The one thing we can be sure of is that the inflation numbers are wrong

Today’s has brought us inflation data with more and indeed much more than its fair share of issues. But let me start by congratulating the BBC on this.

The UK’s inflation rate fell in April to its lowest since August 2016 as the economic fallout of the first month of the lockdown hit prices.

The Consumer Prices Index (CPI) fell to 0.8% from 1.5% in March, the Office for National Statistics (ONS) said.

Falling petrol and diesel prices, plus lower energy bills, were the main drivers pushing inflation lower.

But prices of games and toys rose, which the ONS said may have come as people occupied their time at home.

They have used the CPI inflation measure rather than the already widely ignored CPIH which the propagandists at HM Treasury are pushing our official statisticians to use. Although in something of an irony CPIH was lower this month! Also it would be better to use the much more widely accepted RPI or Retail Prices Index and the BBC has at least noted it.

Inflation as measured by the Retail Prices Index (RPI) – an older measure of inflation which the ONS says is inaccurate, but is widely used in bond markets and for other commercial contracts – dropped to 1.5% from 2.6%.

Yes it is pretty much only the establishment which makes that case about the RPI now as supporters have thinned out a lot. It also has strengths and just as an example does not require Imputed or fantasy Rents for the housing market as it uses actual prices for houses and mortgages.

So as an opener let us welcome the lower inflation numbers which were driven by this.

Petrol prices fell by 10.4 pence per litre between March and April 2020, to stand at 109.0 pence per litre, and
diesel prices fell by 7.8 pence per litre, to stand at 116.0 pence per litre……..which was the result of a 0.2% rise in
the price of electricity and a 3.5% reduction in the price of gas between March and April 2020, compared with price rises of 10.9% and 9.3% for electricity and gas over the same period last year.

Problems. Problems,Problems

Added to the usual list of these was the fact that not only did the Office for National Statistics have to shift to online price collection for obvious reasons which introduces a downwards bias there was also this.

Hi Shaun, the number of price quotes usually collected in store was about 64% of what was collected in February – so yes just over a third. This is for the local collection only.

Let me say thank you to Chris Jenkins for replying so promptly and confirming my calculations. However the reality is that there is a problem and let me highlight with one example.

prices for unavailable seasonal items such as international travel were imputed for April 2020. This imputation was calculated by applying the all-items annual growth rate to the index from April 2019.

Yes you do read that correctly and more than one-third of the index was imputed. In addition to this rather glaring problem there is the issue of the weighting being wrong and I am sure you are all already thinking about the things you have spent more on and others you have spent less on. Officially according to our Deputy National Statistician Jonathan Athow it does not matter much.

A second was to also account for lower consumption of petrol and diesel, which has been falling in price. Reducing the weight given to petrol and diesel gives a figure similar to the official CPI estimate.

Sadly I have learnt through experience that such research is usually driven by a desire to achieve the answer wanted rather than to illuminate things. If we switch to the ordinary experience I was asked this earlier on social media.

Are face masks and hand sanitiser included in the CPI basket? (@AnotherDevGuy)

I have just checked and they are not on the list. This poses a couple of issues as we note both the surge in demand ( with implications for weighting) and the rise in price seen. A couple of area’s may pick things up as for example household cleaners are on the list and judging by their suddenly popularity albeit in a new role lady’s scarves but they are on the margins and probably underweighted.

The New Governor Has A Headache

If we check the inflation remit we see that the new Governor Andrew Bailey will be getting out his quill pen to write to the new Chancellor Rishi Sunak.

If inflation moves away from the target by more than 1 percentage point in either direction, I
shall expect you to send an open letter to me, covering the same considerations set out above
and referring as necessary to the Bank’s latest Monetary Policy Report and forecasts, alongside
the minutes of the following Monetary Policy Committee meeting.

He will of course say he is pumping it up with record low interest-rates and the like. He is unlikely to be challenged much as this morning has brought news of a welcome gift he has given the Chancellor.

Negative Interest-Rates in the UK Klaxon!

For the first time the UK has issued a Gilt (bond) with a negative yield as the 2023 stock has -0.003%. So yes we are being paid to borrow money.

A marginal amount but it establishes a principle which we have seen grow from an acorn to an oak tree elsewhere.

There is trouble ahead

There are serious issues I have raised with the ONS.

How will price movements for UK houses be imputed when there are too few for any proper index? The explanation is not clear at all and poses issues for the numbers produced.

Also this feeds into another issue.

“It should be noted that the methodologies used in our consumer price statistics for many of these measures tend to give smoothed estimates of price change and will therefore change slowly.”

The suspension of the house price index below after today poses big problems for the RPI which uses them and actually as happens so often opens an even bigger can of worms which is smoothing.

In other words we are being given 2019 data in 2020 and this is quite unsatisfactory. So whilst the ONS may consider this a tactical success it is a strategic failure on the issue of timeliness for official statistics. I think all readers of this would like to know more detail on the smoothing process here as to repeat myself it goes against the issue of producing timely and relevant numbers.

Some of you may recall the disaster smoothing had on the with-profits investment industry and once people understand its use in inflation data there will be plenty of issues with it there too. My full piece for those who want a fuller picture is linked to below.


As the media projects lower inflation ahead sadly the picture is seeing ch-ch-changes,

Oil prices rose for a fourth straight session on Tuesday amid signs that producers are cutting
output as promised just as demand picks up, stoked by more countries easing out of curbs
imposed to counter the coronavirus pandemic. Brent crude, climbed 25 cents or 0.7% to
$35.06 a barrel, after earlier touching its highest since April 9. ( 19 May 2020)

That may not feed into the May data but as we move forwards it will. That also highlights something which may be one of the Fake News events of our time which is the negative oil price issue. Yes it did happen but since then we have seen quite a bounce as we are reminded that some issues are complex or in this instance a rigged game.

How much of other price rises the inflation numbers will pick up is open to serious doubt. Some of this is beyond the control of official statistics as they could hardly be expected to know the changes in the patterns for face masks for example. But the numbers will be under recorded right now due to factors like this from the new HDP measure.

Out of stock products have been removed where these are clearly labelled, however, there may be products out of stock that have still been included for some retailers. If the price of these items do not change, this could cause the index to remain static.

What do you think might have happened to prices if something is out of stock?

Meanwhile there is another signal that inflation may be higher ahead.

BoE Deputy Governor Ben Broadbent said it might go below zero around the end of 2020

The reality is of a complex picture of disinflation in some areas and inflation sometimes marked inflation in others.




The Bank of England sets interest-rates for the banks and QE to keep debt costs low

This morning has seen a change to Bank of England practice which is a welcome one. It announced its policy decisions at 7 am rather than the usual midday. Why is that better? It is because it voted last night so cutting the time between voting and announcing the result reduces the risk of it leaking and creating an Early Wire. The previous Governor Mark Carney preferred to have plenty of time to dot his i’s and cross his t’s at the expense of a clear market risk. If it was left to me I would dully go back to the old system where the vote was a mere 45 minutes before the announcement to reduce the risk of it leaking. After all the Bank of England has proved to be a much more leaky vessel than it should be.


We got further confirmation that the Bank of England considers 0.1% to be the Lower Bound for official UK interest-rates.

At its meeting ending on 6 May 2020, the MPC voted unanimously to maintain Bank Rate at 0.1%.

That is in their terms quite a critique of the UK banking system as I note the Norges Bank of Norway has cut to 0% this morning and denied it will cut to negative interest-rates ( we know what that means) and of course the ECB has a deposit rate of -0.5% although to keep that it has had to offer Euro area banks a bung ( TLTRO) at -1%

Next comes an area where action was more likely and as I will explain we did get a hint of some.

The Committee voted by a majority of 7-2
for the Bank of England to continue with the programme of £200 billion of UK government bond and sterling
non-financial investment-grade corporate bond purchases, financed by the issuance of central bank reserves, to
take the total stock of these purchases to £645 billion. Two members preferred to increase the target for the
stock of asset purchases by an additional £100 billion at this meeting.

