UK Retail Sales decline in May after the BRC and GFK report rises

This morning has brought news that we had been expecting to be along sooner or later. After all if you have quite a surge there is a risk of a monthly decline especially in a series which can be erratic in normal times as opposed to the distinctly abnormal ones in which we now live. Thus we arrived at this in the UK.

Retail sales volumes declined by 1.4% between April and May 2021 following a sharp increase in April when retail restrictions were eased;

After all the rise last month was rather dizzying.

Retail sales volumes grew sharply in April 2021 with a monthly increase of 9.2%, reflecting the effect of the easing of coronavirus (COVID-19) restrictions.

We can have a wry smile as you might reasonably think that the purpose of predicting numbers was to be on the case for events like this. However as regular readers are probably expecting that was far from the case.

The monthly drop was unexpected, with economists predicting a 1.6 per cent increase. ( City-AM)

Perhaps they had been reading The Guardian.

UK retail sales surged in May by the most since the Covid-19 pandemic began as shoppers returned to high streets across the country after lockdown measures were relaxed, according to industry figures.

The British Retail Consortium said total sales increased by 10% in May compared with the same month in 2019, before Covid-19 hit consumer spending and tipped the UK into recession.

I have often warned that the British Retail Consortium numbers are a poor guide to the official release and in fact are often actively misleading. Usually they are too low but not this time as we mull whether they were picking up the April surge? We can also look at the breakdown they reported.

After the reopening of non-essential retail and hospitality venues across all four nations of the UK, pent-up demand among lockdown consumers fuelled a sharp rise in spending, with strong growth in furniture sales and homewares, as well as a recovery in clothing and footwear shops.

Clothes shops reported sales growth of more than 100% as going out returned with the opening of indoor hospitality in May.

Actually we were thrown another head fake.

GfK’s long-running Consumer Confidence Index increased six points to -9 in May.

What did happen?

The overall decline hid a mixed pattern. So let us open with the falls.

The strongest monthly declines in sales volumes in May came from food stores and non-store retailers of 5.7% and 4.2% respectively as both sectors were affected by the easing of restrictions for hospitality and non-essential retail.

The food part was probably a switch from this category to a different one.

anecdotal evidence suggests the easing of hospitality restrictions had had an impact on sales as people returned to eating and drinking at locations such as restaurants and bars.

Also there were some more specific changes.

Feedback from retailers suggested that sales were negatively affected in May by both the reopening of all retail sectors and the relaxation of hospitality restrictions, with specialist retailers of alcoholic drinks and tobacco reporting a monthly decline of 8.4%.

On the other side of the coin there was this.

Non-food stores reported a 2.3% increase in monthly sales volumes in May 2021 with household goods stores (for example, hardware and furniture stores) and “other” non-food stores reporting the largest growth of 9.0% and 7.7% respectively……. anecdotal evidence from retailers suggested increased spending on outdoor garden furniture in preparation for the summer and the relaxation of social gathering rules.

So we do at least have something which correlates with the BRC report which is household goods. However there was certainly no surge in clothing sales.

Clothing and department stores both reported monthly declines of 2.5% and 6.7% respectively.

There was a signal of the re-opening of the economy from fuel sales.

Automotive fuel sales grew by 6.2% when compared with the previous month, continuing the recovery witnessed in April (growth of 10.6%) as the relaxation of lockdown measures increased people’s travel.

But numbers are still lower.

However, sales continue to remain 4.3% lower than February 2020 before the impact of the pandemic.

One factor here that may be flattering fuel sales is a likely switch from public to private transport and hence a push to fuel sales. Tube journeys in London are still heavily down and in an irony they are just about to arrive in my area Battersea.


Here was something that could not be described as unexpected as shops reopened.

Online spending values decreased in May 2021 by 5.7% when compared with April 2021, with all sectors reporting monthly falls in their online sales

But if we look back to past levels for this area ( around 19%) it does look like that has been quite a large upwards shift even allowing for some of it to fade away.

This resulted in a decline in the proportion of retail spending online values which fell to 28.5% from 29.8% in April 2021.

It looks as though there is little, if any relief for the downwards trend for the high street.

The value of retail sales online in May 2021 was 58.8% higher than in February 2020, whereas the value of retail sales in store in May 2021 was 1.3% lower than in February 2020.


