Of Jackson Hole Inflation Targeting and Japan

Today sees the opening of the annual Jackson Hole symposium in Japan which has seen several “innovations” in monetary theory in the credit crunch era. The audience of central bankers who of course officially deny that their policies are “maxxed- out” to quote Bank of England Governor Mark Carney are always pleased to hear of new ways of loosening policy. One of these is likely to be in evidence later today as Janet Yellen will be deploying Open Mouth Operations from 3 pm UK time. But as there has been news this morning from the land of the rising sun I would like to look at something which has been in one of its regular phases of being hinted at. On the 16th of this month I pointed out that John Williams of the San Francisco Fed was heading that way.

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

In John’s Ivory Tower low inflation is a bad thing “uncomfortably low inflation………the risks of unacceptably low inflation”. We saw Charles Evans of the Chicago Fed pursue such arguments as he suggested the inflation target could be moved up to 4% and I gather he is now suggesting 3.5%.

Can they do it?

I raise the issue because the US has been below its inflation target for a while now. It has very low interest-rates in spite of the 0.25% nudge higher at the end of last year and the central bank has a balance sheet of over US $4 trillion. But PCE ( Personal Consumption Expenditure) inflation is 0.9% and whilst it is higher than the 0.5% of a year before it is lower than the 1.1% of January. Central bankers are “innovative” so they try to focus on what they call core PCE inflation which excludes food and energy but it too at 1.6% is below the target. A sign of the desperation is that people are now looking at them to two decimal places! 0.88% and 1.57% respectively in case you were wondering.

Actually both measures dipped below the 2% inflation target early in 2012 so it has been over 4 years since the Fed hit its target. You might think therefore that it would be better if its members concentrated on that rather than building castles in the sky. Well actually it is worse than that as in December 2012 we saw it implicitly raise the inflation target.

inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal,

Up was the new down yet again as they completely misread things. Their efforts to raise consumer inflation turned out to be puny compared to the impact of a falling oil price. Of course their economic models would have assumed a rising oil price.

For those of you wondering how PCE differs from CPI inflation a major difference is that it has a lower weighting for owner-occupied housing costs and for that reason usually gives a lower reading. Central bankers love to exclude housing from inflation measures don’t they?


Somewhere In Tokyo Bank of Japan Governor Kuroda has Elvis Costello turned up to eleven.

Pump it up until you can feel it.
Pump it up when you don’t really need it.

He has introduced negative interest-rates and is chomping on Japanese Goverment Bonds at the rate of “at an annual pace of about 80 trillion yen”. In addition he is buying equities and commercial property.

The Bank will purchase exchange-traded funds (ETFs) and Japan real estate investment trusts (J-REITs) so that their amounts outstanding will increase at annual paces of about 6 trillion yen and about 90 billion yen, respectively.

If you look at my articles on the “Tokyo Whale” you may note that the ETF program for equities cannot go on as it is simply because they will run out. He is also buying commercial paper and corporate bonds so soon it will be much easier to point out what he is not buying. So QE to the max or rather QQE to the max as after so many years of it QE got renamed to make it look fresh.

So inflation must be really flying? From Japan Statistics this morning.

The consumer price index for Japan in July 2016 was 99.6 (2015=100), down 0.2% from the previous month, and down 0.4% over the year……  The consumer price index for Ku-area of Tokyo in August 2016 (preliminary) was 99.6 (2015=100), up 0.1% from the previous month, and down 0.5% over the year.

As you can see all that monetary firepower and so little action. Especially troubling is that the situation I have been pointing our regularly for the UK,US and even the Euro area does not exist here. You see they have services inflation which in the first two cases is above target but in Japan that is a measly 0.3%. There is only one area above target to make Governor Kuroda smile and that is clothing and footwear at 2.4%.

What has spoiled the central banking party?

A major factor has been the lower oil price but also in a word currencies. Let me first give a public health warning please stand away from any Ivory Towers at this point. But Japan has found that after a certain point QE does not weaken the currency and actually  new efforts have led instead to a surge in the value of the Japanese Yen. The Ivory Towers would have been applauding as the Yen weakened to over 121 versus the US Dollar post the Bank of Japan negativity announcement but will now claim a lunch engagement when you want to discuss the current level of near 100.