The two who voted for “More! More! More!” were Jonathan Haskel and Michael Saunders. The latter was calling for higher interest-rates not so long ago so he has established himself as the swing voter who rushes to vote for whatever is right in front of his nose. Anyway I suspect it is moot as I expect them all to sing along with Andrea True Connection in the end.

(More, more, more) how do you like it, how do you like it
(More, more, more) how do you like it, how do you like it

What do they expect?

The opening salvo is both grim and relatively good.

The 2020 Q1 estimate of a fall in GDP of around 3% had been informed by a wide range of high-frequency indicators, as set out in the May Monetary Policy Report.

A factor in that will be that the UK went into its version of lockdown later than many others. But then the hammer falls.

The illustrative scenario in the May Report incorporated a very sharp fall in UK GDP in 2020 H1 and a
substantial increase in unemployment in addition to those workers who were furloughed currently. UK GDP was
expected to fall by around 25% in Q2, and the unemployment rate was expected to rise to around 9%. There were large uncertainty bands around these estimates.

As you can see GDP dived faster than any submarine But fear not as according to the Bank of England it will bounce like Zebedee.

UK GDP in the scenario falls by 14% in 2020 as a whole. Activity picks up materially in the latter part of 2020 and into 2021 after social distancing measures are relaxed, although it does not reach its pre‑Covid level until the second half of 2021 . In 2022, GDP growth is around 3%. Annual household consumption growth follows a similar

Is it rude to point out that it has been some time since we grew by 3% in a year? If so it is perhaps even ruder to point out that it is double the speed limit for economic growth that the Bank of England keeps telling us now exists. I guess they are hoping nobody spots that.

Anyway to be fair they call this an illustrative scenario although they must be aware it will be reported like this.

NEW: UK GDP set for ‘dramatic’ 14% drop in 2020 amid coronavirus shutdown, Bank of England predicts ( @politicshome )

Inflation Problems

In a way this is both simple and complicated. Let us start with the simple.

CPI inflation had declined to 1.5% in March and was likely to fall below 1% in the next few months, in large
part reflecting developments in energy prices. This would require an exchange of letters between the Governor
and the Chancellor of the Exchequer.

So for an inflation targeting central bank ( please stay with me on this one for the moment) things are simple. Should the Governor have to write to the Chancellor he can say he has cut interest-rates to record lows and pumped up the volume of QE. The Chancellor will offer a sigh of relief that the Bank of England is implicitly funding his spending and try to write a letter avoiding mentioning that.

However things are more complex as this sentence hints.

Measurement challenges would temporarily increase the noise in the inflation data, and affect the nature and behaviour of the index relative to a normal period.

It is doing some heavy lifting as I note this from the Office for National Statistics.

There are 92 items in our basket of goods and services that we have identified as unavailable for the April 2020 index (see Annex B), which accounts for 16.3% of the CPIH basket by weight. The list of unavailable items will be reviewed on a monthly basis.

There is their usual obsession with the otherwise widely ignored CPIH, But as you can see there are issues for the targeted measure CPI as well and they will be larger as it does not have imputed rents in it. A rough and ready calculation suggests it will be of the order of 20%. Also a downwards bias will be introduced by the way prices will be checked online which will mean that more expensive places such as corner shops will be excluded.

Also I am not surprised the Bank of England does not think this is material as the absent-minded professor Ben Broadbent is the Deputy Governor is in charge of this area but I do.

The ONS and the joint producers have taken the decision to temporarily suspend the UK House Price Index (HPI) publication from the April 2020 index (due to be released 17 June 2020) until further notice……..The UK HPI is used to calculate several of the owner occupiers’ housing costs components of the RPI. The procedures described in this plan apply to those components of the RPI that are based on the suspended UK HPI data.

Perhaps they will introduce imputed rents via the back door which is a bit sooner than 2030! Also the point below is rather technical but is a theme where things turn out to be different from what we are told ( it is annual) so I will look into it.


Unfortunately, since weights are lagged by two years, we would see no effect until we calculate the 2022 weights1. This means that the current weights are not likely to be reflective of current expenditure and that the 2022 weights are unlikely to be reflective of 2022 expenditure.

That sort of thing popped up on the debate about imputed rents when it turned out that they are (roughly) last year’s rather than the ones for now.


There are three clear issues here. Firstly as we are struggling to even measure inflation the idea of inflation-targeting is pretty much a farce. That poses its own problems for GDP measurement. Such as we have is far from ideal.

The all HDP items index show a stable increase over time, with an increase of 1.1% between Week 1 and Week 7. The index of all food has seen no price change from Week 5 to Week 7, resulting in a 1.2% price increase since Week 1.

As to Bank of England activity let me remind you of a scheme which favours larger businesses as usual.

As of 6 May, the Covid Corporate Financing Facility
(CCFF), for which the Bank was acting as HM Treasury’s agent, had purchased £17.7 billion of commercial
paper from companies who were making a material contribution to the UK economy.

I wonder if Apple and Maersk are on the list like they are for Corporate Bonds?

Within that increase, £81 billion of UK government bonds,
and £2.5 billion of investment-grade corporate bonds, had been purchased over recent weeks.

By the way that means that their running totals have been wrong. As to conventional QE that is plainly targeted at keeping Gilt yields very low ( the fifty-year is 0.37%)

Let me finish by pointing out we have a 0.1% interest-rate because it is all the banks can stand rather than it being good for you,me or indeed the wider business sector. Oh did I mention the banks?

As of 6 May, participants had drawn £11 billion from the TFSME




India faces hard economic times with Gold and Liquor

Early this morning we got news on a topic we have been pursuing for several years now and as has become familiar it showed quite an economic slow down.

At 27.4 in April, the seasonally adjusted IHS Markit India
Manufacturing PMI® fell from 51.8 in March. The latest reading pointed to the sharpest deterioration in business conditions across the sector since data collection began over 15 years ago.

It caught my eye also because it was the lowest of the manufacturing PMI series this morning. Although some care is needed as the decimal point is laughable and the 7 is likely to be unreliable as well. But the theme is clear I think. Of course much of this is deliberate policy.

The decline in operating conditions was partially driven by
an unprecedented contraction in output. Panellists often
attributed lower production to temporary factory closures that were triggered by restrictive measures to limit the spread of COVID-19.

So that deals with supply and here is demand.

Amid widespread business closures, demand conditions were severely hampered in April. New orders fell for the first time in two-and-a-half years and at the sharpest rate in the survey’s history, far outpacing that seen during the global financial crisis.

So there was something of a race between the two and of course external demand was heading south as well.

Total new business received little support from international markets in April, as new export orders tumbled. Following the first reduction since October 2017 during March, foreign sales fell at a quicker rate in the latest survey period. In fact, the rate of decline accelerated to the fastest since the series began over 15 years ago.

The plunges above sadly have had an inevitable impact on the labour market as well.

Deteriorating demand conditions saw manufacturers drastically cut back staff numbers in April. The reduction in employment was the quickest in the survey’s history. There was a similar trend in purchasing activity, with firms cutting input buying at a record pace.

Background and Context

We learn from noting what had already been happening in India.

Real GDP or Gross Domestic Product (GDP) at Constant (2011-12) Prices in the year 2019-20 is estimated to attain a level of ₹ 146.84 lakh crore, as against the First Revised Estimate of GDP for the year 2018-19 of ₹ 139.81 lakh crore, released on 31st January 2020. The growth in GDP during 2019-20 is estimated at 5.0 percent as compared to 6.1 percent in 2018-19. ( MOSPI )

Things had been slip-sliding away since the recent peak of 7.7% back around the opening of 2018. So without the Covid-19 pandemic we would have seen falls below 5%. In response to that the Reserve Bank of India had been cutting interest-rates. I would have in the past have typed slashed but for these times four cuts of 0.25% and one of 0.35% in 2019 do not qualify for such a description.

Before that was the Demonetisation episode of 2016 where the Indian government created a cash crunch but withdrawing 500 and 1000 Rupee notes. This was ostensibly to reduce financial crime but also created quite a bit of hardship. Later as so much of the money returned to the system it transpired that the gains were much smaller than the hardship created.

