More on inflation
The Economist is running with a leader on inflationary woes today.
read more...»John Kay on perceptions of inflation
Trust John Kay to make plenty of sense of the furore over whether the official inflation numbers are accurate in telling us what is happening to consumer prices
read more...»Revision: The NAIRU
NAIRU is an acronym for Non-Accelerating Inflation Rate of Unemployment - this revision note looks at the factors influencing the NAIRU for the UK economy.
Revision document
Revision_the_NAIRU.pdf
Dismal prediction for Zimbabwe proves accurate
In the blog I suggested that without the hasty departure of the tyrant Robert Mugabe, things would get worse. Back in April, the Bank of Zimbabwe had just issued a 10m Zimbabwe dollar note. I predicted a billion dollar note in a couple of months.
Unfortunately, it’s looking like my gloomy prediction may prove true. Today the BBC report that Zimbabwe bank issues $500m note. That’s worth a couple of bucks. So a billion Zim dollars is equivalent to around five US dollars. For now.
NICE decade is over
Mervyn King declared that the NICE decade was formally over in his Inflation Report published today – NICE stood for non-inflationary continuous expansion (a good term to use in the exam) – but the combination of sharply rising food, energy and fuel prices is driving inflation higher whilst contributing to a fall in real incomes and a wider economic slowdown.
read more...»Surge in UK inflation
The latest figures for consumer price inflation were far worse that expected. Consumer prices increased by 0.8% in April taking the annual rate of inflation to 3.0% - right at the top of the level allowed by the government as part of the inflation target. Both goods and service price inflation moved higher as the UK economy struggles under a series of cost-push inflationary pressures. I have attached a PowerPoint file showing some of the key inflation charts.
read more...»China’s Inflation Problem
China’s inflation rate has climbed to a twelve year high with consumer prices 8.5 per cent higher than they were a year ago. Much of this is the result of the spiraling cost of food (22 per cent higher over the last twelve months).
read more...»Setting rates is no longer kids stuff
According to Roger Bootle writing in today’s Telegraph. The MPC does face an acute dilemma with evidence of surging cost push inflation and the real possibility (probability?) that CPI inflation will overshoot the 3% ceiling at some point in 2008. But Bootle argues that if the MPC is too cautious over interest rates, fearing a return to a wage-price spiral, then we might well suffer the slump in real output and jobs that characterised attempts to put the lid on rampant inflation in the 1970s and late 1980s.
read more...»Revision: Inflation Targets and Measurement
Here are a couple of useful revision resources on inflation:
read more...»Loss aversion and experiences of inflation
Few people believe that the officially published measure of inflation accurately captures their own experiences and problems - this is hardly a surprise since our own spending patterns will rarely correlate precisely with the weights used to calculate the consumer price and retail price index. But there is a real danger that the published inflation figures are losing credibility - and with it comes a risk of a larger-than-expected wage-price effect into 2009.
David Leonhardt writing in the New York Times links aspects of behavioural economics to the vexed question of just how high is inflation. A really interesting piece and well worth reading:
“Price increases are simply more noticeable — more salient, as psychologists would say — than price decreases. Part of this comes from the notion of loss aversion: human beings dislike a loss more than they like a gain of equivalent size. If you have to sell your house for less than you bought it for, you’re really unhappy. You hate that ground chuck now costs $2.83 a pound, but you didn’t notice that oranges are 31 percent cheaper than they were a year ago. There is also something particular to inflation that aggravates loss aversion. Price increases are obvious. But price declines are often hidden. The cost of an item stays about the same for years, while everything else gets more expensive and nominal incomes rise.”
Gordon’s economic history lesson
It cannot have been easy or much fun for the man. Gordon Brown’s appearance on the Andrew Marr show this morning was supposed to have been the start of the big fight-back after the appalling drubbing that he suffered at the polls on Thursday and Friday. But the garbled mixture of reassurance and platitudes about the government ‘feeling our pain’ was distinctly underwhelming. I winced ahfl way through the interview when Brown claimed that the last Labour government inherited high inflation from the Conservatives. This is simply not true. I applaud his decision to give independence to the Bank of England in May 1997, but low and (relatively) stable inflation did not appear miraculously when Blair walked into Number 10 that year - consumer price inflation (the government’s chosen emasure, but not one that most of us now look at with much credence) was already low for some years before 1997 as our chart shows. Inflation targets (introduced in the UK in 1992 after our departure from the ERM) and a favourable mix of disinflationary economic shocks, globalisation and the strong exchange rate combined to give Brown and his Treasury team an inheritance of low inflation when they came to power. Perhaps it was the stress that caused Brown to make such a shocking mistake in his attempt to teach us all a little economic history?
