Abenomics cannot escape the issue of Japan being trapped between a rock and a hard place

The last couple of years have seen me reviewing the progress of Abenomics or the economic policies of Japan’s Prime Minister Shinzo Abe. These were initially lauded by the media with the Financial Times and Paul Krugman leading the way. However I expressed many doubts about how expanding the money supply and depreciating the currency would lead to an economic transformation for the land of the rising sun. After all it had tried such policies previously without conspicuous success and we had already learnt by then from the UK and the Euro area that higher inflation was likely to hit real wage growth. Accordingly any economic heavy lifting was going to have to come from economic reform which seemed unlikely when Abe-san himself represents the vested interests of old Japan.

(Wo)men overboard

The next feature of pro-Abenomics propaganda was that it was beginning to institute reforms by increasing the number and role of women in the workplace. This morning has seen something of a reverse for that. From Reuters.

Trade and industry Minister Yuko Obuchi, 40, the daughter of a prime minister and tipped as a future contender to become Japan’s first female premier, told a news conference she was resigning after allegations that her support groups misused political funds.

Just hours later, Justice Minister Midori Matsushima also resigned.

This leads to fears that the women promoted by Shinzo Abe have exactly the same problems as the men with issues such as corruption. So rather than a hoped for change of direction it seems that the same group are in charge whatever their gender.

If we move to the reform issue then this looks a bit like the first government of Shinzo Abe rather than a new dawn.

Abe’s first stint as prime minister in 2006-2007 was marred by scandals among his ministers – several quit and one committed suicide.

What about the economy?

A problematic piece of data was released in the middle of last week. This was industrial production for August which fell by 1.9% on July and was some 3.3% lower than a year before. The index where 2010=100 was only at 95.2. This report followed on a 2.9% year on year fall in July which replaced a period of positive growth.

This poses a problem as two of the three months of the third quarter are now accounted for and this part of Japan’s economy has shrunk in both. Whilst the business surveys are mildly positive for September (PMI was 51.7), I note that the Purchasing Managers Index in August was more positive at 52.2 and yet output fell. So this sector seems likely to be a drag on Japan’s economy in the third quarter of 2014.

Also we already have something of a correction to the claims that the economy would quickly bounce-back from the effects of April’s rise in the consumption tax.

What about Real Wages?

This has become an increasing issue in the credit crunch era as we have seen falls in real wages or at best stagnation spread. The (fairy) story told by Abenomics fans was that as inflation rose Japanese firms would increase pay to at least match it and the economic expansion would allow real wages to grow. Meanwhile the Ministry of Labour told us late last week that real wages in August were 3.1% lower than a year before. This was the fourteenth month in a row that annual real wage growth was negative. So on the evidence so far Abenomics has pushed real wage growth downwards rather than the upwards claimed.

Accordingly it is hard to see much of a boost to the Japanese economy coming from the domestic consumer as he/she faces up to lower wages in real terms. The irony here of course is that the rise in the consumption tax has pushed inflation up and real wages down.

Today’s Data

The Economic Statistics and Research Institute has published it surveys this morning and signals  a possible turning point. However as the coincident index fell from 109.9 in July to 108.5 in August and the leading index fell from 105.5 to 104.4 I am not sure where they get their optimistic tinge from.

We also saw modest year on year falls in department store sales and convenience store sales for September.

Financial Markets Surge

There is a grim theme of these times which is the decoupling of the real and the financial economy. This morning has seen an example of that as the Japanese Nikkei 225 equity index has surged by 578 points or a smidgen under 4% to 15,111. No doubt policymakers who have in my opinion an unhealthy obsession with equity market levels will be pleased. But once you look beyond the possible causes such as the improvement in other markets on Friday you also see this. From Japan Today.

Japan’s $1.2 trillion retirement fund will increase its allocation target for shares to about 25 percent from 12 percent, the Nikkei newspaper reported without attribution.

The Government Pension Investment Fund will also boost its holdings of foreign bonds and stocks to about a combined 30 percent from 23 percent,

No wonder the market surged! Has anybody asked the pensioners what they think of this? It makes me wonder two things. Firstly what equity market skills Shinzo Abe has and secondly why this is badged as a reform.

If you are wondering who will buy all the government debt that Japan is going to issue going forwards I guess we need to look at the Bank of Japan. There is certainly very little sign of panic in a ten-year bond yield of only 0.48%.

Oh and with the Bank of Japan buying Japanese equities too then we have a clear Goodhart’s Law issue. If you pressurize institutions to buy the equity market and force it higher then claiming higher equity markets are a sign of economic succession is at best a type of misrepresentation.

Shinzo Abe gets cold feet?

In an interview with the Financial Times Shinzo Abe is suggesting a type of Laffer curve being at play in Japan.

By increasing the consumption tax rate if the economy derails and if it decelerates, there will be no increase in tax revenues so it would render the whole exercise meaningless.

Such a situation will be familiar to those who have followed the travails of the periphery of the Euro area. Except here we are seeing a suggestion that 8% may be as high as the consumption tax can go which if you look at a VAT (Value Added Tax) rate of 20% for the UK seems odd to say the least. Also if you do believe that the Japan really does have a problem as it continues to have high fiscal deficits (7% of GDP in 2013) which only add to the issue of its national debt which is estimated by the IMF to be 243% of GDP in gross terms.


