Economics

Unit 2 Macro: Focus on China - Inflation

2012-01-26T21:28:28+00:00

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.

Inflation - what’s up, what’s down and what’s going to happen next

2012-01-17T21:04:00+00:00

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.

Prospects for the UK Economy in 2012 - PowerPoint download

2011-12-19T08:52:40+00:00

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.

Rising prices and falling real incomes

2011-12-13T17:54:03+00:00

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.

The True Cost of Christmas

2011-12-06T21:04:07+00:00

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.

Top 10 resources on inflation on YouTube

2011-10-26T12:37:22+00:00

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.

Unit 4 Macro: UK Inflation Charts

2011-10-12T07:56:10+00:00

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. http://dl.dropbox.com/u/4368634/Economics/Inflation_Charts_A2.pptx

Unit 1: Rice market intervention

2011-10-09T15:56:09+00:00

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.

Will Jean-Claude Trichet be missed?

2011-10-09T14:09:46+00:00

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.

A2 Micro: Concentration Ratio for the US Smartphone Market

2011-10-07T13:58:21+00:00

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.

King on QE2

2011-10-07T13:50:15+00:00

The Govenor, Mervyn King, explains how he hopes that by injecting 75 billion of newly printed cash into the economy Aggregate Demand will be stimulated enough to avoid a double dip. See video below and the full article here.

Fat tax: Denmark

2011-10-05T21:33:17+00:00

Earlier this year, the Royal Economics Society had the Young Economist of the Year competition with one of the titles being to debate the use of a Fat Tax. This week, Denmark have announced exactly such a tax on some of its foods! Read more here. Supporting article on the Danish fat tax from Time Magazine And this feature on the efficiency and equity arguments surrounding the fat tax from Steve Sexton writing in the Freakonomics blog.

Fuel for Thought

2011-10-05T14:08:49+00:00

When teaching elasticities, fuel always seems to have been a favourite example of a good with very inelastic demand in response to price changes. However, this AA research adds further to the evidence that suggests that even fuel has now reached it’s limit in terms of quantity demanded remaining firm at it’s market price.

Ali G and demerit goods

2011-10-05T00:14:34+00:00

When discussing demerit goods, it is always good to be able to show a few examples. In these youtube clips, Ali G interviews a police superintendent about offensive weapons and a US federal agent about illegal drugs.

3 for 2 no more

2011-10-03T16:58:45+00:00

The book world was shaken this month when it emerged that Waterstone’s, the UK’s largest book chain, is going to ditch its decade-old 3-for-2 offer. Good for A2 micro when discussing firms’ strategies for growth and profit. Read more here.

Unit 2 Macro: Homework Assignment on Consumer Spending

2011-10-03T16:45:49+00:00

I have attached below an example of a homework assignment for my Unit 2 macro economic group which focuses on some of the main drivers of consumer demand for goods and services. It is available for free download as a pdf file. Discussion in class will centre on income, wealth, interest rates, confidence and expectations as key determinants. This is a particularly important stage of the economic cycle and there are many influences constraining household demand as we head towards the end of 2011. AS_Macro_EW_Conusmption.pdf

Unit 1 Micro: Homework Assignment on Market Prices

2011-10-03T02:11:00+00:00

I have attached below a homework assignment for my Unit 1 AS Micro students on market prices. The assignment focuses on the global markets for coffee and also for steel and is attached below as a pdf file for download if teaching colleagues might like to use and adapt it! AS_Micro_Market_Prices_EW.pdf

China - helping or hindering economic development in Africa?

2011-10-02T18:57:18+00:00

If Africa was a physical battleground between east & west during the cold war of the 20th Century, it can arguably be seen today as the ideological 21st Century battleground between the difference approaches to promoting economic development: the western aid model versus the Chinese trade model. Is the Sino-Africa relationship mutually beneficial? I certainly don’t claim to have a comprehensive answer to this but it has been interesting talking to Africans on my journey so far about their perception of this, particularly in Zambia…

AS and A2 Macro: Exchange Rates and “Safe Haven” Currencies

2011-10-02T13:51:47+00:00

This article from the WSJ highlights one determinant of exchange rates that we may not be too familiar with, whether or not a particular currency is regarded as a “safe haven” i.e. if a particluar investor fears that a currency will not hold its immediate or future value, then said investor may choose to exchange it for one which is more likely to.

Economics Resources: Best of Today Podcasts

2011-09-30T21:34:59+00:00

A hat tip to my fellow blogger Graham Carter for suggesting this handy resource. The BBC web site maintains a regularly-updated selection of podcasts drawing on some of the best stories covered by the Today programme. Here is the link. Dip in once in a while to see if there is an audio-resource connected to relevant business, economic and financial news stories.

Unit 4 Macro: Dangers of High Inflation

2011-07-11T15:43:00+00:00

The annual rate of inflation in the UK has overshot its 2 per cent target in 51 of the past 60 months and this has led some economists to believe that the Bank of England has been adopting a tacit policy of allowing inflation to stay above target by keeping official monetary policy interest rates at 0.5% since the Spring of 2009. The Governor of the Bank of England Mervyn King has expressed his concern about “uncomfortably high rates of inflation” but the Bank’s Monetary Policy Committee has yet to reverse the steep falls in interest rates that came in the wake of the global financial crisis in 2008-09. Although modest but persistently higher inflation might be helpful in reducing the real value of outstanding government debt there are also underlying dangers in allowing above-target inflation for a considerable length of time. This blog will look at these.