For newer readers you can find more details on these issues in my back catalogue on here.

Looking Ahead

On April 17th the Governor of the RBI tried his best to be upbeat.

 India is among the handful of countries that is projected to cling on tenuously to positive growth (at 1.9 per cent). In fact, this is the highest growth rate among the G 20 economies………For 2021, the IMF projects sizable V-shaped recoveries: close to 9 percentage points for global GDP. India is expected to post a sharp turnaround and resume its pre-COVID pre-slowdown trajectory by growing at 7.4 per cent in 2021-22.

He was of course running a risk by listening to the IMF and ignoring what the trade date was already signalling.

In the external sector, the contraction in exports in March 2020 at (-) 34.6 per cent has turned out to be much more severe than during the global financial crisis. Barring iron ore, all exporting sectors showed a decline in outbound shipments. Merchandise imports also fell by 28.7 per cent in March across the board, barring transport equipment.

On Friday the Business Standard was reporting on expectations much more in line with the trade data.

While acknowledging some downside risks from a lockdown extension in urban areas beyond 6 June, we maintain our GDP projection of 0% GDP growth for CY2020, and 0.8% for FY21,” wrote Rahul Bajoria of Barclaysin a report.

If we stay with that source then we get another hint from what caused the drop in share prices for car manufacturers today.

Shares of automobile companies declined on Monday as many firms reported nil sales in the month of April after a nationwide lockdown kept factories and showrooms shut.

At 10:11 AM, the Nifty Auto index was down 7.33 per cent as compared to 5.1 per cent decline in the Nifty50 index.

Monetary Policy

You will not be surprised to learn that the RBI acted again as the policy Repo Rate is now 4.4% and the Governor gave a summary of other actions in the speech referred to above.

 In my statement of March 27, I had indicated that together with the measures announced on March 27, the RBI’s liquidity injection was about 3.2 per cent of GDP since the February 2020 MPC meeting.

Those who follow the ECB will note he announced something rather familiar.

 it has been decided to conduct Targeted Long-Term Repo Operations (TLTRO) 2.0 at the policy repo rate for tenors up to three years for a total amount of up to ₹ 50,000 crores, to begin with, in tranches of appropriate sizes.

Oh and as we are looking at India by ECB I am referring to the central bank and not cricket.

If we switch to the money supply data we see that in the fortnight to April 10th the heat was on as M3 grew by 1.2% raising the annual rate of growth to 10.8%. But there was a counterpoint to this as there were heavy withdrawals of demand deposits with fell by 7.8% in a fortnight. We have looked before at the problems of the Indian banking sector and maybe minds were focused on this as the pandemic hit.


I am switching to this due to its importance in India and gold bugs there may be having a party as they read the Business Standard.

The sharp rise in the prices of gold —which almost doubled over the past one year —has been the only good for investors at a time when both equities and debt returns have been under pressure.

That price may be a driving factor in this.

India’s demand declined by a staggering 36 per cent during the January-March quarter, to hit the lowest quarterly figure in 11 years due to nationwide that has forced the closure of wholesale and retail showrooms.


The situation is made worse by the fact that India starts this phase as a poor country. Things are difficult to organise in such a large country as the opening of the Liquor Shops today has shown.

Long queues witnessed outside #LiquorShops in several parts of Chhattisgarh, people defy social distancing norms at many places: Officials ( Press Trust of India)

Also a problem was around before we reached the pandemic phase.

Armies of locusts swarming across continents pose a “severe risk” to India’s agriculture this year, the UN has warned, prompting the authorities to step up vigil, deploy drones to detect their movement and hold talks with Pakistan, the most likely gateway for an invasion by the insects, on ways to minimise the damage. ( Hindustan Times from March)

Now let me give you another Indian spin. The gold issue has several other impacts. No doubt the RBI is calculating the wealth effects from the price gain. However I think of it is another form of money supply as to some extent it has that function there. Also part of the gain is due to another decline in the Rupee which is at 75.6 to the US Dollar. Regular readers will recall it was a symbolic issue when it went through 70. This creates a backwash as it will make people turn to gold even more.

Let me finish with some good news which is that the much lower oil price will be welcome in energy dependent India.






The Tokyo Whale is hungry again!

A new week has started with something which we will find awfully familiar although not everyone will as I will explain. But first let me give you something of a counterpoint and indeed irony to the news.

SINGAPORE (Reuters) – Oil prices fell on Monday on signs that worldwide oil storage is filling rapidly, raising concerns that production cuts will not come fast enough to fully offset the collapse in demand from the coronavirus pandemic.

U.S. oil futures led losses, falling by more than $2 a barrel on fears that storage at Cushing, Oklahoma, could reach full capacity soon. U.S. crude inventories rose to 518.6 million barrels in the week to April 17, near an all-time record of 535 million barrels set in 2017. [EIA/S]

In ordinary times this would be a case of let’s get this party started in Japan. This is because it is a large energy importer and thus it would be getting both and balance of payments and manufacturing boost. In itself it would have been extremely welcome because you may recall that its economy had seen a reverse before the present pandemic.

The contraction of Japan’s 4Q 2019 GDP was worse than expected, coming in at -1.8% q/q (- 7.1% annualized rate) versus the first estimate of -1.6% q/q (-6.3% annualized rate) as the contraction in business spending was deeper than what was first reported in February, ( FXStreet )

So the land of the rising sun or Nihon was already in what Taylor Swift would call “trouble, trouble,trouble”, The raising of the Consumption Tax ( what we call VAT) had in an unfortunate coincidence combined with the 2019 trade war. The former was rather like 2014 as we mull all the promises it would not be. Also let me give you a real undercut, Japan acted to improve its fiscal position just in time for it to be considered much less important.

The Tokyo Whale

Let me open with something which for newer readers may come as a shock.

The Bank will actively purchase ETFs and J-REITs for the time being so that their amounts outstanding will increase at annual paces with the upper limit of about 12 trillion
yen and about 180 billion yen, respectively.

Yes the Bank of Japan is buying equities and has just suggested it will double its annual purchases of them. Those who follow me will be aware it has been buying more as for example it is now buying around 120 billion Yen on the days it buys ( nine so far in April) as opposed to the previous 70 billion or so having bought over 200 billion when equity markets were hit hard. The detail is that it buys via Exchange Traded Funds ( ETFs) to avoid the embarrassment of having to vote at AGMs and the like.

Oh and in another familiar theme upper limits are not always upper limits.

With a view to lowering risk premia of asset prices in an appropriate manner, the Bank may increase or decrease the amount of purchases depending on market conditions.

Also the ,you may note that the limit for commercial property purchases has been doubled too. I do sometimes wonder why they bother with the commercial property buys although now we have an extra factor which is that in so many places around the world commercial property looks under a lot of pressure. For example if there is more working from home as seems likely.

The Precious! The Precious!

Japan has an official interest-rate of -0.1% but not for quite everybody.

(3) apply a positive interest rate of 0.1 percent to the outstanding balances of current accounts held by financial institutions at the Bank that correspond to the amounts outstanding of loans provided through this

For whom?

Twice as much as the amounts outstanding of the loans will continue to be included in the Macro Add-on Balances in current accounts held by financial institutions at the Bank.

Yes the banks and as you can see they will be a “double-bubble” gain from lending under the new Bank of Japan scheme. I wonder if the Japanese taxpayer has noted that extension of operations to the private debt sphere as well?

expand the range of eligible collateral to private debt in general, including household debt (from about 8
trillion yen to about 23 trillion yen as of end-March 2020),

Corporate Bonds and Commercial Paper

I have highlighted another risk being taken on behalf of the Japanese taxpayer.

The Bank decided, by a unanimous vote, to significantly increase the maximum amount
of additional purchases of CP and corporate bonds and conduct purchases with the upper
limit of the amount outstanding of about 20 trillion yen in total. In addition, the maximum amounts outstanding of a single issuer’s CP and corporate bonds to be purchased will be raised substantially.

Should there be a default there might be trouble.