We see that even Shinzo Abe is now facing the contradictions which were always inherent in the policy of Abenomics. Raising inflation was always likely to have a depressing influence on the economy via its impact on the level of real wages. Then adding an increase in indirect taxation to this was only giving it a further push. Perhaps he hoped that the international environment would be more favourable than it is and would cover this up.

The problems I have highlighted above return me to my image of a rock and a hard place. Japan is experiencing something of a fiscal crisis with deficits adding to its already large national debt. The theoretical solution suggested by the IMF of higher indirect taxes – how has that worked for the IMF elsewhere?!- seems to be already in trouble with the next proposed rise being questioned. If we then factor in the impact of Japans population which is both ageing and declining then we see that it is only going to get tougher going forwards. As Japan’s population holds the vast majority of Japan’s national debt a default will cause as many problems as it solves.

Perhaps the new passenger airliner unveiled by Mitsubishi is a hopeful step for an industrial regeneration. But for Japan’s establishment the replacement of the daughter of a previous Prime Minister with the nephew of one about sums it up really.

Why I think a Base Rate cut in the UK is as likely as a rise going forwards

Today’s blog post title goes against quite a lot of conventional wisdom in the UK where we are continually promised that Base Rate rises are just around the corner. So far however we have found ourselves on a straight road and the chances of that continuing have moved higher. It was only last Thursday that I pointed out on here that the Bank of England was moving away from its promises of a Base Rate rise which continued a theme I had opened on the 27th of December last year.

So should we see any slowing of the UK economy in 2014 and the exchange rate of the pound continues to be strong there are factors pointing towards a base rate cut. This would be reinforced if the pound strength actually pushed inflation to below its target. The MPC would be likely to ignore the years of inflation being above target and concentrate myopically on the immediate figures in such a situation.

Okay so what grounds might there be for a Base Rate cut?

Some of these have been established this morning in a speech given by Bank of England Chief Economist Andy Haldane in Kenilworth.

So far, then, so bad. On this evidence, the UK economy is as weak as at any time in the recent or distant past. It is firmly on the back foot.

Okay Andy so what ground do you have for thinking in such a way? The emphasis below is mine.

Annual real wage growth in the UK – average weekly earnings growth adjusted for consumer price inflation – is currently running at close to minus 1%. Growth in real wages has been negative for all bar three of the past 74 months. The cumulative fall in real wages since their pre-recession peak is around 10%. As best we can tell, the length and depth of this fall is unprecedented since at least the mid-1800s.

Regular readers will be aware of this issue but I thought the sentence I emphasised a fresh way of looking at it. Some of you may already have spotted that he has missed a trick as the real wages data would look worse if he had used the Retail Price Index. As he is using data supplied by the Trade Union Congress for their Britain Needs A Pay Rise campaign I suspect they have missed a trick too. Oh and using an index (CPI) only just over a decade old to go back more than a century has its dangers.

Next up we got this.

Productivity – GDP per hour worked – was broadly unchanged in the year to 2014 Q2, leaving it around 15% below its pre-crisis trend level. The level of productivity is no higher than it was six years ago. This is the so-called “productivity puzzle”. Productivity has not flat-lined for that long in any period since the 1880s, other than following demobilisation after the World Wars.

Okay so a further problem and particularly troubling that it has not picked up as our economy has pushed forwards and had a better spell.

There is something of a departure for a Bank of England official in this next section which I wholeheartedly welcome. It is considering the effect of the credit crunch on savers.

Annual real interest rates – for example, rates earned by households on time deposits adjusted for consumer price inflation – are around zero. They have been near-zero for close to four years. Real deposit rates have not been that low since the 1970s, when inflation was in double digits.

This is something of a change as I can remember Deputy Governor the aptly named Charlie Bean telling us this back in September 2010. He replied “Yes” to this question posed by Channel four news.

This bad news for savers is the point of what you are doing?

Now Andy Haldane is implying that this is one of the things which have weakened the economy. Oh and Charlie Bean was displaying his usual anti-prescience skills back in September 2010.

At the current juncture, savers might be suffering as a result of bank rate being at low levels, but there will be times in the future — as there have been times in the past — when they will be doing very well.

So far some four years later such a situation has yet to arrive Charlie! Still I suppose that having retired with a pension fund valued at £3.96 million he has hardly noticed.

The Agony Index

Andy Haldane uses the concepts and data above to create an agony index which is not especially pleasant reading.

The agony index is currently at painfully low levels.
It has been around 5 percentage points below its 1970-2014 average since 2008. Such an extended period of agony is virtually unprecedented going back to the late 1800s, with the exception of the aftermath of the World Wars and the early 1970s.

Bank of England Forecasting Accuracy

The emphasis is mine.

And if you believe the MPC’s growth forecasts, that recovery is set to continue in the period ahead.

Indeed one of my themes has been confirmed here and it is nice to see some refreshing honesty for a change.

These suggest that the MPC, in common with every other mainstream forecaster, has been forecasting sunshine tomorrow in every year since 2008 – that is, rising real wages, productivity and real interest rates. The heat-wave has failed to materialise. The timing of the upturn has been repeatedly put back. Downside surprises have been correlated.

The future does not look especially bright

In the UK, real interest rates are now expected to remain negative for at least the next 40 years. An alternative hypothesis is that these developments reflect pessimistic expectations about future growth prospects, which are mirrored in expected policy rates needing to remain lower for much longer.

You may note that the “lower for longer” mantra of Forward Guidance has found the word “much” added to it. Yet another change? Perhaps and maybe soon we will be following the Bank of Canada and moving away from Forward Guidance completely.

