Japan intervenes to weaken her currency whilst commodity prices are on the march again

After some dull trading in Europe and America not much happened in equity markets yesterday. However the Japanese Nikkei 225 index surged by more than 2% or 217 points to 9516 as the Bank of Japan finally intervened in currency markets to try to weaken the Yen particularly against the US dollar. This has two main effects,the Nikkei has now moved solidly out of bear market territory and following a small fall of 17 points in the Dow Jones Industrial Average yesterday means that the difference between the two indices has fallen to 1010 points or 10.6%. So a considerable improvement but still quite wide. It was if you look at the respective charts as recently as April when the two indices were both above 11000 and on some days the Nikkei was higher.

Inflation and Commodity Prices

The Commodity Research Bureau spot index rose yesterday by 2.66 to 468.94 with the strongest components of the index being livestock and fats and oils again leading to possible thoughts of “agflation”. However the UK retailer Next has added to the debate by stating that a shortage of manufacturing capacity and a rise in the price of cotton will push up the price of its clothes next year “by between 5 and 8 per cent,”  according to Simon Wolfson the  chief executive, and to furhter fuel the debate he added “We haven’t seen price rises in clothing retail for more than 15 years now.” This adds a little to the inflation debate particularly in the UK as in yesterdays figures one of the rising components was clothing and footwear. For those unaware of the UK market many clothing prices have been kept down by the introduction of cheap imports from the Far East in recent years. Next seems to be suggesting the impact of this may be ending. Of course this may be self-interest but if we look at the underlying situation we find this. The textile component of the CRB index has risen by 51.31 to 307.79 over the past year or around a sixth, but cotton prices have risen from just under 60 cents per pound in early October 2009 to 93.79 cents per pound now for an increase of over  a half so it looks like they may be well be something behind the statement.

UK Inflation Indices and the Office for National Statistics

The UK has two main inflation indices the Consumer Price Index and the Retail Price Index and they have given quite different results over the lifespan of the CPI which is the more recent innovation. At the moment the CPI registers UK consumer inflation at 3.1% and RPI at 4.6%. Many will be aware that one main difference between the two is the treatment of housing costs as the RPI includes mortgage interest payments  and the CPI excludes owner-occupied housing costs. Another difference is that they use different mathematical techniques as the RPI uses two types of arithmetic mean whilst the CPI uses a geometric mean.

Where the latter factor matters is in clothing prices as you see they lead the RPI to record them as rising by 6.3% whereas the CPI records them at -1.7%. This is quite a difference and is in danger of bringing the system into disrepute. The reason for this is that earlier this year the Office for National Statistics relaxed its guidelines on product comparability to increase the sample size measured particularly for the RPI which it now says has led to an upward bias. Indeed it has been joined by an ex-member of the MPC Steven Nickell who has been quoted as saying that accordingly wage bargainers should concentrate on the CPI which of course just by chance happens to be lower.

Those who follow such matters may well be more concerned at the way the Office for National Statistics felt itself able to change a system for RPI measurement which has worked for many years in the sense that the numbers were comparable over time. This is the real problem as we go forward credibility of the numbers and hence the credibility of the ONS itself. Following on from problems with its growth figures this has not been a good year for the ONS and this is a particular shame as we are going through a period of economic uncertainty where data is likely to be studied and relied on more than usual.

I would be interested in readers views as to which inflation measure they feel is the more accurate in their experience.

Japan intervenes to weaken the Yen

This subject has come up quite a few times recently in my articles as Japan dithered over whether to intervene to weaken the Yen or to put it in their words whether to take “appropriate action”. Perhaps some of the delay was due to the challenge to the Prime Minister which was settled on Tuesday leading to an ending of political uncertainty at least for now. Either way the breaking of the level of 83 Yen to the US dollar seemed to be a trigger to act and the Bank of Japan stepped in and as this morning UK time the exchange rate is now 85.37 then it has been a short-term success as it is 3% higher. The Yen also fell by a similar amount against the Euro to 110.76.

The intervention was unilateral as it would appear that the Bank of Japan was unable to get its international counterparts to join in. This is not a good sign and is probably caused by the fact that rather inconveniently for Japan who is a G7 member the G7 nations have collectively been calling for increased exchange rate flexibility for China. Another interesting issue comes from the surge in the price of gold yesterday which closed at a new high of US $1270. If we convert the rally into Yen we get a surge on the day of over 4% in the gold price in Yen in one day. Happy days if you own it in Yen and it makes me wonder if the news about exchange rate intervention leaked.

