Household Equipment&Routine Household Maintenance (-0.2%).
Detailed sub-indices show that:
  • Education rose 9.1% in 12 months to the end of May, 2010
  • Housing, Water, Electricity, Gas & Other Fuels was up 3.7%
  • Transport was up 4.9%
So the return of inflation in Ireland - a turnaround sign for some - is driven by such hugely value-additive activities as:
  1. Hikes in mortgages rates by the banks rebuilding margins (mortgage interest was up 6.1%);
  2. Liquid fuels price hikes (+8.5% mom) due to our great Government idea of imposing a new tax on fuel which came in effect in May;
  3. Higher cost of natural gas, courtesy of our regulated state-owned utility that is now offering competition in electricity markets, while jacking up prices in its core activities;
  4. Cost of air transport (up 14% amidst collapsing demand)
  5. Higher cost of petrol and diesel;
  6. In Recreation and Culture group, there was a 4.1% mom increase in the state-controlled cost of cultural admittance;
  7. In education, as numbers of students continue to rise, and as unemployed folks are dreaming about retraining, while financially stretched parents are seeking the ways to cut costs of raising children, our wonderfully accommodating state has ratcheted prices up by 9.1% yoy.
Oh yes, that does really suggest that "demand is improving" and "the economy is turning the corner".

All in, Ireland has now enjoyed an unprecedented 17 months of deflation. In statistical terms, we've hit the bottom and are now returning to positive price inflation territory, slowly but surely, But in economic terms, price increases are driven not by demand, but by the state diktat. desperate to claw as much as possible out of the economy into its own coffers, our state is inventing ever more elaborate schemes to get to our pockets. And with it, the banks too are getting bolder by the day. Instead of a turnaround, all of this smacks of a threat of a renewed pressure on household incomes, and, thus, on the economy.


And, of course, there isn't much of sunshine in the industrial production data released today either. Overall, Irish industrial production was don 11.8% mom in April in terms of production index and up 2.6% in terms of turnover index. Of course, Irish industrial production is the most volatile in the OECD so one must not be tempted to read too deeply into these figures. However, what is clear is that with such dramatic rate of decline, there isn't any signs of an uptick on industrial production side either.

Which, of course, means I am not changing my earlier forecast for GDP growth of -0.3-0.7 in 2010 and GNP growth of -1.0-1.2%. No matter what Ibec or anyone else says...

Thursday, September 10, 2009

Economics 10/09/09: A dive into CPI discovers ESB and B Gais monsters

Consumer prices posted the first increase in August - up 0.4% mom on July or double the consensus forecast. This is the first monthly rise since September 2008. Prices rose helped by the nasty predictables, though:
  • mortgage repayments were up 3.4% on average - although mortgage repayments are still down 48.2% yoy, the latest tick up is a clear sign that the banks are starting to 'repair' their margins and are driving cost of mortgage financing up - bad news for already demoralized consumers;
  • the above trend is likely to accelerate: Irish banks' mortgage rates were the third lowest in the EU in June 2009 (only Portugal and Finland had lower average rates), but this is somewhat simplistic of a comparison as majority of current borrowers in Ireland are taking or holding variable rate or tracker mortgages. In contrast, in other countries of the Eurozone, much higher percentage of mortgages issued are in fixed terms of much longer duration than those in Ireland. But one has o be also concerned with the riskiness of Irish mortgages to the banks - Irish banks spot 173% average loans/deposits ratios and this is a mad level of leveraging for the sector, comparable to the worst 'offenders' - the poorly performing UK banks;
  • a bit more on housing costs: "In the month, price increases were recorded for liquid fuels (i.e. home heating oil) (+9.4%) and mortgage interest (+3.4%). Price decreases were recorded for rents (-2.4%) and bottled gas (-0.4%)." Rents falling - bad news for housing markets then;
  • ex-mortgages (HICP) was up 0.2% in August in mom terms (yoy term we are still in deflation at -2.4%, for comparison Euro area overall HICP is down 0.2% yoy in August - 12 times less than Ireland's);
  • but this August things still were worse than a year ago - back in August 2008 mom inflation was 0.5%, this August it is lower at 0.4% despite a massive deflation since then.
In addition to the above main points, other worrying things are in the pipeline for inflation.