Some care is needed here as we have just concluded that forecasts are not far off hopeless right now but the summary of wages and the labour market is also somewhat ominous.

Taken together, this paints a picture of a widening distribution of fortunes across the labour market – a tale of
two workers. The upper peak of the labour market is clearly thriving in both employment and wage terms. The mid-tier is languishing in both employment and real wage terms. And for the lower skilled, employment is up at the cost of lower real wages for the group as a whole.

Let us cut to the chase

Here is the implied policy judgement from Andy Haldane.

And recent evidence, in the UK and globally, has shifted my probability distribution towards the lower tail. Put in rather plainer English, I am gloomier.


There is a fair bit to consider here and let me open by pointing out that Andy Haldane has got gloomier over a period where the UK economy has apparently grown strongly again (0.7% according to the NIESR). Also the ESA 10 revisions have left our economy somewhat larger in recorded terms but little solace seems to have been gained from that. Perhaps he is not much of a fan of them either!

Also I wish to point out that there was another side to the speech as you might guess from the title of “Twin Peaks”. There was an ecstasy alternative to the agony. But I have the feeling that we are being feed a policy shift in what might be called bite-sized chunks. As I have argued before the chances of a future Base Rate cut are much higher than you are likely to read elsewhere. Please do not misunderstand me as I would not vote for it but the possibility is edging up on the horizon.

If we move to an international perspective then the United States may be edging in the same direction. Here is James Bullard of the St.Louis Federal Reserve on Bloomberg.

Inflation expectations are declining in the U.S…… “That’s an important consideration for a central bank. And for that reason I think that a logical policy response at this juncture may be to delay the end of the QE.

Now who is left raising interest-rates? Oh and did the markets or the central bankers move first?

What interest-rates do governments and central banks control?

Yesterday was a day of wild swings in financial markets and one which makes me miss the days when I used to put on a trading jacket in the open outcry markets of LIFFE. Something about old warhorses and the sniff of battle I guess! However the moves in one area did highlight a fundamental issue which is rarely discussed either properly or in depth so I will explain it today. The issue can simply be expressed as who sets interest-rates? You may note the fact that I use a plural here. Also I guess you are already figuring that it is much wider than the conventional somewhat stereotypical answer which is that the interest-rate is set by the central bank of the respective country. This is particularly relevant at a time when central banks have intervened in so many areas and markets and are considered by some to be giants in a land reminiscent of Lilliput.

The Bank of England

Martin Weale

Martin Weale gave a speech yesterday evening and as he is a voting member of the Monetary Policy Committee you might think that UK interest-rate markets would be hanging on his every word. So let us examine what he had to say.

An increase in Bank Rate of ¼ point would be unlikely to slow that process to a halt immediately but there is a risk that, if the increase were delayed, inflation would be pushed above target or a rather sharper increase in Bank Rate would be needed subsequently.

This represents his view that a nudge higher in UK Base Rates is required right now to combat future upside inflation risks. A bit awkward for a man who “looked through” rises in consumer inflation to over 5% you might think! He did briefly vote for a Base Rate rise then but changed his mind (something which may yet repeat). Also you may be intrigued by this bit.

The margin of spare capacity is shrinking rapidly and all logic suggests that that ought to lead to an increase in inflationary pressures over the two to three year horizon which concerns the Committee.

Whilst he is making his case he has nudged the policy horizon from 2 years to 2/3 years. I guess the vaguer you make it the easier it is to dodge responsibility when things go wrong as they so regularly have.

Let me add here a real problem for inflation targeting which is that right now seeing the future more than a few months ahead is as difficult as it has ever been. On those grounds alone lengthening the policy horizon is not a little dim.

What did the financial markets actually do?

As I have already hinted at yesterday was a day of big moves in interest-rate markets and also high volumes. For instance by I saw reports that the US Treasury market had passed the previous days total volume by 10 am. Let us examine some moves in the UK.

If we go to one of the UK’s longest dated conventional GIlts (2060) I note that it rallied more than 3 points and that its yield fell from 2.83% to 2.73%. Those with personal pensions will be grateful that it is no longer compulsory to buy an annuity because should such yields persist we will see even poorer value from conventional annuities. If we move down the maturity curve to the ten-year yield used as a benchmark then this fell below 2% (and is there as I type this) which contrasts significantly with the (just over) 3% with which 2014 began.

There are also interest-rate futures markets which for the UK are rather confusingly called short sterling. A price rise here indicates a lower path for expected interest-rates in the UK and prices have been rising. We do not have to look back very far to see quite a change as since the end of last week the December 2015 has priced in a future with interest-rates 0.24% lower and the March 2016 contract has priced in interest-rates some 0.29% lower. Just to confirm that these are lower interest-rates and not the higher ones Martin Weale is voting for.

The combination of all these factors will be felt in various areas as for example some mortgage rates (fixed ones in particular) and corporate borrowing rates will respond to the new situation should it remain like this. So the UK is seeing a monetary loosening of policy right now -especially if we also add in the recent decline of the value of the UK Pound- just as two members of the MPC are calling for higher Base Rates. Other countries have more direct formal relationships here as for example yesterday saw lower fixed rate mortgages being offered in the United States in response to the plunge in US Treasury Bond yields which took place.

What about Quantitative Easing?

