Has the under-recording of US inflation led to Egyptian and Tunisian food riots via loose monetary policy?

The weekend news agenda was dominated by news from North Africa with the riots and civil disturbance in Egypt taking centre stage. The civil disturbance issue had started in Tunisia and then spread to Egypt although so far the country in the middle Libya appears unaffected. I feel that firstly one should express sympathy for the dead and injured. If we then look for causes of the unrest then whilst there are issues with corruption and other problems with her autocratic government a large factor at the bottom of this has been rises in food prices. Some 40% of Egypt’s population lives on less than one US dollar per day and they have reached the point where they are struggling to be able to feed themselves and their families. This is a human cost to the rise in commodity prices that I have been chronicling since late summer 2010. This puts a human cost too on the rise in the foodstuffs component of the CRB index from 400 in late November of last year to 479.68 now. A rise of  just under 20% in basic food costs affects everyone but is particularly painful for those with little money, some of whom must have been going hungry perhaps very hungry.

The effect of Egyptian and Tunisian unrest on world markets

If we start with Egypt her EGX 30 equity index fell by 6.1% last Wednesday before falling  some 10.5% on Thursday and is now closed for the time being. Other Arab stock markets fell in sympathy. The oil price as represented by the West Texas Intermediate measure rose by 4% or US $3.70 per barrel as fears for the security of oil supplies from the Gulf rose. It is now just under US $90 per barrel. Stock markets took a pounding on Friday in Europe and the United States and this morning both the UK FTSE 100 and the German Dax equity indices are down by a further 0.6%.

One area which has benefitted has been the US government bond market where as cash has moved to so-called “safe-havens” has seen a rise in price and a fall in yields providing some relief for a market which was in a poor run. Sometimes improvement comes from the most unexpected source! The US ten-year Treasury Bond yield has fallen back to 3.33%. Some of the other government bond markets in the worlds have also seen prices rally like the German Bund or the UK gilt but by much smaller amounts. As I shall discuss later this improvement has yet to reach the peripheral Euro zone nations.

A Cause of this? Loose US Monetary Policy?

For some time there has been a debate over how and indeed if the extraordinarily loose monetary policy being implemented by the US central bank the Federal Reserve will affect the rest of the world. Initially there was fear over the effect on exchange rates combined with fears as to what this might do to world asset and commodity markets. It would appear that the effect of pumping an extra US $75 billion of cash a month into the hands of those who used to own Treasury Bonds has helped to drive up food prices. For the people who are struggling to feed themselves Mr. Bernanke’s claim that he is “100% sure” that he could deal with any inflationary response to this must ring very hollow in their ears.

Indeed if you look at US inflation it is hard to avoid the conclusion that it is recorded as being so low mostly because of the changes made to the recording of it which started around the time of Jimmy Carter’s Presidency. Indeed an American economist.John Williams, who records all such data faithfully believes that if all such changes were reversed ( the changes that have taken place have all,just by coincidence of course, led to recorded falls in the  official consumer price inflation rate) the US inflation rate would be what it was then around 10%. I wrote an article on the under-recording of US inflation back on the 2nd of July 2010.

It’s a long link from the debasement of US inflation indices to the asset purchase policy of the US central bank to the rises in food prices that have led to riots in North Africa but there is also some truth in it.

What is happening with the oil price?

I like to stick with regular benchmarks to provide consistency and for the oil price this has been the West Texas Intermediate or  WTI measure I discussed above. From time to time such measures can be questioned by events. Currently there has been a decoupling between WTI and the Brent measure with WTI just under US $90 per barrel and Brent just under US $99 per barrel. So they are not telling the same story! Whilst WTI has the most active futures contract Brent is used to price two-thirds of global oil including North Sea grades such as Forties and Ekofisk and West African exports including Nigeria’s Bonny Light and Angolan Nemba. So in future I will look at both and for now will leave you with the thought that as Brent has risen there has been arise in oil prices on the blind side so to speak! I know some readers specialise in energy markets and will be interested in their thoughts on this decoupling of oil price benchmarks.

US Economic Growth

The Bureau of Economic Analysis released these numbers on Friday.

Real gross domestic product — the output of goods and services produced by labor and property located in the United States — increased at an annual rate of 3.2 percent in the fourth quarter of 2010, (that is, from the third quarter to the fourth quarter), according to the “advance” estimate.

There are two initial thoughts. The first is that it is a preliminary estimate which is likely to be revised, maybe heavily, an example of this came in the same report where growth in the second quarter was revised from 2.5% to 1.7% and growth in the third was revised  up from 2 % to 2.6%. The second is that these numbers are annualised so divide by four for an international comparison. Ok for someone from the UK like me there was also a third thought that these were on the face of it much better than our figures!

Analysing the figures

If we look to the breakdown of the figures we see that this time inventory growth was negative at -3.7% reversing a recent trend which is good as they cannot rise for ever.

This was offset by a positive contribution from Net exports of goods and services of 3.44 %, again a good influence.