AS Macro Key Term: Demand Pull Inflation

2011-05-24T21:48:00+00:00

Demand pull inflation occurs when aggregate demand and output is growing at an unsustainable rate leading to increased pressure on scarce resources and a positive output gap. When there is excess demand in the economy, producers are able to raise their prices and achieve bigger profit margins because they know that demand is running ahead of supply. Typically, demand-pull inflation becomes a threat when an economy has experienced a strong boom with GDP rising faster than the long run trend growth of potential GDP. Demand-pull inflation is likely when there is full employment of resources and aggregate demand is increasing at a time when SRAS is inelastic.

AS Macro Key Term: Inflation

2011-05-24T20:10:00+00:00

Inflation is a sustained increase in the general price level leading to a fall in the purchasing power of money. The rate of inflation is measured by the annual percentage change in consumer prices.

China set to become exporter of inflation

2011-04-14T21:08:00+00:00

A few years back we talked of the China Effect - where the rapid transformation of the Chinese economy and the huge growth of high volume low labour-cost manufacturing was acting as a supply-side cause of lower prices in the world economy. A decade or more of this may be coming to an end as the Chinese economy risks experiencing several more years of higher inflation and slower economic growth. This article from the Telegraph “China inflation threat underestimated” reports on research from economists at Legal & General Investment Management that pinpoints of some of the inflationary impulses in the Chinese economy - notably the surge in credit, higher food and other commodity prices and the rapid rise in wage costs in urban areas as cities find the pool of cheap labour from the countryside is not running behind demand and creating labour shortages. This piece from the Economist provides a super chart on what has happened to Chinese wage costs in recent times. China’s tricky wage dynamics Despite recent increases - wages in Chinese manufacturing in 2008 were still only about 4 per cent of those in the USA. If the Chinese authorities are truly serious about controlling inflation we can expect further tightening of monetary policy in the coming months driving the Yuan higher and curbing the rate of growth of real GDP. China has a new growth target of 8% per annum. Might this prove to be an over-estimate if the over-heating economy enters a clear slowdown phase? BBC News: China grew at a robust 9.7%, as inflation hits highs Al Jazeera: China’s inflation continues to rise

AS Macro Key Term: Aggregate Supply Shock

2011-04-06T18:39:00+00:00

Supply-side shocks are unexpected events affecting costs and prices in different countries. An aggregate supply shock is either an inflation shock or a shock to a country’s potential national output.

AS Macro Key Term: Inflationary Pressure

2011-04-05T20:55:00+00:00

Inflationary pressures refers to the demand and supply-side pressures that can cause a rise in the general price level. Demand-pull inflationary pressure is greatest when actual GDP exceeds potential GDP causing a positive output gap. Cost-push inflationary pressure can arise from increases in unit wage costs, rising import prices and an increase in the prices of raw materials, fuel and components used in production.

AS Macro Key Term: Relative deflation

2011-04-02T08:20:00+00:00

The term “relative deflation” is generally used to describe an economy with an inflation rate, which has not necessarily descended into negative territory, but is markedly lower than comparable economies. Over time, a low relative rate of inflation can lead to an improvement in price competitiveness in international markets, assuming that there has not been a compensating change in the exchange rate between two countries. In our data example shown below we track consumer price inflation in Ireland, Spain and Germany. For most of the period shown, the annual rate of inflation in Germany was substantially lower than two of her partners in the European single currency area - this is an example of relative deflation.

Timetric: Weights in the UK Consumer Price Index

2011-03-09T22:56:00+00:00

The consumer price index is a weighted index measuring changes in the cost of living for households in the UK. The weights used in the CPI calculation change over time reflecting movements in spending patterns on different goods and services. Our Timetric chart today tracks movements in a selection of key items used in the CPI measure.

Tuesday Talks! The Smell of Money

2011-03-02T09:23:01+00:00

A fascinating half-hour broadcast on Radio 4 yesterday really grabbed my attention - The Smell of Money looks at the growing prevalence of the cashless society, and its implications for modern economies. A lovely accompanying article on the impact of forged money can be found here. As a short extension activity that could follow on from using these resources, students could consider the following question (one of my favourite mock interview questions): Suppose that aliens on Mars have found a way of forging our money so that it is completely indistinguishable from ‘official’ currency. They then come to Earth on a shopping spree, and take their purchased goods back with them to Mars. Who pays the cost of the shopping spree?

Theory Thursdays! Interesting indices

2011-02-17T13:47:01+00:00

Most students will now have met indices in some shape or form in their A-level course, probably in relation to the Consumer Price Index. This extension activity helps students to develop their understanding of the construction of indices in general. As a starting point, you may want to ask your students to contribute towards the latest Economist Big Mac Index, which looks at the price of a Big Mac in various cities around the world in order to work out whether exchange rates are over- or under- valued as well as the cost of living in various countries. The Economist has asked people around the world to go into their local McDonald’s and then post the price of a Big Mac onto their online forum - you can do this here.

Worst Cases of Hyperinflation

2011-02-16T18:13:00+00:00

Here is a slideshow from CNBC on some of the worst examples of hyperinflation around the world from years gone by.

Combining monetary and fiscal policy to curb inflation in China

2011-02-16T06:02:00+00:00

Inflation is rising in China, and many of the reasons are the same as those given by Mervyn King for the rise in the UK - food prices are up 10.3% and the producer price index has risen to 6.6%, giving an annual inflation rate of 4.9% in January. This is in spite of three interest rate rises in the last four months, and has brought about a further rise from 5.81% to 6.06% by the Central Bank. The growth of the property owning middle class is recognised as having a role here - the National Bureau of Statistics also announced changes in how it calculates consumer price inflation. In spite of the fact that there is still a huge proportion of the population who live on a very low income, and poor families spend up to half their incomes on food, housing has now been given a much larger share of the new consumer price index (CPI) basket, and food prices have been given less weight, it said.