This has been an attempt to reduce longer-term interest-rates via bond yields by several of the worlds major central banks. You would think that such large purchases (some £375 billion) would have an effect on the price. Except that yesterday UK Gilt prices surged and yields fell without there being any new QE purchases. The only action these days is the rolling over of maturing bonds (which just to be clear I would stop). Whilst there is a stock of UK QE we have to question if UK Gilt yields would have dropped anyway leading to the possibility of it being a waste of time and a failure.

As it did exist in the UK we need to look elsewhere for clues. Germany is currently an interesting test case as its bonds continue to surge with its five-year yield now a mere 0.11%. It does not have QE and yet if we move to Japan long considered the home of QE and currently deploying it with kamikaze enthusiasm we see a five year yield of 0.14%. The circumstances of the two countries are of course by no means exactly the same but the country without QE has lower shorter maturity bond yields. Also with longer-dated bonds surging in price in Germany again today they could not be catching up much faster.

Putting it another way QE is now generally expected in Italy for example and maybe rather soon. Yet its government bonds are falling in price and the ten-year yield is up by 0.34% to 2.74% today alone. It was not so long ago that the discussion was around Spanish yields were below the UK, er not now and by a fair margin and yet QE is expected there too….

What does the central bank control?

It controls the official interest-rate and these days there may be more than one occupying this mantle. Let us look at the UK Base Rate. This is an interest-rate that is for overnight borrowing only. if we are generous we might add that it usually holds for one month until the next MPC meeting.

Accordingly the impact is then implied onto a range of other interest-rates. Some are explicit as there are mortgage rates which are tied to the Base Rate. Others are not so explicit but are expected to respond. What if increasingly they did not? We have seen that sort of behaviour in parts of the Euro area.


I hope that this has clarified matters on this subject. As ever we do not have a laboratory and some test tubes to do a controlled experiment. But two members of the MPC are currently voting for Base Rate rises and Mark Carney has hinted at future rises. Yet right now the financial markets are apparently approving of the recent reforming of Fleetwood Mac.

You can go your own way
Go your own way
You can call it another lonely day
You can go your own way
Go your own way

The Royal Statistical Society

I raised the issue of the treatment of UK inflation with respect to rail fares ( CPI or RPI) with the RPICPI User Group. In response the Chairman has written to the head of the UK Statistics Authority requesting clarification. The details of the exchanges can be found below.


The UK has falling real wages and oil prices but a rising price of football

Over the past week or so the pace of action in financial markets has really picked up. It was only yesterday that I was discussing disinflationary trends and this morning I note that the price of a barrel of Brent Crude Oil has fallen below US $84 per barrel. Since the peak of US $115.71 on June 19th it has fallen by some 27% and the pace has accelerated over the past 24 hours. The report from the International Energy Agency reducing oil demand forecasts for this year and next and telling us that supply exceeds demand right now certainly put the skids under the oil price! We are now back to levels last seen in the latter part of 2010 so some care should be taken as we have fallen very far very fast and must be vulnerable to a short-covering rally.

Also I would like readers to take a step back from the media coverage which will involve panic over disinflation and deflation in some confused combination. Whilst a falling oil price does signal issues with the current state of the world economy it is also a strong reflationary influence and so many economies will get a much needed boost from it. Indeed it will be oil importers who most benefit and there is a long list of them. For once there is some good news for the Euro area although it comes with a problem for the European Central Bank which will get lower inflation before the growth boost. Imagine the panic if Euro area consumer inflation should have a print below zero. Let me wish Mario Draghi good luck in explaining that one.

However we are seeing consequences of this oil price fall in more and more places with China adding itself to the list today. From the National Bureau of Statistics via Google Translate.

2014 years 9 months, the national consumer price index rose 1.6%

So the disinflationary trend is clearly in evidence (it was 3.1% this time last year) there with some already wondering if we will see before long a number less than 1%. With the producer price numbers negative that may yet happen. Of course Chinese consumers and workers will welcome the reduction in inflation and may choose to avoid reading the experts who will tell them it is bad for them.

The UK

As we switch to the UK we see that it will be receiving a boost from the falling oil price and maybe even a small one to the trade figures as it is now a net importer. Adding to this is the recent fall in the value of the UK Pound which has dipped below US $1.59 today. Whilst this will offset some of the oil price fall it should in theory give the economy a boost although the lesson of the 2007/08 depreciation was to weaken expectations for such effects.

We are seeing lower fuel prices at the pump at least. According to the official data petrol prices are some 5.2 pence per litre cheaper and diesel some 8.1 pence cheaper. As I driver of a diesel may I add a little hurrah to the narrowing of the gap? It used to be cheaper but that was before many of us in the UK were persuaded to switch fuel type. Let us hope that more price falls are on their way.

What about today?

Employment has continued its recent growth phase.

There were 30.76 million people in work. This was 46,000 more than for March to May 2014………The proportion of people aged from 16 to 64 in work (the employment rate), was 73.0%,

So our quantity measure has performed extraordinarily well considering the economic distress that we have seen in the UK. However as it approaches all-time highs in terms of the ratio (73.2%) we do have a problem for projecting that forwards. Is this a type of (near) full employment? Personally I think that there is still room for reductions in the under employed sector but any such thoughts about nearing a maximum poses obvious issues.

The improvement in employment has followed through to the unemployment numbers.

There were 1.97 million unemployed people, 154,000 fewer than for March to May 2014 and 538,000 fewer than a year earlier. This is the largest annual fall in unemployment on record. Records for annual changes in unemployment begin in 1972.

The unemployment rate continued to fall, reaching 6.0% for June to August 2014, the lowest since late 2008.