Comment

Whilst the intervention has had a short-term success we are so far only measuring its impact in hours. Over time I expect the foreign currency markets to challenge the willingness of the Bank of Japan to weaken its own currency. The one thing it has in its advantage to my mind is that it has acted at a peak for the Yen, however the Swiss National Bank thought this earlier in the year and its intervention ended up in an embarrassing and expensive defeat for it. If there is a currency similar to the Yen at this time then it is the Swiss Franc which is not a good omen. I wrote an article on the “currency twins” on the 31st of August.Those who have a wry sense of humour may raise a smile at the fact that the Swiss National Bank is currently looking to recruit a foreign exchange trader,and may well consider that it may have thought of this before!

The fact that Japan is intervening on her own makes it less likely to succeed. If we look at past interventions then we see that the efforts of 1995 had some success when they were combined with intervention by other central banks whereas in spite of the expenditure of some US $319 billion the solitary intervention of 2003/2004 failed. Personally I often wonder if talk of intervention often creates its own problems as in being responsible for a market climate where the markets test the central banks resolve. Of course this type of view on market psychology is almost impossible to prove! Indeed my personal view is that currency intervention at the present time is only likely to succeed in the short-term as the size of markets is so large and at this time with so much economic uncertainty abounding they are likely to be volatile too.

This intervention also raises my theme that I feel that central banks are involved in too many markets at this time. A bit like the UK military they are suffering from “overstretch”. Also this move is somewhat contrary to what has been asked of the Chinese and indeed contrasts with what they have been doing as for example they have been purchasing Japanese Government Bonds recently and hence buying Yen. Accordingly I wonder how this move will be received In Beijing.

There have been some remarkable numbers from the UK particularly on employment and so I will publish this article without them for now whilst I take a good look at them. I will update later on them.

Unemployment and Employment in the UK

We saw some numbers today which on a first reading looked rather optimistic as employment rose by a substantial 286,000 in the three months to July. Unfortunately the good news was tempered by the continuance of a recent trend as this increase was once again mostly made up of a  166,000 rise in part-time employment,leaving the full-time increase at 120,000. Also these numbers showed greater gains amongst men rather than women which reverses for now anyway a trend of recent years.

The unemployment numbers were somewhat disappointing by comparison. For example registered unemployment or what is sometimes called claimant count  edged up by 2,300 in August which compares to a drop of 1,000 in July and falls more like 30,000 in the late Spring. The unemployment rate dropped by 0.1% to 7.8% but the rate at which unemployment is falling dropped to a much lower 8000 on the three month labour force survey measure .

So a mixed picture overall particularly as the public-sector is likely to be shedding jobs fron now on.

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16 thoughts on “Japan intervenes to weaken her currency whilst commodity prices are on the march again

  1. Hi Shaun,

    With regard to your request for the opinion of readers about RPI and CPI, I as expressed previously have no real confidence in either measure as now used to represent the real changes in prices. The main reason that CPI fails so badly, in addition to the different questionable weighting calculation method, is total real housing costs not being included. Even David Cameron stated previously that CPI would be revised to include these costs, but now that he and Osbourne have announced the change from using RPI to calculate pension increases and other increases to CPI they have gone quiet on that change; it is clear that the real reason for this is to reduce government spending on pension increases with inflation. After all, the largest cost which we all have to bear is that for housing, so to exclude any changes in the cost of purchasing the most expensive item we have to purchase is a deliberate gambit to reduce the numbers!

    The other problem I have is that I fundamentally disagree with the way in which so called “Hedonics” is used to reduce the ONS numbers, and the method of statistical weightings used. It is common knowledge amongst those with any reasonable level of statistical and mathematical understanding that this is done deliberately to reduce the real values for political and supposed semi-neo-Keynesian purposes. The ONS is not alone in these tricks, and other countries have followed the same deceitful delusions. What therefore happens is that any company wanting to follow the same smoke and mirrors conjuring, instead of increasing its product price, reformats the packs, labelling them “New improved”, and actually reducing the weight or value of the ingredients or components in the product; this has exactly the same effect on profit as an overt price increase would have done, but is cleverly concealed. However, the ONS’s present methodology for monitoring and aggregating price changes is fooled by this approach due to Hedonics and weightings, and sees this gambit as a price fall, because it is a “New Improved” product with more features. (That is just a simple example of the errors which Hedonics introduces; there are many other more complicated instances where the effect is the same or worse.) See http://www.chrismartenson.com/crashcourse/chapter-16-fuzzy-numbers .