Transport costs rose 1.1% mom due to higher cost of fuel (as some analysts claimed in their rushed notes). Alas, CSO detailed sub-indices show that it was not petrol that was the main culprit: "In the month, price increases were recorded for air fares (+7.0%), bus fares (+3.8%), petrol (+1.7%), maintenance & repair (+1.4%), diesel (+1.2%), other vehicle costs (which includes parking fees and car rental charges) (+0.8%) and motor cars (+0.4%). Price decreases were recorded for other transport (-4.3%), spare parts & accessories (-1.8%), sea transport (-1.6%) and bicycles (-0.7%)." So in short - private sectors are still competing on price, but state bus monopoly is ripping off the customers, while airlines are scrambling to cover losses.

"Education costs decreased by 0.3% in the month and increased by 3.9% in the year to August 2009. This compares to an increase of 6.5% for the year to August 2008. A price decrease was recorded for other education & training (-0.7%)." No savings on third level or any level education in sight then which means - wait, CSO won't tell you this in their summary -
  • cost of primary education in this country has gone up by 7.6% yoy in August 2008-August 2009 period;
  • cost of secondary education went up 7.1% yoy;
  • cost of third level education is up 4.5%
We really are doing everything possible to increase the level of educational attainment for kids and adults in Ireland, aren't we?

Of course there was no easing of costs of our two grand state monopolies: ESB and Bord Gais. Year on year, the former dropped 10.9% and the latter rose 6.5%, so given their weights in expenditure, the basket of these two energy sources lost roughly 5.2% of its value. But in the same period of time, oil dropped 36% and gas dropped 63%, so the actual spot market price savings on the basket should have been around 44.9%. Ok, allow for a profit margin of a whooping 10% (we are in a recession) and a cost margin of 15%. Still, you get something to the tune of 25-27% savings that is not being passed onto consumers by ESB and Bord Gais.

Ah, the costs of our glorious state monopolies. I know, some will stop reading here, but - folks, the Exchequer (the same one who is 'protecting' taxpayers interests in Nama, allegedly) is the sole owner of these rip-off monopolies! Shouldn't Brian Lenihan 'protect' taxpayers from their abuses? That would give him at least some credibility in claiming that he actually acts in the interest of this country's people...


I must confess - after Pat McArdle's retirement, I stopped quoting from the Ulster Bank notes. But here is a rare exception: "For the year as a whole we expect an average consumer price fall of 4.2% [CPI, I presume], which would represent the greatest decrease since the 6.4% drop in 1931". A nice piece of history, folks, and possible a good forecast target too.

Thursday, July 9, 2009

Economics 09/07/2009: Green Shoots to Brown Manure

Inflation figures are out - more significant deflation in works than was anticipated by the analysts (-0.3% in June relative to May, with annual rate off -5.4% in June against 4.7% in May). We are also diverging from the Eurozone, though no one should really care about that. Mortgage costs reductions (down 5.7% on average in June relative to May) were the largest factor. Public sectors and state-controlled prices are still in inflationary territory, so no surprise here either. My prediction for the annual inflation rate to hit -5.8-6% in Q4 2009 and reach -4.1-4.3% in a year as a whole. Public sector v private sector price differentials should widen by ca 5.5-6%, so the rip-off that is our State controlled economy will continue into 2010.