Again these are very welcome figures and we should perhaps take a moment to let them percolate.

The hours worked numbers did show a clearer change of trend as they had been growing but now did this.

Total hours worked per week were 987.3 million for June to August 2014. This was:
• little changed on March to May 2014,
• up 24.5 million (2.5%) on a year earlier,

If we continue with our glass half full view there is a glimmer of a possible improvement in productivity there as our economy was growing then (h/t Chris Dillow).

What about real wages?

This remains a problematic area to say the least.

For June to August 2014, regular pay for employees in Great Britain was 0.9% higher than a year
earlier and total pay for employees in Great Britain was 0.7% higher than a year earlier.
Between August 2013 and August 2014, the Consumer Prices Index increased by 1.5%.

As you can see wages continue to be growing more slowly than the rate of inflation. The number for total pay growth in August alone was marginally better at 0.8% but the theme remains broadly the same. If you want an even grimmer measure then take a look at the Retail Price Index which was rising at an annual rate of 2.4% in August. So real wages were falling at an annual rate of 0.7% or 1.6% in August.

Breaking the numbers down

The detail of the average earnings numbers is not what you might expect. You might be surprised to learn that public-sector pay (excluding RBS etc..) was up by 1.6% in the year to August. Not quite the impression we are given is it? Pay in manufacturing was a bright spot but as the last three months have gone 2.2%,1.9% and now 1.3% that looks as though it is fading. My commiserations go to those who work in the retail hotel and restaurant sector as annual pay growth was negative in both July (-0.9%) and August (-1.1%). As it is a low paid sector this looks particularly grim and oddly considering our economic position it is reversing a better effort up to this spring.

If we put 3% economic growth into a computer model I would suggest it would react in the manner of HAL-9000 in the film 2001 A Space Odyssey if we put in overall current wage growth let alone the falls in some areas.


I wanted to widen the perspective today beyond the boundaries of the UK because that is the environment we need to judge our labour market statistics from. We should welcome the fact that the quantity measures are as strong as they are but also be troubled by the continued failure of wages to even keep up with inflation. How can this be with economic growth of 3%? Apparently in the new era quite easily.

I also welcome the fall in the oil price as it should give a boost and of course help the consumer. But it is not the only international trend right now as I observe that the government bond market of Germany has gone to further new highs today with its ten-year bond yield falling to 0.823%. I do not know about you but this makes asset prices (equities and houses) look very vulnerable to me right now. And yet we know that the establishment of political leaders and central bankers will do everything they can to stop any sustained falls. It could yet get very messy.

Of course there are places which could be forgiven for thinking that the credit crunch never existed. From the BBC.

Price of Football: Ticket increases outstrip cost of living

Market Update at 4:10 pm UK Time

It has been rather an extraordinary day with the US Dow Jones index falling some 350 points soon after opening and then swinging wildly. However the real moves -if you will forgive an old bond trader- have been found in the government bond markets. German 10 year bonds now yield a measly 0.77% which does not project much of an optimistic future does it? Also France saw Fitch move its outlook to negative last night and the response? Its government bonds have blasted higher too with the ten-year yield now 1.14%. Even children are old enough to remember days when adverse ratings moves led to upwards panic in bond yields not downwards ones!

Even the 10 year UK Gilt now yields less than 2%.

Disinflationary pressure is even impacting on the UK

Today is one where consumer inflation is in the news and in particular weak or low consumer inflation. So the current disinflationary phase is persisting and let me illustrate this with some concrete details from this morning. First from Sweden.

The inflation rate was -0.4 percent in September, down from -0.2 percent in August.

Actually some of this is due to the fact that like the UK Retail Price Index interest-rates are used as a measure here and they have been cut. But even if we allow for this (called CPIF) the inflation rate only climbs to 0.3%

Now let us take a look at Spain.

In September, the annual rate of change of the HICP stood at -0.3%, two  tenths above the previous month.

Actually the monthly rate was 1% but as you can see the annual rate remained negative and if we look back we see a measure which has fallen from 2.9% in February 2013. Also apologies for the confusing nomenclature as HICP is the official name for the European consumer inflation standard which we call Consumer Price Inflation or CPI in the UK.

Let us now look at the situation in France.

The Harmonized Index of Consumer Prices (HICP) decreased by 0.4% in September and grew by 0.4% year-on-year, after +0.5% in August 2014.

So finally we get a positive reading but it is a weak one and this is reinforced by this below.

In September 2014, core inflation (ISJ) decreased by 0.3%. It reached zero year-on-year, the lowest level of this indicator (computed from 1990).

Also there is Italy which has declared this.

In September 2014, the Italian harmonized index of consumer prices at constant tax rates (HICP-CT) rose by 1.9% compared with August 2014 and declined by 0.5% with respect to September 2013.

I have used that measure for Italy so we can see the extent of the disinflationary pressure without the indirect tax rises that have taken place. One of those (the VAT rise from 21% to 22%) soon falls out of the annual numbers. The headline annual figure is -0.1%.

So having been used to situations where inflation has been following the song “the heat is on” we now find ourselves observing one much more like “ice,ice,baby”.

Why is a central banker talking of overshooting inflation targets?

In a world of disinflationary pressure right now there is a lot of food for thought in this from Charles Evan of the Chicago Fed.

In sum, we should be exceptionally patient in adjusting the stance of U.S. monetary policy — even to the point of allowing a modest overshooting of our inflation target to appropriately balance the risks to our policy objectives.