There are several ways of doing this and this is not it.

Retail sales volumes in May 2021 were 24.6% higher than in May 2020,

We can however compare with what we consider to have been past normal levels.

 over April and May combined, average total retail sales volumes were still 7.7% higher than in March 2021, and were 9.1% higher than in February 2020 before the impact of the coronavirus (COVID-19) pandemic.

Also the last three months helps with identifying a trend.

The large increase in sales volumes in April, followed by a relatively small fall in May, has resulted in the volume of sales for the three months to May 2021 being 8.3% higher than in the previous three months; there was strong growth in automotive fuel sales and non-food retailers of 19.3% and 17.8% respectively.


I think we should take the opportunity to remind ourselves of what we were told on Tuesday.

Average total pay growth for April 2021 compared with April 2020 was 8.4% for total pay and 7.3% for regular pay which feeds into the strong 5.6% average growth for February to April 2021.

Looking at levels before the coronavirus pandemic we can compare April 2021 with April 2019 where average total pay growth was 7.1%,

So people have had a surge in wages but have not spent it? That is very much against the usual British pattern. So we get a reminder that a little humility is required with the figures. Of course there was a strong rise in April to allow for too.

As to the scale of the May fall a fair bit of it will no doubt be collected in another category via a switch from food sales to restaurants and bars. As they charge more it may even end up as a boost to economic output and GDP. Also we can make a nod to tonight’s fixture between England and Scotland because it may be in play in the June numbers according to City-AM.

Alcohol sales in the UK have skyrocketed during the Euros, as sunny weather spurred fans to splash the cash on booze, according to data from PayPoint.

Sales data from PayPoint’s network of 28,000 retailers found that over the weekend the Three Lions played their first fixture against Croatia, alcohol sales climbed 11 per cent in Britain.

Not just south of the border.

Meanwhile, north of the border in Scotland, sales rose 6 per cent – with the tipple of choice being Tennent’s Lager, which enjoyed an 18 per cent boost, Dragon Soop (16 per cent) and Buckfast (13 per cent)

Although the weather in London today (heavy rain so far) is not helping much



Was the Fed a case of Much Ado About Nothing?

We have become used to central banking being a bit dull, certainly compared to March last year. They essentially opened the monetary taps and have spent the intervening period not doing much. We have had some fiddling at the edges and a lot of open mouth operations, but last night the stakes were higher because of the pace of the recovery in the US economy. If we move to the effect we can see that markets made an immediate response.

After FED meetings, gold fell down significantly in the last Newyork session, from $1860/oz to $1800/oz, then went up back to $1820/oz ( @fxstreet)

So Gold was hit immediately and the futures contract is at US $1810 this morning meaning that $50 was knocked off its price. So it has been a bad 24 hours for Gold bugs and places were it is held such as India. This gives us our first hint of some news about interest-rates.

Hollar Dollar gives us the picture.

At 3:15 AM ET (0755 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, was traded 0.2% higher at 91.418, after surging nearly 1% overnight, its biggest rise since March of last year.

The rally meant that we have seen some big figure changes with the Euro pushed below 1.20 and the UK Pound £ pushed below $1.40. They should not matter but often do. Also there was some relief for the Bank of Japan as the Yen weakened to 110.60 as it continued a weaker run for the Yen since the days it ended up being pinned around 104.

Bond Markets

Having established a theme of financial markets responding to something about interest-rates we now move to one which gives a qualified response. What I mean by that is yes we get some confirmation from a 0.07% rise to 1.56% for the US ten-year yield but it is not a large move. Also bond yields had been falling for the last couple of weeks so net we are still lower.

The Federal Reserve

The initial statement only gave is a couple of hints.

 Amid this progress and strong policy support, indicators of economic activity and employment have strengthened.

So some confirmation of an improvement and we also got the beginnings of covering their backside on inflation via the use of “largely”

Inflation has risen, largely reflecting transitory factors

But neither of those explain the market response. Nor does the interest-rate change which was announced.

The Board of Governors of the Federal Reserve System voted unanimously to set the interest rate paid on required and excess reserve balances at 0.15 percent, effective June 17, 2021.

