Central banker speak gets ever more Orwellian

Today sees the first of the main sets of economic data post the Brexit leave vote as we get both the numbers for consumer inflation and house prices for July. These will give us a snapshot of what was happening then but I explained the backdrop and hence future prospects using the “Draghi Rule” back on the 19th of July.

If we look at the way that the UK economy is relatively more open than the Euro area and the fact that our fall was more against the US Dollar in which many commodities are priced I expect a larger impact on the annual rate of inflation than the Draghi Rule implies and estimate one of say 1%.

As the UK Pound has weakened since then with the main measure for inflation purposes being  the US Dollar via its impact on commodity prices then the impact will be a little over 1% now assuming we remain around US $1.29.

Higher Inflation Targets

There are some who welcome higher inflation and the main members of this pack are usually central bankers who receive inflation linked pensions. John Williams of the San Francisco Federal Reserve warms us up for this by hoping we will forget that what he is describing below are policies which he told us would work!

As nature abhors a vacuum, so monetary policy abhors stasis

Although of course Mr.Williams is quick to point out that what is happening is nothing to do at all with him or policies he has supported. Very Orwellian ( The most effective way to destroy people is to deny and obliterate their own understanding of their history.)

Importantly, this future low-level of interest rates is not due to easy monetary policy;

Those who have had higher real wages as a result of the result phase of disinflation will be discomfited by these bits.

uncomfortably low inflation………the risks of unacceptably low inflation

I point this out regularly but for newer readers Mr. Williams says he wants “price stability” but when we have a phase as near to that as we have had for decades he then describes it as he has above. He has a suggestion.

First, the most direct attack on low r-star would be for central banks to pursue a somewhat higher inflation target.

Okay why?

This would imply a higher average level of interest rates and thereby give monetary policy more room to maneuver

So to have the weapons to make you better off he first has to make you worse off. Talk about being in an Ivory Tower lost in the clouds. Although briefly reality is a friend of John’s as the clouds clear and he realises that the losses from this are real but the benefits are in his mind’s eye.

Of course, this approach would need to balance the purported benefits against the costs and challenges of achieving and maintaining a somewhat higher inflation rate.

Up in the Ivory Tower Mr.Willaims has discovered an old file which is a higher inflation target by another name so he gives it a go.

inflation targeting could be replaced by a flexible price-level or nominal GDP targeting framework, where the central bank targets a steadily growing level of prices or nominal GDP, rather than the rate of inflation.

The problem is that this even according to a proponent like Mr. Williams has “potential advantages” whereas the problems are real as for example what would he do in response to the 21% GDP growth seen in Ireland in the first quarter of 2015. Way over target so interest-rates at 10%? Or is this like so many others just a theoretical framework constructed as a one-way bet to policy easing to infinity?

Of course Mr.Williams is welcome to pay higher prices personally for things  I wonder if he does so?

Today’s numbers

If you are a UK rail passenger then you will rue the numbers below.

The all items CPI annual rate is 0.6%, up from 0.5% in June…….The all items RPI annual rate is 1.9%, up from 1.6% last month.

For foreign readers it is the latter higher number that they pay. It might seem odd that the UK establishment has chosen what is for them a measure ” found not to meet the required standard for designation as National Statistics” until you realise that the government benefits from higher rail fares vis having to support the industry less. The rail passenger who sees for example income tax thresholds going up by the lower CPI is right to feel that this is a form of stealth taxation.

Next comes a technical point which is shown below.

The difference between the CPI and RPI unrounded annual rates in July 2016 was -1.26 percentage points,

The UK establishment has blamed what they call the “Formula Effect” for this forgetting that in the 2010 Technical Manual they estimated it at around 0,.1%. Actually it had half the impact this month of the “housing components” that the CPI lacks. The RPI has its flaws in the way it measures owner-occupied housing costs but at least it gives it a go. Can anybody think why the CPI measure excludes them?

UK average house prices have increased by 8.7% in the year to June 2016 (up from 8.5% in the year to May 2016), continuing the strong growth seen since the end of 2013…..The average UK house price was £214,000 in June 2016. This is £17,000 higher than in June 2015 and £2,100 higher than last month.

A fair proportion of the Student Loan book has its interest-rate set with respect to the RPI as we return to the subject of hard times for millennials and those even younger. I analysed the many problems here on the first of the month.


Producer Prices

The fall in the value of the UK Pound £ is having an impact here.

Factory gate prices (output prices) for goods produced by UK manufacturers rose 0.3% in the year to July 2016, compared with a fall of 0.2% in the year to June 2016.

This is the first time that factory gate prices have increased on the year since June 2014.

Actually the situation was turning anyway – I explained a few months ago that I expected inflation to pick-up as we move into the latter part of 2016 – but the post Brexit lower UK Pound has given it a further push. This is shown even more clearly by the input numbers.

The overall price of materials and fuels bought by UK manufacturers for processing (total input prices) rose 4.3% in the year to July 2016, compared with a fall of 0.5% in the year to June 2016.


