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The European Central Bank implemented a negative interest rate policy yesterday. Whilst we have become very accustomed to a low base rate in the UK, the ECB policy seems extraordinary.
The policy has come about due to a continued concern over the economic situation in the Eurozone. Growth remains weak, unemployment is high and inflation sits below the target of 2% in many of the 18 countries. The ECB is unlikely to follow the UK (and others) strategy of quantitative easing and so is left with fewer choices.
By setting a negative interest rate, the ECB wants to discourage banks from keeping larger reserves and promote a greater level of lending (and thus stimulate economic growth).
If you want to download a short Powerpoint slideshow that explains the policy and its possible consequences then click on this link.
England's odds of winning the World Cup are about 30-1 - which reflects a rather low level of confidence that we have a realistic chance. However, the Governor of the Bank of England seems to think that a safer bet would be to back the recovery of the UK economy, judging by Mark Carney's launch of the latest Inflation Report yesterday. He likened the path the economy has to follow to that of England's task in Brazil, and said that the Bank's priority was to steer the economy through the opening rounds, all the way to victory.read more...»
Teachers and students of the Phillips Curve will be delighted to access this updated classroom ready presentation on the Phillips Curve from Ed Dolan, Professor of Economics at Stockholm School of Economics, Riga, Latviaread more...»
In the year to March 2014, consumer prices in Sweden fell by 0.4 per cent. This has prompted the central bank, the Riksbank, to abandon the normally cautious language used by such institutions. Over the same period, inflation was negative in a further seven European countries, such as Greece, Portugal and Spain. In eight other countries, inflation was still positive but very low, running at an annual rate of less than 0.5 per cent.
The Riksbank argues that these very low, often negative, rates of inflation are caused by a ‘very dramatic tightening’ of monetary policy. There is a definite risk of a slide into a prolonged depression similar to that of the 1930s.
Surely low inflation is a good thing? Well, up to a point.read more...»
The UK’s official inflation benchmark, the Consumer Prices Index, slid to 1.7 per cent in February – the lowest for more than four years. What are some of the main factors causing inflation to fall below target?read more...»
I thought it worthwhile sharing my resources which I have been collecting for students (and teachers alike). I have been promoting them on Twitter (@Economics_KSF) through scoop.it but for those of you not on there, the link for the scoop.it boards are here:read more...»
The basket of goods and services that makes up the products used when calculating changes in the cost of living is periodically updated to reflect shifting patterns of spending by UK households.read more...»
Here’s a great topic for an economics debate. National income is still lower than before the financial crash. We have a ‘cost of living crisis’. Yet it’s possible to argue that life is better now than it was in 2005. How can that point be made without being laughed out of the room?read more...»
As Japan continues to push forward with Abenomics, monetary stimulus tapers off in the USA and and a halt elsewhere in the world alongside still timid business and consumer confidence, deflation becomes a serious risk for the advanced economies in the short term future.
The area with the biggest concerns without doubt is the Eurozone with deflation pushing up the real value of still cripplingly large debt levels, worryingly that analysts, forecasters and Eurozone representatives are finding difficult to objectively quantify. What the world really needs to see is business confidence and spending to pick up in advanced economies, fuelling positive inflationary pressure dampening the impact of exported deflation from Japan as a result of Abenomics. The Euro Area have yet another worry to add to their ever growing sickness list, worth watching very closely as to what happens in the coming months. This video explains further:read more...»
Here are ten questions for students wanting to check their understanding on inflation and deflationread more...»
We have spent a little time in our A2 economics lessons this week looking at some of the challenges facing the Indian economy. Growth is slowing, inflation is persistently high, interest rates are rising and the Indian current account deficit on the balance of payments is widening. The economy faces many challenges and pressures for better government and structural economic reform are growing. I have linked below to some of the charts we used in our discussions and note-taking.read more...»
My A2 macro students are now looking at some fascinating macro policy challenges facing a range of countries. This week they choose one from two set assignments.
The first offers them an opportunity to analyse some of the causes of high inflation in India and consider how much of a threat it is to India's continued growth and development.
A second assignment looks at Abenomics in Japan and whether it can lift the Japanese economy out of over two decades of slow growth and deflationary pressures. I am hoping that there will be some interesting insights allied to good A2 macro analysis as students crack on with their independent research.