Inflation Stats - Look no Further!

2011-02-14T12:59:00+00:00

The Timetric team have set up this new web site dedicated to tracking the published inflation stats for the UK economy - this will become a go-to resource whenever I am teaching inflation, it allows you quickly and easily to dig beneath the inflation numbers and there is a helpful glossary and some great long run data on inflation. You can also embed the charts into your school blogs. Simon Briscoe from Timetric will be showcasing many of the ways in which this data can be accessed and utilized for teachers at our forthcoming Business and Economics ICT event at the British Library.

Martin Weale argues for higher interest rates now!

2011-02-01T08:03:00+00:00

The newest member of the Monetary Policy Committee - Martin Weale - makes the case here in this article in the Guardian for an early and modest rise in base interest rates.

Changes in Real Prices

2011-01-24T22:40:00+00:00

This is a graphic I use each year when looking at changes over time in indices of consumer prices for different goods and services. Using data drawn from the published Retail Price Index since 1988 (the base year) I print this chart out and explore in classroom discussion some of the economic factors behind the divergence in prices for rail fares, cigarettes, household repair services, clothing and electrical items. We discuss the impact of changes in indirect taxes, unit labour costs, economies of scale, trade and globalization effects and the intensity of competition among other factors. Eagle-eyed students spot the upturn in clothing prices and link it to the rising world price of cotton. Others notice the strong seasonality in clothing prices and the annual hike in rail fares! I have copied the latest chart into a PowerPoint file for colleagues who might want to use it Real_Prices.pptx

5 Fresh Links: Focus on Inflation

2011-01-23T10:02:00+00:00

There has been much coverage of the rise in UK consumer price inflation to 3.7% in December 2010 and another rise will happen when the January 2011 data is published because of the spike in VAT to 20%. Here are five links to comment pieces on the inflation issue:

Economics Q&A: Will the Government spending cuts affect inflation?

2011-01-03T17:49:00+00:00

In early July 2010 Chancellor George Osborne announced a tough government spending review designed to cut the size of the UK’s structural budget deficit and bring down managed state sector spending as a share of GDP. The UK is not alone in introducing fiscal austerity measures and they have prompted fierce debate not least among economists about the likely impact on economic performance. The spending squeeze brings to an end more than a decade of strong real terms increases in state spending. This question is really about causation and in this case we are asked to think about how the steep planned cuts in government spending may affect the annual rate of consumer price inflation in the next couple of years.

EU Economy: Focus on Inflation

2010-12-16T13:45:00+00:00

The economic and financial affairs unit of the EU has produced this resource on inflation within the European Union. It covers the meaning and measurement of inflation, inflation expectations and some study notes on the consequences of inflation for people living inside the single market. It is available here.

Revision Presentation on Causes and Effects of Inflation

2010-11-04T09:40:00+00:00

Here is our latest revision presentation for A2 macroeconomics Streamed: Handout (pdf) SCORM VLE Import (Zip File)

Brazil’s battle with hyperinflation

2010-10-27T07:45:00+00:00

This is a super piece on the economic and social benefits from successful policies to bring about price stability in a Brazilian economy that has suffered from hyperinflation during the late 1980s and early 1990s. Very good on the consequences of high and volatile inflation on real incomes, the incentive to save and the asymmetric impact of rampant inflation on different social groups.

Revision Presentation on Measuring Inflation

2010-10-26T10:20:00+00:00

A revised presentation on measuring consumer price inflation is now available - we have offered it in three formats Streamed presentation Handout (pdf) SCORM VLE Import (Zip File)

AS Macro Revision: Policies to Control Inflation

2010-05-31T11:32:00+00:00

This revision blog focuses on policies that can be used to control the rate of inflation. Our starting point is that inflation comes from more than one source. Rising prices are not simply the result of increasing aggregate demand but also from higher costs of production and the direct and indirect effects of changes in government policies. It is also important to note that many inflationary impulses come from outside the domestic economy - namely from external shocks in the global economic system - many of which an individual country has no control to change.

AS Macro Revision: Cost Push Inflation

2010-05-31T10:29:00+00:00

This revision blog focuses on some of the causes of cost-push inflation. Cost-push inflation occurs when firms respond to rising costs, by increasing prices to protect their profit margins. There are many reasons why costs might rise:

AS Macro Revision: Demand Pull Inflation

2010-05-31T09:46:01+00:00

Britain at risk of Japan-style deflation

2010-05-25T08:41:00+00:00

So warns MPC member Adam Posen - whose remarks at a speech at the LSE are reported in the Telegraph. It is worth flagging up three of the specific difficulties facing the UK according to the Posen view 1/ The heavy reliance on foreign investors as a source of funding for the UK fiscal deficit 2/ Britain’s small manufacturing sector - currently rebounding quite well - but not of a sufficient size to make a really big difference to prospects of a recovery 3/ Continued weakness and fragility in the UK banking system - where deeply risk averse behaviour and continued de-leveraging is “undermining companies’ abilities to raise funds” prompting many businesses to hoard cash rather than invest. More here from the Independent The Realities and Relevance of Japan’s Great Recession - slides and transcripts are available here

Irish Deflation

2010-05-20T20:17:00+00:00

Deflation has been an issue for the Irish economy over the past 18 months. Given its strong position as one of the European PIIGS, rising unemployment and weak financial system, deflation is just another economic problem among many!

Agflation in the Indian Economy

2010-05-19T09:41:00+00:00

Steep increases in the costs of ingredients have contributed to high rates of food price inflation in the Indian economy. And rising food prices have been one of the key reasons why inflation in India is now amongst the highest in the world - on some estimates, food prices account for half of the acceleration in consumer price inflation posing a policy dilemma for the Indian central bank. This BBC news video provides good background on the issue of cost-push inflation in India and the impact of higher food prices on real incomes.