The 0.05% move was also applied to the troubled reverse repo market which went from 0% to 0.05% and we see why from this.


We have looked at this several times before where the monetary push from the Federal Reserve has been added to by the fiscal stimulus and the cheques in particular leaving the banking system awash with cash. The pressure has been such there has been a danger of negative interest-rates spreading ( we have seen some in US Treasury Bills). I know it is an irony but the Fed is now acting to stop further falls in interest-rates. Or as Stevie V put it.

Money talks, mmm, mmm, money talks
Dirty cash I want you, dirty cash I need you, ooh

The US Treasury has been asleep here as it could have helped by issuing some more bonds, it is not as if it will not have deficits to finance.


More meat came here.

However, the jolt came when new projections saw 11 of 18 central bank policy makers plan for two interest rate increases of 25 basis points in 2023, a year earlier than expected, and a sharp change from the previous meeting when none of these officials were looking for hikes during that year.  (

Such was the shift that the projection had a 0.6% expectation for interest-rates in 2023 or two 0.25% hikes from the present 0.1%. This led to this perception.

“With the world’s so-called ‘smartest market’ expecting a quicker and more aggressive liftoff in interest rates, the fallout from this Fed meeting could continue to drive all markets in the days and weeks to come,” said Matthew Weller, Global Head of Market Research at GAIN Capital. (

I have no idea how he could consider that to be aggressive but each to their own. As to the meaning of the shift well I well leave that to Chair Powell.

FED Chair Powell: Not Appropriate To Lay Out Numbers That Mean Substantial Further Progress

Dots Are Not A Great Forecaster Of Future Rate Moves

– Didn’t Discuss If Liftoff Appropriate In Particular Year  (@LiveSquawk )

This is a bit awkward because having sent a signal about higher interest-rates you then say that it does not mean much. Ironically he is of course correct with the statement that central bankers are not great forecasters of future rate moves, and he has thus just torpedoed the “Forward Guidance” claims that have been pressed over the past few years. It gets more awkward as we note they have predicted a “Liftoff” in 2023 but didn’t discuss it. What did they discuss then?

If we return to the dot plot then we see this from Chair Powell back in March 2019.

Each participant’s dots reflect that participant’s view of the policy that would be appropriate in the scenario that he or she sees as most likely.

That could be from Sir Humphrey Appleby in Yes Minister.

Taper Talk 

Essentially it remains that because there is no change.

 In addition, the Federal Reserve will continue to increase its holdings of Treasury securities by at least $80 billion per month and of agency mortgage‑backed securities by at least $40 billion per month until substantial further progress has been made toward the Committee’s maximum employment and price stability goals.


In some ways this echoes the much ado about nothing line from William Shakespeare. The Fed has sent a signal with its forecasts but it is hard not to smile at reports it is being hawkish, especially when CPI inflation is at 5%. Also raising interest-rates in 2023 is an inversion of monetary policy leads and lags with inflation higher now. If it is transitory then why bother? Indeed I could go further because in its forecasts is the assumption that the “normal” level of interest-rates is now 2.5%, does anyone actually believe that? None of this deals with house price rises in double-digits.

The Tapering of QE is an issue where some will keep talking about it and claim to be right should it happen forgetting the failed lottery tickets they previously bought. But my view is that the central banks are all hoping someone else will move first. I know that the Bank of Canada has acted but having bought around 40% of the market in short order it soon would have been out of road anyway.

So we are left with markets and if they have pushed the US Dollar upwards and it persists then they may have achieved something. Although did they intend to? Also we have the nuance which is do we have a clear cause and effect or were markets waiting for a trigger and without the Fed something else would have come along?

Also we saw a bit of insurance taken out against the future.

The Federal Reserve on Wednesday announced the extension of its temporary U.S. dollar liquidity swap lines with nine central banks through December 31, 2021

So they can use the word temporary…….




UK Inflation posts a warning as it rises above target

Today has brought something of an inflation warning for the UK as we note this from earlier.

The Consumer Prices Index (CPI) rose by 2.1% in the 12 months to May 2021, up from 1.5% to April; on a monthly basis, CPI rose by 0.6% in May 2021, compared with little change in May 2020.