Download the assignment sheet below and I have added in some suggestions for further reading on the two topicsread more...»
We’re very used to the idea of monitoring inflation, measuring it, and worrying about the consequences of it. But like any good answer that requires an element of balance, it’s worth noting that too little inflation can be a problem too.read more...»
Here's a simple resource to introduce the concept of inflation over a period of time. This was inspired by a marvelous example given by Mark Mitchell at a recent Tutor2u TBBLE teacher CPD event - Mark used a wonderful back-catalogue of issues of the Beano to illustrate changes in prices over time as a way of introducing the concept of inflation.
This resource is not quite as much fun but does allow you to input any date from February 1971 (the date of decimalization in the UK) and find out the price of a First Class stamp in the UK (assuming a standard weight of under 60g). A simple image then materialises indicating the cost of the stamp at that given time.
You could ask students to give you significant dates during their life time (e.g. birth, start-date of primary school/secondary school, siblings birth dates and possibly parents birth dates, last time their football team won a significant trophy) and track how prices have changed.
The file also has a single chart showing how stamp prices have changed compared to inflation in any one year - perhaps an interesting thing to look at and discuss given the current flotation of the Royal Mail.
Click here to download the Powerpoint presentation.
If you are teaching inflation as part of the AS macro course, here are ten charts that focus on recent changes in the consumer price index and related inflation measures. Useful perhaps as handouts for class discussion and annotation. You can download the charts as a pdf file.read more...»
Just as I am in the midst of teaching my AS students about macroeconomic indicators, and focusing on inflation and unemployment, up pops this piece by Linda Yueh about the latest data on those two indicators this week, and the Misery Index.read more...»
How bad is inflation? Like any good answer, your response to this question will include an element of evaluation, probably wrapped up in a sentence containing the phrase "it depends". With inflation, the impact is significantly influenced by who you are. Stated simply, different groups of people have different experiences of inflation.read more...»
Ed Miliband is a real hero for teachers of economics at the moment. Not only does his promise to cap energy prices provide a wonderful lesson for unit 1 (already covered on the blog in a lesson plan by Jonny Clark), but it gives an opportunity to investigate the domestic fuel component of CPI, and it's weighting, for unit 2.read more...»
What effects does the rapid growth and development of the Chinese economy have on the prices we pay in the UK for different goods and services. This short video from the Bank of England looks at some research into the impact of China on our own consumer price index. It is good for deepening your understanding of the inter-connections between the two economies.read more...»
A terrific teaching resource - KAL, The Economist's resident cartoonist and animator, explains hyperinflationread more...»
The headline on the BBC website this afternoon is "Pound falls after surprise dip in inflation". It is important that students taking the A2 economics papers next month are able to give current figures for the macroeconomic indicators, so they should take note of today's CPI inflation figure for April, which is down to 2.4% from 2.8%.
They should also note the reasons - weaker commodity prices and oil in particular, with petrol and diesel prices contributing half of the drop in inflation. Slow earnings growth is also expected to contribute to the outlook for inflation remaining closer to the 2% target than it has been since the end of 2009 - which also suggests that the remaining inflation is not due to demand-pull pressures, but to cost-push.
But can they explain why and how the announcement of a lower rate of inflation has led to a weaker pound? It is not enough, in an essay, simply to state that this cause-and-effect has taken place; in order to gain good marks for analysis, it is essential to trace the process by which one leads to the other. This article from Reuters should give the clues that they need to fill the gaps on the table below ...
What are the costs of a higher average rate of inflation? With CPI inflation staying persistently above target over much of the last six years, to what extent has this undermined UK macro performance? Or has a little extra inflation and an ultra-loose monetary policy (0.5% base rates and £375bn of quantitative easing) been a price worth paying to avoid an ever deeper recession and depression?
"The high retail price inflation seen in recent years has outpaced earnings and eaten into household spending power. Ongoing relatively high inflation will continue to impact consumer spending, especially with unemployment unlikely to fall quickly. The effect on consumer spending will vary between different demographic groups and product sectors, causing companies to revisit their offerings."
Here is the link to the Ernst and Young report - click hereread more...»
He's back but he's still angry! In this latest version of The Angry Economist, our favourite curmudgeonly analyst wants to know students' opinion on George Osborne's economic policies - no wonder his blood pressure has risen!