The Bank will increase the maximum share of the Bank’s holdings of CP and corporate
bonds within the total amount outstanding of issuance by a single issuer from the current
25 percent to 50 percent and 30 percent, respectively.

Surely at any sign of trouble everyone will simply sell to the Bank of Japan which will then be a buyer of more like first than last resort.

Who will provide the grand design?
What is yours and what is mine?
‘Cause there is no more new frontier
We have got to make it here ( The Eagles )

Japanese Government Bonds

This is something we have been expecting and just as a reminder the previous target was between 70 and 80 trillion Yen a year.

The Bank will purchase a necessary amount of JGBs without setting an upper limit so that 10-year JGB yields will remain at around zero percent.

It is hard to get too worked up about that as we have been expecting it to be along. In theory the plan remains the same, although there is a slight shuffle as in the past they have indicated a range between 0% and -0.1%.


The first issue is that the Japanese economy is doing extremely badly. It already had problems and the PMI business survey suggested a GDP decline of the order of 10%. With its “face” culture that is likely to be an underestimate. In response there has been this.

The Japanese government has outlined details of its plan to hand out 100,000 yen, or more than 900 dollars, in cash to all residents as part of its economic response to the coronavirus outbreak.

The cash handouts will go to every person listed on Japan’s Basic Resident Register, regardless of nationality. ( NHK)

They tried something like this back in the 90s and I remember calculating it as £142 as compared to £752 this time. As to adjusting for inflation well in the Lost Decade era Japan has seen so little of that.

So we see that the Bank of Japan is underwriting the spending plans of the Japanese government which of course is the same Japanese government which underwrites the bond buying of the Bank of Japan! It seems set to make sure that the Japanese government can borrow for free in terms of yield as I note this.

In case of a rapid increase in the yields, the Bank will purchase JGBs promptly and appropriately.

In fact just like a parent speaking to a child you can indulge in the JGB market but only if you play nicely.

While doing so, the yields may move upward and downward to some extent mainly depending on developments in economic activity and prices.

You will find many cheering “Yield Curve Control” although more than a few of those will be hoping that there claims that the Bank of Japan will need to intervene less have been forgotten. Actually there have been phases where it has kept yields up rather than down.

In the future will the Bank of Japan own everything?

The Express

I have done some interviews for it recently and here is one on the benefits of lower oil prices

Podcast on central bank equity purchases


How many US Dollars are enough?

The issue of what you might call King Dollar is not one which gets the coverage it deserves. Instead the media coverage tends to highlight claims that its period of rule is on the way out with China demanding more use of the Yuan or Russia the rouble and so on. Or we get the various proclamations that we need some sort of world currency which to my mind are more like pie in the sky thinking than blue sky thinking. When we looked at the IMF on the I noted the suggestions that its SDRs ( Special Drawing Rights) could become the world currency but there are all sorts of flaws there.

So far SDR 204.2 billion (equivalent to about US$281 billion) have been allocated to members, including SDR 182.6 billion allocated in 2009 in the wake of the global financial crisis. The value of the SDR is based on a basket of five currencies—the U.S. dollar, the euro, the Chinese renminbi, the Japanese yen, and the British pound sterling.

If we look at the issues of the Euro can anybody even imagine trying to apply a fixed exchange-rate to the whole world? We would have all sorts of individual booms and busts before we even get to the idea of a joint interest-rate. That is before we get to the track record of the IMF after all can you imagine trying to get its currency accepted in Argentina and Greece.

Supply of US Dollars

It is not as if the taps have been turned off.

The numbers: The Federal Reserve’s balance sheet expanded to a record $6.6 trillion in the week ended April 22, an increase of $205 billion from the prior week, the central bank said Thursday.

What happened: Holdings of U.S. Treasurys rose by $120.5 billion to $3.9 trillion. The central bank has been purchasing Treasurys at a rapid pace in a bid to restore functioning to this key U.S. financial market. The central bank’s holdings of mortgage-backed securities rose $54 billion to $1.6 trillion. ( MarketWatch)

As you can see the balance sheet is expanding at a rapid rate and let me just add that if you really think the US Federal Reserve is buying US Treasury Bonds to “restore functioning to this key U.S. financial market.” I have a London bridge to sell you. The truth is that it is implicitly financing the US Budget Deficit as we note that the ten-year yield is a mere 0.58% and the long bond is a mere 1.17% in spite of surging expenditure.

We can now switch to the money supply for further insight because we have noted in the past that QE does not go straight into the numbers as one might assume. Looking at the ECB data has shown that what should be clear cut narrow money creation seems to sometimes go missing in action. However we are seeing quite a surge in the money supply as we note that the narrow money measure ( M1) only went through US $4 trillion as March began but by the 13th of April was already US $4.73 trillion.

I’ll be back in the high life again
All the doors I closed one time will open up again
I’ll be back in the high life again
All the eyes that watched me once will smile and take me in ( Steve Winwood )

Putting that another way the annual rate of increase is 11.6% the annualised six-monthly one is 15.7% and the quarterly one is 23.4%. You can see which way that is going and I would point out that only a month or so ago 11.6% would be considered very high.

Peering into the detail we see that the surge in narrow money is mostly deposits, There has been a rise in cold hard cash, dirty money as Stevie V would say but deposits have risen by around US $700 billion over the past couple of months.

Sending Dollars To Friends Abroad

This a subject I have covered throughout the credit crunch and NPR seem to have caught up with.

As the global economy shuts down, the U.S. Federal Reserve has begun sending billions of dollars to central banks all over the world. Last month, it opened up 14 “swap lines” to nations such as Australia, Japan, Mexico, and Norway. A “swap line” is like an emergency pipeline of dollars to countries that need them. The dollars are “swapped,” i.e., traded for the other country’s currency.

The numbers here have ballooned and are the missing link so to speak in the balance sheet data above. As of last night some US $432.3 billion have been supplied to foreign central banks. I will let that sink in and then point out that it means banks in those countries or regions either cannot get US Dollars at all or can only get them at an interest-rate which challenges their solvency.

As to the demand then we always expected it to be mainly from the following too although not always in this order. Bank of Japan US $215 billion and the ECB $142 billion. Particularly troubling from the Japanese point of view is that as well as being the leader of the pack they are needing ever more. When we note that the Bank of England has only asked for US $27.3 billion which is low when you look at the size of the UK’s banks we see the Bank of Japan needed another US $19 billion overnight.

One factor of note is that the Norges Bank requested some US $3.6 billion for 84 days yesterday. So the heat is on for at least one Norwegian bank.

Also the extension of the swaps to Emerging Markets as requested by @trinhonomics has been used. The Bank of Korea has taken US $16.6 billion, the Bank of Mexico some US $6.6 billion and the Monetary Authority of Singapore some US $5.9 billion.

Exchange Rate

In spite of the balance sheet rises and the effort to become in effect the world’s central bank by supplying US Dollars the exchange rate remains firm. We can look at it in terms of the broad index being 123.2 as opposed to the 114.7 it ended 2019 or simply that it was set at 100 in 2006.


There are plenty of influences here but one thing we can be sure of is that the US Dollar is in demand. Let me give you some examples.

Kenya shilling hits a new all-time low of 107.6500 against the US dollar according to data from @business


Rupee falls to all-time low of 76.87 against US dollar in early trade ( Press Trust of India from Wednesday)


At the start of the year, $1 bought you 4.00 Brazilian reals. It now buys you 5.53 reais. That’s a 38% rise for the dollar (27% fall for the real) in less than four months. ( @ReutersJamie )

We have looked at India before and back then going through 70 seemed significant. As to Kenya an interest-rate of 7.25% is not helping much is it? Then we have Brazil showing how the Dollar has impacted South America.

So economics 101 is having another bad phase because a massively increased supply is not pushing the price down. In come respects it may even be creating more demand because if you know there is a ready supply then you may then use it more. Ouch! After all the much lower oil price should be reducing the demand for US Dollars and indeed the negative price such as it applied should be depth-charging it.

Once I built a tower up to the sun
Brick and rivet and lime
Once I built a tower, now it’s done
Brother, can you spare a dime? ( Bing Crosby )


How much extra will the UK government borrow?