The first thing to note is the monthly increase of 0.6% which means that we have now gone 0.3%, and 0.6% twice which is a signal of acceleration in inflation. That is I think more significant than the 2.1% reading although it does have significance for the Bank of England. If you heard a loud sigh of relief from Threadneedle Street this morning it will have been from Governor Andrew Bailey who now looks to be clear of the phase when he had to write an explanatory letter for inflation being more than 1% below target. However it does present a problem because this afternoon the Bank will but another £1.15 billion of UK bonds to boost UK inflation. That is now somewhat awkward when it is boosting inflation which is above target.

Continuing the theme of inflation above target there are these two variants of the inflation measure.

The annual rate for CPI excluding indirect taxes, CPIY, is 3.8%, up from 3.2% last month…….The annual rate for CPI at constant tax rates, CPI-CT, is 3.8%, up from 3.2% last month.

I point this out continuing the Bank of England theme because they have been keen on using such variants in the past when they fit their views. So I will leave it to your imagination whether they will be pointing this out! As a matter of fact UK inflation would be quite a bit above target without the temporary tax cuts. Maybe not the full amount as these things are not always fully passed on but it would be over 3%.

What is driving the move?

The biggest factor was transport.

where prices rose by 0.3% between April and May 2021, compared with a fall of 1.0% between the same two months of 2020. The effect was principally from motor fuels, with the price of petrol rising by 1.7 pence per litre this year, compared with a fall of 2.8 pence per litre a year ago as prices reached a four year low of 106.2 pence per litre in May 2020. Similarly, diesel prices rose by 1.5 pence per litre this year,

Next comes two categories which have proven very difficult to measure over time.

There was also a large upward contribution of 0.15 percentage points from recreation and culture, where prices rose by 1.2% between April and May 2021, compared with a fall of 0.1% between the same two months a year ago.

This is because the main movers here were computer games and music ( downloads and CDs) where this happens.

It is equally likely to be a result of the CDs, DVDs, music downloads and computer game downloads in the relevant bestseller charts. Price movements for these items can often be relatively large depending on the composition of these charts.

That is not well explained. Essentially prices are high when in the charts but are then discounted heavily and that is not easy to capture properly in an inflation measure. That principle applies to the next category where the advent of ever more fashion clothing with newer retailers like Primark reacting fast means prices can go from (relatively) top dollar to being discounted very quickly.

The rise this year has been influenced by a fall in the amount of discounting recorded in the dataset between April and May,

So with that warning we have this.

Clothing and footwear contributed 0.13 percentage points to the change in the CPIH 12-month inflation rate. Prices, overall, rose by 2.3% between April and May this year, compared with a smaller rise of 0.3% between the same two months a year ago

The Trend

The moves in producer prices have been harbingers of the consumer inflation rise and the beat goes on.

The headline rate of output prices showed positive growth of 4.6% on the year to May 2021, up from positive growth of 4.0% in April 2021.

The headline rate of input prices showed positive growth of 10.7% on the year to May 2021, up from positive growth of 10.0% in April 2021; this is the highest the rate has been since September 2011.

Some of the move is the result of the plunge in oil prices last year.

Petroleum products had the highest annual growth rate of any component of output prices in May 2021, at 67.0%

However if we bring things up to date we see that right now the price of crude oil is rising again. Yesterday for example the price of a barrel of Brent Crude Oil went above US $74 yesterday for the first time since April 2019. As we look around we see some things going the other way as Lumber for example has fallen back somewhat after the surges we saw in previous weeks and months. But in terms of the overall picture the 1.1% monthly rise in UK input inflation continues the 2021 trend of it being around 1% every month. So as Hard-Fi put it.

Pressure, Pressure, Pressure
Feel the pressure

Housing Costs

This area continues to be quite a problem. So let me start with what is officially claimed to be the most comprehensive measure of UK inflation.

The Consumer Prices Index including owner occupiers’ housing costs (CPIH) rose by 2.1% in the 12 months to May 2021, up from 1.6% to April…….On a monthly basis, CPIH rose by 0.5% in May 2021, compared with little change in May 2020.

It’s problem is the bit which is claimed to make it so comprehensive.