I know that the US inflation situation is different to that of Europe right now but I found it interesting that at a time when inflation is at most weak that he is worried about it overshooting. I would say that establishes a link between central bankers and reality! But I suspect Charles is signalling his intentions for the future. Anyway it is nice of him to confirm one of the earliest themes of this blog.

I feel that before the Fed raises rates, we should have a great deal of confidence that we won’t be forced to backtrack on our moves and face another painful period at the ZLB. (Zero Lower Bound).

Disinflationary pressure in the UK

We have been seeing signs of this in the producer price numbers in the UK but we are in the middle of a phase of it for our headline official consumer inflation number too now.

The Consumer Prices Index (CPI) grew by 1.2% in the year to September 2014, down from 1.5% in August.

If we allow for the fact that the UK retains a tendency to official or administered inflation there must be considerable downwards pressure elsewhere. Transport costs were a driver of this and those who recall that recreational drugs have been added to the national accounts may have a wry smile at this other component.

prices for a range of recreational goods

Actually if we look at the overall picture goods inflation seems to be fast disappearing in the UK.

The CPI all goods index annual rate is 0.2%, down from 0.6% last month

Increasingly the consumer inflation in the UK is services inflation and even this has fallen from an annual rate of 2.7% to 2.3%.

The outlook

I have been discussing the falls in the price of oil and other commodities for a while on here and the price of a barrel of Brent Crude Oil has fallen below US $88 today. More domestically we see this.

The output price index for goods produced by UK manufacturers (factory gate prices), fell 0.4% in the year to September, compared with a fall of 0.3% in the year to August.

The overall price of materials and fuels bought by UK manufacturers for processing (total input prices) fell 7.4% in the year to September, compared with a fall of 7.7% in the year to August,

So there is more downwards pressure in the system with the main contrary trend coming from the value of the UK Pound which has fallen below US $1.60 after today’s data was released.

What about the red pill from the Matrix?

Whilst there is plainly disinflationary pressure right now it is not correct to sing along with this from Blur.

There’s No Other Way

If we swallow the red pill then our previous inflation target will move into our range of vision.

The annual rate for RPIX, the all items RPI excluding mortgage interest payments (MIPs) index, is 2.3%, down from 2.5% last month.

As you can see on this measure we have seen disinflationary pressure as it has fallen but we are now only just below target. The simple answer to the question were we misled when the inflation target was changed in 2002/03? Is yes.

What about house price inflation?

Well according to the official numbers this is still motoring even if we exclude London.

UK house prices increased by 11.7% in the year to August 2014, unchanged from the year to July 2014.

Excluding London and the South East, UK house prices increased by 7.8% in the 12 months to August 2014.

So we see that asset price inflation continues to let rip. Many of you will be thinking that there was a plan to exclude house prices from even the housing consumer inflation measure so that policy could push them higher. Whether you believe in that as a Sir Humphrey style conspiracy theory or not that is the way that it turned out.

It is possible to do a few calculations and put them where I feel they should rightfully be. If we do that then we would have a measure of CPI (Housing) running at approximately 2.8%. It would be flashing a warning which is exactly its role in life.

Meanwhile our official measure tells us this.

CPIH (not a National Statistic) grew by 1.2% in the year to September 2014, down from 1.5% in August.

And no that is not a misprint it is in fact a national disgrace. You may note that it has been so embarrassing it lost its status as a national statistic. My issue would be how it ever got it  in the first place. Stealers Wheel got it right I think about those responsible for this.

Clowns to the left of me,jokers to the right

Has anybody apologised for this utter failure?


The ordinary worker or consumer will welcome a lower level of consumer inflation especially in these times of weak wage growth. However governments do not because inflation tends to help them and of course this is a time they need help with the debt burdens they have built up. Accordingly they have with the aid of much of the media built up a fear of it associating disinflation with deflation. Odd that in the other direction they call hyper-inflationists “nutters”! Not much symmetry there.

As we stand there is clear disinflationary pressure around the world and if I was to pick one signal it is a new price high and yield (0.856%) low for ten-year German Bunds. Turning Japanese? Well they still have 0.356% to go. However projecting trends forever plainly has its dangers and there are other roads forwards.

As ever there is much to consider and I shall leave you today with a tweet from M&G’s Bond Vigilantes.

The rally in UK index linked gilts is HUGE. Capital return of the longest linker is +22% since July!

From today’s morning meeting: “Long linker yields are so low that we’ve had to recalibrate all our charts”. Linker 68s now yield -0.44%.

Just to be clear it is bonds linked to (higher) inflation which are rising in an environment which is disinflationary.

UK Wages growth is an example of some being much more equal than others

As the credit crunch has progressed the issue of wage growth and in particular the lack of it has moved ever more centre stage in economic analysis especially in the UK. It is hard to believe now but the Office for Budget Responsibility (OBR) forecast wage growth of around 5% back in the summer of 2010. Not only was that the stuff of fantasy but I also feel that such forecasts encouraged the Bank of England to think that above target inflation would only have a minor adverse effect on the UK economy. Instead as I warned back then it had a much more major effect which was made most public in the way that real wages went strongly negative and became a drain on the UK economy. Actually the OBR seems to have such thoughts automatically programmed into its systems as its current forecasts have annual wage growth rising to 3.8% in 2018. I would love that to be true but we have to face a current reality which at the very minimum questions that.

