Posts Tagged ‘Inflation’

19 May

The day after the inflation shock, the gilt rockets …

Posted by freethinkingeconomist in Uncategorized. Tagged: , .

which may confuse some people, but shouldn’t.    Here is the graph of the June Gilt future since March:

As this story indicates, yields are now at a very low level.

Good news?  Well, no.  A naive, political interpretation of this would be: the Conservative government has impressed the market that it has borrowing under control.  Control = less debt issued = less supply = higher price.   But as Tyler and others on this blog would rush to point out, that it not the story today.  For if this were the cause, we would also expect higher equity prices, which all things being equal benefit from such circumstances.  Instead, the FTSE is down 2% or more. Instead, there has been a rush – again – from ‘risk’ assets to those regarded as unrisky.

The missing word – as ever – is demand.  The demand we are talking about is the demand expected in the economy, that rewards money put at risk in things like equity.  All the signals from the markets are that -despite yesterday’s ‘dreadful’ figures – the market as a whole is happy receiving just 3.7% for its money for a long period.   And the only interpretation of that is that the market is expecting fewer great opportunities to earn its money the honest way – out there in the world of enterprise – than it was before.

Read the Economist’s blog, if the UK is getting high inflation, it may be the only major currency bloc to achieve this.  (See their account of the US trends and also Krugman.)  And given what problems deflation may cause, you may want to ask whether or not our policy – even if unintentional – is in fact better.  Indeed, if targeting high nominal growth is what we need – as I called for in Credit Where It’s Due – then maybe Merv is doing it, just by mistake. …

Rather than trying you with my amateurish interpretations, Scott Sumner has done a fantastic, educational and counterintuitive job here.  Has the euro got weaker in the last few days?  If only – it has got stronger – just the dollar has got stronger still. With commodities and equities falling, and ‘money-ish’ things like gilts rising, what we are seeing is money itself gaining in value.  Money demand up means money is tight, which in Sumner’s system is what causes recessions …. Read it!

19 May

Defending the Bank of England

Posted by freethinkingeconomist in Uncategorized. Tagged: , , .

It is looking pretty dicey for the Bank and it’s inflation-fighting reputation.  Read Jeremy Warner (Does the inflation target actually mean anything any more?) and above all the point made clear in Simon Ward’s post yesterday (UK CPI inflation 3 percentage points above BoE year-ago forecast).  Here is a graph from last year’s May Inflation Report:

One quick observation: the prediction was based on 125bn of QE.  We have had 75bn more than that, which must have had some effect on inflation (though as I droned on in Credit Where It’s Due, the mechanisms are rather wobbly and demand-dependent).

Another is: how on earth did they make such a prediction when they knew VAT would be returning? Did they simply miss it out? the April CPIY index stands at 112.8, which is 2.1 points above the April 09 level of 110.7, or almost exactly 2 per cent higher.   This would put the forecast error down to 1 per cent.  But if it WAS CPI without tax which they were forecasting, they didn’t tell us.  I see a straight mistake.

A third observation is that Britain’s inflation is a bit of an exception within Europe.  See the charts from Wolf’s (rather boilerplate) post today:

A final observation (coz I have to go to lunch) is this: if the Bank has made a mistake, I would rather it made this one than the other one.  Reading Chris Giles today about what this means for you and me, it comes down to this: it makes living standards go down, but it may help make the budget deficit lower.   And so far households are not expecting it to last.  In other words, a one off transfer, lightening the biggest problem (government debt) and making all of us fairly evenly contribute to the problem.

This crisis needs measures OF THAT SORT to get the country back in balance: lower government debt, lower living standards.   (We could also do with being more competitive, which this doesn’t help, but weak sterling manages that).  Though I look like a hubristic fool to some (even though I stand by my points about Base Effects), actual deflation to such an indebted country suffering from insufficient demand may have been worse.

Lunchtime!

18 May

I won’t deny it: the inflation figures suck

Posted by freethinkingeconomist in Uncategorized. Tagged: , , .

Here is the BBC story; here is where you can get the data.