A decent note on inflation was from the Davy's this time around (sadly, my usual favorite Ulster Bank note was a bit less advanced than customary). Davy: "The good news is that Ireland has closed the gap further with the euro area price level. HICP in the euro area was up 0.2% mom, according to the “flash estimate”, versus no change (+0.0%) here in June. Ireland's price level is slowly but surely re-adjusting towards the euro area-16 level. Note that the gap was a massive 22% in 2008 on average according to Eurostat. It has closed by more than two percentage points since the peak last year and will be below 20% on average at end-2009. We do not think the price levels should necessarily converge (productivity and, hence, income disparities justify a premium), but Ireland's exporting sector – particularly the indigenous part – needs the gap to tighten significantly yet."

Now, not to overplay these trends, one has to be aware of the fact that this is exactly what we are missing in terms of devaluation. Competitiveness, normally restored via dropping one's currency value, would imply the value of the Irish Euro traveling south of the current 20% price gap with the EU and would require a devaluation to the tune of 30%. Why? I don't frankly believe in our superior productivity, so any income differential between Ireland, and say, Germany, should be nominal. We can't do that currency adjustment. Which means that with price deflation taking, say, 6-10% of the Eurozone-Ireland gap away, this leaves a 20-24% decline in wages to take up the slack. Awesome price to pay for the Euro membership.


Production in manufacturing figures for May 2009 are out as well:
Turnover index is down on renewed pressure - sales are stalling again, but production index is up, so is overcapacity looming again?
The two series crossed over in May, so expect production to turn down in summer months and turnover index to stagnate, setting stage for new layoffs should things fail to improve in September. Margins tighten, so workers must be next.

As manufacturing records -1.3% fall in January-May 2009 in annual terms, the rate of decline has indeed slowed, but this can easily be a technical correction before a renewed pressure down. Of course, 18.7% increase in pharma output obscured the reality somewhat. Significantly, other modern sectors posted a 22% drop in output, while domestic sectors recorded 13.8% contraction in 2009 to June 1. Now, recall that Davy eagles have spotted the end of economy-wide recession by pointing to agriculture turn-around. Inclusive of massive subsidies boost to pork producers, food sector output was down 0.4% in the first five months of 2009.

In seasonally adjusted index terms, manufacturing industries now stand at 97.6 - a reading that is bang-on in line with December 2008 (97.4) and February (97.5), marking the third lowest point for the sector since 2005. Turnover indices have hit new spells of deterioration in Manufacturing, Chemicals and Chemical Products, Basic Pharma Products & Preparations, Computer, electronic & Optical Products and Other Manufacturing - in other all sectors but Food Products. Capital goods production index is at the second lowest point since January 2008, Intermediate Goods index is no turning negative again.

In case you need an illustrative proof:
Slightly more interesting day for the US economy.

First, a great salvo from Warren Buffett, who said that as unemployment can hit 11%, the US economy might need a second round of stimulus. To those still looking for those 'green shoots', Buffett's analysis is clear: "We're not in a freefall, but we're not in a recovery either," he told ABC's "Good Morning America. We were in a freefall really in the last quarter of last year, starting in the financial markets and spreading to the economy, and we had this huge change in behaviour." Buffett compared the 2009 $787 billion stimulus passed by Congress to "half a tablet of Viagra and then having also a bunch of candy mixed in --- it doesn't have really quite the wallop."

Second, US first-time claims for state unemployment benefits fell 52,000 to 565,000 in the latest weekly data, after seasonal adjustment, while continuing claims hit a record high, as the Labor Department reported. The four-week average of initial claims was down 10,000 to 606,000. The monthly moving average of continuing claims rose 12,000 to a record 6.77mln.

Nouriel Roubini has a superb article in Forbes (here): "The June employment report suggests that the alleged green shoots are mostly yellow weeds that may eventually turn into brown manure." A priceless openning salvo. As Brian Cowen is waiting for the US to pull us out of the depression.