This simple Powerpoint resource is aimed at getting your students to analyse and evaluate economic policies - 8 of the Chancellor's policies are presented and the Angry Economist randomly picks a macro-economic objective to consider. All you have to do is get 8 volunteers from your class to do the analysing - a great 10 minute activity whilst revising for the up-coming macro exams at either GCSE, AS or A2 level.
Here is a list of the policies the Angry Economist wants students to look at (you may wish to recap on them before you start the activity):
- Reduce Government debt
- Increased number of private sector jobs
- Increased allowance before Income Tax needs to be paid
- Cut Corporation Tax
- Set up Regional Growth Fund
- Funding Lending Scheme
- Deregulating some planning rules
- Frozen Council Tax
Of course, the beauty of this resource is that you can change any of these policies to whatever you want them to be.
Click on this link to download the Angry Economist 2.
PS. Click on this link to have a look at the original Angry Economist.
Keeping actual and expected inflation under control is one of the key objectives of macroeconomic policy. The rate of inflation in the UK is calculated using the Consumer Price Index. For many years data on the Retail Price Index (RPI) has also been published but from March 2013, the RPI is no longer regarded as an official national economic statistic. Please be aware of this when writing your exam. This revision blog provides updated figures on the latest CPI data for a variety of countries - it reminds us that inflation rates vary quite a lot. Think about what persistent differences in inflation rates can have on macroeconomic stability and performance.read more...»
Here's a 5 to 10 minute activity for your post-Easter classes on macro-economic objectives - The Angry Economist! The design is very loosely based upon the 'Angry Bird' game.
You will need up to 8 volunteers to answer the 'Angry Economist's' questions.
Each student can choose a Government policy named on-screen and then the Angry Economist randomly chooses a macro-economic objective. The student has to to apply their knowledge and understanding of their chosen policy to the macro-economic objective shown.
The screen encourages the student to analyse and evaluate their own answer.
Use this link to access the resource. Give it a go!read more...»
Economic commentators love their acronyms and abbreviations - they come in handy when reaching character capacity limits on a tweet and also for students fighting the exam clock to complete a timed essay. Two new ones have come to my attention in recent days. What does ZIRP and PLOG mean to you?read more...»
This 10-question revision quiz focuses on inflation.
Does that reflect your changing habits over the last year? The ONS have released news of changes to be made to the official representative basket of goods whose prices they check to measure inflation. Each year they update the 700-or so items in the basket so the contents accurately reflect current trends in spending. So the items added and removed provide an interesting view of the goods and services which are most important to us, and how we are choosing to spend our disposable income.
Are you following important macroeconomic developments in Japan? The new government of Shinzo Abe is reforming monetary policy - including a change to the inflation target - and undertaking more aggressive fiscal measures. Will it work in lifting the Japanese economy to a higher growth plane after two decades and more of sluggish growth and the debilitating effects of price deflation?read more...»
An updated glossary of key terms for AS macroread more...»
Here are collections of regularly updated resources on two key AS macro topics, inflation and unemployment
In this 60 second summary, David Mitchell explains that Bill Phillips' curve historically described an inverse relationship between the rate of unemployment and the rate of wage (and therefore price) inflation - but since his analysis became popular the relationship has changed.read more...»
One of the stock answers students are encouraged to make when describing the pitfalls of high inflation is its link with increasing the burden on the poorer sections of society. The argument goes that periods of high inflation are not traditionally matched by an equal increase in benefit payments. This has not been the case in recent years in the UK - benefits have been rising at a faster rate than inflation, even during its upwards blip of recent years. Now the argument has reverted to one of how the cost of benefit payments have become excessive for a Government attempting to reduce its deficit and bring spending under control. Reports by the BBC and covered by the Guardian today have suggested that the Government is about to break this link.read more...»
Paul Krugman made an impassioned plea for a reversal of austerity policies in a talk to a packed Peacock Theatre at the LSE in London last night - I was live tweeting the event and I have brought together these tweets and some other comments together with some of the charts in his talk. I have also drawn on the live tweets of Stuart Foster whose excellent twitter feed can be found here: @econbant
The slides from Krugman’s talk at the LSE can be found here
Paul Krugman talks to Evan Davis on the Radio 4 Today programme: Click here Niall Ferguson provides a contrary view here: ‘You can’t solve debt with more debt’ See also: European Commission supports UK deficit-cutting course (BBC news)
Productivity is a key measure of supply-side economic performance and labour efficiency.read more...»