The OOH component annual rate is 1.5%, up from 1.4% last month. ( OOH = Owner-Occupiers Housing )

There are probably amoeba on Jupiter smelling a rat here because the issue of rising house prices has been in the news everywhere. Indeed it has been official policy to pump them up via the Stamp Duty Cut for example. Even the official house price series illustrates that.

UK average house prices increased by 8.9% over the year to April 2021, down from 9.9% in March 2021.

Average house prices increased over the year in England to £268,000 (8.9%), in Wales to £185,000 (15.6%), in Scotland to £161,000 (6.3%) and in Northern Ireland to £149,000 (6.0%).

So if we take a broad sweep we see that house price rises of 10% or so become the much more friendly 1.5% or so via the use of Imputed Rents. They assume owners pay themselves rents in a methodology which is going spectacularly wrong all around the world right now. It is amazing that it has not been questioned more. There is a British spin to this because our official statisticians have so little faith in the reliability of the rental data they collect they “smooth” it. This means that the number above is really last years rents rather than May’s.


We are receiving something of an inflation warning in the UK as we note that we have nudged above the 2% target and would be above 3% without the indirect tax cuts. Another way of putting this is to replace the fantasy imputed rents in the official measure CPIH with a something which is paid which is house prices. Doing so gives a 3.5% reading if you use current house prices.

The irony is this means that our past measure of inflation the Retail Price Index is giving a better guide to the state of play.

The all items RPI annual rate is 3.3%, up from 2.9% last month……..The annual rate for RPIX, the all items RPI excluding mortgage interest payments (MIPs), is 3.4%, up from 3.2% last month.

If we take an international perspective we can be grateful that for once we are not at the front of the pack. Why is the US at 5%.If we put aside different measures.  Looking into it the rise in the price of “Gasoline” is much more marked there due to lower taxes as it is up 56%. Also used car prices have surged (29.7%) and that is different to our experience. Yes we have a marked monthly rise ( 1.2% in May) but it only has a weight of 0.12% so the impact is minor. Also the stronger period for the UK Pound £ has helped this year.

Meanwhile perhaps Scotland has given us a clue about what might happen when the Stamp Duty Cut full expires.

The slowdown in house price growth in Scotland may have been driven by the end of the Land and Buildings Transaction Tax holiday on 31 March 2021.


UK annual wages growth is not over 8% as reported earlier

This morning has brought some more positive news for the UK economy and it has several facets.

The number of payrolled employees has increased for the sixth consecutive month, up by 197,000 in May 2021 to 28.5 million.

So May brought strong employment growth for the UK and it is also an improvement for our statisticians who have made this part of their data more timely. There is of course higher risk in a more timely estimate but we have been behind other countries in this area. After all the US has already produced a full set of numbers for May. The UK employment numbers do tell the same story as the Market PMI release.

Capacity pressures and increasingly upbeat projections for
customer demand spurred greater staff recruitment in May. The latest increase in payroll numbers was the strongest since March 2015, with survey respondents citing a combination of new hires and the return of employees from furlough. There were many reports suggesting difficulties with staff availability, especially among consumer service providers.

So good news for Markit too who have been struggling in other areas.

If we now bring in a wider context we see that we still have ground to make up.

It is however 553,000 below levels seen before the coronavirus (COVID-19) pandemic. Since February 2020, the largest falls in payrolled employment have been in the accommodation and food services sector, people aged under 25 years, and people living in London.

A young person working in hospitality working in London has had it really rough and yesterdays 4 week extension to restrictions will only add to the issue. Things have got better but slowly.

These three groups have also seen the largest monthly increases but are still well below pre-pandemic levels.

Conventional Employment Measures

Perhaps the best measure throughout this period has been hours worked.

In February to April 2021, total actual weekly hours worked in the UK increased by 7.2 million hours from the previous quarter. This coincided with the relaxing of coronavirus lockdown measures, which had stalled the recent recovery in total hours. However, this is still 77.0 million hours below pre-pandemic levels (December 2019 to February 2020) to 975.2 million hours.

They edged forwards but we are back in a world where we only have data up to April. We know from Friday’s GDP release that the economy was growing strongly ( over 2%) and if anything the improvement here is a bit disappointing after that. Perhaps May will catch up.

The more conventional metrics tell us this.

There was a quarterly increase in the employment rate of 0.2 percentage points, to 75.2%, and a quarterly decrease in the unemployment rate of 0.3 percentage points, to 4.7%.