Thursday, April 9, 2009

Daily Economics 10/04/09: Rappers want Euros

Taxpayer champions?
An excellent argument by David Quinn on the need for someone to step out of the shadows and become a taxpayers champion (here). FG to the front, suggests David. Most likely. But in the end, in my view, even Sinn Fein will do? Or a backbenchers'-led revolt in the FF. The country is now at its knees and the ZanuFF's leadership is so out of touch with reality, Cowen is telling us - private sector workers battered by unemployment, wage cuts, higher taxes and unbearable debts - that public sector employees know pain endured by the economy first hand. "I believe that the reality of the crisis we face as a society is particularly evident to public servants who are dealing at first-hand with the consequences – personal, social and economic – of our current difficulties,” said our out of touch leader (here). Tell me Brian - how? Through their jobs-for-life, strike-for-any-reason, guaranteed-pensions, increments-wage-rises, Partnership-giveaways, excessive-holidays, take-your-time-to-do-anything positions?


Consumer prices... deflation is of little help to the consumers
: Per yesterday's figures on Irish CPI, see my comment in today's Irish Independent (here). And a quick comment to the Wall Street Journal from me relating to the latest Gov plan for a 'bad' bank (here).


And Gerard O'Neill has an excellent post on Partnership (here). Stockholm Syndrome at the IBEC and:
"Oh, I forgot: there's the Enterprise Stabilisation Fund - a grand total of €50 million this year. Let's work it out: say there's 1,000 companies eligible for support (about par with the numbers Enterprise Ireland works with every year). That equates to €50,000 in support - or stabilisation - for each company. Jaysus lads, this time next year we'll be millionaires..."
Actually it is even worse - of the €50mln, only €25mln is in new allocations to DETE, the other €25mln is coming from somewhere else - already in existence. And there was no support for export credits - a mad lunacy of the Government that is willing to waste billions on bad developer loans, but pinches an odd €10mln to provide short-term credit to companies with exports waiting at the dock and willing buyers on the other end. Instead of this virtually risk-free financing, we have the net 'stimulus package' is €25mln - a slap in the face to private sector Ireland and a clear indication of the arrogance and incompetence at the head of DETE.


A solution at hand for Cowen, Lenihan and Coughlan...
Here is an excerpt from the post (here) by a celebrity masseuse, Doctor Dot:
"Tonight... I massaged the best looking President on earth, Mikheil Saakashvili... He is the President of Georgia and super fun to talk to. He originally wanted only a 30 minute massage but 90 minutes later, he told me my massage is "the best massage I have had in my life so far". Mikheil had body gaurds [sic] outside the massage room the whole time, who were all over 6 feet tall and like 4 feet wide. One spoke English really well and told me his favorite group is Metallica. Ha. He said "I am a rocker!" so we got along fine, whilst waiting for the President to finish his work out. I was excited to finally get to massage a President. I have massaged the Prince of Saudi Arabia before and a few Mayors, but this was the first President for me."

Thus we have a prescription to presidential joy: get your economy demolished, country demoralised, make some spectacularly disastrous decisions across the board, appease your cronies, get your country into debt to the EU and then, get a massage...

Doctor Dot, we have three Saakashvilli equivalents here in Ireland - not as good looking and with less pleasing body guards, but otherwise, even more spectacular disasters... Massage sessions on taxpayers' bill?



Inflation cometh... Here is an excellent recent blog post from Marc Faber on the issue of upcoming inflation (and a related blog here). I've spotted the risk a while ago (here), so I am happy to report that we are now seeing more and more commentators beginning to concerns themselves with the obvious problem: where can all the liquidity that the Fed and other Central Banks are pumping into the global economy go. From the point of view of the long-term policy consistency for the Irish Government, this is a proper conundrum.

Having raised taxes in 2008-2009, what will Brian do when we have externally imported inflation hammering households, the ECB hiking rates killing off scores of Irish homeowners and we have no control over tax levers (because we have borrowed so much that rising interest rates will simply make it impossible to cut tax rates as the inflationary spiral uncoils)? Oh, I get it - he will simply remind us all of our patriotic duty to keep paying his wages.