Inflation is a sustained increase in the cost of living or the average / general price level leading to a fall in the purchasing power of money. The opposite of inflation is deflation which is a decrease in the cost of living or average price level.read more...»
A selection of key terms on monetary policy and inflationread more...»
This is a new revision presentation which provides an overview of inflation and the business environment. The measurement and causes of inflation are outlined together with notes on the potential impact of inflation on business.read more...»
The international price of crude oil has been rising strongly in recent weeks and threatens to be an external factor driving an already weak Euro Zone and UK economy back into recession.read more...»
Three years ago Andrew Sentance was one of the 9 members of the MPC who voted for the extraordinary measures of bringing base rate down to 0.5% and creating the new stimulant of Quantitative Easing in an attempt to bring the economy around. In today’s Sunday Telegraph he recalls why he voted for them at that time, and explains why he thinks that they must be gradually withdrawn now from an economy which has become dependent on them for its survival.read more...»
The super-charged growth in China has brought about a rise in inflationary pressures and is a good example of the possible conflicts between rapid economic expansion and rising costs and prices. The Chinese government’s inflation target is 4% but inflation is a growing worry for the Chinese government – after some mild deflation in 2009 there has been acceleration in the consumer price index. Agricultural prices have been a key driver of inflation with food costs up 12% in the year to March 2011.
For many commentators high inflation in China is a symptom of an over-heating economy with an unsustainable credit and property boom. Another factor behind high inflation is that Wages are rising fast in China – many economists believe that China has hit a point in its development at which demand for labour starts to grow faster than supply, creating labour shortages and pushing up salaries. This is known as a Lewis Turning Point.read more...»
Just as the Monetary Policy Committee have been saying for a while, inflation is starting to fall back towards their target. The fall to 4.2% in December is rather sharper than expected, and is the biggest monthly fall since April 2009. With further falls almost certain in the next few months as the VAT rise and energy price hikes roll out of the 12-month figures, analysts have commented today that this will leave the opportunity for the MPC to inject further rounds of QE into the economy with less fear of triggering too much demand-pull inflation.read more...»
Geoff has kindly made available for download his presentation made to students at Dulwich College recently in which he analyses the prospects for the UK Economy in 2012. A Slideshare-streamed version is also provided below.read more...»
The CPI headline inflation rate has fallen to 4.8%. This BBC chart shows recent changes in the rate of increase of the general price levels using CPI and RPI indicators.read more...»
It’s here! PNC Wealth Management, have produced their 28th annual index of the true cost of Christmas, calculating the cost of giving of all the gifts in the Twelve Days of Christmas, and then the change in the price compared to last year, to give the annual rate of inflation for Christmas. This year they have an animated train ride that takes you through a snowy landscape, with various games on the way - the maids a-milking one is brilliant! The journey, and the links to information about how the index has fluctuated over the years and where on earth they find the prices of swans a-swimming or lords a-leaping needs a bit of investigation before you introduce it to a class, but is worth it and great fun for a Christmas lesson.
What follows is a list of the ten video clips I use when teaching inflation as a topic.
They are a mixed bunch. Some are useful for class use, others work as pointers to a series of video clips from one producer. What I’ve tried to avoid, however, are links to the teach yourself Economics resources (though obviously they have their place) that are out there.read more...»
I am teaching the background to consumer / retail price inflation in the UK this week and making use of a selection of up to the minute data charts. Here they are as a downloadable powerpoint file for colleagues who might find them useful on whiteboards or as handouts for annotation and discussion.
A good example to discuss of government intervention into agricultural markets - in this case Thailand’s government have intervened in the market to buy unmilled rice at 15,000 Thai baht per metric tonne, which is a 50% premium on the current market rate. A good discussion of the possible impacts can be found, with a discussion of the economic rationale/consequences of it, here.
JCT is no longer president of the European Central Bank and he leaves, after eight years at its helm, with as many detractors as there are supporters. The ECB is widely perceived as being ‘genetically’ close to the German
Bundesbank following the neo-classical school where inflation is the route of all problems and so needs to be controlled no matter the cost.
We´re going to be looking at this part of the syllabus very soon and the two graphics below from here and here look at how the US market for smartphone operating systems is split between the major firms and also how global market share for mobiles as well as smartphones is split.read more...»