Domestic consumption rose with real personal consumption expenditures increasing by 4.4 % in the fourth quarter up from  an increase of 2.4 % in the third quarter.


These figures looked strong and in comparison with the ones published in the UK have led many commentators to declare victory in the stimulus (US) austerity (UK) debate. Those who have done so appear to have ignored the rather inconvenient truth that austerity has barely started in the UK and mostly kicks in from the new financial year in April.

Also there was a curious development in the US inflation figures in this report. The price implied deflator was at 0.3% much lower than expected. The probable cause of this was the fact that oil prices had risen! Bear with me in this I now it looks wrong! But higher petrol prices are recorded as part of imports and import prices are subtracted from the GDP deflator. Apart from the obvious issue in higher prices leading to lower inflation it leads to higher recorded economic growth as there is less inflation to subtract from an increase in output to get the “real” improvement. If you choose to allow for this you might conclude that the US growth rate would have been halved if this had not taken place. Quite a difference? Welcome to the murky world of official statistics.

Paul Krugman’s View

I do not remember referring to the American economist before so let me put that right as he did have an interesting way of illustrating these figures.

Today’s GDP report puts real GDP basically back where it was in the 4th quarter of 2007 (1/10th of a percent higher, but who’s counting?) Based on the trend between the previous two business cycle peaks, the economy should have grown — had the capacity to grow — around 2.3 or 2.4 percent per year over that period, so we’re actually around 7 percent below where we should be.

More attempts to conceal the truth in the Euro zone

There was some talk at Davos about a way of solving the problems of the peripheral Euro zone. As it came from European Central Bank Governing Council members then it may have some credibility. This idea is to change the length of the time Greece and Ireland have to repay the loans given to them to thirty years from the 7 to 11 of the Irish deal and the 3 of the Greek one (they plan to make the Greek deal like the Irish one but have not done so). This is a form of soft default and it is really giving the can an enormous boot into the future. In rugby terms I guess it is like kicking the ball up in the thinner air of the veldt in South Africa!

Whilst this may seem a good idea as it solves the problem that no-one in their heart of hearts can really expect the money to be repaid under current plans it has a flaw. If you are a private-investor in these markets you are bound to ask the question if they cannot repay official borrowing what about me? We get some sort of answer from Irish ten-year government bond yields which at 9.13% are above 9% again and the Portuguese equivalent which at 7.06% are back above 7%. Both levels leave them insolvent looking forwards and Greece,of course, at 11.4% has looked insolvent for months.

The UK loan to Ireland

When we provided assistance to Ireland I argued that it was a mistake as we were unlikely to get the money back. By default, if you think about it, then it would appear that members of the Governing Council of the European Central Bank now agree with me by the way they are floating the idea of a loan extension. In addition to my letter to the London Evening Standard I emailed the Chancellor of the Exchequer back on the 22nd of November expressing my views. As I had not received the courtesy of a reply I sent it to the UK Treasury again last week.

That leaves me 0 for 3 on the subject of receiving the courtesy of a reply from our political representatives as when I emailed my Member of Parliament Jane Ellison with my suggestions for reform of the Monetary Policy Committee she failed to manage the courtesy of a reply too. Is this usual these days?


16 thoughts on “Has the under-recording of US inflation led to Egyptian and Tunisian food riots via loose monetary policy?

  1. Hi, very interesting article as ever. I’d be interested to know what the official rate of US CPI is, as compared with the estimated actual rate of 10%?

    • Hi Liz

      Here is the latest report from the US Bureau of Labor Statistics

      The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.5 percent in December on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 1.5 percent before seasonal adjustment.

  2. Shaun, your point about food prices is well made and I agree. The regime has not kept subsidies in line with prices. However, having lived in Egypt for many years and seen at first hand the brutal oppression by the regime of virtually all dissent, even the most moderate, and the truly squalid living conditions of many Egyptians I would say that there is rather more to this than food prices. While our democratic system in the UK leaves a great deal to be desired, at least we get a chance to vote now and then and change things! Egyptians have been denied that systematically. I remember one (very rich) Egyptian telling me that the people were too uneducated to be allowed to vote. He failed to mention that the lack of education was government policy.
    Sorry, end of politics, back to economics…

  3. Shaun,

    My email last year to our new conservative MP for South West Norfolk, Elizabeth Truss, on the issue of online retailers who base their fulfilment operations in the Channel Islands to avoid VAT – estimated to cost the UK Treasury up to £1 billion per year – was promptly responded to.

    It will probably come as no surprise that the response was non-comittal, and despite “actively reviewing the operation of Low Value Consignment Relief” there hasn’t been a peep out of the government yet, but at least I received the courtesy of a reply.

    Good manners cost nothing, so the old saying goes…

    Great blog and much appreciated – keep up the good work.