An end in sight for hyperinflation in Zimbabwe? It can’t get worse, can it?
Zimbabwe is tipping into economic oblivion in response to the crazy policies of its resident tyrant, Robert Mugabe. Once the ‘breadbasket’ of southern Africa, about 80% of the country’s population now lives in poverty and it is estimated that three million people have left the country for a new life in South Africa.
Staple goods are scarce and the government responds to shortages by increasing the supply of money. The central bank has introduced new banknotes to cope with the spiralling prices, recently issuing a 10 million Zimbabwe dollar note.
Chart of the Day: Imported Inflation into the UK
Our chart for the day is linked to the news that the pound has fallen to an historic low against the Euro. One of the consequences of a depreciating currency is that the prices of many of the goods and services we import from overseas goes up potentially leading to a fresh burst of cost-push inflation.
read more...»Revision: Cost push & demand pull inflation
This revision note considers two of the main causes of inflation – namely cost-push and demand-pull factors. It is designed for AS economists preparing for Unit 2 but is also useful revision for students revising for unit 6.
Revision note file
Revision_Causes_of_Inflation.pdf
Policy conflict for the UK economy?
The IMF is forecasting a slowdown in global growth to 3.7% in 2008 and 2009. This is in contrast to recent growth rates of over 5%.
read more...»Chart of the Day: UK Shop Prices
There are few signs so far that the fall in the UK exchange rate against the Euro and accelerating inflation in costs and prices in China are yet showing through in the prices we pay for non-food items in the shops.
read more...»Deflation in Goods
I have an admission to make. A few weeks ago I inadvertently dropped my digital camera and my Blackberry into a toilet during a rest-stop at Portsmouth FC’s training facility! The camera is now useless but the Blackberry survived intact and working fine!
Having decided to replace the camera I find on Amazon.co.uk that the same make is available for twenty per cent less than at the same time last year and perhaps a good example of the heavy rate of annual price deflation in the prices of household goods in the UK. In part this helps to explain why the official measures of inflation captured by the CPI and RPI remain relatively low despite sharply rising food, fuel and utility bills. But critics of the RPI and CPI calculation retort that few households replace their household goods every year – so price reductions have little direct impact on their annual cost of living. The Times covered this trend in an article in yesterday’s paper.
“According to Pricewaterhouse-Coopers (PwC), the accountants, the prices of everything from a kettle to a camera have tumbled by nearly 50 per cent since the early 1970s…..The biggest price-cuts have come in the past decade, as retailers have taken advantage of improvements in technology, the manufacture of products overseas and, most recently, the depreciation of the dollar against the pound.”
How long can this price deflation last? The pound is falling against the Euro and marking time against the US dollar, there is plenty of evidence of surging cost and price inflation in China and other emerging market countries.
Stephen King savages rigid inflation targets
Stephen King, Chief Global Economist at HSBC is brilliant in today’s Independent - attacking the rigid adherence to an inflation target based solely on the rate of change of consumer prices and ignoring asset price deflation. One of the best comment pieces on macroeconomic policy that I have read in a long time.
“The rigid adherence to an inflation target in a world of constant external shocks may sometimes be more a source of instability than of tranquillity. With sizeable relative price shocks stemming from globalisation, the risks of instability are all the greater. Even worse, if the public thinks that price stability is the only litmus test of economic health, the achievement of low inflation may encourage excessive risk-taking which, in turn, could undermine the achievement of broader economic objectives.”
How is the rate of inflation calculated?
It’s not too big a problem if your income keeps rising, however. This has happened in Britain, where things are generally more expensive than in the past. The difference is that – mostly – people earn so much more money they really are better off. This is called an increase in ‘real’ (as opposed to ‘nominal’) income.
It’s quite hard to measure the level of inflation. This is for a variety of reasons. The main problem is that you will have noticed some prices rising, but a lot of others have fallen at the same time. The first clever bit of maths required is to come up with an average figure. To do so, you need an idea of the ‘average’ household and their ‘average’ purchases. Before long inaccuracies will creep in and you might not feel that you are average (and you’re not!).
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US and UK inflation
Latest data on inflation suggests price rises are dampening in the US - opening the door for further rate cuts.