UK inflation hits 17-month high

2010-05-18T18:39:00+00:00

On the CPI measure, inflation hit 3.7% - well above the target of 2% and the highest rate since November 2008; whilst on the RPI measure, which includes housing costs, inflation was up to 5.3% - its highest rate in 19 years.

A2 Economics Revision - Price Expectations and Money Illusion

2010-05-08T18:52:00+00:00

Expectations of what lies ahead can influence how we behave today and price expectations in the economy remain topical and relevant to the handling of macroeconomic policy in the UK.

AS / A2 Revision - Where Next for the UK Economy?

2010-05-02T06:44:00+00:00

Students wanting to demonstrate up-to-date understanding of the UK economy should find this streamed revision presentation really useful. It was delivered by Geoff at our AS & A2 Economics workshops in London & Manchester. It provides a comprehensive coverage of recent developments in the UK economy and highlights some potential downsides and upsides as the economy attempts to sustain a recovery during 2010 and 2011. Has the era of macro economic stability been replaced by a new phase of macro economic uncertainty, slower growth and a recovery constrained by debt? Or are there grounds for being more optimistic about the near-term future for the British economy? Revision Presentation on the UK Economy

Kaletsky on the Phillips Curve

2010-04-07T08:51:00+00:00

Academics ready to crush old economic theories with a new reality: Anatole Kaletsky previews the inaugural meeting of the Institute for New Economic Thinking with an attack on what he terms abstract theories such as the efficient markets hypothesis, rational expectations and the natural rate of unemployment.

UK Economy Revision: Inflation in the last few years

2010-04-01T17:55:00+00:00

What has been happening to inflation in the UK? Consumer price inflation in the UK has been volatile in the last few years. Partly this is because of external factors over which the UK government and the Bank of England have little control:

UK Economy in 2010 - Essential Revision Presentation

2010-03-26T11:42:00+00:00

Many thanks to Geoff for producing this superb 51-slide analysis and evaluation of the prospects for the UK Economy in 2010. Updated to 25 March 2010 with the latest available data.

How does inflation affect us? A great example from India

2010-03-23T05:53:00+00:00

A hat tip to Sibylle Hyde from the Ellen Wilkinson School for Girls for spotting this super BBC news article on wage and inflationary pressures in India. Sibylle writes: “I found this BBC article on wage inflation in India, attached with suggested questions. I have used it for year 12 Economics & Business students (“how does inflation affect us all”) but then also gave it to year 13 Economics students for practice on international competitiveness. The article and discussion questions are attached below. How_does_inflation_affect_us.docx

Duck Tales and the Costs of Inflation!

2010-03-21T08:53:00+00:00

A spring hat tip to Mark Seccombe for suggesting this resource as an alternative way of teaching some of the costs of rising inflation. Mark writes: I was looking for an interesting way to teach the kids the problems of inflation rather than resorting to the slightly depressing Zimbabwe option which always ends up in a political discussion. I think I may have come up with something - DuckTales to the rescue! The first episode of the pair is better and if you then run through into the first minute or two of the second one, it makes a nice 10 minutes starter! Episode 1 Episode 2 If nothing else, it’s a great reminder of my youth!

How do you shop?

2010-03-16T08:14:00+00:00

Lip gloss is the new lipstick according to the ever-changing basket of goods and services that make up the CPI basket, discussed here.

Slumpflation? UK inflation jumps to 3.5%

2010-02-16T23:47:01+00:00

A bump in the night or a worrying sign that higher inflation will impose deal cuts on the real incomes of people taking pay freezes or the millions of savers being offered derisory interest rates on their deposit accounts? Consumer price inflation jumped to an annual rate of 3.5% last month prompting the Governor of the Bank of England to unlock the quill pen and write a letter of explanation to the government. The reasons behind the latest surge in inflation look clear cut 1/ The lagged effects of the fall in sterling on import prices 2/ Much higher oil and gas prices and rising import prices for metals and other raw materials 3/ The effects of the reversal of the temporary cut in VAT (nb VAT is likely to rise to 20% by year end) 4/ Less discounting in the January 2010 sales compared to the same time last year when the UK retail sector looked close to melt-down! And we can always blame the snow ........!!!!! 5/ Snow last month raised the price of certain seasonal vegetable prices, with cauliflowers rising by the highest amount since at least 1996 and the cost of carrots doubling Snow as the cause of a spike in inflation .... do you get my drift? Expect inflation to come down in the months ahead - the pricing power of retailers and manufacturers remains very weak and there is probably a substantial margin of spare capacity in the economy following the 5% decline in real output last year. Britain is no longer a high inflation country despite the gloomy predictions of those concerned about the size of quantitative easing. Economist: Storm before the calm Stephanie Flanders considers the latest inflation figures (BBC news)

Inflationary pressures in China

2010-02-16T08:56:00+00:00

This BBC news video provides an interesting window on the pressures for wages to rise in the booming city of Shanghai. The impressive rebound in Chinese economic growth is driven by the strength of the underlying growth forces in the economy together with the impact of the huge fiscal stimulus. But for many young professionals growth is causing the cost of living to surge - food and property prices are the main concerns. Inflation is a genuine risk for the Chinese economy - what might the Chinese authorities do about this?

