Whatever happened to the concept of price? how has it changed and what does it mean?

Today I wish to return to what was my earliest theme when I stepped into the online world nearly 6 years ago. Back on the 17th of November 2009 I argued that there were problems with the simple concept of what is a price and used some examples from my own shopping bag to demonstrate this.

For example own brand wine gums have varied between 27 pence and 85 pence. On Sunday a 300 gram tin of garden peas cost 25 pence whilst a 142 gram tin cost 30 pence. So what is the price of these two articles and what level of inflation would we get from them? As the world has changed as a nation we shop more at supermarkets. Everybody who does so will realise that they manipulate prices quite a lot.

This was on my mind the other day when I noticed that the price of a supermarket own brand pot of yoghurt seems to bounce backwards and forwards between 90 pence and £1.10 for no apparent reason.

I pointed out that if we were struggling at times with what is a price or more formally price discovery then we were on dodgy ground when we tried to calculate inflation. I will go further now and say it is one of the reasons why we get caught out more often by inflation numbers and it was nice of Bavaria statistics to illustrate my point on cue this morning by publishing an inflation number  rising by 0.5% and catching the “experts” out (again).

Subsequently I went onto other areas where modern life had made price discovery ever more difficult.

Now if we leave the supermarket who has recently compared mobile phone tariffs? How easy are they to compare? I can confirm that domestic energy prices (electricity and gas) are very difficult to compare even on websites that are supposed to help you. Suppliers are clearly making comparisons difficult. There are many other examples of this. This is quite a serious market failure.

Bringing this up to date the TalkTalk scandal which may cover me as a customer poses its own questions as my custom got sold on from AOL to Carphone Warehouse and now maybe whoever! But the truth is I lost touch a bit with both what was happening and the price. Here is another awkward bit as one of the reasons I did that was because internet service reliability is important to me.

This brings me one of the fundamental credit crunch issues which is that as price discovery was failing pre credit crunch so was much economic theory. We had no equilibrium or if we briefly did we were unaware of it. However it has got much worse in the credit crunch era

Rents

This time it is the official bodies which have failed to discover price and inflation numbers as the UK Office for National Statistics have reminded us this morning.

We have designated the IPHRP (Rents) as experimental statistics. The results presented in this article are subject to revisions if improvements in the methodology are identified.

You see they had a series which did so badly it found itself stopped and redacted and sent to whatever place you find abandoned and friendless statistics. It did not stop the UK economics establishment (Consumer Prices Advisory Committee and others) from recommending it. So everyone – apart from those who read my blogs – were sent in the wrong direction on rental and indeed owner occupied inflation. Of course nobody is to blame and indeed many of those responsible have been promoted! But the point is that we were misled as to another price.

Interest-rates

These are another form of price and we have seen an emergency interest-rate of 0.5% in the UK for over 6 years now. This has been accompanied by QE and other measures to drive down longer-term interest-rates as well. So in terms of Bank Rate we have no signal of a recovery from the price.

What we do have though is plenty of hype and I note that Bloomberg classify Mark Carney as a “hawk” ignoring the fact that he has yet to actually cast a vote for an interest-rate hike. So let me through in something more subtle. As we struggle to know what a price is central bankers are acting on expectations of price changes via Forward Guidance and expecting that to work. What could go wrong?

Also there was the Li(e)bor scandal.

Market manipulation

Bond  Markets

One can debate the issue over control of short-term interest-rates as central banks have of course intervened in them for decades and decades. Although driving them negative is a new venture. However the advent of large-scale QE and the way that government bond prices and yields have been influenced is new outside of Japan. Let me show you something which illustrates this. From the Financial Times

Italy has sold two-year debt at a negative yield for the first time………Investors accepted a guaranteed loss to buy €1.75bn of Italian debt at a yield of minus 0.023 per cent .

I pointed out last week that such bonds were trading at negative yields but Tuesday was the first time that the Italian Treasury and taxpayer had a guaranteed profit from it.

Now back as 2012 began the ten-year yield in Italy was popping above 7% and back then the national debt had been 116% of GDP (Eurostat 2011). Now the national debt is 136% of GDP and the yield is 1.4%. We need also to factor in the economy but it shrank by 2.8% in 2012 then 1.7% in 2013 and by 0.4% in 2014 followed by growth of 0.9% so far in 2015. So as you can see but for the fact there has been some recent growth everything is worse! Accordingly we see that the “everything it takes speech” and subsequent actions of Mario Draghi have driven this. There is no price discovery here beyond what the European Central Bank wishes us to see.

Only yesterday Sweden announced another effort in this long-running game as it announced another 65 billion Krona of government bond purchases. After that Swedish bond yields went negative out to the five-year maturity chasing Germany (6 years) and Switzerland (15 years). The FT puts it like this.

Sub-zero club now encompasses €2.6tn of debt, up from €2tn in a week.

In a recovery? How is the price discovery system working right now then?