But in the UK there are fears that sustained inflationary pressures will prevent the Monetary Policy Committee of the Bank of England reducing the base rate until at least the summer. Geoff looked at this in detail earlier in the week.
read more...»Adaptive expectations?
For over ten years the Bank of England has been keen to manage expectations of inflation. It knows that if people fear a return of high rates of price inflation, they will factor that into their wage demands and there is a risk that the price stability we have enjoyed for fifteen years or more might be under threat. That would make the setting of interest rates even more complicated than normal, particularly given the current economic uncertainties at home and abroad.
With that in mind, the latest quarterly survey of price expectations published by the bank does not make happy bed-time reading for the Governor. Expectations of future inflation rose to 3.3 percent in February - the highest since the Bank started to publish the survey in 1999 and (importantly) more than a percentage point above the actual rate of CPI inflation.
Perhaps this survey is an example of adaptive expectations at work. Families see the rising cost of living every time they go to the supermarket, fill their car with diesel or check their quarterly energy bills. More people than ever before are discovering that the official measure of inflation (the CPI) bears little resemblance to the inflation they feel. The RPI inflation rate which includes housing costs, is much closer to their day-to-day experience.
It might be that we are unduly influenced by the prices we see around us and those highlighted in news broadcasts and on the front pages of the papers. Behind the scenes, the prices of audio-visual products continues to fall, as does the retail prices of clothing and second hand cars!
Whatever the cause, the reality is that rising expectations of inflation will make it more difficult for the MPC to sanction aggressive cuts in interest rates if and when the economy moves into a sharper than expected slowdown.
Too hot to handle? China’s new export - inflation!
Much of the terrific economic growth of China over the last decade has been export driven. Double-digit annual increases in the volume of goods and services sold to the US and Europe and more recently to the rest of Asia has enabled China to grow it’s real GDP by more than 11% for the last 3 years. Cheap manufacturing exports from China drawn from using it’s enormous pool of low cost labour has allowed the global economy to benefit as this additional supply of low cost products has helped to bring down world inflation. But now the tide is turning and the massive container ships being loaded in ports around the country might well be sending us a unwelcome rise in cost-push inflation.
read more...»Two perspectives on inflation
Two articles caught my eye today both relating the the rise in world inflation (now close to 5 per cent) and the risks of a return to a mild form of stagflation. Firstly Stephen King writing in the Independent looks at why it is that emerging market economies are more susceptible to surges in inflationary pressures. Second Robert Samuelson writes about The Specter of Stagflation. Both good for A2 students I feel.
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Five inflation stories in one day!
Last week we ran a podcast about the rise of cost-pish inflationary pressure in the UK economy. The BBC news site today carries five stories directly linked to the inflation story. Recall that the Bank of England was rather pessimistic last week when it released its latest quarterly Inflation Report, it expects a sharp jump in consumer price inflation over the coming months with CPI perhaps heading once more above the 3 per cent upper limits. Here are the stories
Cadbury Schweppes plans to raise prices
Oil prices head high on expectations of OPEC output cut
Brewer S&N warns of price rises
Chinese inflation hits an eleven year high
Wine prices set to rise (BBC news audio-visual)
Getting personal regarding the rules?
If a fretful Gordon Brown was watching on Wednesday as the Bank of England unveiled its latest strategy for the British economy, the Prime Minister may well have wondered whether he might end up feeling much the same way over his decision last month to hand Mervyn King a second term as Governor of the Bank.
Mr King’s flinty and uncompromising message on Britain’s economic prospects was bleak enough to leave any occupant of No 10 wringing his hands over the likely evaporation of the country’s “feelgood factor”.
read more...»Economics Podcast - Cost Push Inflation-13 Feb 2008
Download this brief podcast presentation on cost push inflation.
Podcast on Cost Push Inflation
Some scary data on cost-push inflation
The government is committed to price stability and has set the Bank of England a target for consumer price inflation of 2.0 per cent. But there are some dark inflationary clouds on the horizon which will test the Bank of England to the limit in the coming months.
read more...»The Wrong Kind of Inflation?
Invited as the obligatory economist to my institution’s Salaries Committee, I spent lunchtime today discussing what sort of pay rise we deserve (huge, of course) and the sort of pay rise we might receive (rather less than huge, we suspect). I filled a happy half hour being questioned by my colleagues on the difference between RPI, CPI, RPIX, the CBI, the FBI, and even the CIA.
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