Rethinking the mantra of price stability

2010-02-14T10:21:00+00:00

In a break with the consensus that has enveloped policy makers in institutions such as the International Monetary Fund, the IMF’s Chief Economist Oliver Blanchard has written a new paper (Rethinking Macroeconomic Policy) that suggests that a relaxation of tough inflation targets and acceptance of slightly higher average inflation is needed to give macro economic policy more traction in the years ahead. For A2 economists this is an important policy debate. Are the economic and social costs of average inflation of say 3 to 4% much higher than achieving consumer price inflation of 2%? Here are some links to coverage of the paper. Guardian: More inflation may be better after all, says IMF Paul Krugman: The Case For Higher Inflation Economist Blog: Reorienting macroeconomic policy

Mervyn King on Tailwinds and Headwinds

2010-02-10T16:39:00+00:00

Mervyn King delivers the latest Inflation Report from the Bank of England and focuses on the strength of two forces: 1/ The tailwind of the policy stimulus from monetary and fiscal policy 2/ The headwind of the continued deleveraging in the financial system It is a good analogy to use and one that students should be able to latch onto as they grapple with their macroeconomics. This BBC news video provides a good overview of the Bank’s current thinking. In it the Governor explains why the Bank will - for the third time - expects to write to the Chancellor to explain an inflation overshoot. And he comes out with a good quote “Monetary policy can do little to affect short-term changes in inflation” ....... instead it has more leverage on the growth of total spending in the economy which (relative to the supply-side capacity of the economy) affects demand-pull inflationary pressures during the economic cycle.

And now here is the inflation weather forecast…

2010-01-24T12:13:00+00:00

Weatherman John Kettley provides an inflation weather forecast at the start of this super four-minute audio clip on why economists, just like weather forecasters, get a lot of flack when they get things wrong. Launch audio clip on inflation forecasting

China the hungry teenager

2010-01-23T18:19:00+00:00

Hamish McRae is on excellent form in this piece in the Independent - China’s latest growth surge is the result of an enormous fiscal stimulus and a massive (and unsustainable) rise in credit. One of the short term consequences is that China’s turbo-charged growth is once again putting upward pressure on world commodity prices. Just as a hungry teenager will happily eat food long into the night, China’s incremental demand for natural resources and manufactured components is threatening another rise in cost push inflationary pressures in the world economy. This is one of the inflation risks facing developed countries and a factor behind fears of a rise in short term and long term interest rates before a recovery gains sufficient traction.

Zimbabwe moves from hyperinflation to deflation

2009-12-26T23:00:00+00:00

Ask a student on the first day back which countries you associate with hyper-inflation - its a fair bet that most will offer Zimbabwe as an answer - and of course they would have been right up to a few months ago. But currency reforms have brought about a remarkable twist in the inflationary outlook. “Since January, inflation has slowed rapidly after the country shelved use of the local currency and adopted various currencies such as the dollar, South African rand, British pound and Botswana pula” ......indeed there are signs of mild deflation in consumer prices.

Inflation targets

2009-12-15T14:19:00+00:00

The UK first introduced inflation targets in 1992 following sterling’s suspension from the exchange rate mechanism. The government wanted an inflation target to be the ultimate objective of monetary policy having opted to move to a floating exchange rate system.

What is the True Cost of Christmas?

2009-12-10T10:47:00+00:00

Hat tip to A Ellams for spotting this little gem! What is the True Cost of Christmas? The True Cost of Christmas is the cumulative cost of all the gifts when you count each repetition in the song—so it reflects the cost of 364 gifts. There is a video link here on how the Christmas Price Index is constructed:

Deflation - Teacher Presentation

2009-11-17T08:44:00+00:00

This new revision presentation examines the causes and effects of deflation and the possible economic policy responses. Launch interactive presentation on deflation Download pdf handout of presentation slides

Inflation - Measurement (Teacher Presentation)

2009-11-15T17:39:00+00:00

This updated and extended revision presentation looks at the main measures of inflation - and some of the challenges and problems of measurement Launch interactive presentation on Measuring of Inflation Download printable pdf handout of presentation slides

Inflation - Causes and Effects (Teacher Presentation)

2009-11-15T17:18:00+00:00

This updated revision presentation takes a detailed look at the causes and effects of inflation. It explains the theory behind demand pull and cost push inflation, and examines recent trends in data on average earnings, commodity prices and the output gap. There are also some new weblinks to great interactive resources on inflation. Launch interactive presentation on Inflation: Causes & Effects Download printable pdf handout of presentation slides

The power of words…

2009-11-12T13:11:00+00:00

Some say that “words have meaning and names have power”. Well when Mervyn King speaks, markets listen. And sell the pound too.

Gloomy summary

2009-10-13T21:02:00+00:00

Here is a summary of four reports posted on the Business and Economics sections of the BBC News website over the last few days. Be warned - none of them are particularly hopeful, the green shoots of summer giving way to autumn mists.

The UK Economy - a Long Run Perspective

2009-10-07T07:41:00+00:00

We tend to focus on short run changes in output, jobs, prices and profits and risk missing the long term picture of where an economy is. A year ago I produced this chartroom presentation as the UK economy entered recession - this has now been updated and might be useful for colleagues helping students develop an appreciation of the long-run trends in key UK economic data. It is available for download in pdf and scorn-compliant VLE format. Launch streamed revision presentation on the Long Run Perspective Download SCORM-compliant VLE ZIP version Download printable pdf handout version

King confirms green shoots

2009-09-16T05:45:00+00:00

CPI inflation has fallen to 1.6%, and RPI inflation started to recover to -1.3%, in the measure of the annual rate to August. Is this good news? For CPI, it means that the rate is moving further away from the target of 2%, which would be a concern if it was to continue on that trend, but the RPI measure indicates a slightly lower level of deflation, which should be a welcome sign. However, in both cases, it depends upon the reason as well as the expectation of what happens next. In a speech to the Treasury Select Committee, Mervyn King suggested that inflation is likely to be volatile over the next year, and focusing on GDP, he said that there were signs of a recovery to positive growth in the third quarter of the year. But he remains very cautious; although the European Commission forecast the UK to grow 0.2% between July and September, this is less than in France or Germany, and Mervyn King suggested three factors, or headwinds, against which UK growth would have to struggle in order to become positive.

