The Jackson Hole symposium should embace lower inflation

Later this week the world’s central banks will gather at the economics symposium of the US Kansas Federal Reserve at Jackson Hole in Wyoming. The description can be found below.

The 2017 Economic Symposium, “Fostering a Dynamic Global Economy,” will take place Aug. 24-26, 2017.  (The program will be available at 6 p.m., MT, Aug. 24, 2017).

It is appropriate that they do not yet know the program as the world’s central bankers find themselves at a variety of crossroads which they are approaching from different directions. It is also true that after all their expansionary monetary policy and “masters ( and mistresses) of the universe” activities over the last decade or so they now approach one of the most difficult decisions which is how to exit these programs. For some this will simply mean a slowing of the expansion. This all looks very different to when a speech on Forward Guidance was eagerly lapped up by a receptive audience and quickly became policy in many countries. After all Open Mouth Operations make a central banker feel both loved and important as we all hang on every word. Oh and there is a clear irony in the title of “Fostering a Dynamic Global Economy” for a group of people whose propping up of many zombie banks has led to anything but. That is of course assuming anyone knows what the phrase means in practice!

The inflation issue

The issue here is highlighted by this from Bloomberg today.

The world’s top central bankers head to Jackson Hole amid growing unease about low inflation.

Of course central bankers and those in the media subject to their brainwashing program may think this but the ordinary worker and consumer will be relieved. Should any of the central bankers suffer from stomach problems no doubt they will be delighted to discover this from CNBC.

Hikma Pharmaceuticals Plc’s U.S. subsidiary has raised the price of a common diarrhea drug by more than 400 percent and is charging more for five other medicines as well, the Financial Times reported on Sunday……The average wholesale price of a 60 ml bottle of liquid Atropine-Diphenoxylate, a common diarrhea drug also known as Lomotil, went from about $16 a bottle to $84, the FT reported.

Central banker heaven apparently and what needs looking into in my opinion is the clear examples of price gouging we see from time to time. Also more mundane products are seeing price rises. From last week.

The iron ore price is now trading up a whopping 43% from its 2017 lows struck just two months ago.

According to Yuan Talks the Dalian futures contract rose 6.6% today before price limits kicked in. It is not alone as the Nikkei Asian Review points out.

Three-month zinc futures were at their highest level in 10 years, at about $3,100 per ton, rising 26% over the same period.
Aluminum also rose 10% over the same period.

So as well as raising a smile on the face of the heads of the central banks of Canada and Australia there are hints of some commodity inflation about. This provides a counterpoint to the concerns about low inflation which in the Euro area and the US is not that far below especially when we allow for the margin of error.

Does QE lead to inflation?

Some care is needed here as of course we have seen waves of asset price inflation across a wide range of countries. But of course the statistical policy across most of the world is to avoid measuring that in consumer inflation. Then it can be presented as growth which for some it is but not for example for first time buyers. However one of the building blocks of economics 101 is that QE ( Quantitative Easing) leads to inflation. Yet the enormous programs in the US and the ongoing one in the Euro area have not got consumer inflation back to target and the leader of the pack in this regard Japan has 0% inflation. After all the money involved has it simply led to price shifts? That is especially awkward for Ivory Tower theorists as they are not supposed to be able to happen with ~0% inflation so I guess they sent their spouse out to fill up the car as the petrol/diesel price fell.

More deeply whilst the initial effect of QE should have some inflationary implications is there something in it such as the support of a zombie business culture that means inflation the fades. It could of course be something outside of the monetary environment such as changing demographics involving ageing populations. Perhaps it was those two factors which broke the Phillips Curve.

As to future prospects there are two issues at play. The US Federal Reserve will start next month on an exit road which I remember suggesting for the Bank of England in City-AM some 4 years ago. If you do not want QE to become a permanent feature of the economic landscape you have to start somewhere. The issue for the ECB is getting more complex mostly driven by the fiscal conservatism of Germany which means that a supply crunch is looming as it faces the prospect of running out of German bonds to buy.

Currency Wars

There are two specific dangers here which relate to timing ( during thin summer markets) and the fact that markets hang on every central banking word. Eyes will be on the Euro because it has been strong in 2017 and in particular since mid April when it did not quite touch 93 on its effective ( trade-weighted) index as opposed to the 98.7 the ECB calculated it at on Friday. It has put another squeeze on the poor battered UK Pound £ but of more international seriousness is yet another example of a problem for economics 101 as interest-rate rises should have the US Dollar rising. Of course there is a timing issue as the US Dollar previously rose anticipating this and maybe more, but from the point of Mario Draghi and the ECB there is the fear that cutting the rate of QE further might make the Euro rally even more. Although one might note that in spite of the swings and roundabouts along the way the Euro at 98.7 is not far away from where it all began.

The Bank of Japan is also facing a yen rallying against the US Dollar and this morning it briefly rose into the 108s versus the US Dollar. Whilst it is lower than this time last year the trend seemed to change a few months back and the Yen has been stronger again.


It is hard not to have a wry smile at a group of people who via Forward Guidance and Open Mouth Operations have encouraged markets to hang on their every word now trying to downplay this. If you create junkies then you face the choice between cold turkey or a gradual wind down. Even worse you face the prospect of still feeding addiction number one when a need for number two arises as sooner or later an economic slow down will be along. Or creating fears about low inflation when the “lost decades” of Japan has shown that the world does not in fact end.

If we move onto the concept of a total eclipse then I am jealous of those in the United States today. From Scientific American.