The BBC mentions volcanic ash driving up Food prices. But as far as I can see, the things that rose hardest from March to April were not particularly vulnerable to delayed flights:

(correct me if I am wrong: I did that graph in  2 minutes and who knows what might have slipped)

My concern – and everybody’s – should be the problem Chris alluded to that may be happening in the US (via his blog) – a permanent worsening in the unemployment-inflation trade off.  If we get higher inflation for each level of capacity utilisation, the economy is in for a very poor time.  I continue to hold onto hopes that are still mentioned in the Bank’s Inflation Report – that there is still considerably slack according to surveys, that currency weakness will pass through (commodities are off their highs, driven by world economy weakness), and that working capital will be freed up, which helps drive prices lower.

If these figures DO indicate higher inflation in the future, the consequences ought to be higher Bank rates, a higher currency, and so on. Sep 11 LIBOR futures fell 7 bps on the news, indicating the former at least. If it is any comfort, they are still considerably higher (i.e. rate expectations considerably lower) than at the beginning of May – by 50bps.  However, let the comfort end there, because what probably happened since then is a general expectation that euro growth will be much lower.  That is not, in anyone’s book, good news.

(PS While I am depressing you all, see this graph of a warming world from Econbrowser.

20 Apr

Three more views on inflation

Posted by freethinkingeconomist in Uncategorized. Tagged: , .

Stephanie Flanders has a long discussion of how much of a shock it is.

Simon Ward is (typically) hawish, calling for more rate hikes.

But the most interesting view comes from an unpublished private note from Jamie Dannhauser of Lombard, who urges people not to be fooled by the shock, and identifies one-offs like the VAT rise, petrol prices (the petrol price sub-index is up 25%), and most interestingly motor vehicle prices, rising by 9% on the year, despite “the collapse in the demand for cars as credit availability has shrunk”.  Cars alone make the headline rate of inflation 0.5% higher, and 2nd hand cars are up 16% on the year.   He finds that this may be because of (a) sterling and (b) people undersupplying the 2nd hand market partly because of the scrappage scheme.  Taking these effects out, the index looks much weaker.

But.  If cars had been cheaper, consumers might have bought something else, pushing the other index up, surely?   I appreciate this may be a one-off.  But it reminds me of one-offs that keep happening …

30 Mar

Disinflation, narrow banking, stuff

Posted by freethinkingeconomist in Uncategorized. Tagged: , .

Just to keep the world up to date with, you know, stuff:

Economist’s View: nothing but disinflation in the US

Krugman disses John Kay’s regular suggestion of Narrow Banking as the answer. Without namechecking Kay.

Chris Giles finds the Chancellors’ Debate a ‘depressing consensus’.  Whereas Bagehot thinks they were a good thing for democracy.

Paul cleverly compares Blond to a Communist. He apologises to intelligent Marxists.  Now, I think they are all intelligent, Marxists.  Just wrong, that’s all.

GDP growth has been revised up to 0.4%.

25 Mar

Two pieces I’d wished I’d written

Posted by freethinkingeconomist in Economics. Tagged: , , , .

Together, they make the arguments for Credit Where It’s Due far better than I managed.   The arguments being: don’t worry about inflation right now, and a nominal growth target is superior.

First Hat Tip to Luis commenting here, for the link to this blogpost: “Target the Cause not the Symptom“. It is worth reading twice to understand how growth targets prevent central banks responding in the wrong way to a supply shock of some kind.  Very very clever, full of graphs.

The second Hat Tip goes to my friend John who sent me a private paper from a training body, with a piece by Van Hosington about Deflation and Inflation.  I have often observed how a credit crunch damages supply capacity – a point made by Charles Bean for example.  In this publicly available newsletter, Van H makes the point much better than me:

Inflation will not commence until the Aggregate Demand (AD) Curve shifts outward sufficiently to reach the part of the Aggregate Supply (AS) curve that is upward sloping. The AS curve is perfectly elastic or horizontal when substantial excess capacity exists. Excess capacity causes firms to cut staff, wages and other costs. Since wage and benefit costs comprise about 70% of the cost of production, the AS curve will shift outward, meaning that prices will be lower at every level of AD. Therefore, multiple outward shifts in the Aggregate Demand curve will be required before the economy encounters an upward sloping Aggregate Supply Curve thus creating higher price levels. In our opinion such a process will take well over a decade.