    Then the gambit of periodically changing the composition of the commodity basket which is used to monitor prices has completely distorted the ongoing measurement of price changes, as has changing from RPI to CPI. This also of course has been done deliberately so as to substitute items which have fallen in price, such as consumer electronics goods, so as to reduce the overall price change numbers for political and supposed semi-neo-Keynesian purposes. There is also some evidence that rather than monitoring the actual price changes in fixed retail outlets, outlets with the lowest price at the time of each recording activity are deliberately selected. This further distorts the results, by producing lower numbers, of course.

    Finally, because the concentration of the ONS’s approach has been based on only purporting to monitor price changes rather than real inflation, this has caused an additional converse algebraic ongoing error – that of any indirect taxation changes. Any indirect tax increases show up as price increases in this distorted system and conversely. For example, if VAT is increased this is actually deflationary, yet it shows up as being inflationary in a price change monitoring only system, which is monitoring the effect rather than the cause.

    The overall effect of all of these errors and distortions is to misrepresent real inflation in these official numbers. This is of course deliberate and ensures that real inflation is always grossly understated, whether in RPI or CPI, so as to deliberately deceive the Public as to the real ongoing level of inflation. See http://www.dailyreckoning.co.uk/economic-forecasts/us-inflation-calculation-adjustments-mask-true-rate.html and http://moneycentral.msn.com/content/p72746.asp .

    • Drf, excellent summary. We are being lied to continually using computer-based models with bias of assumptions ( not only in economics but in many other areas such as AGW).
      One of your key comments was the issue of measuring effect rather than cause. The use of computer models with their in-built complexity is stopping people using their brains, information replaces knowledge and wisdom. I think that if you can’t explain something in three or four sentances its probably not true.
      The cause of our western economic problems is the manipulation of fiat currency to bring forward future wealth. We now have to pay for that. And the payment will either be brutal with societal changes or long, slow and painful with decline in living standards across 99% of the population. Neither are nice, I prefer the second, but history shows the first is more likely resulting in a vastly reduced global population. What irks is that the top 1% keep their dominance in either scenario.
      Sorry if this strays from pure economics , but at ‘turning points’ everything is in play.

      • Hi JW,

        I agree entirely with you. We now will all have to pay in one way or another. The initial stage it is clear from the remarks by the newest MPC member will be QE2 – more debauchment of the currency which will never be redeemed. Thereafter a slow decline into insignificance.

  2. you ask what we think about CPI and RPI

    well CPI = Creative Price Index

    used when politicians what things their way to reduce costs – ie lower pensions payouts

    As for the RPI – well you might argue that its going the same way as the CPI .

    your chocolate rations are being increased from 4 ounces to 2 !

    P.

  3. As an expat retired in S Africa I can say that the distortions of reality in inflation figures are even worse here. Hardly a week goes by without noticeable increases in every thing from house prices, paint, food etc and yet statistics show that we have had a continually decreasing inflation rate so that it supposedly stands around 3 to 5 %. I know that that still means an increase, but simply comparing the doubling price period suggests a rate of 10 to 15 %. Personally I think governments are on a mission to lower interest rates and need to show declining inflation rates to be able politically to do so. Certainly here in S Africa I can see that interest rates need lowered to help control the carry trade from USD which is giving us a hot currency.
    Be that as it may, surely it must be worrying that governments are making decisions based on incorrect data.
    The sooner the US gets an ounce of sense and starts raising interest rates to a realistic level the better, and I suppose that depends on when China is going to stop controlling the yuan.

    • Hi Robert
      I was asked a question on here a few months ago about UK inflation statistics as opposed to American ones. I replied then that we were in better shape in the UK in my view. However since then the gap has narrowed and it is not a good thing as there are a lot of problems with the measurement of the CPI in the United States. Part of the UK problem is that the Office for National Statistics seems to be struggling in its role. Or perhaps it has a role which I do not agree with as you hint at….

  4. Hi Shaun

    You asked for comments on your informative article on CPI v RPI.

    It is quite difficult to argue either with your comments, or those of many of the people that have responded earlier. I guess putting yourself in the shoes of the ONS or government, which needs to produce some data on prices for the Bank of England and the MPC in particular, quickly and regularly may be helpful.

    It is the UK system that is particularly vulnerable to the CPI measure, due to the importance of house price inflation, or more accurately the risks of property asset bubbles. For this reason the UK has kept producing the RPI measure, to ensure that a reality check is maintained on house price inflation.

