Investment planning; NS&I slashes rates and more.

• August inflation numbers 
• NS&I slashes rates
• More government debt records broken

 

August inflation numbers

(AF4, FA7, LP2, RO2) 

The CPI for August fell to a barely visible annual rate of 0.2%, down 0.8% from July but still higher than market expectations of zero, according to Reuters. The last time the CPI hit this lowly level was December 2015. Across July to August prices dropped by 0.4%, whereas they rose 0.5% over the same period last year.                        

The CPI/RPI gap shrunk to 0.3%, with the RPI annual rate falling even more precipitously, from 1.6% to 0.5%. Over the month, the RPI was down 0.3%.

The Office for National Statistics (ONS)’s favoured CPIH index was down 0.6% for the month to 0.5%.

The continued easing of lockdown restrictions (during the survey period) meant that the number of items in the CPIH ‘shopping basket’ that were unavailable to consumers in the UK fell from 12 (or 1.3% of the CPIH basket by weight) in July to just 8 (1.1%) in August. Even so, the ONS says that it “collected a weighted total of 86.9% of comparable coverage collected previously”.

The ONS highlights the following as the more significant of the moves causing the drop in the CPIH inflation rate:

Downward

Restaurants and Hotels: The largest downward contribution by far (of 0.44%) came from this category. Catering services prices fell by 5.7% between July and August 2020, compared with a rise of 0.2% between the same two months in 2019. The 2020 fall this year is down to the Eat Out to Help Out Scheme and, to a lesser extent (as it has not been fully passed on), the temporary reduction in VAT from 20% to 5% for the hospitality sector.

Clothing and footwear: This category, which made the largest upward contribution in July, made the second largest downward contribution in August. Overall prices rose by 0.5% between July and August this year, compared with a rise of 1.8% between the same two months a year ago. The ONS notes that price movements this year have not followed the normal seasonal pattern because of lockdown effectively bringing forward discounts normally deferred to the Summer sales season. Overall, prices have been relatively flat since the beginning of this year.

Miscellaneous goods and services: A smaller downward contribution came from this category as prices rose this year by less than a year ago. The downward effect came principally from jewellery.

Food and non-alcoholic beverages: This category also produced a downward contribution as prices rose by 0.1% between July and August this year, compared with a larger rise of 0.5% a year ago. The largest effect came from bread and cereals, where prices fell this year but rose a year ago, particularly for items such as chocolate biscuits, packs of individual cakes and dried potted snacks. Overall annual CPI inflation in this category is now 0.4%.

Transport: There was a small downward contribution from transport, but the ONS says that this masked larger offsetting contributions within the group. Unusually, air fares fell between July and August this year, whereas normally they rise between these months, for example, by 22.4% in 2019. However, largely offsetting this are upward contributions from coach fares and second-hand cars.

Upward 

Recreation and culture: The largest upward contribution (of 0.02%) came from this category. Prices, overall, fell by 0.4% between the two months, compared with a larger fall of 0.6% between the same two months a year ago. Within this broad group, the main upward contribution came from games, toys and hobbies, particularly computer game downloads. Over the year-to-date, price movements for games, toys and hobbies have been less volatile than during the same period last year. The ONS reckons that the relative stability may be down to the lockdown changing the timing of demand and the availability of some items, particularly consoles. Echoing the falling flight prices, package holidays prices fell this year, but rose a year ago.

Only two of the twelve broad CPI categories saw annual inflation increase, while nine categories posted a decrease and the remaining one was unchanged. The category with the highest inflation rate remains Communications at 4.1% (down from 4.3%).

Core CPI inflation (CPI excluding energy, food, alcohol and tobacco) fell by 0.9% to 0.9%. Goods inflation fell from 0.0% to -0.2%, while services inflation dropped 1.5% to 0.6%%.

Producer Price Inflation was -0.9 % on an annual basis, unchanged on the output (factory gate) measure. Input price inflation fell 0.1% to -5.8% year-on-year. The main driver here was crude oil prices. 

This month’s inflation numbers are severely distorted by the Eat Out to Help Out Scheme, which will drop out from next month’s figures. The September CPI number will be the basis for indexation of benefits and allowances, if the Chancellor does not impose a freeze or take some other action.

As far as the pensions Triple Lock is concerned, yesterday saw the publication of initial earnings growth data for May-July, which revealed an annual change of -1.0%. The decline is lower than the -3.3% estimated by the Resolution Foundation in its June paper on the future of the Triple Lock. The smaller fall points to a correspondingly reduced bounce back in earnings (which Resolution had put at around 5% in 2021). The net result could be that the potentially costly Triple Lock distortion that had worried economists during the Summer never happens. Either way, it suggests the Chancellor will let the 2.5% Triple Lock increase take effect in April 2021 and await developments before reviewing that particular manifesto pledge.

Source: ONS 16/09/2020

NS&I slashes rates

(AF4, FA7, LP2, RO2)

NS&I has announced wide-ranging interest rate cuts, moving from top of the table to bottom in a single bound.