Pay including bonuses for employees in Great Britain was 0.6% higher than a year earlier. Pay excluding bonuses for employees in Great Britain was 0.7% higher than a year earlier.

Not what you might expect

The first issue here is rather basic and it is simply the small size of the increases when economic growth at around 3% per annum is strong. There have been excuses made around bonus payments timed last year to manoeuvre around the 50% higher income tax rate but the number for the single month of July – which should be relatively clear of this – only showed annual growth of 0.7%.

Now let me present the numbers for the annual rate of wage growth in July since 2011 which go 3%,1.5%,0.8% and now 0.7%. Anybody spot a trend? It looks as though wages began to behave as we might have expected in the past and then found themselves crunched downwards in the period 2011/12. As the Bank of England was “looking through” the high degree of consumer inflation then we saw an even sharper reverse in real wages and an own goal from it. But now we see that even the current recovery has so far not reversed the fall in wages. The relationship between wages and economic growth is not what it was and frankly looks broken right now.

Flickers of hope do emerge as for example this morning has seen a stronger employment confidence report (10) from Lloyds Bank. But such moves have so far improved employment numbers and not wages whereas in the past we would have expected both to improve. Also there is a certain irony in Lloyds Bank reporting employment confidence just as it is supposed to be on the cusp of cutting more jobs! My sympathies to anyone reading this who fears they may be affected.

Income Tax Revenues Are Struggling

The slow growth of wages is beginning to have an impact on income tax revenues as OBR head Robert Chote has pointed out on BBC Radio 4 this morning.

British income tax receipts will probably fall short of the government’s target for the current financial year despite a surge in employment,

There is something of an irony here because I am a fan of the increase in the Personal Allowance – the amount you can earn before paying income tax – that has taken place as for example it helps the poverty-trap. However the fact that much of the jobs growth has been in lower paid jobs means that the tax take has not responded to the economic growth we have seen in the way one might have expected.

Also it has other consequences such as the cost of such things as Working Tax Credit which these days acts at times as if it is a subsidy for lower-paid jobs.

What about Directors?

They seem to be existing along the lines of the alternate universe that was described by the pig Squealer in George Orwell’s Animal Farm.

Comrades!’ he cried. ‘You do not imagine, I hope, that we pigs are doing this in a spirit of selfishness and privilege? Many of us actually dislike milk and apples. I dislike them myself. Our sole object in taking these things is to preserve our health. Milk and apples (this has been proved by Science, comrades) contain substances absolutely necessary to the well-being of a pig. We pigs are brainworkers. The whole management and organisation of this farm depend on us. Day and night we are watching over your welfare. It is for your sake that we drink the milk and eat those apples.

Such thoughts and themes are only natural when one reviews the latest data on FTSE 100 Directors pay in the UK from Income Data Services or IDS. It starts relatively mildly.

Salary rises, however, remained muted, increasing by just 2.5%*.

So we start with salary rises which seem modest but of course are much larger than what is general elsewhere. But we need to factor in the fact that salaries are often a much smaller proportion of bosses pay so we need to look deeper and when we do we see this according to IDS.

“FTSE 100 directors have seen their total earnings
jump sharply in the last year, fuelled by a rise in the value of share based awards. Bonus payments have also recovered strongly following a downturn last year.

I thought that bonuses were supposed to have fallen. Apparently not for everyone!

IDS explains that overall earnings growth for FTSE 100 directors was driven by a 44% increase in vested long-term incentive share awards and a 12% increase in bonuses.

IDS says that the median total earnings for a FTSE 100 director is now £2,433,000.

So we observe that George Orwell was indeed correct when he pointed out this.

All animals are equal, but some animals are more equal than others

How has this changed?

Whilst the bare numbers do illustrate a relationship which is plainly changing along the lines of a 99.9% and a 0.1% we do get a more direct comparison if we look at Chief Executives of FTSE 100 companies only.

Between 2000 and 2014 the median total earnings for FTSE 100 Chief Executives increased by 278%, while the corresponding rise in total earnings for full-time employees was 48%.

In 2000 the FTSE 100 Chief Executive earned 47 times more than a full-time employee, by 2014 a FTSE 100 Chief Executive earned 120 times more than a full-time employee.

As you can see there has been a fundamental change in this relationship in this century.


I wish I could say that such research came as a surprise to me but it seems in tune with the times. The establishment seems to be doing quite nicely whilst the rest of us are feeling the economic squeeze. In a way it seems particularly revealing that such numbers are released on a day when NHS midwives are striking for a 1% pay rise.

For the subject of economics the issue of inequality is a major one. If you believe in rewards for success then by definition you are accepting some inequality. But we have a lot of problems I think in defining success. If a company succeeds how much of that is down to one person? In the case of an owner/entrepreneur such as Richard Dyson then yes I can see the case but I think it is much weaker for those running public companies as they are hired hands and not owners and rarely do the companies boom due to inspiration from them. Yet they are increasingly paid as if it does. If we look at the situation for failure how often are they punished for that? Here we see long-term contracts – which apparently are much too expensive to be given to lower-paid staff – cushioning any blow.

Sky News has calculated the position thus.

 · ow. calculates annual package of highest paid FTSE CEO (Sir Martin Sorrell) is equivalent to pay of >1400 new midwives

The UK exposes itself to peril by ignoring its persistent balance of payments deficit

In these suddenly volatile times- The US Dow Jones Industrial Average fell 334 points yesterday after rising 275 points the day before- there is one familiar certainty about today and that is that the balance of payments for the UK will show a deficit when they are released this morning. It has become an unfashionable topic to discuss because in human psychology familiarity can breed a form of contempt. In this instance this means that many assume that because it has been a problem for a considerable period and that in recent history it has not directly led to an economic disaster that it will not do so. In other words many assume that deficits can go on and on and on.