Japanese unemployment rises to record high

2009-08-29T09:54:01+00:00

Japan may have edged out of technical recession in recent weeks but deflationary pressures continue to bear down on their economy.

Inflation or Unemployment - Which is Worse

2009-08-26T20:31:00+00:00

Here is a super short resource from BBC World Business. Paul Krugman, Nobel laureate and professor of economics in Princeton University, and first Niall Ferguson, history professor at Harvard University followed by interpretation of the discussion by Stephanie Flanders.

Deflation in the European Economy

2009-08-14T12:46:00+00:00

Yesterday we learned that France and Germany were making tentative steps out of recession with 0.3% increases in real GDP in both countries during the second quarter (April through to June). Today the latest consumer price data came out for the Euro Zone and they show that the single currency area is now firmly in the grip of price deflation. The average annual rate of inflation for the sixteen nations that are participating in the single currency was -0.7% in July 20092, down from -0.1% in June. A year earlier the rate was 4.0%. For the EU as a whole there remains wide variations in the rate of inflation. Deflation is happening in Ireland (-2.6%), Belgium (-1.7%) and Luxembourg (-1.5%), whereas CPI inflation is relatively high in Romania (5.0%), Hungary (4.9%) and Poland (4.5%). The latest CPI inflation data for the UK was 1.8% in June - a tad below the inflation target of 2.0%. Inflation in the Euro Zone is likely to remain low in the near-term: 1/ There is a growing margin of spare capacity in the EU economy with most countries fighting recession and operating with a large negative output gap 2/ The recession is having a dampening effect on wage pressures 3/ A stronger Euro against the US dollar is keeping a lid on the cost of rising international commodity prices 4/ Manufacturers and retailers have lost pricing power because of the economic downturn

Borrow now inflation later - Art Laffer

2009-07-18T22:23:00+00:00

Steve Evans interviews supply-side Economist Art Laffer - notorious for the Laffer Curve - who typically flags up some of the perceived dangers of government borrowing during a recession. This link takes you to the audio of the interview

Ireland in the grip of deflation

2009-07-10T09:26:00+00:00

The debt ridden Irish economy is plunging into a period of price deflation according to new figures on consumer prices. The Irish economy is more exposed to the dangers of inflation than most because the private sector of the economy has a level of outstanding debt equivalent to around 175 per cent of GDP. The big risk is that a persistent downturn will bring about reductions in wages and prices and increase the real value of unpaid debts.

Q&A: Does a positive output gap always mean rising inflation?

2009-06-02T06:11:00+00:00

A student asks “Does a positive output gap always mean rising inflation?”

Q&A: AD and Inflationary Pressures

2009-06-01T17:38:00+00:00

A student asks: Will a rise in AD will only cause cost-push inflation if there is a positive output gap?

Revision - Stagflation

2009-05-30T13:49:00+00:00

Stagflation, accelerating inflation, slow growth, rising unemployment, UK economy, commodity prices Stagflation refers to a combination of stagnant economic growth and high and rising inflation. Some economists also add in rising unemployment into the dangerous stagflation mix! In this situation it becomes difficult to manage the economy because, on the one hand, companies and employees are suffering from slow-growing or falling production (which can lead to weaker profits and job losses), whilst prices are rising more quickly which threatens our real standard of living.

Revision - Cost of Living

2009-05-26T19:00:00+00:00

The cost of living is a measure of changes in the average cost for a household of buying a basket of different goods and services. Percentage changes in the cost of living are measured by the inflation rate and in the UK there are two officially published measures, the Retail Price Index (RPI) and the Consumer Price Index (CPI).

RIP RPI?

2009-05-20T07:09:00+00:00

A headline in today’s Times “Threat of deflation as retail price index falls to lowest-ever level” I am confident that every AS and A2 economics student in the land will spot the obvious error in this headline! There is a world of difference between the general level of prices and the annual rate of change of prices! Here Hugh Pym considers whether wage freezes or pay cuts will become a more frequent feature of the labour market during the recession.

Geographical Seepage in the World Economy

2009-05-17T14:54:00+00:00

I was listening to a talk by Stephen King from HSBC a few weeks ago and he mentioned the idea of geographical seepage as it relates to the current state of the world economy.

Revision: Wage Cuts in a Recession

2009-05-14T19:51:00+00:00

What connects professional rugby players at Gloucester RFC, staff at Swindon’s Honda car plant, employees of the successful Game retail store and thousands of people working for the Royal Mail? The answer is that all of them have been asked either to take a pay cut for the year ahead, or at the least endure a wage freeze until economic conditions improve. They are part of a growing trend.

Merle Hazard And Bretton Wood - Musical Double Act

2009-05-12T20:06:01+00:00

Merle Hazard and his singing partner Bretton Wood sing about the risks of deflation in this entertaining You Tube video.