Someone said that it is like suddenly being in some sort of CGI of another world or maybe like a drug-induced hallucination that feels (and is) totally real.

No they have not switched to central banking analysis but if the excellent BBC 4 documentary ”  do we really need the moon?” is any guide we should enjoy solar eclipses whilst we still have them. Meanwhile of course there is Bonnie Tyler.

I don’t know what to do and I’m always in the dark
We’re living in a powder keg and giving off sparks.





8 thoughts on “The Jackson Hole symposium should embace lower inflation

    • Hi DL

      Indeed and much more besides

      “Money, it’s a crime.
      Share it fairly but don’t take a slice of my pie.
      Money, so they say
      Is the root of all evil today.
      But if you ask for a raise it’s no surprise that they’re
      giving none away. ”

      I saw a BBC4 documentary where Roger Waters tried to downplay his songs as the ramblings of an 18 year old boy. Oh no they weren’t ( in my opinion..).

  1. The real reason banks and governments like inflation is because their debts get inflated away. I don’t think they have any real intention of reversing QE but over time they hope it will fade away in significance within the vast debts many governments are running. No wonder they hate it if inflation doesn’t take off.

    In UK we know most of the QE money has resulted in vastly increased asset prices (mainly property) and in propping up zombie companies so not where it was intended to go. We have been fooled into thinking rising property prices are a good thing and the inflation indeces do not properly include property so they got away with it.

    Now most people are skint and up to their eyeballs in debt so any inflation will hurt us badly. Personally I do see inflation in food and bills eg council tax, rail fares etc etc. The people rather than the governmentbank would love a good dose of disinflation but I doubt we will get it.

    • Hi Jan
      In your theme of price rises you may enjoy this which combines the property market and shrinkflation. From the BBC.

      “The UK has seen a sharp rise in homes little bigger than a budget hotel room, according to consumer group Which?.

      The number of newly built micro-homes, which are smaller than 37 sq m – the size of a Tube carriage – rose 40% in the UK last year, the group found.

      They are often cheaper than traditional homes, but Which? warned that buyers could struggle to get a mortgage.

      Industry experts put the growth down to the housing shortage and the difficulties facing first-time buyers.

      Which? found examples of micro-homes of less than 28 sq m – the size of an average Travelodge hotel room – on sale in London for as much as £450,000.
      The smallest apartment it found was in Brent, measuring just 8 sq m – only 1 sq m larger than a prison cell.”

      Makes you think doesn’t it?

    • Hi Chris

      That’s an intriguing point as in essence a central bank wants a type of carry trade when it raises interest-rates to protect a currency and to reduce inflation. It used to be called “hot money” flows. So how do we define a full Carry Trade? I would say when the flows are much too large for the underlying economy and currency which we saw with the Swissy and the Japanese Yen.

      A possible protection for the Mexican Peso is that the market may be too small for the bigger funds to play and it is the wrong way round to borrow in. But if you were long it you have made a profit and picked up what in these times is a lot of interest/yield. Well played to those who have been long especially since January.

      Moving to the UK I think we have seen some of that in the case of for example Chinese investment in Everton and Southampton football clubs.

  2. Great blog as always, Shaun.
    Bank of Canada Governor Stephen Poloz raised the overnight rate by 25 basis points in July just before StatCan announced the June inflation rate had dropped to 1.0%, which is at the lower bound. In July it was up to 1.2% again, which has the Canadian chartered bank economists saying this is all Poloz needs to justify another hike in October. This when the target rate of inflation is 2%! If you simply invented this kind of stuff, no-one would believe you!
    Problems with the conceptual basis for measuring inflation are virtually ignored by the Bank of Canada as is the obvious underestimation of housing price inflation in the CPI. It does talk about the politically driven drop in electricity prices, but that only accounts for about 20 basis points of the 80 basis point difference between the most recent inflation rate and the target.
    The Bank of Canada has never acknowledged that a mistake was made in the 2016 renewal agreement in raising the targeted true rate of inflation by 20 basis points, so that targeting 2% inflation now is equivalent to targeting 2.2% in 2011. Nor has anyone suggested that they would have been better off targeting 1.75% (which David “Get Out of” Dodge, Carney’s mentor, was willing to consider as the target rate in 1993, when he was still with the Department of Finance, although Dodge seems to have forgotten all about it now), or 1.5%.
    If the renewal agreement had moved to a 1.5% target in 2016, the current tightening would look defensible in terms of the inflation targeting framework. As it is, the Bank’s statements simply aren’t serious. Its own outlook survey taken before the hike showed that the markets expect inflation to be lower than two percent over the policy horizon, so its insistence that a hike now was needed to keep inflation from soaring above 2% lacks all credibility. Policy should be committed to a lower inflation target rate, but it isn’t.

  3. “More deeply whilst the initial effect of QE should have some inflationary implications is there something in it such as the support of a zombie business culture that means inflation the fades”

    Nope (with the exception of Japan) , it’s the output gap which you mock the BOE about. It’s an output gap beyond your economics 101 definition though.

    The gap comes from the fact of globally mobile labour but again outside of normal 101 thinking. Yes cheap labour physically moves around the world helping to suppress wages and thus demand in various countries but it is also mobile in the sense that it stays in it’s own country and the work is outsourced from the consumer country to it and the finished product is exported to the consumer country at cheaper prices. The ultimate expression of capitalism on a global scale (get the job done as cheaply as possible and charge the maximum possible) The second part has run against every other capitalist doing the same thing and there’s too many of them to form a price setting oligopoly trade cartel hence the ongoing price wars and cost of global labour arbitrage.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.