Regular readers will be aware that this has been a problem both in the way it is measured and its rise. Although it is hard not to have a wry smile at the fact that it is reported as well below the level at which former Bank of England Governor Mark Carney assured us ( Forward Guidance) he would raise interest-rates. Of course he did no such thing.

For now the elephant in the room in several contexts is this.

There is an outstanding question of what happens to those workers on furlough. The numbers have continued to fall and while we wait for the official data, our most recent (but uncertain) estimate comes from our business survey and is around 1.8m in May. ( @jathers_ONS )

That is quite a context to an unemployment total of 1,613,000 in April when the furlough numbers will have been even higher. Our Deputy National Statistician summarises the state of play here.

Will everyone currently on furlough go back to their employer? If not, this might cause employment to fall & unemployment to rise later in the year. But we don’t know what will happen yet. So we are not out of the woods yet.

I am a little unclear how he could even think briefly we are out of the woods but the uncertainty expressed is correct. We simply do not know.


Let us start by going to a place described by Mariah Carey.

Sweet fantasy (sweet, sweet)
You’re my fantasy
Sweet fantasy
Sweet, sweet fantasy

Oh as reported by the Office for National Statistics.

April 2021 saw a growth rate of 8.4% for total pay and 7.3% for regular pay which feeds into the strong 5.6% average growth rate for February to April 2021.

We find ourselves at a destination I warned our statisticians about back in March.

Response from Ed Humpherson to Shaun Richards: ONS Average earnings figures

Or rather one of the destinations because a future swing the other way seems likely.

There is at least an effort to begin to explain things although sadly that will go straight over the heads of the reports which simply copy and paste the official figures.

We have become used to noting this but it comes with a kicker.

Latest data show the compositional effect is approximately 2.5%, compared with approximately 1% before the pandemic affected the workforce.

For newer readers this effect is essentially that more lower paid workers lost jobs which raises the average wage for those who remain employed and thus wage growth is reported. Or things that are worse are recorded as better. But the kicker is the confession that the numbers were always flawed. Indeed at times of low wage growth a 1% issue is very significant. Looking back through the series I note that reported average earnings growth of 2.8% in January 2020 was in fact 1.4% of growth and 1.4% of compositional effects which changes the picture considerably.

If we try to look back two years to remove what have become called base effects we gain little and in the case of regular pay nothing.

Looking at levels before the coronavirus pandemic we can compare April 2021 with April 2019 where average total pay growth was 7.1%, so lower than the growth when comparing with April 2020 (8.4%). For regular pay growth comparison with both periods was similar, at 7.2% when comparing April 2021 with April 2019 and 7.3% when comparing with April 2020.

There has been an additional level of uncertainty provided by the swings in the furlough scheme. It is of course good that it is reducing but in this context we are left scratching our heads a bit.

We have published estimates indicating that 21.8% of the workforce were on furlough leave at the end of April 2020, compared with 10% of employees being furloughed in the last two weeks of April 2021. The lower proportion of workers on furlough has contributed towards the strong growth when comparing pay in April 2021 with April 2020.


We can pick out what we can from the wages numbers. April saw a £5 a week rise to £571. The main drivers of this were the finance and business industry which saw a £28 a week rise to £758 and the construction sector which saw a £9 rise to £659. The latter is a little awkward when only last Friday we were told this.

Construction output fell 2.0% in April 2021………Monthly construction fell by 2.0% in April 2021 because of declines in both new work (2.9%) and repair and maintenance (0.6%).

Perhaps it was a lagged response to previous rises. The finance numbers were pushed higher by strong bonuses, was it a good bonus season in the City of London. Also there is a counterpoint to this coming out on a day when we see wages cuts. Now you may have issues with public-sector pensions and this is not in the wages figures but it is a cut.

NEW: UK university employers have overwhelmingly supported proposed cuts to guaranteed #pension benefits for hundreds of thousands of sector workers. ( @JosephineCumbo) 

Returning to the quantity figures things are getting better and we can hope for an even stronger increase in hours worked in May. But it is still a depression and the end of the furlough scheme could quite easily set us back.


Does higher inflation mean higher economic growth?