What has been the scale of the problem?

Those of an especially nervous disposition might like to look away now.

The UK has run a combined
current and capital account deficit in every year since 1983, and every quarter since Quarter 3 1998.

If we look to the second quarter of 2014 to gain a little perspective from the recent data we see this.

The United Kingdom’s (UK) current account deficit was £23.1 billion in Quarter 2 2014, up from a revised deficit of £20.5 billion in Quarter 1 2014. The deficit in Quarter 2 2014 equated to 5.2% of GDP at current market prices, up from 4.7% in Quarter 1 2014.

A rising current account deficit has been a feature of the last year or so. Actually it is not quite so simple as the UK’s relative economic out-performance sucking in imports although there was a phase  of that. More recently we have also seen a deterioration in our income account.

The primary income deficit widened to £9.5 billion in Quarter 2 2014, from £7.1 billion in Quarter 1 2014. This was mainly due to UK private non-financial corporations profits on their direct investments abroad falling from £14.4 billion in Quarter 1 2014 to £11.7 billion in Quarter 2 2014.

In essence in these low yield times we have downgraded the return we expect from their overseas investments.Although at a time when we are told that corporate profitability is high that does strike me as being somewhat odd.

The past was worse than we thought

The recent revisions to the UK national accounts also reached the balance of payments under what is called BPM6. Actually the main themes here are not especially different with one exception. Whilst the impact of the credit crunch on economic output has been trimmed the impact on the balance of payments has ballooned. Let me provide some details of this.

with the exception of 2008, which shows a bigger deterioration in the trade balance of around £12 billion.

In the period 2008 to 2009 the revisions lead to a relatively large deterioration in the income balance, with the  biggest revision (-£30 billion) in 2008.

Before I explain what has happened in these changes let me point out that they illustrate the fundamental unreliability of analysing anything other than broad trends in trade data. The year 2008 has been poured over by analysts and statisticians and suddenly it is £43 billion worse than we thought it was!

Whilst there are a multitude of factors at play here you may not be surprised to read that the major change is a review of our financial sector and a substantial downgrade of its trade position as the credit crunch took effect. One example is that it is assumed that UK banking operations abroad were more of the investment banking kind and therefore took much more of a hit than foreign banks operations in the UK which tended to have more of a retail banking bias. Put like that it does not sound a big deal but it does albeit with some smaller factors end up in a number as large as £30 billion.

There was also an impact on 2009 but of a lesser size then we returned to a more normal pattern at least until 2012 which is as far as the current revised data sets go.

One thought that this leaves me with is that in a way it is a surprise that the UK managed to revise upwards its economic output for 2008/09 with this going on.

A New Hope 

In the trade gloom there have been a flicker of hope in more recent data and it comes from the service sector.

In August 2014, the UK’s estimated surplus on trade in services was £7.2 billion.
Exports in August 2014 were estimated to have been £17.0 billion and imports £9.8 billion.

Whilst this is one months data from this morning it reflects a pattern over the past year where our monthly services surplus has been revised up from £6.5 billion to £7.2 billion. As good news on UK trade is rare let us take a moment to enjoy that. However this is the least reliable section of an unreliable report unfortunately. You see the statistical bulletin gives us twenty pages of data on trade in goods giving us sectoral and geographical detail whereas we get a bare page on services. What information we have is gleaned from quarterly and annual surveys so the truth is that we are flying virtually blind in an important area of our economy.

What are the latest numbers?

This morning we have been told this.

In the three months ending August 2014, the deficit on trade in goods was £29.2 billion, increasing
by £2.7 billion from the three months ending May 2014.
Total exports decreased by £2.2 billion (3.1%) to £70.4 billion and total imports increased by £0.5
billion (0.5%) to £99.6 billion.

As you can see it appears that our mini-boom is not sucking in as many imports as we might have expected from looking at our past experience, but exports have disappointed. Perhaps there is some evidence of the Euro area stagnation here as in terms of countries we export too Germany is second, France is fourth and Italy is ninth.


There is much to consider in the situation here. Whilst I would like to repeat one more time that the data is unreliable I think that a continuous annual current and capital account deficit since 1983 does give a clue! We need to do better but unfortunately our political class has hamstrung us via its concentration on and obsession with Europe. This is not especially an anti-EU point as many of these countries have long been our friends and I hope that they remain so but they do not have to be our only friends and interests.

Meanwhile there is a fundamental gap between the current level of the UK Pound and our persistent balance of payments deficit. Except that we have a problem because when the Pound fell in 2007/08 it did us little good in trade terms. This is of course part of the problem and another factor is provided by the fact that the list of countries which would like a lower currency feels like it is growing day by day. As they can only fall against each other there is an obvious problem and I think that this is a factor amongst others (Ebola, Euro area stagnation…) which is seeing equity markets take a dive an example of this is a FTSE 100 which is down 1.2% so far today.

Even ESA 10 cannot help Greece

Regular readers will be aware that the national accounts revisions under the ESA 10 banner have in general boosted recorded economic output. There is now one major exception which is Greece. It is a crude measure to add up the annual GDP changes from 2008-13 but if you do the answer is -2.8%. Simply horrible in the circumstances.