    Neither of these measures or any of the other wide range of economic data available was sufficient for policy makers to have the necessary warnings heeded and take the right steps in time to avert the recent pre-crunch asset bubble.

    The effects of the rapid increase in the price of oil in 2008 were reflected in the data, but the danger signals that were evident were not sufficient for any action to be taken, anywhere in the world, using any measure of inflation; CPI, RPI, et al.

    • Hi Johnathan and welcome

      I agree we have particular but not unique issues with house prices and their importance in our economy. However we have instituted as an official inflation target CPI without including any measure of house price inflation It was known to be important and was discussed in 2002 when plans for CPI’s introduction were made but nothing was done. Indeed it was discussed later and nothing was done and we are undergoing a third consultation at this moment in time.

      Those who have little faith in our authorities might have more belief that the index will be modified this time round as we may well be seeing house price falls although actually the bureaucratic mind is often so slow they may well manage to miss this phase….

  5. Yes, the Japanese Nikkei 225 index surged by more than 2% or 217 points to 9516 as the Bank of Japan finally intervened in currency markets. And I can assure you that the value of the Yen, FXY, will be going down and the value of the US Dollar, $USD, will be going up.

    You write “this has two main effects,the Nikkei has now moved solidly out of bear market territory.”

    Well, I must tell you, the move out of bear territory is going to be short lived !!!!!

    I am going to quote from my Seeking Alpha article Yen Falls Dramatically To Its 50 Day Moving Average On Bank Of Japan Intervention

    The Nikkei 225, ^N225, for the last ninety days, has had a strong deflationary wave structure falling from 10,238 on June 21, 2010 to today’s 9,510 today.

    When using Yahoo Finance charting, and overlaying, the Semiconductors, XSD, and US Banking, KBE, the wave structures are similar to the Nikkei 225, that is, deflationary.

    The Nikkei 225 is like semiconductors, something that has seen its prime and is quickly passing away. And the Nikkei 225, is ailing, like the US banks, the epitome of failed social experimentation. Although Japan has had a strong currency, its stock market, the Nikkei 225, has been leading the way down in a deflationary global economic collapse. A rising Yen has been decimating export driven Japan.

    Investment has been flowing out of Japan down as is seen in the chart of ^N225, DNH, EWU, VTI, and EWD

    The Yen, FXY, had been rising from 105.44 on April 26, 2010; to yesterday’s September 14, 2010 high of 119.13, to trade today lower today, September 15, 2010 at 115.71 on Bank of Japan Intervention.

    One reason for the strong ongoing rise of the Yen, is that it has been a cheap source of funding for carry trade investing, with many able to obtain 0.25% interest and below loans; and another reason for its rise is that some used it as a means of protecting their short positions, that is they called it higher, to keep the “short pressure” on the markets as a high yen is not conducive for going long the markets.

    The Yen, FXY, has been “the juice” for going long a number of carry trade safe-haven investments, such as US Treasuries, up until September 1, 2010. Other destinations have been Tin, JJT, Food Commodities, FUD, the Brazil Small Caps, BRF (which are the opposite of the US Small Caps, the Russell 2000, IWM, which are encumbered, by poorly performing US Financials), the Frontier Emerging Market, FRN, Hong Kong, EWH, and the Emerging Market Small Cap Dividend, DGS, These have been the destination of investment capital ever since the EU Finance and State Leaders convened the Eurozone May 2010 Summit and announced European Economic Governance, seigniorage aid for Greece, and called for a Monetary Union with seigniorage authority to issue eurobonds.

    Those owning Forex accounts and long yen carry trades, such as the AUD/JPY, seen in the chart of FXA:FXY, scored big. They checked their accounts to find they had literally blossomed as the Yen, FXY, was called lower. Those long had a windfall. I ask what would you do at this time? I know what I would do, I would take profits and go short AUD/JPY, which would create downward pressure on Australian shares, EWA, and Copper Miners, CU. The capital inflow was greater in the AUDJPY than the EURJPY, so therefore, I expect the downward pressure on the Australian Shares to be greater than on the European Shares.

    Likewise investors in the EUR/JPY, seen in the chart of the FXE:FXY, experienced a bonanza. I believe this places downward pressure on the European shares, FEZ, as well as country shares like Spain, EWP, and the European Financials, EUFN. The same can be said of FXS:FXY, producing downward pressure on Sweden, EWD.