OCR 2888: The Social Impact of Agflation

2009-04-04T21:43:00+00:00

Two of the key themes of the OCR2888 pre-release stimulus material this year are the causes and consequences of rapid food price inflation - something known to economists as agflation. 2007-08 witnessed a dramatic increase in the prices of many basic foodstuffs across the world. Agflation has many demand and supply-side causes (discussed in our toolkit publication) and the economic and social impact is hugely important not just for EU consumers and producers but around the world. This is highlighted by a number of global campaigns by organizations such as the World Food Programme and Save the Children. A recent Save the Children press release for a food relief programme for people in Kenya makes the point better than I ever can: “Poor people in the poorest countries were hit hard by the rise in food and fuel prices last year. The financial crisis will hurt them even more, and children are most at risk. Without a big increase in financial resources for the poorest countries, large numbers of children will fall into poverty, drop out of school, suffer ill-health or be more exposed to violence and exploitation.” And now Save the Children is turning its attention to food poverty in the United Kingdom. This BBC article covers the issue but better to turn to this short video clip. Persistently high food price inflation creates winners and losers (someone somewhere receives the money down the supply chain) but the social consequences cannot be denied especially the dangers of malnutrition and its impact on education and health outcomes among the most vulnerable.

Q&A: Full employment and inflation

2009-04-01T15:49:01+00:00

When the economy is at full employment, what measure is most effective in reducing inflation in the short run? This question hints at the possible trade-off between two macroeconomic objectives - namely high employment and stable prices.

On the cusp of deflation

2009-03-24T17:51:00+00:00

We shouldn’t be too surprised with the news that RPI inflation stayed just above the point at which we can call the first phase of price deflation since 1960. Sterling has fallen by 28% on a trade weighted index since the summer of 2007 and a depreciation of the exchange rate of such magnitude must show through into consumer prices despite the softness of demand in the wider economy. There are hints too that retailers have reversed the ill-judged and singularly ineffective VAT cut from 17.5% to 15% announced back in November. And we should keep in mind that some commodity prices are starting to move higher again with oil prices back above $50 a barrel and the Economist Commodity Price index for metals and foods also showing signs of renewed strength. The media will pick up on the link between RPI inflation and the likely pattern of wage negotiations over the next six to twelve months. In truth, pay freezes and some deeper pay cuts are inevitable anyway regardless of what the official data for inflation is showing. Businesses across the country are desperate to cut overheads and salary costs are pretty much first in line. Any pay rise of between 1 and 2% if going to look pretty generous by the time we get to the summer. I have attached a handout covering some aspects of the latest inflation data. Handout Inflation_March_2009.doc

Printing Money Graphic

2009-02-19T08:29:00+00:00

There is much in the press this morning about the fact that the Bank of England has asked Alistair Darling if it can begin the process of ‘quantitative easing’ (many refer to it as ‘printing money’). What does this actually mean though? There is an excellent graphic in today’s Times that makes it all a little clearer. There was also a good blog from the BBC’s Economics editor Stephanie Flanders yesterday on quantitative easing. Heather Stewart is also on good form this morning with a good Q & A piece in today’s Guardian.

Bootle on Deflation

2009-01-25T14:52:00+00:00

Roger Bootle’s quarterly Deloitte Economic Review rarely disappoints and the new edition which is available here provides a timely and crystal-clear explanation of the demand and supply-side factors that might bring about price deflation in the UK economy during 2009 and into 2010. Seven forces are raised as contributing to downward pressure on the general price level 1. The sharp fall in global food and energy prices 2. Intense competition amongst retailers such as deep-discounting to maintain cash flow and market share 3. The impact of the temporary cut in VAT from 17.5% to 15% 4. Falling housing costs including lower mortgage interest repayments (which affects RPI inflation) 5. The lagged effects of a large margin of spare capacity in the economy due to the negative output gap 6. Downward pressure on basic pay settlements and average earnings - how many people will take pay cuts this year? 7. The sustained and persistent decline in asset prices with consequences for consumer confidence and aggregate demand For AS students - consider how these forces might be explained and illustrated using AD and SRAS analysis. The risks of price deflation are not insignificant, indeed as Bootle points out, price deflation might have been rare during the latter part of the twentieth century but we have had plenty of instances of it in the UK in earlier ages. What of the likely consequences of a bout of price deflation? Some of the forces mentioned above are indeed likely to be temporary (the VAT cut is reversed in 2010) and some will have favourable effects on real income and spending power. But the consensus seems to be that deflation can have a pervasive and damaging effect on the real economy: 1. A rise in the real value of debts - personal, corporate and state 2. A change in the psychology and expectations of businesses and consumers 3. Second round effects including pressure for wages to fall and output to be cut back further 4. The possibility that the usual instruments of monetary policy become ineffective 5. Consequences for welfare benefits - will the government cut unemployment and state pensions in a world of deflation? 6. The damaging effects on the corporate sector of falling prices and profit margins Sterling’s continued depreciation perhaps holds out the best hope of avoiding deflation this year as does a partial rebound in the price of oil and gas and other inputs. Bootle predicts that - having cut policy interest rates to the bare bones of 1.5% - the Government and Bank of England are likely to resort to further emergency measures to prevent a Japanese-style deflationary spiral.

Official recession figures and graphics

2009-01-23T11:26:00+00:00

This BBC resource has bang-up-to-date graphs and data for the performance of the macroeconomy – GDP, Unemployment, House prices, Inflation, Repossession and Interest rates – as well as some interesting regional comparisons and the opportunity to check your own personal inflation rate. It should be read by anyone studying macroeconomics, especially those taking AQA Unit 6 next week!

The Dangers of Wage Cuts

2008-12-11T18:52:58+00:00

A few weeks ago JCB workers offered to take a pay cut in a bid to prevent hundreds of job losses – their stance was admirable but such has been the drop in demand for JCB’s products that the redundancies went ahead anyway. Today we hear that workers at Corus (bought last year by the Indian steel giant Tata) may have to agree to across the board pay reductions of ten per cent in a similar attempt to stem likely labour shedding. These are the high profile pay and wage reductions that make the headlines. But there are countless examples of downward pressure on pay packets – either in the form of cuts in hourly wages or fewer hours worked – that are affecting people throughout the economy, many in small to medium sized businesses. This BBC news clip looks at the example of a yacht company in Plymouth Whilst wage flexibility can be a useful tool in minimizing the likely scale of redundancies in employee head counts as the downturn bites, there are dangers if wage reductions become widespread and expected. Here is a timely article by Edmund Conway in the Telegraph that considers the impact of lower pay in an economy at risk of entering a deflationary spiral.