A feature of our economic life going forwards will be much higher levels of national debts. This is being driven by much higher levels of government spending which will lead to a surge in fiscal deficits. That is before we even get to lower tax receipts a hint of which has been provided by Markit with its PMI reports this morning.

Simple historical comparisons of the PMI with GDP indicate that the April survey reading is consistent with GDP falling at a quarterly rate of approximately 7%. The actual decline in GDP could be even greater, in part because the PMI excludes the vast majority of the self-employed and the retail sector, which have been especially hard-hit by
the COVID-19 containment measures

I think you can see for yourselves what that will do to tax receipts and that will add to the falls in revenue from the oil market. After all how do you tax a negative price? As an aside Markit do not seem to have noticed that the economists they survey are wrong pretty much every month. They seem to have to learn that every month.

The UK in March

Whilst the world has moved on we can see that the UK government was already spending more before the virus pandemic fully arrived,

Borrowing (public sector net borrowing excluding public sector banks, PSNB ex) in March 2020 was £3.1 billion, £3.9 billion more than in March 2019; the highest borrowing in any March since 2016.

A further push was given to an existing trend.

Borrowing in the latest full financial year was £48.7 billion, £9.3 billion more than in the previous financial year.

Because of the situation we find ourselves in let us in this instance peer into the single month data for March.

In March 2020, central government receipts fell by 0.7% compared with March 2019 to £67.2 billion, including £47.5 billion in tax revenue.

That is a change and the actual situation is likely to be worse due to the way the numbers are collected.

These figures are subject to some uncertainty, as the accrued measures of both Value Added Tax (VAT) and Corporation Tax contain some forecast cash receipts data and are liable to revision when actual cash receipts data are received.

By contrast spending soared.

In March 2020, central government spent £72.6 billion, an increase of 11.2% on March 2019.

Also one big new scheme is not yet included.

We have not yet included central government expenditure associated with the coronavirus job retention scheme, some of which is expected to relate to March 2020.

Tucked away in the detail was quite a shift in the structure of the UK public-sector.

In March 2020, central government transferred £13.6 billion to local government in the form of a current grant. This was £4.2 billion more than in March 2019, is mainly to fund additional support because of the COVID-19 pandemic, and represents the highest March transfer on record.

There was also a rise in social benefits from £8.2 billion to £9.2 billion in another signal of a slowing economy.

One warning I would make is that Stamp Duty receipts at £1 billion are supposed to be the same as March 2019, does anyway believe that?

Looking Ahead

This morning also brought some strong hints as to what the UK government thinks.

The UK Debt Management Office (DMO) is today publishing a revision to its 2020-21 financing remit covering the period May to July 2020. In line with the revision to the DMO’s financing remit announced by HM Treasury today, the DMO is planning to raise £180 billion during the May to July 2020 (inclusive) period, exclusively through issuance of conventional and index-linked gilts.

They are hoping that it will prove to be one higher burst of borrowing.

In order to meet the immediate financing needs resulting from the government’s response to COVID-19, it is expected that a significantly higher proportion of total gilt
sales in 2020-21 will take place in the first four months of the financial year (April to July 2020).

If we look back we can see that they planned to issue some £156 billion in the whole financial year previously whereas now we plan to issue some £225 billion by the end of July. This is because we are already issuing some £45 billion this month.

We can add to this flashes of examples of where some of that money will be spent. Here is the Department of Work and Pensions or DWP from yesterday.

Around 1.8 million new benefits claims have been made since mid-March – over 1.5 million for #UniversalCredit

Also the amounts are now higher.

We’ve increased #UniversalCredit, making people up to £1,040 better off a year and are doing all we can to make it as straightforward as possible for people to claim a benefit, easing some of the worry that many are facing right now:

National Debt

As we will not be seeing numbers this low again and we need some sort of benchmark here we go.

At the end of March 2020, the amount of money owed by the public sector to the private sector stood at approximately £1.8 trillion (or £1,804.0 billion), which equates to 79.7% of gross domestic product (GDP). Though debt has increased by £30.5 billion on March 2019, the ratio of debt to GDP has decreased by 1.0 percentage point, as UK GDP has grown at a faster rate than debt over this period.

As you can see the increase in debt over the past year will be happening each month now and with GDP falling the ratio will sing along with Fat Larry’s Band.

Oh zoom, you chased the day away
High noon, the moon and stars came out to play
Then my whole wide world went zoom
(High as a rainbow as we went flyin’ by)


We are seeing fiscal policy being pretty much dully deployed. If we consider this from economic theory we are seeing the government attempting to step in and replace private sector spending declines. That means not only will the deficit balloon but the number we compare it too ( GDP) will drop substantially as well. We should avoid too much panic on the initial numbers as the real issue going forwards will be the long-term level of economic activity we can maintain which we will only find out in dribs and drabs. One example has been announced this morning as the construction company Taylor Wimpey has announced it will restart work in early May.

Next comes the issue of spurious accuracy which has two factors. There are issues with the public finances data at the best of times but right now they are there in spades. To be fair to our official statisticians they have made the latter point. So messages like this from the Resolution Foundation are pie in the sky.

But the Government’s financing needs could reach as high as £500bn if the lockdown last for six months, or £750bn if it last for 12 months.

We struggle to look three months ahead and a year well it could be anything.

One thing we should welcome is that the UK continues to be able to borrow cheaply. Yesterday £6.8 billion of some 2024 and 2027 Gilts and had to pay 0.12% and 0.16% respectively. So in real terms we could sing along with Stevie Nicks.

What’s cheaper than free?
You and me

That brings me to the other side of this particular balance sheet which is the rate at which the Bank of England is buying Gilts to implicitly finance all of this. By the end of today it will be another £13.5 billion for this week alone. I have given my views on this many times so let me hand you over to the view of Gertjan Vlieghe of the Bank of England from earlier.

I propose that these types of discussions about monetary financing definitions are not useful. One person
might say we have never done monetary finance, another might say we are always doing monetary finance,
and in some sense both are correct.

Nobody seems to have told him about the spell when UK inflation want above 5% post the initial burst of QE.

 Instead, the post-crisis recovery was generally characterised by inflation being too weak, rather
than too strong.

Anyway I dread to think what The Sun would do if it got hold of this bit.

If we were the central bank of the Weimar Republic or Zimbabwe, the mechanical transactions on our
balance sheet would be similar to what is actually happening in the UK right now

The Investing Channel



Do we know where we are going in terms of inflation and house prices?

The credit crunch has posed lots of questions for economic statistics but the Covid-19 epidemic is proving an even harsher episode. Let me illustrate with an example from my home country the UK this morning.

The all items CPI annual rate is 1.5%, down from 1.7% in February…….The all items CPI is 108.6, unchanged from last month.

So the March figures as we had been expecting exhibited signs of a a downwards trend. But in terms of an economic signal one of the features required is timeliness and through no fault of those compiling these numbers the world has changed in the meantime. But we do learn some things as we note this.

The CPI all goods index annual rate is 0.6%, down from 1.0% last month…..The CPI all goods index is 105.7, down from 105.8 in February.

The existing world economic slow down was providing disinflationary pressure for goods and we are also able to note that domestic inflationary pressure was higher.

The CPI all services index annual rate is 2.5%, unchanged from last month.

So if it is not too painful to use a football analogy at a time like this the inflation story was one of two halves.

Although as ever the picture is complex as I note this.

The all items RPI annual rate is 2.6%, up from 2.5% last month.

Not only has the RPI risen but the gap between it and CPI is back up to 1.1%. Of this some 0.4% relates to the housing market and the way that CPI has somehow managed to forget that owner occupied housing exists for around two decades now. Some episode of amnesia that! Also in a rather curious development the RPI had been lower due to different weighting of products ( partly due to CPI omitting owner-occupied housing) which pretty much washed out this month giving us a 0.3% shift on the month.

Of course the RPI is unpopular with the UK establishment because it gives higher numbers and in truth is much more trusted by the wider population for that reason.