Back in mid-April, National Savings & Investments (NS&I) revealed a change of mind on interest rates. It had previously announced a cut in rates, but as the lockdown ground on, NS&I said the proposed cuts to variable rate products would not be implemented “To support savers at this difficult time”.

Wind forward five months and NS&I has made a radical change of tack, announcing cuts across the board that wipe as much as 1.75% off existing rates from 24 November: 

Product	Current rate	Rate from 24/11/20
Direct Saver	1.00% gross/AER	0.15% gross/AER
Income Bonds	1.15% gross/1.16% AER	0.01% gross/AER
Investment A/C	0.80% gross/AER	0.01% gross/AER
Direct ISA	0.90% gross/AER	0.10% gross/AER
Junior ISA	3.25% gross/AER	1.50% gross/AER
Premium Bonds*	1.40% 24,500:1 monthly odds	1.00% 34,500:1 monthly odds

* Change effective from December prize draw

In July, the Chancellor increased NS&I’s Net Financing target for 2020/21 from £6bn (± £3bn) to £35bn (± £5bn) in response to the costs of the COVID-19 pandemic. In the three months from April 2020, NS&I received inflows of £14.5bn. Demand for NS&I products has remained at similarly high levels since (NS&I do not give a figure). Thus, it seems likely that its year-end target has near enough been met at the half-way stage – hardly surprising given it was paying just about the best rates available.

NS&I say that the cuts ‘will see NS&I align its savings products against the rates offered by the banks and building societies.’ That is a somewhat creative interpretation of what is currently available – the instant access universe is not dominated by accounts paying 0.15% or less. Indeed, last week Skipton (briefly) offered 1.20% for instant access.

For fixed-rate products (only available for reinvestment of maturing monies) rates have also been cut by between 0.90% and 1.15%, again effective from 24 November.

NS&I’s variable rate cuts catch up with two reductions in base rate, from 0.75% in early March to 0.25% on 11 March and 0.10% from 19 March. Although the dramatic decreases will produce some kickback at a time the Government is not enjoying great popularity, from a financial viewpoint NS&I’s move is not only justified, but woefully late. At the time of writing, gilt yields for terms of up to seven years were in negative territory, so paying 1.15% for instant access money (the current rate on Income Bonds) makes no sense.

The NS&I moves leave premiums bonds the only relatively interesting (sic) option, particularly for taxpayers (albeit the maximum investment is £50,000 per person).   

Source: NS&I News: NS&I slashes interest rates and premium bond prizes – dated 21 September 2020.

More government debt records broken

(AF4, FA7, LP2, RO2)

The day after the Chancellor revealed his Winter Economic Plan (with no costings), the latest Public Sector Finances data were released by the Office for National Statistics (ONS). At first sight they were not as grim as might have been feared:

• The public sector net borrowing requirement (PSNBR) in August 2020 is estimated to have been £35.9 bn, £30.5bn more than a year ago and the third highest borrowing in any month since records started in 1993. However, the number was £2.1bn below market expectations and £8.5bn lower than the Office for Budget Responsibility (OBR)’s Financial Stability Review (FSR)central scenario projection for August.

• For the first five months of this financial year, total borrowing amounted to £173.7bn, despite the ONS reducing its estimate of the first four months borrowing by £12.7bn. It almost goes without saying that the year-to-date figure was the highest borrowing in any April to August period on record.

The corresponding OBR FSR projection at this stage was £223.5bn - £49.8bn higher. In its review, the OBR says about a third of this is because it allows for projected write-offs on Government guaranteed loans, which the ONS is still deciding how to incorporate into its data. The other two thirds are down to lower than projected central Government spending and stronger HMRC cash receipts over June to August, according to the OBR. The latter ‘appears to be broadly consistent with the faster-than-assumed recovery in real GDP through the summer’ in the OBR’s view.

• Overall Government debt rose to £2,023.9bn, £249.5bn (14.9%) higher than a year ago. As a percentage of UK GDP, debt rose to 101.9% in August; a year ago it was 80.9%.

• In terms of financing, the OBR notes that to the end of August the Debt Management Office (DMO) had sold £262bn of gilts, just over two thirds of its £385bn target for April-November. At the same August point in the financial year, the Bank of England had bought £246bn of (different) gilts under its latest round of quantitative easing (QE). To quote the OBR, ‘So, in effect, the Bank has purchased just £17 billion less from the private and overseas sectors than the DMO has issued (and £4 billion more on a net basis)’.

The Bank has £54bn of its latest QE round left to spend, which was originally intended to last until the end of the year. Unsurprisingly, there are now suggestions that more QE will be on the way. All the talk of negative interest rates may be a smokescreen to allow another £100bn of QE to appear, and the base rate to be kept at 0.1%

The best comment is probably that of the OBR; ‘With the virus taking hold again and the Chancellor announcing new support measures, prospects for the rest of the year remain highly uncertain’.

Source: ONS 25/9/20 OBR 25/9/20