Exchange Rates

Here we obviously have the issue of currency wars. In the last week we have had the Open Mouth Operations of Mario Draghi followed by an interest-rate cut in China, more QE in Sweden and “next time” promises from Janet Yellen and the US Federal Reserve. So we have had some action but mostly talk. But my point is that exchange-rates follow central banking pronouncements like dogs on a short lead. The Euro fell for Draghi and the US Dollar rose for Yellen making a win double of course for the former. Does anybody believe that either of these two individuals have any idea where the equilibrium or market-clearing exchange-rate is? Actually we could go deeper and argue that it is a bit like Heisenberg Uncertainty Theorem but that is for another day.

For now let me just point out that as exchange-rates are a zero-sum game then as a total the effort is pointless unless of course Blondie were prescient here.

And out comes a man from Mars

Rather than “we come in peace” I fear we would try to devalue our currencies against the Martian currency even quicker than Paul Krugman would be able to ask him/her for a fiscal boost.

Comment

I am reminded of the 1983 Yes Minister episode which discussed manipulation of numbers so some of this has been going for a long time. But my contention is that it has got worse and just as we would hope to know more via price discovery we in fact know less as they are manipulated. This leads us to Goodhart’s Law.

When a measure becomes a target, it ceases to be a good measure.

Prices? inflation? Interest-Rates? Bond Yields? Exchange-Rates? Oh and I have not even got onto how the QE era and the flow of funds seems to have influenced both commodity and equity prices. Is it a fluke that as bank trading desks withdrew from commodity markets prices fell?

Actually today has seen a more basic manipulation in another sphere apparently come to an end. From Xinhua News.

China abandons one-child policy, allows two kids for all couples

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17 thoughts on “Whatever happened to the concept of price? how has it changed and what does it mean?

  1. Everything has become more and more complicated and this makes it more snd more difficult to see the wood for the trees so to speak. So in spite of increased “transparency” we are more and more in the dark than ever about everything to do with economics generally. I think it’s done on purpose a lot of the time so even what should be a simple comparison of food prices in the supermarket becomes a complicated question. Thank goodness you are around to throw a little light on the subject!

    • Hi Jan

      I am not sure if the word “transparency” has gone into my financial lexicon for these times before but you have given it the final shove! Or perhaps another twist in the tale.

      There have been extraordinary advances in the way that we can check on things online although we have to remember that some are excluded. But as that has happened the business world has moved to erode those gains. How long ago was it revealed that price comparison sites promoted some choices in return for a fee? The game has changed and if we move to economic measurement I do not believe that official statistics have kept up.

      Also the establishment has manipulated more and more prices itself then has the cheek to complain about a lack of market liquidity.

  2. Hi Shaun

    It seems to me that there are two strands here: prices which may be difficult to monitor for technical reasons in order to arrive at a “reasonable” statistical position and those which are consciously “manipulated” for some ulterior motive.

    It may be that the advent of computerisation has meant that eg supermarkets can change prices much more quickly and perhaps with regional variations and that getting figures to report in a CPI type national index has become more difficult. However, although any index which comes out of this may be unreliable, as you have pointed out on numerous occasions, it does not mean that it is “manipulated” in the sense of being actively “misreported” – although, as a matter of fact, it may be.

    Some prices, and mobile phone tariffs and rail fares, spring to mind are in my view designed to confuse the consumer.

    However, when it comes to such things as the interest rate it is clear that it is “manipulated” as it does not (?) rely on a price which arises out of a bargain between investment needs and savings availability. In this case it has always been “manipulated” has it not; indeed it is manipulated by definition? However, I’m inclined to agree with your implicit sentiment that it has been “manipulated” in one particular direction for far too long.

    Some commentators have said that the current low interest rates are a result of a secular glut of savings but what does this mean when most of the money created is created ex nihilo by banks? The implication is that the surplus results from an excess propensity to save a la China but this is nonsense.

    I am of the view that you cannot “manipulate” forever; that somewhere down the line there will be a reset which may not resolve all this issues but may clear out some of the rubbish. Until then it’s Alice in Wonderland for us all.

    • Hello BoBj

      I’ll have to look up ” a glut of savings” as my memory must be playing up. since I had money it was stated that the British do not save enough…..

      Oh the Bank rate is most certainly a “fix” . but if you look at the rates for actual people where there is a “market” , there are a variety of rates dependent on who you borrow and how good your record is of paying back

      Saving rates reflect the distortion of the Bank rate thats set for HMG and for currency wars ( I ;m sure others will add other reasons )

      As for anything do with CPI farce , then just remember the acronym stands for ” Creative Price Index” , its an index designed on the belief that food , fuel , water and housing either dont exist or are “too Variable” to include (!!) ( not true , they go UP mostly , thats why )

      As for actual measurement then as Shaun points out we have always had obscurement of prices , like shrinkflation , yet alone how do you compare tinned tomatoes with fresh ( eh? )

      As for tech, how can you compare mobile phones with phones in the 1970’s ? Well techincally you can , its the actual cost of a phone call per minute on any of the networks , fixed or mobile , including the handset .