This may be optimistic.  My view is that the SRAS can be so elastic if firms have access to capital to expand and so choose the lower-price higher Q route.  That is what I was calling for. …  he has made my case stronger, I think

23 Mar

Ed Conway’s thoughts on nominal GDP growth targets

Posted by freethinkingeconomist in Economics. Tagged: , , .

can be found here. He mentions yours truly, but expands on the pros and cons to a degree I have not yet managed:

[Wilkes] suggests, among other things, that the Bank start targeting nominal economic growth (in other words GDP as we know it plus inflation). It is an intriguing idea: the Bank’s CPI target is narrow and specific; with inflation likely to bounce around for some time, markets, the risk is that market participants start to anticipate that the Bank will tighten policy before QE has really helped boost the economy. That anticipation could be as bad as the actual act of raising rates (or withdrawing QE) since banks change their lending rates to reflect expected changes in official monetary policy.

His concern:

is that any change to the monetary policy rules right now – even if it would actually improve it – could have the perverse effect of undermining peoples’ confidence in the Government’s determination to control inflation. This is a pragmatic rather than an ideological or pure economic concern: it takes years, if not decades, to persuade people that you’ve worked out a pretty reliable way to prevent prices getting out of control. The risk is that a change in remit would undo much of that good work – even if you were only changing the target to a better one.

This is a very good point, and one I was much more concerned with when writing my first and rather dismal piece about inflation in, ahem, autumn 2008.  It took years to get to this point, and if for a minute the markets think that you are changing targets to make life easier, then you might have hell to pay.

But as Ed’s previous post has argued, governments don’t benefit as much from inflation as everyone might think.  And it is not as easy to achieve as the conspiracy theorists think.

17 Mar

Oh sterling doommongers, where are ye?

Posted by freethinkingeconomist in Economics, Politics. Tagged: , , , , .

Remember those hazy days at the beginning of March? It was obvious, innit: a hung parliament spells doom to the pound.  Since then, the possibility of a hung parliament has remained just as strong (see Betfair)

and yet the Pound is up.  From the $1.50 level to $1.54.  Nothing spectacular: just enough to confirm my hunch that this is not “tories down, sell the pound’.     The sort of dumb stuff that Tory newspapers were and are desperate to believe.

Although FT Alphaville have every reason to pick on him, it was not just Jim Rogers.  Every saloon bar economist thinks that you can go from 1. not remembering what the UK produces (read Policy Exchange’s recent report on manufacturing) to 2. assuming the pound should fall.

Why is the pound up?  Perhaps the unemployment figures – stronger economy, stronger finances, safer gilts (gilts are also up today).  Perhaps the mildly hawkish BOE minutes. It is not likely to be eurozone strength: they have weaker prices than since the Euro was brought in.    Nor inflation in the US, which is still kinda missing.   Though if the UK is going to outgrow both these it might be good for the pound, it might just as easily translate into even more export weakness, more QE, and the other direction.

Unsurprisingly, though dismayingly for armchair political pundits determined to use their rules of thumb to dictate messages linking the Pound to Political Weakness, I think the direction of sterling is something to do with economics.  I have no idea where it is going, but don’t think it will be much to do with the latest gossip about Liberal Conservative alliances, no matter how well informed.

25 Feb

You can tell things are going downhill when ….

Posted by freethinkingeconomist in Economics. Tagged: , , , .

Jeremy Warner of the Telegraph is berating the heir-presumptive of the ECB, Axel Weber, for being anti-inflation:

Yet it is plainly better to be attempting to choke off an inflationary boom than to be in a Depression wondering how to get out. In a deflationary debt spiral, monetary policy becomes almost wholly impotent. However low rates go, people will still be keener to pay down debt than invest and consume. The risks of Depression are therefore much worse than those of inflation.

To be fair, I overreacted to his previous Stagflation post, where he admits that inflation is unlikely and deflation would be worse.  But for someone on the Telegraph to hint that pushing the inflation target out to 4% may be a lesser evil is pretty amazing.

And the FT is now doing a Double Dip Watch.  The link is very useful indeed.  And sad news: Krishna Gua, the excellent US monetary correspondent, is leaving for the Fed.

Sterling is down 2c today on the investment figures that Chris discussed.