The issue of inflation is a hot topic in economics right now. Indeed this morning has suggested that to quote Glenn Frey the heat is on in India.

The wholesale price-based inflation hit an all-time high of 12.49% in May on the back of a spike in prices of manufactured products, crude petroleum, and mineral oils.

It touched the double-digit mark of 10.49% in April (2021). This is the fifth straight month of an uptick in WPI inflation. ( Business Today)

It is the five months in a row of rises which bothers me more than the all-time high which is influenced by the pandemic driven lows of last year. The vibe has also been reinforced by this.


So the issue in May has pushed into June and as an aside a higher oil price has negative consequences for the Indian economy. But for out purposes today the issue is one of inflation risks.

The Reserve Bank of India

We can stay on the sub-continent for the latest central banking missive assuring us that inflation is good. Earlier this month the RBI produced a working paper looking at this.

The concept of threshold inflation is linked to the level of inflation beyond which it becomes detrimental to economic growth.

There are a lot of begged questions in the assumptions but applying them to India the researchers get to this.

 For macroeconomic policy targets consistent with maintaining fiscal deficit at 6.0 per cent and current account deficit at 2.0 per cent of GDP, our estimates suggest a threshold inflation level of 6.1 per cent and optimal growth rate of 7.5 per cent for India.

As you can see they are juggling several plates at once but in principle they are replicating the western approach. What I mean by that is we are seeing an attempt to raise the inflation target by 50% or from 2% to 3%. Well in India a 50% rise takes you from 4% to 6%. The extra 0.1% is the same as when Everest was estimated to be 28,000 feet high so they made it 28,002 as otherwise they thought they would not be believed.

They then ram their point home in case we missed it.

If we consider the inflation target at 4 per cent instead of the threshold level of 6 per cent, the long-term growth rate would decline by about 80 bps.

By contrast if you miss the inflation target on the upside the issues created are relatively smaller, in fact much smaller.

On the other hand, if we consider the inflation target of 8 per cent instead of the threshold level of 6 per cent, the long-term growth rate would decline by only about 30 bps.

I suppose it is kind of them to so explicitly confirm one of the themes of my work.

 Thus, the trade-off between long-term inflation and growth is not symmetric on both side of the threshold inflation.

If you prefer it can be expressed in terms of economic growth.

When the inflation target is less than the threshold level, the sacrifice is 0.4 per cent point growth per one per cent point reduction in long-term inflation. However, if the inflation target exceeds the threshold level, the sacrifice of growth is only 0.15 per cent point per one per cent point increase in the long-term inflation.

Extraordinarily clever for a number if not picked at random has in fact been pulled out a hat.

The claimed gains are put up simple terms for politicians.

If the threshold inflation rate is somehow considered to be too high, the policy makers can choose a lower inflation target only by consciously sacrificing long-term real growth of GDP.


In a country with so many poor I am sure that pretty much everyone reading this with thing of it as a big deal.

 Of course, there are arguments in favour of lower inflation rate in terms of its favourable redistribution impact particularly on the poor and the financial stability concerns.

The problem here is one of the swerves in this type of analysis which appears in the early part.

The Keynesian analysis of non-neutrality of money assumes that nominal wages are more rigid than prices. Increase in money resulting in higher price level, therefore, leads to a decrease in real wages that would bring about an improvement in real economic activity (Rangarajan, 1998). This was loosely interpreted to mean higher inflation resulting in higher growth.

They deny this is being used and instead point to this.

 In an open economy, the rate of inflation can become an important determinant of the steady state rate of growth. It can influence TFPG through its effect on investment and effectiveness of research and development expenditure (Briault, 1995).  ( TFPG = Total Factor Productivity Growth )

Thus they are in fact assuming that higher inflation leads to higher economic growth via what we have come to call the “productivity fairy”. Personally I do not see a link between inflation and productivity. Also on the dynamic world in which we live and exist there is no “steady state rate of growth” and the conclusion is thus castles in the sky.

 Thus, the steady state growth would occur at the threshold inflation in an economy left to market forces. Since this is a base case, the government can avoid unnecessary adjustment costs in practice by targeting long-term inflation and growth respectively at the threshold inflation and steady state growth.