A turning point for price expectations

2008-12-11T18:29:52+00:00

Here is an important turning point for the British economy and one that the Bank of England was expecting when the latest Inflation Report was published at the back end of November. There has been a sharp downward shift in people’s expectations of price inflation for the year ahead. The average inflation rate expected over the next year is 2.8 per cent, compared with 4.4 per cent in August – this is the biggest move in price expectations in the nine years over which the Bank of England/GfK NOP Inflation Attitudes survey has operated. Visible price reductions on the high street and on petrol forecourts will have played a role. Once people start to notice lower quarterly energy bills and the next wave of price discounts at the tills of food stores, inflation expectations can be expected to head south once more. The cut in VAT will accentuate this process. But just as the Bank of England was worried that rising inflation expectations could stimulate a wage-price response, so it will be concerned to avoid expectations of price deflation since this might lead consumers to postpone spending and deepen the demand-led recession. The depreciation in sterling will be one factor helping to keep the economy away from deflation’s door in 2009.

Making the case for higher inflation

2008-12-04T20:53:02+00:00

My AS students were last week writing about the economic costs and benefits of price inflation and price deflation - I was pleased that they managed to see through some of the intuitively attractive aspects of price deflation (cheaper iPhones, clothing and technology prices) to show their awareness of the impact that sustained deflation can have on business revenues, profits, jobs and ultimately real wages and jobs. In this piece in the Guardian Kenneth Rogoff makes the case for the world economy needing a burst of ‘moderate inflation - which he defines as annual price increases of around 6 per cent for two or three years. Rogoff Article

Some reading on deflation

2008-11-27T00:32:02+00:00

Deflation is a period when the general price level falls i.e. the cost of a basket of goods and services is actually becoming less expensive. It is normally associated with falling level of AD leading to a negative output gap where actual GDP < potential GDP. But deflation can also be caused by an increase in a nation’s productive potential which leads to an excess of aggregate supply over demand. My AS economists have been writing about deflation this week. Here is a selection of recent articles on price deflation that considered some of the issues involved: Independent: Why buy now if prices are plummeting? How deflation could drag us all down Reuters: What is deflation and why is it feared? Belfast Telegraph: Deflation is the enemy of growth and prosperity

Disinflation and Deflation

2008-11-18T17:21:00+00:00

To judge from the instantaneous reactions of the news channels the British economy is on the edge of a deflationary precipice. Journalists anxious to put a fresh spin on their well-worn recession / credit crunch story-lines are now turning their attention to headline grabbing reductions in food and petrol prices and extrapolating that – pretty soon – the economy will be in the grips of a deflationary recession. Hold on a minute.

A primer on deflation

2008-11-13T09:00:01+00:00

One key aspect of the Bank of England’s Inflation Report published yesterday was the re-emergence of price deflation as a risk for the UK economy in 2009 and 2010. Deflation occurs when there is a sustained fall in the general level of prices and it is thought to be a major problem given the large amount of household debt. Larry Elliot has a useful primer on the economics of deflation in today’s Guardian. More articles here: BoE sounds warning on recession and deflation (Independent) Britain in Deflation (Chris Dillow, Investors Chronicle)

Who are the Bank of England’s spies on the ground?

2008-10-25T19:50:01+00:00

The Bank of England has a network of Regional Agents operating across the length and breadth of the UK. Think of the Regional Agents as a form of intelligence network designed to give the Bank of England a feel for what is really happening on the ground.

Highest inflation for 16 years - but no panic!

2008-10-14T20:31:00+00:00

The annual rate of CPI inflation jumped to 5.2% in October - the highest inflation number since the UK was last in recession in 1992. Yet remarkably the response was muted. Much of the climb in the cost of living was attributed to the steep increases in utility bills compared to this time last year. Indeed the consensus is that consumer price inflation will move lower in the months ahead as oil prices fall, food prices move down from their peak, petrol and diesel prices dip on the forecourt and the there is some reversal in utility bills. And in a recession the power of workers to bid for inflation-busting pay rises is severely constrained. I have put together a ten chart presentation on the UK inflation numbers in case colleagues teaching inflation want to use some bang up to date charts. This Guardian interactive graphic is also recommended. Chart presentation High_UK_Inflation.ppt

Another upward spike in inflation

2008-09-16T11:49:00+00:00

The annual rate of consumer price inflation has spiked up to 4.7% in August - up from 4.4% a month earlier. The striking numbers this month seem to me to be the surge in the prices of goods with goods price inflation now running ahead of price rises for services for the first year in many a long year. A sharply lower exchange rate, increased manufacturing and shipping costs together with accelerating inflation in many of the lower-cost manufacturing centres of the world are just three of the factors causing goods price inflation to climb above 5%. The Bank of England has forecast that inflation will climb above 5% in the near term. The good news is that falling world oil prices and a downturn in other internationally traded commodities is likely to bring some relief to interest rate setters as we move through the autumn, giving the Monetary Policy Committee scope for rate cuts starting in October or November. Inflation affects different people in different ways and few of us experience the same rate of inflation. But the upward movement in the consumer price index is a huge cause for concern. Latest inflation numbers are available in this powerpoint file UK_Inflation_Data.ppt