But let me give you an irony for my work from a different release.

UK average house prices increased by 1.1% over the year to February 2020, down from 1.5% in January 2020.

I have argued house prices should be in consumer inflation measures as they are in the RPI albeit via a depreciation system. But we are about to see them fall and if we had trade going on I would be expecting some large falls. Apologies to the central bankers who read my blog if I have just made your heart race. Via this factor we could see the RPI go negative again like it did in 2009 although of course the mortgage rate cuts which also helped back then are pretty much maxxed out now.

If we switch to the widely ignored measure that HM Treasury is so desperately pushing we will see changes here as well.

Private rental prices paid by tenants in the UK rose by 1.4% in the 12 months to March 2020, unchanged since February 2020…..Private rental prices grew by 1.4% in England, 1.2% in Wales and by 0.6% in Scotland in the 12 months to March 2020…..London private rental prices rose by 1.2% in the 12 months to March 2020.

Rises in rents are from the past. I have been told of examples of rents being cut to keep tenants. Of course that is only anecdotal evidence but if we look at the timeliness issue at a time like this it is all we have. Returning to the conceptual issue the whole CPIH and Imputed Rents effort may yet implode as we mull this announcement.


The comparison of private rental measures between the Office for National Statistics and private sector data will be published in the Index of Private Housing Rental Prices bulletin released on 22 April 2020.

Oh well! As Fleetwood Mac would say.

Oil Prices

We can look at a clear disinflationary trend via the inflation data and to be fair our official statisticians are awake.

U.S. crude oil futures turned negative for the first time in history, falling to minus $37.63 a
barrel as traders sold heavily because of rapidly filling storage space at a key delivery point.
Brent crude, the international benchmark, also slumped, but that contract is not as weak
because more storage is available worldwide. The May U.S. WTI contract fell to settle at a
discount of $37.63 a barrel after touching an all-time low of -$40.32 a barrel. Brent was down
to $25.57 a barrel. ( 19 April 2020)

Actually Brent Crude futures for June are now US $18 so more is on its way than they thought but it is a fast moving situation. If we look at diesel prices we see that falls were already being noted as per litre prices had gone £1.33, £1.28 and £1.24 so far this year. As of Monday that was £1.16 which of course is well before the recent plunge in oil prices. This feeds in to the inflation data in two ways.

A 1 pence change on average in the cost of a litre of motor fuel contributes approximately 0.02 percentage points to the 1-month change in the CPIH.

Also in another way because the annual comparison will be affected by this.

When considering the price of petrol between March and April 2020, it may be useful to note
that the average price of petrol rose by 3.8 pence per litre between March and April 2019, to
stand at 124.1 pence per litre as measured in the CPIH.

If we switch to the producer price series we see that the Russo/Saudi oil price turf war was already having an impact.

The annual rate of inflation for materials and fuels purchased by manufacturers (input prices) fell by 2.9% in March 2020, down from negative 0.2% in February 2020. This is the lowest the rate has been since October 2019 and the sixth time in the last eight months that the rate has been negative.

The monthly rate for materials and fuels purchased was negative 3.6% in March 2020, down from negative 0.9% in February 2020. This is the lowest the rate has been since January 2015.

Roughly they will be recording about half the fall we are seeing now.


These times are providing lots of challenges for economic statistics. For example if we stay with oil above then it is welcome that consumers will see lower prices but it is also true we are using less of it so the weights are wrong ( too high). As to this next bit I hardly know where to start.

Air fares have shown variable movements in April which can depend on the position of Easter.

I could of course simply look at the skies over Battersea which are rather empty these days. I could go on by looking at the way foreign holidays are in the RPI and so on. There will of course be elements which are booming for example off-licence alcohol sales. DIY is booming if the tweet I received yesterday saying paint for garden fences had sold out is any guide. So you get the drift.

Returning to other issues the UK remains prone to inflation as this suggests.

“It’s right that retailers charge a fair price for fuel that reflects the price of the raw product, and in theory petrol prices could fall below £1 per litre if the lower wholesale costs were reflected at the pumps – but at the same time people are driving very few miles so they’re selling vastly lower quantities of petrol and diesel at the moment. This means many will be at pains to trim their prices any further.” ( RAC)

We learnt last week that some areas are seeing a fair bit of it as the new HDP ( Higher Demand Products) inflation measure recorded 4.4% in just 4 weeks.

So there are plenty of challenges. Let me give you an example from house prices where volumes will be so low can we calculate an index at all? Regular readers may recall I have pointed this out when wild swings have been recorded in Kensington and Chelsea but based on only 2 sales that month. What could go wrong?

Also we are in strange times. After all someone maybe have borrowed at negative interest-rates this week to buy oil at negative prices and then maybe lost money. If so let us hope they get some solace from some glam-rock from the 70s which is rather sweet.

Does anyone know the way?
Did we hear someone say
“We just haven’t got a clue what to do!”
Does anyone know the way?
There’s got to be a way
To Block Buster!



What do negative oil prices tell us?

Yesterday brought a new development in the word of negativity. We regularly look at negative interest-rates and bond yields here and a couple of years ago or so noted negative prices for gas in the Permian Basin.More recently we have had to come to terms with negative economic growth rates. But then there was something new to see. From the BBC.

The price of US oil has turned negative for the first time in history.

That means oil producers are paying buyers to take the commodity off their hands over fears that storage capacity could run out in May.

Demand for oil has all but dried up as lockdowns across the world have kept people inside.

As a result, oil firms have resorted to renting tankers to store the surplus supply and that has forced the price of US oil into negative territory.

The price of a barrel of West Texas Intermediate (WTI), the benchmark for US oil, fell as low as minus $37.63 a barrel.

What has happened here?

The BBC does get some bits right bit also some wrong so let us start with the correct bits. The oil price has been under pressure due to lower demand as the tweet below highlights.

Coronavirus has wiped out more than 90% of international flights ( @ZSchneeweiss )

Some were pointing out that they had filled up their cars ahead of the lockdowns only not to drive anywhere giving us a form of storage for these times which is in car petrol or diesel tanks! But the crucial point was that in most cases ( like me) they have not driven anywhere. I am sure you can think of other examples.

Missing from the BBC piece is that in a type of turf war Saudi Arabia and Russia decided to sing along with Elvis Costello on the 8th of March.

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

I still remember the shock of that Sunday night into Monday morning when the oil price fell to US $30. It seemed a big deal at the time and was but the increased supply in an example of hubris or accident or both flooded into a collapse in demand.

There is another factor in play so let us return to the BBC on the 12th of this month.

The initial details of the deal, outlined by Opec+ on Thursday, would have seen the group and its allies cutting 10 million barrels a day or 10% of global supply from 1 May.

This U-Turn was trumpeted at the time by the BBC who rather curiously were for once in concert with The Donald.

The big Oil Deal with OPEC Plus is done. This will save hundreds of thousands of energy jobs in the United States. I would like to thank and congratulate President Putin of Russia and King Salman of Saudi Arabia. I just spoke to them from the Oval Office. Great deal for all!

How wrong can you be?

The next factor is that the cuts do not start until May 1st and that matters because the May future ends this week. Many futures contracts are like that and wither expire in the month before or roll over to a later month in the month before. So May is April and confusingly expires before the output cuts in er May. Please do not shoot the messenger.

Next returning to the original BBC article they have made a mistake.

As a result, oil firms have resorted to renting tankers to store the surplus supply

The problem with WTI is that it is a land locked contract and so they cannot do that. By contrast Brent is a sea bourne contract and thus is being stored in oil tankers which are available for obvious reasons. Here is from a few days ago.

As of April 16, data provided by VesselsValue shows that of the 802 VLCCs on the water 60 are now being used as floating storage. Suexmaxes come in at 37 of the 566 live vessels while crude Aframaxes number 35 out of 694.

So Brent Crude dodged a bullet for now anyway because there is somewhere to store it whereas there are obvious issues for landlocked contracts in using supertankers.

So pressure came on the WTI contract and specifically the May one as it expires before the output cuts and there is another issue tucked away in its definition.