Another straw in the wind is the way that UBS has warned of the consequences of more savage cutting.   See this from Ed Conway’s blog:

Taking too sharp an axe to the deficit  would “endanger tax revenues, Britain’s sovereign rating, the recovery of the banking sector and the UK labour market,” the strongly-worded report argues. With confidence in British policymaking gone, the pound would risk plunging to $1.05 against the dollar and slumping beyond parity for the first time against the euro

Everyone seems to agree now that the pace of recovery, and not the scale of the deficit, is the real problem.  See this on Stephanie Flanders’ blog.  Talking of the Man with a Shovel, she says:

On the basis of his testimony – and that of other members of the Monetary Policy Committee (MPC) - it is the state of the recovery that is clearly their major concern. We heard several times that “risks to the Committee’s central view of a gradual recovery of output remain to the downside”. Subtitle: we’re not out of the woods yet. Britain’s banks, households and government all need to get their balance sheets in order over the next few years, and bring down their stock of debt. That has long been a reason to expect a weak recovery. But, as King and his colleagues noted, the weakness of the recovery in the eurozone gives us another one.

This reminds me of the punchline to Slash and Grow (October 2009):

If the next British government proceeds upon the basis of deficit reduction before growth, it risks achieving neither.

I’m not claiming a toldyouso here: for most of the intervening few months, I was relatively bullish.   It is only since this around this time on 6th Feb I have thought the double-dip the biggest worry.  I don’t think economics is really about predictions as such; more tracing out consequences if X or Y happens.  And coming up with ideas for what to do: hence the column today.

23 Feb

More Robin Hood

Posted by freethinkingeconomist in Economics. Tagged: , , , , .

The excellent Tim Harford says “If that’s the Robin Hood tax, I’m the sherrif of Nottingham” and

I have been appalled by the campaign’s profound lack of curiosity as to whether this tax would be a good idea. Start with the claim on the Robin Hood tax website that this is a “tiny tax on bankers … the people who caused this mess”. First, it’s not a tax on bankers. It’s a tax on financial transactions. And it’s not necessarily tiny, because some worthwhile financial transactions have a very large face value, and a much smaller true value. For instance, I might buy car insurance which could – if I knocked somebody down and permanently disabled them – trigger a payment of £1m. My insurance company might want to reinsure that million-pound risk, a perfectly sensible, socially useful and non-speculative transaction. But at a “tiny” tax rate of 0.05 per cent, that’s a £500 tax on a face value of £1m. It’s hard to imagine such a tax wouldn’t somehow affect my premium.

Meanwhile, I would like in proof of my integrity to point out a piece by Simon Ward of Henderson, which if it bodes as he thinks it bodes, is bad for my chances of winning my bet against Guido.  Which you may recall is about whether deflation is a-coming.  Ward writes:

Sterling commodity prices are 55% higher than a year ago – the largest gain since 1974. Input price inflation – an annual 8% in January – may rise to 20% or more this spring. With output and orders recovering, the low level of sterling reducing competition from foreign producers and the Bank of England signalling no intention to tighten policy despite high inflation, manufacturers are likely to pass these increases on rather than absorb them in margins.

If right, I will be proved to be a numpty.

Finally, while I appreciate that fiscal and macroeconomic policy has many shades of grey, you occasionally come across views that seem plain wrong.  John Cochrane seems to have them, when he uses the pre-War ‘thought’ that “Government spending can’t make a difference, because that money must come from somewhere”.  This is wrong, and also very tricky to refute in a rage. Brad DeLong is your guide to how Cochrane is wrong.

Cochrane is working in a pure cash-in-advance economy in which the velocity of money has not only a technological upper limit but also a technological lower limit–that spending is by assumption proportional to the quantity of money and to nothing else. But even in that model fiscal stimulus will almost always alter the quantity of money: the Federal Reserve would have to take active steps to raise interest rates as an offset in order to keep it from doing so. And the Federal Reserve right now is not–as a matter of empirical fact–not in the business of raising interest rates to offset the effects of fiscal stimulus on demand.

Read all of it.  Everyone – Friedman, Fisher, Keynes – are on the other side to Cochrane here.

UPDATE: in some tasty left-on-left action, Paul Krugman tuts Brad DeLong for even imagining Cochrane has a model.  I think this post is worth reading to remind us that BDL does not say “stimulus, always, wherever”. It wouldn’t work for Greece.  We’re not Greece.

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