    • Hi Daryl
      Thanks for the compliment and welcome to my blog.
      As to replies I was some years ago chasing the matter of the pension scheme of our Members of Parliament which I felt had been manipulated to their advantage. I did not realise then I was on the verge of something bigger… However my MP then was slow and the answers from the Leader of the House which was then Harriet Harman showed a lack of grasp of the position but both she and Martin Linton my MP did reply.

  4. Welcome to the world of democratic representation! I very much doubt our MP could follow the thread of the arguments never mind work out the validity!

    The only way the dreaded ‘Default’ word might not be used literally is if repayments are extended into the wide blue yonder. We are back to trying to fix a new contemporary problem using historical economic philosophies. It’s like trying to fix a modern car’s CPU using a hammer and ½ inch AF open ended spanner!

  5. via WSJ:

    [Congressman Barney] Frank was dressed something like a rock star himself, wearing a paisley tie that was wrapped almost completely around the outside of his collar. He had just emerged from a meeting of the world’s leading economic officials, including European Central Bank President Jean-Claude Trichet. Reporters asked him whether Mr. Trichet had expressed worries about inflation. No, he said.

    They asked again; that began to annoy Mr. Frank.

    “I am terribly sorry. Look, I understand not giving bad news to journalists is like not giving candy to children. But I apologize I have no bad news to give you.”

    One reporter would not be dissuaded: There was no discussion of inflation?

    “That’s the third time you’ve asked me, and you would obviously like me to say there was inflation, and I can’t make it up!”


  6. I expect MPs are suffering from email bankruptcy (as well as moral, financial and possibly others) in that the volume of incoming emails is probably vastly more than they could ever cope with. I suppose they ask Uncle Ben or Uncle Merv to fire up the printing press so they could afford a(nother) secretary, which would then be cut due to austerity measures (and, Yes Minister style, could then be added to the official job cuts figures).

    So if real inflation is 10% in the USA, what is it here in the UK? I think you mentioned a figure of about 6% last week Shaun. Is that about right? Savers be very afraid! 😦

  7. “Indeed if you look at US inflation it is hard to avoid the conclusion that it is recorded as being so low mostly because of the changes made to the recording of it…”

    and then “More attempts to conceal the truth in the Euro zone”. Of course; they are all at it! As I have pointed out before, the essential toolkit for the big inflation fraud is the combination of manipulated fake official data plus QE and other clandestine injection gambits. It does not change and they become more blase with more success! Dollar hegemony (with the petro-Dollar) has given much more scope for it.

    I know you do not do politics Shaun (at least not on this blog), but increasingly it is impossible to claim that Economics may be divorced from politics. The two are inextricably linked. You cannot have one without the other, and in the present world you cannot do one without the other! (You can pretend to do Economics in isolation, but that is not truly possible in the modern world, because it is politics which will always determine the real Economic action and particularly the Economic deception. This is because political ideologies are all about the control and distribution of real national and global resources.)

    I detect at least a slight change recently in your valuation of the quality of official, published data? (Or is it just a change in the manner in which you are declaring your opinion about it?) Anyway, if so I see that as being a good thing.

    • Hi Drf

      I am determined to avoid politics on this blog! Well apart from a general disdain for our political class in general…

      As to official statistics there has been a change since I started this blog. The Office of National statistics has had several problems where it has had to delay data. It changed the basis of our producer price numbers as I discussed on here a couple of months ago leading to lower recorded figures and it has represented data such that you have to look further down documents now to find mention of certain things. My view on the poor quality of CPI as an inflation measure is long-standing…

      But unless there is evidence to the contrary I continue the policy of accepting the numbers as I feel that is the only way forward. The alternative leads to picking and choosing which doesnt work.

      • Hi Shaun, well of course I did not mean the propagation of political persuasions; only as you put it “a general disdain for our political class” – all of them! I personally find it increasingly difficult to find much if any difference between any of them. However, they all influence Economic aspects of life in one way or another, and not to any good in general I feel.

  8. Hi Shaun.. excellent article as usual. Unfortunately for a large number of very poor nations, this food inflation is going to be a huge issue for a while. I fear Egypt is but the first of many. My worst fear is that in some nations, these disturbances will make matters much worse as the common folk begin to hoard goods as instability arrives. Pakistan, Jordan, Nigeria & Bangladesh are likely to be taking their turn soon enough.

  9. Hi Shaun. Great article.

    Can you explain in some future article why protectionism is bad?

    Thanks william

  10. HI SHAUN,

    Your thoughts visa vee statitics manipulation and qe and other financial and statistical conjuring and their links to egypt and tunisia is exactly the train of thought going on in my mind.
    you see no matter what figures the politicians,government and central banks produce as honest.the masses on the street in egypt are the real painful face of the fakery our elites practice. this is the price real people pay with their living standards being eroded by the theft of inflation .
    in essence the same happenning here at home. fake inflation figures leading to a real drop in peoples income.gdp will fall as peoples spending power falls .no matter what figures they conjure.
    eventually as in egypt the truth will show when our masses will tip over the edge.the truth is the only commodity going down in value.

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