Saturday 29 October 2011

Inflation Adjusted Oil Price since 1986 - UK Pounds

From reading this Septembers Inflation report from the Office of National Statistic today, one of the sectors highlighted as a big culprit for that month’s large increase in inflation, were fuel and energy.  I regularly see the historical oil price and have often wondered what the historic price was in UK Pounds or what it was when adjusted for UK inflation.  So I thought I would investigate.   

Using the West Texas Intermediate (WTI) crude oil spot price since 1986, from US Energy Information Administration, (www.eia.gov/petroleum/data.cfm#prices) and using the daily UK £ to US $ exchange rate from the Board of Governors of the Federal Reserve System (www.federalreserve.gov/releases/h10/Hist/) to convert it into Pounds Sterling per barrel.  The affect of UK inflation was adjusted for by using the Retail Prices Index (RPI) all items, from the UK Office of National Statistics for the UK inflation (www.ons.gov.uk).  The first two chat shows the daily US Dollar to UK Pound exchange rate and the WTI Oil price in US Dollars and UK Pounds.  

Daily West Texas Intermediate crude oil spot price since 1986 in US Dollars and UK pounds
Daily US Dollar to UK Pound Exchange Rate

It can be seen that the oil price has been pretty volatile in recent years, both in US Dollars and Pound Sterling.  Furthermore the US Dollar to UK Pound exchange rate has been fairly volatile since 1986 and varied from 1.4 to 2.2 US $ to a the UK Pound.  When priced in UK Pounds the oil peaked in 2008 at around £68 per barrel and this price was matched again in April 2011.  When the oil priced peaked in Dollars in 2008, it was around $135 per barrel.  This price has not been matched the rally at the beginning of 2011, where it reached around $110 per barrel.  So in the UK oil is very close to the price peak in 2008 and its all down to the falling value of the UK Pound compared to the US Dollar.  Below is the inflation adjusted historical WTI crude oil spot price in Pounds Sterling.
Inflation adjusted historical WTI crude oil spot price in Pounds Sterling since 1986





The dark blue line is the unadjusted daily spot price converted into UK Pound at that day’s exchange rate.  The pink line is the oil price adjusted to account for UK inflation (RPI).  As it can be seen, the present price in Pounds pretty much where it was in mid 2010 and end of 2005.  The end of 2005 was an interesting time in the UK, as it was the second time that the oil refineries where being blockades by lorry drivers (www.guardian.co.uk/uk/2005/sep/13/politics.oil).  The other time was in late 2000 when the same thing happened (news.bbc.co.uk/1/hi/uk/920679.stm).  The interesting thing to note is that on both of those occasions the oil price in Pounds Sterling was above £50 per barrel.  It looks like the last 26 years of cheap oil in Pounds is well and truly over.


Saturday 1 October 2011

Have UK Mortgages ever been cheaper?

I was reading an interesting news article on www.moneyobserver.com titled “Mortgages have never been cheaper”.  They talked about the fall in mortgage interest rates and how this equates to mortgages never being cheaper.  Although that is correct, as consumer what really maters tome in the monthly mortgages pay (which is a function of the interest rate and the total loan value).  Over the last decade as mortgage interest rates came down, the total loan value increased.  So I though that I would investigate the historic mortgage interest payments against Inflation (UK RPI) and wages. 

Using the data from the Office of National Statistics, available from the guys over at www.InflationaryPressure.com for their charts, we see the following.
Chart presenting the index of the average UK mortgage interest payment since and the retail price index RPI since 1987 to 2011 showing that the most of the time the mortgage interest payment has grown faster than inflation. However by 2009 mortgage interest payments had dropped by over 40 per cent and have increased in line with inflation ever since.
UK Mortgage Interest Payment vs. PRI.  From: www.InflationaryPressure.com



Chart presenting the index of the average UK mortgage interest payment since and the average UK house prices RPI since 1987 to 2011 showing that there is very little correlation between them.
UK Mortgage Interest Payment vs. Average House Prices.  From: www.InflationaryPressure.com


Presently the average mortgages interest payment has fallen below average wages, meaning that they are cheap historically.  However mortgages interest payment has been very volatile over the past 24 years.  Interestingly average wages index is currently around the middle of the extreme highs and lows in the mortgages interest payment index!  Then you compare the mortgages interest payment against RPI you observe that it is now equal to RPI.  Historically you observe that, uncannily the lows in the mortgages interest payment index equal RPI since 1987.

However when we examine the house price index against the average mortgages interest payment index you notice that they are not collated.  This indicates that something else is the driving force for house price growth.  As we are now finding out, house prices are driven prominently by the amount of money available to be lent out as mortgages.