Hopes are rising?..
No, not in Ireland, but my hedge funds networking group website has been inundated with jobs offers - sales, technical, trading etc - from US headhunters. For the first time since early 2008, the usual daily page of posts has been dominated not by 'distressed assets for sale' or 'looking for a position' memos, but by jobs offers. May, just may be, should jobs situation abroad stabilise, by the mid 2009 we will have that Irish solution to an Irish problem - emigration - becoming available to Irish financial sector professionals. Then we'll truly arrive in the 1980s scenario.


On the US data
: Yesterday's data from the US is painting an interesting, and cautiously encouraging picture.

First, the jobs front.
First-time claims for unemployment benefits fell a seasonally adjusted 20,000 to 654,000 in the week ended April 4. The level of first-time claims is 83% higher than the same period in 2008. The four-week average of th2 initial claims fell 750 to 657,250. However, for the week ended March 28, the number of people collecting state unemployment benefits reached yet another new record, up 95,000 to 5.84mln - double the level in 2008. Per Marketwatch, "continuing claims have gained for 12 consecutive weeks, and have reached new weekly records since late January." The 4-week average of continuing claims was up 146,750 to a record 5.65mln. The insured unemployment rate - the proportion of covered workers who are receiving benefits - rose to 4.4% from 4.3%, reaching the highest level since April 1983. All of this signals that while the new unemployment may be bottoming out, workers are not seeing an increase in new jobs availability. Of course, unemployment itself is a lagging indicator relative to, say, capital investment. Inventories declines, posted in recent days, have probably more to say about the underlying dynamics, signalling potentially a flattening of the downward trend in economic activity.

Corporate earnings... Two major corporates announced pre-reporting updates last night. Wells Fargo & Co surprised the markets yesterday with the Q1 2009 earnings note claiming that earnings will rise to $3bn - ahead of analysts forecasts - on the back of falling impairments and rising mortgage lending. Earnings figures were quoted net of dividends on preferred securities, including $372mln due to the Treasury Department. Analysts expected earnings of ca $1.94bn.
Total net charges will be $3.3bn, compared with Q4 2008 net charges of $2.8bn. Wachovia - purchased by Wells Fargo on December 31, 2008, will see net charges of $3.3bn. Provisions will be about $4.6bn in the quarter compared to $8.4bn in provisions during Q4 2008.The news drove US financials to significant gains yesterday as the markets were delighted to see the bank finding a way of generating profits out of free Federal money it received. Who could have thought that possible.

Aptly, US stocks jumped higher across the board, with the Dow Jones Industrial closing its first five-week stretch of gains since October 2007, rising 246.27 points, or 3.1%, to finish at 8,083.38, up 0.8% for the week. The S&P 500 added 31.40 points, or 3.8%, to end at 856.56, a 1.7% rise in the week. The Nasdaq Composite climbed 61.88 points, or 3.9%, to 1,652.54, a weekly rise of 1.9%.

But there were some side-line noises from the real (i.e non-financial) side of the US economy when Chevron and Boeing issued earnings warnings on the back of lower oil prices, high production costs and falling demand for aircraft respectively. No free money from the taxpayers in their sectors has meant that the real economy continues to push lower.


World's new reserve currency... We have arrived - the Euro is becoming a reserve currency. The dollar is toast per BBC's latest report (here). And no, Euro's gains are not just in the market for Russian mafia wealth (remember those €1,000 bills issued in hope of diverting some of 'cash' reserves away from dollars). In fact, it is well diversified. As BBC reports, for some time already there has been a strong movement of US rappers out of dollars into euro. And there has been growing trade in services for euro-based money laundering by the drug cartels. At last, the hopes for a reserve currency challenge on the dollar are being realised.

I am of course being sarcastic - a disclaimer I have to put up for all Brusselcrats so concerned about any criticism of the euro. But to be honest, do we know how much of the EU paper been stuffed into the black markets? Seriously: rappers, mafia, drug barons... and Chinese Government - all think euro is the best thing since sliced bread... we've arrived.


And here is the latest take on the Budget (hat tip J):