The phase of US Dollar strength also took the US Fed away from its inflation target as in more recent times a stronger Euro is doing to the ECB. Some have lost of course as for example the ECB did when it’s initial QE efforts did weaken the Euro.

The other factor is that the central bankers have spoiled their own pitch. Plenty of countries have seen inflation in asset prices such as houses but of course the central bankers have led a long campaign to keep them out of inflation measures.


Mostly today I have discussed what are tactical issues concerning inflation targeting. This can be put simply in the form of why do you want a higher target when you cannot hit the one you have? Let me now move to strategy and there are two elements to this so let me start with Japan. After so many claims of an improvement in real wages from official sources and Bloomberg in particular we have in more recent times seen an improvement due to lower and indeed negative inflation. So exactly the reverse or a doppleganger of what they have promised! Remember wages are supposed to plummet in this environment and in fact they were strong in June as another Ivory Tower foundation turns to dust. Of course we need more than one month’s evidence as it could be one-off bonuses. But like the US and US lower inflation has led to higher real wages.

For the UK and US the situation has another nuance as we are more inflation prone. Once the phase of goods and commodity price disinflation ends then inflation is likely to head to and in the UK’s case beyond it. So why would you need an even higher inflation target?



30 thoughts on “Of Jackson Hole Inflation Targeting and Japan

  1. ok s so let me get this right ,

    higher wages for me and lower inflation ,according to the nobs in Banker Land , are bad for the economy

    whilst lower wages and higher inflation is good ?

    just who are these guys working for , because it aint Joe Public for sure

    or are they just trying to pump up RPI so they can get a bigger payout on their pensions? ( ok that just the UK )


    • Hi Forbin

      They want the higher inflation and then will be “surprised” that wages do not follow. Actually some of them are so in thrall to their economic models they may well actually be surprised.

      Meanwhile more disinflationary pressure for you from corn futures as US $3.1675 is down 13% on a year ago. Wheat prices are down as well so those who like bread and popcorn may get things a bit cheaper.

      • Yet another case of cart before horse. Inflation is a function of spending, increasing wages one of the more effective ways to increase spending into the economy.
        Also I may quibble a little with you over the effect of commodity prices on end consumer product prices, I think distribution and other overheads tend to dominate.

  2. Another lyric from that excellent song:
    ‘Though you try to stop it,
    She’s like a narcotic.

    As Forbin’s post alludes to, mine will say outright; the establishment of the World is at war with its populace.

    • Hi therrawbuzzin

      Yes Elvis Costello can be a bit up and down but when he is good he is very good and that song is in my view. When I was getting better from the dizziness episode I had I liked to listen to “I can’t stand up for falling down” as well.

  3. So we can’t reach our 2% inflation target, so let’s up it to 4% – brilliant!
    How do you justify 2% or 4% as a target, we can’t, but it sounds good – brilliant!
    In our calculations of inflation we ignore the biggest and most important cost, housing – brilliant!
    You could not make this up – where do we get these Muppets from?

    • Foxy, I agree with you completely. The US Fed couldn’t justify a 2% target rate and made no attempt to do so. They just took it as a rule-of-thumb, because the Bank of Canada, the Bank of England and the ECB used 2%. Even adopting it as a rule of thumb made little sense, because there is less upward bias in the US PCEPI than there is in the Canadian or UK CPI or the euro area MUICP. In adopting the same rate as the other central banks the US Fed was arguably targeting the highest effective inflation rate of any of them. And the two men who initiated the 2% rate, Canadian Finance Minister Michael Wilson and Bank of Canada Governor John Crow, never tried to justify it at all. It had no special significance for them. It was just the last of three interim targets (3%, 2½%, 2%) on a downward trajectory for inflation that they had charted with the initial inflation control agreement of 1991. That same agreement said that the ultimate target would be something “clearly below 2 percent” without specifying what it was. (In his memoirs, Crow said that he thought the next interim rate should have been 1½%.) The next Finance Minister, Paul Martin, put an end to the downward target path in the renewal agreement, but he never made a case for two percent being the ultimate low rate either. Now it seems the number 2 is to central bankers what 42 is in the Hitchhiker’s Guide to the Galaxy. It’s bizarre, really.