You have to take some of the black stuff whereas for Brent you can simply settle in cash. So as the May WTI contract came to its end it found a lot of people long oil suddenly facing up to the fact that they were being squeezed and even worse that anyone they might try to deal with knew it. Thus the price fell. Then it got added to by volumes being low and I am sure that meant that some gave it a nudge or “low ticked” it.

Let me explain that. If you have a large position say short 50,000 oil futures and you can move a price by selling 10 then you might be willing to sell that 10 for -$10. In itself it is crazy but should the price of the 50,000 move only marginally you can sing along with Hot Chocolate.

So you win again, you win again

Have I seen people do this? Yes.

As you can see there were quite a lot of factors in play and context is needed because the June futures contract was at US $22 or so and trading actively all day. There were also elements of confusion because it turned out there were some places you could store some WTI crude so perhaps in the panic some brains got a little frazzled.In fact it became such a mess I could see some of the trades being busted. The main factor against that is that it would be very embarrassing so probably will not happen.


Let me point out a consequence I tweeted yesterday.

The contango in the oil price may trade like an option. It will be interesting to see if the June future ( $22.84) is pulled down to the spot price ( $11) or whether there will be more of a merger over the next month…

I was already thinking that the June WTI would get that sinking feeling as May faded from view. That was based on two factors. Firstly valuing the gap between it and spot as an option and secondly thinking of spot being an anchor it will be pulled down too. With the June WTI future at US $12.82 as I type this we see yet another example of financial life being on speed.

If we now look at the economic consequences I am one of the few who welcome lower oil prices and their impact on inflation. This will help workers and consumers in terms of real wages in what are going to be hard times. There are a couple of nuances to this. Let me start with the fact that as we are using less of it the gains are reduced. The second is that there is also a switch from producers to consumers as oil producers will be hit hard. In fact there is an irony here because this is one of the causes of where we are which is the Saudi/Russian attempt  to get the oil price below the break even for US shale oil wildcatters.

Next comes a consequence via financial markets which is that some funds and banks must be in trouble from this. Before this latest phase we were seeing stories like this.

SINGAPORE (Reuters) – Singapore oil trader Hin Leong Trading (Pte) Ltd, which has begun talks with lenders to extend its credit facilities, owes $3.85 billion to 23 banks, two industry sources said on Thursday.

Now will be worse with the only saving grace being that volumes were low. Of course that may yet change with the June future falling today.

What is next? Perhaps we could see QE for oil from the US Federal Reserve…..

Let me finish with some humour from The Guardian back in December 2013.

A former British Petroleum (BP) geologist has warned that the age of cheap oil is long gone, bringing with it the danger of “continuous recession” and increased risk of conflict and hunger.




We are facing both inflation and disinflation at once

Before we even get to the issue of inflation data we have been provided an international perspective from China Statistics.

According to the preliminary estimates, the gross domestic product (GDP) of China was 20,650.4 billion yuan in the first quarter of 2020, a year-on-year decrease of 6.8 percent at comparable prices.

This provides several perspectives. Firstly there is clear deflation there and as this gets confused let me be clear that it is a fall in aggregate demand and whether you believe the China data or not there has clearly been a large fall. That is likely to have disinflationary influences but is not necessary the same thing as many assume.

After all China has had an area where the heat is on as Glenn Frey would say for some time.

pork up by 122.5 percent, specifically, its prices went up by 116.4 percent in March, 18.8 percentage points lower than February.

This contributed to this.

Grouped by commodity categories, prices for food, tobacco and alcohol went up by 14.9 percent year on year;

Vegetable prices were up by 9% too adding to the food inflation and this led to the Chinese being poorer overall.

In March, the consumer price went up by 4.3 percent…….In the first quarter, the nationwide per capita disposable income of residents was 8,561 yuan, a nominal increase of 0.8 percent year on year, or a real decrease of 3.9 percent after deducting price factors.

Regular readers will be aware that a feature of my work is to look at the impact of inflation on the ordinary worker and consumer as opposed to central bankers who love to torture the numbers to get the answer they wanted all along. An example of this is the use of core inflation which excludes two of the most vital components which are food and energy. Also if you use the European measure called CPI in the UK you miss a dair bit of shelter as well as owner-occupied housing is ignored.

The Bank of England

One of its policymakers Silvana Tenreyro was drumming a familiar beat yesterday.

During Covid-19, large, temporary changes in relative prices and consumption expenditure shares will make inflation data difficult to interpret.

Many of you are no doubt thinking that higher prices will be “looked through” and falls will led to some form of a central banking war dance. In an accident of timing we were updated on this subject by the Office for National Statistics yesterday as well.

Prices for the HDP basket increased by 1.8% from 30 March to 5 April (week 3) to 6 April to 12 April (week 4) with prices for all long-life food items decreasing by 1.5% and all household and hygiene items increasing by 1.1%.

At a more detailed level, prices for pet food and rice rose by 8.4% and 5.8% respectively, while prices of pasta sauce fell by 4.5% (note that the size of the sample means that sometimes single retailers can contribute to substantial movements at the item level).

Firstly let me welcome this new initiative from the ONS which in fact is likely to be too low as to be fair even they admit. If you look at the Statsusernet website I have made some suggestions but for now let me point out that something were prices are likely to have shot up ( face masks) have been dropped. The overall picture is as below.

Movements in the all HDP items index show a stable increase over time, with an increase of 4.4% since week 1. Pet food has a high weight in the all HDP items basket and is one of the main drivers of this change.

Up is the new down

Silvana seems to be heading in another direction though.

.Current policy actions will help counterbalance some of
this underlying weakness in inflation.

If she was aware of the numbers above maybe she has a sense of humour. Sadly we then get an outright misrepresentation.

Low and stable inflation is an essential pre-requisite for longer-term economic prosperity.

For example the Industrial Revolution must have seen quite large disinflation and in modern times areas of technology have seen enormous advances and price falls. This next bit is wrong too.

And it allows households, businesses and governments to finance their spending without introducing inflation risk premia to their borrowing costs.

If the inflation target of 2% per annum is hit as is her claimed objective then that is a clear inflation risk premium that needs to be paid. We are back to the central banking fantasy that 2% per annum is of significance rather than plucked out of thin air because it seemed right.

Indeed she continues in the same vein.

Our recent policy decisions will help ensure price stability by mitigating any deflationary pressures arising
from recent events.

Just for clarity central bankers merge both deflationary and disinflationary pressures and as she says there has already been a policy response.

The MPC’s policy actions have involved reducing Bank Rate from 0.75% to 0.1%, introducing a Term
Funding scheme with additional incentives for Small and Medium-sized Enterprises (TFSME) and increasing
the size of our asset purchase programme, or quantitative easing, by £200 billion.

That gets awkward when she shifts to agreeing with me about inflation trends..

The exact effect of these issues, or even the sign of their effect, is going to be difficult to gauge.

Why? Again we are in agreement.

The key conceptual challenge is that there have been large shifts in spending patterns, which will change the
representative household consumption basket. Spending on social consumption has stopped almost
completely, for example, while spending on essentials from supermarkets has increased markedly.

Then she is in agreement again.

There are also likely to be considerable shifts in the prices of some goods still in high demand relative to
those no longer being purchased

Trouble is she had already acted.


A clear sign of a disinflationary trend is the price of crude oil. There are all sorts of issues with measuring it but according to the WTI benchmark is around US $25 and Brent Crude around US $28. Both have more than halved compared to this time last year.

Silvana looks at this with relation to labour costs and maybe my influence is beginning to spead as she wonders about the numbers.

While not mismeasurement per se, measured
productivity growth has been stronger in consumer goods producing sectors than in aggregate. Thinking
about how the consumption basket relates to inflation behaviour may be crucial over the coming years, given
the vast changes we are currently seeing in spending patterns.

We diverge on the fact that I think there has been mismeasurement.

As to the weakness in commercial rents I think most of you can figure that one out merely be looking at your local high street.

There are a range of possible explanations for the weakness in rent inflation over the past few years.