    In many ways the US Dollar, $USD, is simply the 8 ball on the billiard table; its value is the sum of investors trading in other currencies.

    September 14, 2010, is peak Japanese Yen, FXY; just as August 31, was peak credit, that is peak bond, BND, value.

    Today’s fall of the Yen, FXY, to 50 day moving average to 115.60, gave a 2.4% boost up in the Nikkei 225.

    Today’s rise in the Nikkei 225, ^N225, on a higher Yen, FXY, brings it into alignment with the World Shares, ACWI, and the S&P, SPY, “setting it” with the others for completion of an Elliott Wave 2 up, and “loading it into a Wave 3-of-3-of-3 down”.

    Today’s fall of the Yen marks a pivotal point in yen carry trade investing; it’s continuing fall will underwrite a deflationary bias in investing long stocks; just as a flattening 30-10 US Government Bond Yield Curve will be a deflationary bias in investing long bonds. Yesterday, September 14, 2010 was peak investment liquidity.

    The “approximate”, and I do emphasize approximate, Elliott Wave count on the ^N225 is:
    Elliott 3 Down commenced April 7, 2010: 11,292
    Elliott 3 of 3 Down commenced June 21, 2010, 10,238
    Elliott 3 of 3 of 3 Down is ready to commence September 15, 2010, 9,501.

    The Elliott Wave 3s are the most sweeping and dramatic of all waves. They are the ones that build wealth on the way up and destroy wealth on the way down. The coming down wave will for all practical purposes utterly and completely destroy fiat wealth. The only wealth that will abide is gold and perhaps silver. These are sovereign wealth. Yesterday’s rise in gold, $GOLD, and today’s fall in the Yen, FXY, knocks the Yen, out of competition with gold as the sovereign currency: gold is now the sovereign global currency and means of preserving wealth.

    The fall of the Yen was most likely “coming”. Mike Mish Shedlock in article Currency Intervention Madness relates: “It has been proven time and time again that currency intervention does not work” …. Assuming Japan was going to have a “line of defense”, one near the 1995 is a spot (at 123) where there would be technical resistance anyway. If the Yen does drop in a sustained way, it will not be because of the intervention, but rather because the Yen had outrun fundamentals and was simply ready to drop”.

    The fall of the Yen “had to be dramatic”; that is simply, “the way currency waves work”. A strong down was needed to boost the Nikkei 225, ^N225 up, resetting it for an Elliott Wave 3-of-3-of-3 to do its work. “This is the natural way of Elliott Waves”: there has to be a strong 2 up, as evidenced today September 15, 2010, so that the 3-of-3-of-3 down, can be the awesome thing that it is.

    All stock markets now have been reset for their 3-of-3-of-3 downs. Get ready for investment, economic, and cultural “shock and awe”. Social hardship and chaos is coming.

    The fall of the Yen, FXY, commenced competitive currency deflation that is part of global debt deflation.

    The coming 3-of-3-of-3 downs in stock markets, will be intense debt deflation.

    Debt deflation is the contraction and crisis that follows credit expansion. One of the most famous quotations of Austrian economist Ludwig von Mises is from page 572 of Human Action: “There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion or later as a final and total catastrophe of the currency involved.”

    Global Debt Deflation commenced on April 26, 2010, when the value shares failed to outperform the growth shares.

    It was on April 26, 2010, the currency traders went long the yen and short the global currencies as is seen in this MSN Finance chart of FXA, FXE, FXM, FXC, ICN, FXB, FXS, SZR, FXF, BZF, XRU, FXY causing the US Dollar to rise; as can be seen in this chart from April 26, 2010 to June 7, 2010.

    On June 7, 2010, the US Dollar, $USD, turned down as the Euro, FXE, rallied on news of the call for the EFSF Monetary Authority to be established.

    Today’s fall of the Yen, FXY, commenced competitive currency deflation, that is part of global debt deflation. The fall of the Yen today has turned off the only remaining spigot of investment liquidity; the other spigot of investment liquidity was the US Federal Reserve’s QE which ended for all practical purposes on March 31, 2010.

    September 15, 2010 is a pivotal day in investment history. Not only have the spigots of investment funding been turned off. But now, carry trade activity will now be operating in reverse to deleverage: the carry trades will be like black holes sucking in and destroying capital.

    Now with the fall of the Yen, the Global Elliott Wave 3-of-3-of-3 Down Wave can get underway to destroy wealth world wide: serious downdrafts will be coming to all financial and bond markets globally.