We see that the UK inflation outlook has darkened further. This is a particular shame as the phase of lower inflation which the President of the San Francisco Fed calls “uncomfortably low” boosted the economy via higher real wages. No doubt one of the equations in his Ivory Tower tells him that wages will surge higher just like it has been telling him for the last 8 years. Why change a losing formula?

Meanwhile the ordinary person faces a future of rising inflation and indeed above target inflation as we seem set for UK CPI to head towards 3% per annum whilst RPI will head for 4%. This of course will be an economic nirvana for all those who want higher inflation except when they get it be prepared for all the excuses under the category of “counterfactual” as they find themselves watching the TV series “Surprise! Surprise!”. Even worse the ordinary person might want to buy a house and note that prices are rising at an annual rate of 8.7% and forget that according to the Bank of England’s Chief Economist Andy Haldane this is a victory.

Over recent years, there have been fairly rapid rises in UK asset prices — houses, shares and bonds. These have increased measured national wealth by as much as £2.7 trillion since 2009.

As George Orwell so presciently put it.

War is peace.
Freedom is slavery.
Ignorance is strength.

9 thoughts on “Central banker speak gets ever more Orwellian

  1. indeed , we are to be punished for the sin of Brexit


    Ps: except most inflation is HMG built in , pensions? I’m all right Jack for ” Maggie ” May and her backing group the BoE swindlers

    • Hi Forbin

      One factor I did not point out today was the way that the oil price is edging higher. In itself not an enormous amount in the rise to US $49 per barrel in Brent Crude Oil terms but we are paying for it with a lower level of the UK Pound £ so we should be grateful for the bounce to US $1.30.

  2. Great article as always Shaun.

    I’ve noticed that the left wing media are laying into ftse companies for paying more dividends, rather than shoring up pension funds. And yet no-one questions that ZIRP and gilt manipulation are the direct cause of these deficits.

    Despite being incompetent, the boe are masters of misdirection and media manipulation. Apart from you that is 😉

    • Anteos,

      there once was a time our BBC and MSM in general would have questioned the establishment . Those days are apparently behind us .

      we have nothing now but scribblers and copy n paste “kiddies” ( I will not call then journalists anymore – not even bloggers suits ) than have not be taught to answer back or question their superiors ( to see if they are “superior”…)

      Now finding the truth has become difficult in the back -slapping , self engrandment , world of twit(ter)s and hash-tag reporting .

      thanks god for Shaun’s webpage



    • If it WAS a left-wing media, do you not think it’d be shouting that, “ZIRP and gilt manipulation are the direct cause of these deficits?”
      The evils of capitalism, etc.

      They’re all neo-liberal; that’s why they are so despised in the country, nay, WORLD at large.

      If you are still seeing reds under the bed, I suggest you take your meds.

  3. Great blog, Shaun, as always.
    John Williams and his colleagues at the San Francisco FRB may be hotshot econometricians, but they obviously aren’t hotshot index number people. If you look at the working paper on which Williams bases his conclusion that the natural real rate of interest has declined in Canada, the euro area and the UK, as well as the US, his inflation measures for the four regions are not at all compatible with each other. For the US, he uses the core series for the Personal Consumption Expenditure Price Index, presumably the Personal Consumption Expenditure Price Index less Food and Energy (PCEPILFE), although it isn’t clearly stated; there are other core measures linked to the PCEPI. For the UK, he uses the “CPI excluding food and energy” but this is an HICP series with a quite different treatment, among other things, of owner-occupied housing (OOH). The UK CPI, of course, excludes most OOH costs, while the PCEPI uses a rental equivalence approach to measuring them. The odd thing is, the BLS calculates an HICP for the total US population that is compatible with the UK CPI, and the euro area Monetary Union Index of Consumer Prices. The US has a comparable core measure, the HICP less food and energy, that could have been used. The differences between the two measures aren’t chump change. In June 2016 the PCEPILFE had an annual inflation rate of 1.6% lower than the 1.8% inflation rate for the HICP less food and energy. However as recently as August 2014 the PCEPILFE had an inflation rate of 1.7%, substantially higher than the 1.3% inflation rate for the HICP less food and energy. The main reason for this was the omission of OOH costs from the HICP series, which meant that declining energy prices impacted it much more than its PCEPILFFE counterpart.
    So this is really an apples and oranges comparison, but it didn’t have to be that way.

    • Hi Andrew and thanks

      I am glad that you did an in depth comparison of the inflation numbers used because I was busy thinking of the concept itself. Mr.Williams defines it thus.

      “the concept of the natural interest rate—that is, the short-term real (inflation-adjusted) interest rate that balances monetary policy so that it is neither accommodative nor contractionary in terms of growth and inflation.”

      I think that it changes a fair bit and that there may be more than one of them but why worry about practicalities when you can assume whatever you like! it gets worse when you add in inflation because as you correctly point out the comparisons are misleading. Oh and speaking of misleading here is John Williams from January.

      “For 2016, “I think something in that three to five rate hike range makes sense at least at this time,” Williams said in an interview on CNBC.”

      As opposed to the 0 so far…

  4. Where does all this end?

    I can see a deliberate and co ordinated financial collapse, not far off, to remove debt and also steal all savings and pensions. Then the process will be complete. Happy serfdom!

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