      But then you have so-called “smart ” phones , Utility comes to mind , heres another example or two

      My dads car has aircon , he doesnt use it and couldnt buy the actual car he wanted without it , did he really get an imputed increase in utility / specification ?

      My car has a CD player , I had a tape radio before and I have moved onto mp3 , what use is the CD player to me ? it has no aux input so its use is marginal ( but CPI says I have better utility )

      Frankly I’d exclude all technology and just concentrate on pounf of “X” , pound of steak , pound of cheese , kw of electricity , therm of gas , per SQ feet of housing

      but of course if we did something like that we’d find that actually we’re much worse off and no party will get elected on that !

      Forbin

    • Hi Bob.
      I don’t believe there’s any glut of savings, I believe there’s a scarcity of minimal-risk creditors, and that banks are so insolvent they daren’t offer even low-risk credit at reasonable prices.

      Last week I posited that what was actually going on was that the banks were keen on my savings, so keen that they were offering me credit that was extremely cheap, in order not to spend my savings.

      Further though has reinforced my view. Allow me to explain:

      My current accounts pay me 3% interest for balances as long as the balance remains between £3k and £20k or 4% as long as the balance remains between £4k and £5k.
      It is the fact that, although it is instant access money, it is earning more interest than it would elsewhere, BUT A LARGE WEDGE (for a current account) HAS TO BE HELD IN ORDER TO QUALIFY FOR THESE RATES.
      This is the equivalent of punitive punishment for falling below these rates, once you have reached the point where you qualify for them.
      However, that there is a top end to the amount that qualifies for these rates also shows that when you reach it, banks want you to put your money into longer-term vehicles.
      This is quite sophisticated policy and it is so for a reason.
      I believe that reason is the rules behind fractional reserve lending.
      Banks can lend £100k for every £7k they hold in assets, so if they offer me 3% for £20k, they can lend nearly £300k on the strength of it.
      If they offer me £20k practically free credit, so that I don’t need to use my own money, I can make £600pa in interest, whilst they can lend £280k at higher rates.
      Even better if I re-invest that money, perhaps as a joint current account, as they can lend another £300k!!!

      If I’m right, it shows even clearer the level of bank desperation.
      If I’m wrong, I’m dying to hear a better explanation for the complexity of the current account policy.

      • I think you’ve hit the nail on the head. I was wondering why banks were paying interest at all on current a/cs when they must be “losing” on it but of course I was forgetting they can use this money as an asset and leverage it to lend out at higher rates.

        They are making mugs out of us as they will always win doing this while the average person becomes a wage slave for ever to pay it all back when they borrow. Hence massive house price inflation is a winner for the banks. Glad to see you’re playing them at their own game.

  3. Talking about market manipulation; if I knew that a 300g tin of peas was in the basket of commodities upon which the food component of inflation was calculated, but a 142g can wasn’t, I could trim the price of the 300g can, more than compensate by adding more to a 142g can, make a few quid, and it shows as negative inflation.

    The credit price of money is supposed to be need divided by (availability x risk), but because banks cannot afford to take any risk at reasonable prices, this too has become distorted; minimal risk is seriously underpriced, to the point of being free, whilst low-moderate risk sees shark prices.

    • Hi therrawbuzzin

      I have long suspected that supermarkets are at this sort of game. After all their pricing systems are much more sophisticated than those used by the ONS. Whilst it is welcome that the UK ONS is experimenting with web prices it is well behind the game.

      The banks remain in a mess as this weeks figures have proved.

  4. Hi Shaun, Bob J beat me to it in his theory above that interest rates have always been manipulated. I ask how do you think true price discovery may be arrived at with interest rates, if you exclude CB/Government intervention without creating a myriad of different interest rates, likely applicable to each individual player and with no resulting overall bench mark for market participants to refer to leading to, in my view chaos in the first instance, followed by financial and economic collapse in the second?

    One other thing, what to you and I is “market failure” when it comes to calculating the price/cost of something and trying to discern similar items for cost comparison is “marketing success” to a company – ever twas thus.

    • Hi Noo2

      I was reaching for more of a nuance with interest-rates and Bob J put it better here.

      “However, I’m inclined to agree with your implicit sentiment that it has been “manipulated” in one particular direction for far too long.”

      As to market failure and success I agree but if we look at the situation as disinterestedly as we can then it is clear that there are many examples of market failure right now. That is why the central banks keep bemoaning the issues with market liquidity, as well as of course an effort to shift the blame from themselves!

  5. The Chinese decision is interesting. There was a good case to say that China was the most honest and effective “green” country in that it was the only one with the courage to limit the root cause of environmental degradation, namely population.

    Obviously, it believes that a more youthful population is economically necessary. Whether this is actually true, with increasing “robotisation”, remains to be seen.

  6. “China abandons one-child policy, allows two kids for all couples”

    Well I think that was for the majority Han population anyway and was often distorted by party officials too.

    makes you think why they really need more people , I dont beleive the excuse of older population my self

    Still apparently on anther thread , check your Nationwide accounts – they had a hack 2 weeks ago that was not MSM reported ….

    Forbin

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