      • “Now it seems the number 2 is to central bankers what 42 is in the Hitchhiker’s Guide to the Galaxy.”

        Maybe they’re all Lene Lovich fans – “Lucky Number” as they sing to each other:

        “You certainly do have a strange effect on me
        I never thought that I could feel the way I feel
        There’s something in your eyes gives me a wild idea
        I never want to be apart from you my dear
        I guess it must be true
        My lucky number’s two

        This rearrangement suits me now I must confess
        The number one was dull and number two is best
        I wanna stay with you
        My lucky number’s two
        Ah! Ooh! Ah! Ooh!

        Number two, number two “

  4. Great blog as always, Shaun. Another reason the PCEPI tends to give a lower inflation rate than the CPI-U is the index formula. The CPI-U, like the UK CPI, is a chain Lowe index. By contrast the PCEPI is an annually-linked chain Fisher index. (Actually it is a quarterly-linked chain Fisher index benchmark adjusted to annually-linked chain Fisher benchmarks. It’s complicated, in my opinion, too complicated: the US Bureau of Economic Analysis would have been better off to forget about the quarterly linking) This means there is less upper level substitution bias in the PCEPI than in the CPI-U. The lower OOH weight for the PCEPI will not always mean it will show lower inflation than the CPI-U, since sometimes OOH inflation will be lower than non-OOH inflation, but the formula difference will always drag the PCECPI inflation rate down as compared to the CPI-U inflation rate.

    • Hi Andrew and thanks

      Oh no not another formula effect! I have had enough of that with the UK where 0.1% (2010) has ballooned somewhat. More seriously it still amazes me that the US CPI only covers Urban areas. How do they get away with that?

      • I agree with you, Shaun. The “U” in CPI-U stands for urban, and the Bureau of Labour Statistics still calculates a CPI-W, a CPI for wage-earners that defines the population even more restrictively. The chained consumer price index (C-CPI-U) that Obama had agreed to use for upratings to US social security with Republican leaders and then changed his mind about is also restricted to urban areas. However, as you know, the BLS does produce an HICP for the total population, i.e. urban and rural households. It is in almost every respect comparable to the UK CPI except that, like the CPI-U, the index basket is only changed ever two years. That also is pretty backward when you think that the UK RPI switched to annual basket updates in 1962.

  5. Shaun,
    Are not inflation targets and currency manipulation related?
    The MPC are just getting their excuses ready as they see through institutional inflation next year e.g. rail fares , petrol prices etc.
    Interesting times as USA and EU states have upcoming elections that could spring Brexit type results?

    • Hi Chris

      Yes they are although the exact relationship varies. The US can sail more blithely through such things because it pays its own currency for most commodities but there will be an effect for it as well. Actually the main role of the Bank of England seems to be to look through above target inflation….

  6. Maybe the bankers work hard to exclude housing costs from their inflation measures in order to make it easier for their political masters to claim that we are all getting wealthier.

  7. I think you made a Freudian slip when saying that Jackson Hole is in Japan whereas geographically it is in Wyoming. Economically you are right though – it is indeed in Japan because the US is turning Japanese.

    When you say “Can they do it?” in relation to inflation I think the more pertinent question is “Can they stop it?” At some point it may be that inflation will be resurgent in which case do they indeed have the courage to stop it by raising IRs or will they do a BOE and “look through” it? I have my doubts.

    Also you have to pause and take on board the total insanity of a policy whose target is to increase the cost of living – this is nonsense on stilts.

    I understand that a planet has been discovered fairly close by that may be able to support some sort of life. It is clearly a potential home for central bankers as they no longer live on the same planet as the rest of us.

    • in a high Ivory Tower , somewhere in unicorn land, two astute and widely regarded top economists ( well at least amongst themselves that is ) look out and down…….

      #1: It seems the peasants are revolting…

      #2: maybe soap is too expensive ….

