So far 2015 has been dominated by the way that many measures of consumer inflation around the world have recorded negative annual rates of inflation. Even the inflation nation that is the UK did so in the month of April.
The Consumer Prices Index (CPI) fell by 0.1% in the year to April 2015, compared to no change (0.0%) in the year to March 2015.
This had all sorts of effects on monetary policy as the Euro area,Sweden and especially Denmark and Switzerland have plunged into the world of negative interest-rates in response. It also affected economics as media hysteria ran riot about “deflation” and also saw the rise of what on the I labelled on May 19th as “deflation nutters” who to paraphrase told us this. From R.E.M.
It’s the end of the world as we know it
It’s the end of the world as we know it
There has been a smattering of such talk and “analysis” today as Taiwan has announced that the annual rate of consumer inflation was -0.73% in May. There are various problems with it however.Firstly is the issue of economic growth being expected to be 3% in 2015 so there is no sign of collapsing demand. Next is the fact that the underlying index is 103.14 where 2011 = 100 so prices have risen and then fallen back a bit. What is there to be afraid of in that? Next is the fact that the rate of disinflation is showing signs of slowing as it was -0.84%. It is the latter that is facing many countries as we move into the summer of 2015.
The Euro area
On Tuesday we saw a clear sign of the tide going out for the deflation nutters as Eurostat produced its latest consumer inflation report.
Euro area annual inflation is expected to be 0.3% in May 2015, up from 0.0% in April.
This means that in 2015 it has gone -0.6%,-0.3%,-0.1%,0% and now 0.3%. Anybody spot a trend there? If we look into the detail we find that the driver here has been the way that the stabilisation and rise of the oil price has impacted on the numbers. The annual rate of inflation in the energy sub-component has risen from -9.3% in January to -5% in May and will continue to do so if prices remain at current levels. All the other sub-components are showing a positive rate of inflation which should thoroughly embarrass the deflation nutters who predicted exactly the reverse. Also if we look at the services sector we see that inflation has been around 1% in 2015 and is now 1.3% so the vast majority of the economy never saw any price falls. It is often forgotten that the price falls have been for goods and it is odd that this time around it has been badged as bad as in the preceding decade price falls in goods from China were regarded as positive.
Meanwhile the average Euro area consumer and worker will be disappointed to see energy costs begin to rise again and also to see the end of falls in food prices. Rather than the end of the world as we know it they would have welcomed the time when prices dipped and fell.
It feels like only yesterday that we were discussing a ten-year bond yield in Germany as low as 0.07%. Well yesterday seems so far away in a week when it has nearly touched 1%! The market has seen price falls of 6 points in the futures contract this week alone as we await for reports of casualties. In an era of privatisation of profits and socialisation of losses we should fear the losses. The 100 year bond that was issued by Austria has fallen from around 220 to 160 just to give you an idea of scale. As I type this the ten-year German bund yield is 0.89% and relatively calm.
The Grand Old Duke of York must be having a wry smile at all of this but if we peer through the panic and hysteria we see a change in trend which indicates that the bond markets have lost faith in the deflation saga too. Perhaps one or two thoughts of inflation have popped up which are hard to pay for with a 0.07% yield!
Inflationary expectations in the UK
This mornings release must have caused a few red faces at the Bank of England.
Median expectations of the rate of inflation over the coming year were 2.2%, compared with 1.9% in February.
Asked about expected inflation in the twelve months after that, respondents gave a median answer of 2.3%, compared with 2.1% in February.
So not only do they expect higher inflation but you may note that the numbers are above the inflation target. Oh dear and it gets worse as the Bank of England “experts” looked for confirmation of the official statistics.
Asked to give the current rate of inflation, respondents gave a median answer of 2.2%, unchanged since February.
So rather than the price falls we get inflation above target. As the Bank of England shuffles this to the back of its files in it slowest basement let me give you some thoughts as to why this might be.
1. The “not an official statistic” Retail Price Index has stayed positive and is 0.9% so may well be a better guide than CPI as I have argued all along.
2. House prices are officially increasing at an annual rate of 9.6% which the official numbers completely ignore. This is because you ignore the rise being inflationary you can claim it is a wealth increase and then tell everyone they are better off.
3. Services are around 4/5 ths of the UK economy and rising and even under the measure used by the CPI they are increasing at an annual rate of 2%.
The UK establishment reverts to type
Even the UK establishment realised that its inflation infrastructure had lost credibility and in fact had become a bad joke. So changes were proposed and they looked hopeful as I attended the meetings about them at the Royal Statistical Society. However sadly a latter day Sir Humphrey Appleby has intervened along the lines of this below.
You never interefere with a member of her majesty’s judiciary
Hacker: What do you do then?
You appoint someone who does not need interfering with!
From the RSS Statsusernet as to the respective committee chairs.
Dame Kate Barker – Stakeholder Panel
Nick Vaughan – Technical Panel
So Kate Barker who sat supinely on the Monetary Policy Committee as RPI was replaced by CPI and house prices were removed from our consumer inflation measure. Of course she was still on the MPC when the economy collapsed partly due to a house price boom on her watch. Mr. Vaughan comes straight from the UK Treasury and perhaps more importantly was on the complete failure that was the Consumer Prices Advisory Committee. Rewards for failure? Or more cynically was it considered a success?
Just for clarity it is a role I would have been happy to undertake as I have plenty of ideas, which of course probably excluded me! Also thank you to Andrew Baldwin for his kind words about me in his reply to this neutering of a good idea.
There are plenty of hazards facing the world economy in the years ahead. But for now we have seen the current deflation scare start to fade away. Much of it was self-inflicted in the way that official institutions have changed and manipulated consumer inflation indices in particular by either never including house prices or dropping them out like in the UK. But there were also clear disinflationary trends from oil and commodity prices.
As inflation returns to the system then let us consider the impact on real wages. It was the surge in late 2011 which pushed real wages lower in the UK which gets conveniently ignored. Also it is the poorest who gets the most affected by inflation and of course it is those who will have most benefited from the recent energy price falls. But it has been a while since even those in better circumstances had seen gains if this from the Wall Street Journal is any guide.
Median household income, adjusted for inflation, was $51,939 in 2013, only slightly higher than it was in 1988, when it was $51,514. Slow wage growth is part of the problem; adjusted for inflation, blue-collar pay has increased just 0.3% a year over the past quarter-century.
Something to think about as we peruse the monthly US labour market data.