Today sees the opening of the annual Jackson Hole symposium in Japan which has seen several “innovations” in monetary theory in the credit crunch era. The audience of central bankers who of course officially deny that their policies are “maxxed- out” to quote Bank of England Governor Mark Carney are always pleased to hear of new ways of loosening policy. One of these is likely to be in evidence later today as Janet Yellen will be deploying Open Mouth Operations from 3 pm UK time. But as there has been news this morning from the land of the rising sun I would like to look at something which has been in one of its regular phases of being hinted at. On the 16th of this month I pointed out that John Williams of the San Francisco Fed was heading that way.
First, the most direct attack on low r-star would be for central banks to pursue a somewhat higher inflation target.
In John’s Ivory Tower low inflation is a bad thing “uncomfortably low inflation………the risks of unacceptably low inflation”. We saw Charles Evans of the Chicago Fed pursue such arguments as he suggested the inflation target could be moved up to 4% and I gather he is now suggesting 3.5%.
Can they do it?
I raise the issue because the US has been below its inflation target for a while now. It has very low interest-rates in spite of the 0.25% nudge higher at the end of last year and the central bank has a balance sheet of over US $4 trillion. But PCE ( Personal Consumption Expenditure) inflation is 0.9% and whilst it is higher than the 0.5% of a year before it is lower than the 1.1% of January. Central bankers are “innovative” so they try to focus on what they call core PCE inflation which excludes food and energy but it too at 1.6% is below the target. A sign of the desperation is that people are now looking at them to two decimal places! 0.88% and 1.57% respectively in case you were wondering.
Actually both measures dipped below the 2% inflation target early in 2012 so it has been over 4 years since the Fed hit its target. You might think therefore that it would be better if its members concentrated on that rather than building castles in the sky. Well actually it is worse than that as in December 2012 we saw it implicitly raise the inflation target.
inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal,
Up was the new down yet again as they completely misread things. Their efforts to raise consumer inflation turned out to be puny compared to the impact of a falling oil price. Of course their economic models would have assumed a rising oil price.
For those of you wondering how PCE differs from CPI inflation a major difference is that it has a lower weighting for owner-occupied housing costs and for that reason usually gives a lower reading. Central bankers love to exclude housing from inflation measures don’t they?
Somewhere In Tokyo Bank of Japan Governor Kuroda has Elvis Costello turned up to eleven.
Pump it up until you can feel it.
Pump it up when you don’t really need it.
He has introduced negative interest-rates and is chomping on Japanese Goverment Bonds at the rate of “at an annual pace of about 80 trillion yen”. In addition he is buying equities and commercial property.
The Bank will purchase exchange-traded funds (ETFs) and Japan real estate investment trusts (J-REITs) so that their amounts outstanding will increase at annual paces of about 6 trillion yen and about 90 billion yen, respectively.
If you look at my articles on the “Tokyo Whale” you may note that the ETF program for equities cannot go on as it is simply because they will run out. He is also buying commercial paper and corporate bonds so soon it will be much easier to point out what he is not buying. So QE to the max or rather QQE to the max as after so many years of it QE got renamed to make it look fresh.
So inflation must be really flying? From Japan Statistics this morning.
The consumer price index for Japan in July 2016 was 99.6 (2015=100), down 0.2% from the previous month, and down 0.4% over the year…… The consumer price index for Ku-area of Tokyo in August 2016 (preliminary) was 99.6 (2015=100), up 0.1% from the previous month, and down 0.5% over the year.
As you can see all that monetary firepower and so little action. Especially troubling is that the situation I have been pointing our regularly for the UK,US and even the Euro area does not exist here. You see they have services inflation which in the first two cases is above target but in Japan that is a measly 0.3%. There is only one area above target to make Governor Kuroda smile and that is clothing and footwear at 2.4%.
What has spoiled the central banking party?
A major factor has been the lower oil price but also in a word currencies. Let me first give a public health warning please stand away from any Ivory Towers at this point. But Japan has found that after a certain point QE does not weaken the currency and actually new efforts have led instead to a surge in the value of the Japanese Yen. The Ivory Towers would have been applauding as the Yen weakened to over 121 versus the US Dollar post the Bank of Japan negativity announcement but will now claim a lunch engagement when you want to discuss the current level of near 100.
The phase of US Dollar strength also took the US Fed away from its inflation target as in more recent times a stronger Euro is doing to the ECB. Some have lost of course as for example the ECB did when it’s initial QE efforts did weaken the Euro.
The other factor is that the central bankers have spoiled their own pitch. Plenty of countries have seen inflation in asset prices such as houses but of course the central bankers have led a long campaign to keep them out of inflation measures.
Mostly today I have discussed what are tactical issues concerning inflation targeting. This can be put simply in the form of why do you want a higher target when you cannot hit the one you have? Let me now move to strategy and there are two elements to this so let me start with Japan. After so many claims of an improvement in real wages from official sources and Bloomberg in particular we have in more recent times seen an improvement due to lower and indeed negative inflation. So exactly the reverse or a doppleganger of what they have promised! Remember wages are supposed to plummet in this environment and in fact they were strong in June as another Ivory Tower foundation turns to dust. Of course we need more than one month’s evidence as it could be one-off bonuses. But like the US and US lower inflation has led to higher real wages.
For the UK and US the situation has another nuance as we are more inflation prone. Once the phase of goods and commodity price disinflation ends then inflation is likely to head to and in the UK’s case beyond it. So why would you need an even higher inflation target?