      #1: dont be silly , its imputed to have gone from 40kilo-pounds to 80kilopounds just last week!

      a third joins them;

      #3: We dont count it anymore as its non-core , like eating breathing and keeping warm….


  8. Janet Yellen all talk no action…..the children’s game of the economy is complex….rate increases maybe later in the year….interpret that as tomorrow ever comes.
    There can be no interest rate rise because the US is bankrupt rate increases bring forward the inevitable day of reckoning,so their not going to do that
    Much better to pump up the stock market with cheap money another bubble…….stock market is on the up nothing to worry about ……$20 trillion dollar debt”we’ll just print some more electronic dollars.”
    If we get some inflation great that will help reduce the debt burden…..we can fleece the sheeple’s pensions and savings what are they going to do about it.?
    These people are intelligent but they obviously think that the populations are stupid or impotent….bread and circuses……..Trump or Clinton says it all and they say Corbyn is unelectable!

    • Hi PrivateFraser

      I felt that Janet Yellen had to hint at an interest-rate rise in her speech today but it turned out it was not quite enough so Stanley Fischer had to speak to CNBC. So Open Mouth Operations to the max! What about simply doing it as the Bundesbank used to?

      Oh and should such briefings be given to one channel by a public-sector body?

      • Hi Shaun that is the problem always hinting at interest rate rises but will never do it.Yet the media and markets hang on their every word!
        It is long past the point of losing credibility
        Yet “clowns to the left of me jokers to the right” carry on as though these statements mean something.

  9. Kylee’s “if I could turn back time”, and check prices 20 years ago. In 1996 a pound bought 3 Deutschemarks, 3 NZ dollars or 5 pints in Prague. You could buy a 3 bed house in the South East for under £100K, under 4 times average earnings.

    Now a pound buys NZD $1.80, maybe 1 beer in Prague or 1 beer from a German supermarket and a house costs 8 times average earnings. The ONS can print whatever GDP increases it likes, but by my reckoning the pound is sinking ….

    • Hi ExpatInBG

      I know incomes were lower then but 5 pints for a Pound sounds like a recipe for trouble! One of the TipTV staff is off to Krakow for a week and assures me that beer is cheap there in spite of the Pound’s latest burst of reduced circumstances.

      • Krakow is nice, and I really liked my stay there. As for cheap beer and trouble – Tallinn had quite a problem and I avoid Sunny Beach for the same reason.

        Economically the point is the benefit of a hard currency and the pound’s softening. The 0.1% of German industrialist elite benefit from a weak euro. The 99% of Germans would benefit from a harder currency. Cheaper food, fuel and holidays.

  10. Hi Shaun:
    “This can be put simply in the form of why do you want a higher target when you cannot hit the one you have?”

    In my time in the Public Sector when management found they weren’t hitting the target they always decided the reason was because it was not high enough, so they increased the explicit target beyond the original target, although the original target remained implicit, welcome to the world of Yes Minister and Kafka……..

  11. Another thing, you ask can the Fed increase the inflation rate?

    Well, if Trump gets elected and implements his rocketing tariffs on all imports, thus enabling American workers to make things for the same (inflated) price allied with an immigration ban and forced repatriation of existing immigrants who work for low wages then of course they can do it, no problem except they will then be replicating the stagflation of the UK in the 70’s and 80’s which will soon be returning to the UK. Unfortunately, when the US “achieves” this state it will take the world with it…..

      • Was of mine, wages failing to pace inflation so living standard fell. Mind, it wouldn’t have affected me had I been in receipt of index linked benefits or pension..

      • I think I said FAILING to pace inflation?

        Unless you’re talking about the 90’s on to 2007 when wages paced RPI?

        House inflation is a ruse. Over the long run of 10+ years it paces the RPI rate + 1%

        The reason houses are that much more in real terms is that the average semi in the 70’s and 80’s didn’t have central heating, cavity wall insulation or pvc double glazed windows which most possess now.

        If you cost in these installations and then inflate the cost of them at the time to today’s values, you realise that as I said earlier REAL house price inflation adjusted for all these extras that didn’t used to be incorporated in housing paces the RPI +1%. Stop improving houses and they’ll probably merely pace RPI or may even fail to pace RPI as we approach NIRP.

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