    I personally am invested in gold bullion, $GOLD. But, I do provide a listing of ETFs and Stocks to sell short for a debt deflationary bear market; one suggestion is now to go short JYN. I agree with Tyler Durden Zero Hedge article Goldman Joins BofA In Calling For Sub-79 USDJPY Over Next 6 Months Despite Intervention who wrote: “The near-term risks are still skewed towards marginal additional $/JPY strength. A test of historic record lows below 79 appears possible, in particular if option related activity has the potential to accelerate a down move, as we have seen in the past. But in reality we are likely quite close to the bottom of $/JPY. Fundamental support for further Yen appreciation is fading as valuation starts to hurt trade flows, and rates differentials approach the lower bound. In this environment, the chances of “big splash” interventions eventually succeeding are quite high.Our forecasts remain 85 and 83 in 3 and 6 months, although we think a temporary move to marginal new lows is possible. Over a 12-month horizon, we maintain our “GSDEER reminder” and forecast $/JPY at 90.” Based upon those remarks, I recommend that one go short JYN as it will be falling from today’s value of 69. Mr Durden has additional thoughts on the USDJPY in article Banker Catfight: It’s On!

    The Yahoo Finance chart of the USD/JPY shows a big explosion up today from 83 to 85.5.

    ForexBegin.Net relates: “Price level is testing 38.2% retracement, with further resistance at 86.30 and 89.00 area”.

    Tyler Durden in Zero Hedge article FASB Proposes Semi-MTM Requirement, American Banker Association Goes All “Mutual Assured Destruction”: “The FASB has just fired a semi-warning salvo at the banking system with a new proposed rule that would seek the gradual return of that long lost concept known as mark-to-market. However, while not going all the way and demanding that everything on the balance sheet flowed through the income statement’s bottom line, the FASB has decided to give banks the leeway of accounting for MTM adjustment in the bottom bottom line” ….. “The American Bankers Association released a statement that said the accounting change would present “significant problems, not only for banks, but also the general economy. If implemented, the proposal would greatly undermine the availability of credit by making it difficult to make many long-term loans, the value of which, even if performing perfectly, would likely be reduced on the day a loan is made.” This new proposal is at odds with the previous FASB 157 announcement which entitled banks to mark assets at manager’s best estimate rather than mark them to market. So get ready for some real engagement between the FASB and the ABA.

  6. Very good points and discussions – thank you. I note that the BoE inflation expectations survey for August places inflation expectations for an average of those sampled well above target at 3.4% for the next 12 months. I think that it was interesting to read Mervyn King’s speech to the TUC. I dont think he mentioned the role of monetary policy in reducing inflation from its current overshoot, which is reducing real wages of the TUC’s members. He only mentions it as a means to boost money supply to keep inflation “on track” and to “manage the economy” in the short run – quantitative easing. Back to the MPC holding on to the output gap theory in ‘looking through’ the current high rate of inflation.

    Dr Weale tells the Treasury Committee ” The Office for Budget Responsibility suggests the output gap is currently around 4% of GDP – this seems a plausible number although at the same time it is important
    to remember that all experience shows that contemporary estimates of the output gap are highly uncertain and often subject to substantial revision after the event.”

    If this is correct, are not risks being deliberately taken with inflation by policy makers whilst they await an uptick in money supply.

    Beggar-thy-neighbour could be why BoJ did not have the support of other central banks. Is not competitive devaluation of currency the game by all central banks, including ours, to support home trade abroad.Some might say, its a good thing.

  7. As an amateur economist I divide spending into essential and discretionary spending. The majority of the UK population (average income under 30,000) spend the majority of their income on essential spending (accomodation, food, utility bills, council tax, transport costs)

    Inflation on luxury items normally causes belt tightening. Inflation on the essential items has a bigger impact on people with smaller discretionary income.

    In the Bulgarian hyper inflation of 1996, the rich had plenty food, heating fuel and foreign currency where the poor were hungry and cold. This of course caused political unrest and an early election …

    I find the RPI more useful because it includes the housing market inflation. Therefore it maps inflation on essential spending more accurately. I think RPI better represented the concerns of a majority of voters.

    • Hi Alex and welcome to my blog.

      One problem is if you ask people their definition of what is essential varies! On the subject of housing costs there are better ways of measuring them in an inflation index than the use of mortgage costs i think but at least it is in RPI amongst one or two other housing costs. It is not far short of a scandal that CPI has not been modified to include them.

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