Let me welcome a Bank of England policymaker actually looking at inflation developments and doing some thinking. But as an external member I think one should be going further. For example I know she is looking mostly at commercial rents but there have been similar issues with ordinary rents but where is the challenge to these numbers being foisted on the owner-occupied housing sector. Or indeed the attempt to gerrymander the inflation data by replacing house prices and mortgage rates with Imputed Rents in the Retail Prices Index?

The UK Statistics Authority (the Authority) and HM Treasury are jointly consulting on reforming the methodology of the Retail Prices Index (RPI).

If you like it will be a case of one inflation measure to rule them all and in the darkness bind them. At least the consultation has now been extended until August as believe it or not they were hoping to get away with running it during the lockdown. As to the changes let me hand you over to the RPI-CPI User Group of the Royal Statistical Society.

1. The UKSA is consulting on how to splice the RPI and CPIH together – effectively replacing RPI with CPIH, but retaining the name RPI.
2. The Treasury is consulting on when (between 2025 and 2030) this change should take place.
Importantly, neither is consulting on whether this change should be made.

Looking ahead we will see pockets of inflation in for example medical areas and as some are reporting essential goods too. Or rather what are called non-core by central bankers and Ivory Towers.

My usual essential shopping has cost between £32 – £38 for months, now jumped to £42 – £48. Inflation, the quiet poverty maker. ( @KeithCameron5 )

In other areas like fuel costs we will see disinflation. But further ahead as we see production of some items brought back to domestic industry we are likely to see higher prices. So our central bankers have abandoned inflation targeting if you look several years ahead as they are supposed to.




The Emerging Markets Problem and debt jubilees

Some familiar topics are doing the rounds and making a few headlines and today I shall use the focus of the problems of many of what are called Emerging Markets to focus in on them. So let me open with the issue of the apparent lust for US Dollars that keeps popping up and return to an issue we analysed on the 18th of March.

*Bank Indonesia Governor Says New York Fed Will Provide $60B Repo Line ( @VPatelFX )

So we see another country on its way into the US Federal Reserve liquidity swaps club so let us ask the Carly Simon question which is why?

Indonesia’s foreign exchange (forex) reserves dropped US$9.4 billion in March to $121 billion as Bank Indonesia (BI) stepped up market intervention to stabilize the rupiah exchange rate amid heavy capital outflows, according to the central bank.

Forex reserves have continued to decrease since February,  when they dropped from $131.7 billion in January, the second-highest level in the country’s history. March’s figure is enough to support seven months of imports and payments of the government’s short-term debts and is above the international adequacy standard of about three months of imports. ( Jakarta Post

Di you notice how Bank Indonesia reports its foreign currency reserves in US Dollars? That is a slap in the face for those reporting its hegemony is over and as an opening salvo confirms the issue at hand. The secondary issue is that the level of foreign exchange reserves is only $10 billion below the second highest ever and yet if not panic stations there are clear worries. Next comes something I have pointed out before when a crisis hits it is the rate of change of reserves which worries people more than the size left. So in fact only a certain percentage of reserves are what one might call “usable” in that you them have to do something else as well. Finally we get to the nub of the issue which is how long you can pay for your imports and finance your debts. Of course borrowing in US Dollars in size is something that is on our checklist of trouble as well.

The Jakarta Post goes onto point out that the heat is on.

The fear has induced capital outflow and amplified exchange rate pressures on the rupiah, especially in the second and third week of March 2020,” BI wrote in a statement on Tuesday.

The rupiah lost around 15 percent of its value against the dollar in March as investors rushed to sell riskier assets and flock to safe haven assets amid fears over COVID-19’s rapid spread.

Also on March 19th I did point out that QE ( Quantitative Easing) seems to be spreading everywhere.

The central bank has purchased Rp 172.5 trillion in government bonds, including Rp 166.2 trillion from foreign investors in the secondary market.

Indeed if we switch to Fitch Ratings this morning another response to this crisis is the beginning of what is literal printing money.

Another extraordinary measure is the decision to give Bank Indonesia (BI), the central bank, the authority to buy government securities in the primary market…….However, the move raises a number of risks, including central bank financing of the fiscal deficit (which could increase the monetary base and raise inflationary expectations), increased political interference in monetary policy decision-making and the erosion of the market’s ability to price Indonesian public debt.

As a counterpoint the extent of the crisis is shown by the fact that by one metric Indonesia has been quite conservative in economic terms.

 We believe that the fiscal loosening will push general government (GG) debt to a peak of 37% of GDP in 2022, from about 30% in 2019,

As an aside it is interesting that Bank Indonesia will be applying QE at an interest-rate of 4.5% I will be looking later at how they account for that as it is a long way from ZIRP or around 0%.


On the 19th of March the International Monetary Fund summarised a grim situation as follows.

Since July 2019, the peso has depreciated by over 40 percent, sovereign spreads have risen by
over 2700 basis points , net international
reserves fell by half, and real GDP contracted more
than previously anticipated. As a result, gross public
debt rose to nearly 90 percent of GDP at end-2019,
13 percentage points higher than projected at the
time of the Fourth Review.

A 27% increase in sovereign spreads! This was all very different from the words of Christine Lagarde when she was managing director of the IMF.

These efforts are starting to yield results, and should lay the foundation for the return of confidence and growth.

That was then and this is now or rather the Buenos Aires Times from yesterday.

The government has issued a decree to postpone close to US$10 billion in dollar-denominated debt payments issued under local law, cancelling all such actions until the end of the year.

The move, which should relieve pressure on payments due this year, does not impact Argentina’s wider bid to restructure around US$70-billion worth of debt in foreign currency issued under international law.

So it is the dollar denominated debt which sings along with Lindsey Buckingham.

I should run on the double
I think I’m in trouble,
I think I’m in trouble.

I would have thought that reporters in Argentina would be familiar with the concept of default but apparently not.

Some experts warned that the move could be interpreted by creditors as putting Argentina in “technical default,” as it implies a change in the conditions under which those bonds were issued.

Anyway a sign of the trouble Argentina is in is show by two separate factors. Firstly how much it saves.

And by allowing the government to save some US$8.5 billion in local payments this year, it could actually be a boon for holders of foreign-law debt by freeing up cash.

Secondly it has tried to avoid affecting these foreign bonds presumably knowing that just like The Terminator “I’ll be back”

Argentina has already been unilaterally delaying payments on some peso-denominated debt, even as it kept current on overseas obligations and embarked on restructuring talks over its overseas notes.


We have looked at two different ends of the spectrum today as we see why so many what we call Emerging Markets are in trouble. There are quite a few metrics where Indonesia is strong but the US Dollar is making it creak and of course poor Argentina is at the basket case end of the spectrum. Indeed I rarely quite from Zerohedge but this is a masterpiece.

There is a saying: three things in life are certain: death, taxes and another Argentina default.

Also it reminds me of something that bemused me at the time as I note this from the 21st of May last year.

The 100 year bond is trading at 68.5, but I suppose you have 98 or so years left to get back to 100.

They still have 97 or so years to go but with a price of 28.5 now a lot further to go.

The pressure is leading to two suggestions. Firstly from DebtJubilee.

Borrower governments have it within their power to stop making debt payments but they should not suffer any penalties for doing so. All lenders should therefore agree to the immediate cancellation of debt payments falling due in 2020, with no accrual of interest and charges and no penalties.

It has its strengths but ignores what happens to those who were relying on the interest payments as you may simply be kicking the problem can elsewhere.

There is also this from the Brookings Institute.

Last week, we put forward a proposal for a major issuance of the IMF’s Special Drawing Rights (SDRs) as a key tool to attack the worldwide spread of the financial fallout. In essence, we proposed that IMF members agree to an allocation of the equivalent of at least $500 billion as part of the global response to the crisis generated by the corona virus pandemic.

The catch is that you can create money as this does. But there are two problems that immediately occur to me. If you have more money but as we stand fewer goods and services you are solving one problem by creating another ( inflation) for others. That may be asset inflation ( look at equity markets right now) more than consumer inflation. Next is the way that non elected bodies get power and distribute it, who are they responsible too?