The conclusion is an interventionist and central planners dream. It feels like something from the 1960s and 70s with a “white-heat of technology” add on. In the credit crunch era we have seen a familiar trend where such ideas start with a single central bankers and the spread. Some years back it was Charles Evans of the Chicago Fed pushing the higher inflation target line and now we see it has become official policy.

With inflation running persistently below this longer-run goal, the Committee will aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time and longer‑term inflation expectations remain well anchored at 2 percent.

Actually that is now out of date as inflation is not only above target but if the May CPI reading is any guide may well be considerably above it.

Where this falls down is that the research is designed to come to the conclusion that it does. I have already highlighted the productivity issue and with it comes the related one of wages and real wages in particular. This has been a troubled area for years and maybe decades for example the “lost decade” in Japan is one of a lack of real wage growth and my home country the UK has struggled too. Thus, in my opinion, and there is plenty of evidence to back it up you cannot simply assume higher inflation will lead to higher wage growth. The nominal wage rigidities of economic theory have got worse. We see examples of this regularly in the news and this may well be backed up by official numbers too.

Real average hourly earnings for all employees decreased 0.2 percent from April to May, seasonally
adjusted, the U.S. Bureau of Labor Statistics reported today…..Real average hourly earnings decreased 2.8 percent, seasonally adjusted, from May 2020 to May 2021.

Then we have the issue of assuming a steady-state for an economy at a time when we have seen waves of uncertainty. It is hard not to laugh as the theorists describe their theoretical world but describe one which has not much of a relation to the real one leaving us Seasick like Steve.

Cause I started out with nothing
And I’ve still got most of it left


The UK Services sector powered GDP ahead in April

This morning has brought a combination of good news and what used to be familiar news for the UK economy. If we start with the good we see this.

UK gross domestic product (GDP) is estimated to have grown by 2.3% in April 2021, the fastest monthly growth since July 2020, as government restrictions affecting economic activity continued to ease.

So the hopes of a good April for the economy became true and if you want to briefly bathe in an extraordinary number there is this.

In comparison with April 2020, monthly GDP in April 2021 is estimated to have grown by 27.6%.

Of course the numbers here are heavily affected by the pandemic last year and thus are not much of a guide to anything.

The familiar element of the numbers came with something of a return to form.

The service sector grew by 3.4% in April 2021, with consumer-facing services re-opening in line with the easing of coronavirus restrictions and more pupils returning to onsite lessons.

We see that the growth was broad based.

The growth in services was driven by a rise in 12 out of the 14 sectors in the Index of Services, the largest contributions to growth being from wholesale and retail trade, education, and accommodation and food service activities.

However there were particular niches in it with the leader of the pack being no real surprise.

There was strong growth for hotels and short-stay holiday accommodation (which includes cottages, chalets, and apartments). However, the sub-industry leading the growth was camping grounds and caravan parks.

As someone who enjoyed a regular summer week at a caravan park in Selsey as a boy with my grandparents I am pleased they are still a thing. Simple pleasures but a pleasure none the less. The next area of strong growth is a surprise in the sense that I am struggling to get my head around how an area can be fully booked but also 25% down?

Personal services activities saw strong month-on-month growth at 63.5%, which was driven by other beauty treatments and by hairdressers.  Although hairdressers and beauty salons reported having no available appointments in the weeks after reopening because of the level of demand for their services, output was still 25.0% below its February 2020 level.

These areas have seen wild swings due to the lockdowns and if we return to accommodation we see there is plenty of ground still to recover.

The accommodation industry grew by 68.6% between March 2021 and April 2021 after lockdown restrictions were eased, although output was still 59.9% below its February 2020 level.


I thought I would pick this out as the way the UK measures it has led us to be at first a relatively poor performer and now a relatively strong one.

Education grew by 11.2% between March 2021 and April 2021, although this meant that output was still 4.7% weaker than its February 2020 level. The growth in education output was driven by schools being open for a full calendar month to all pupils for the first time since November 2020.

The UK uses an output measure for GDP here which is why I have highlighted the school re-opening part which boosts us now but hurt us when they closed and went online. Most other countries use the income measure which whilst teachers are paid avoided such swings.

Imputed Rent

I often get asked about it so for those curious it rose by 0.2% in April. Also there were a couple of curious numbers in the report. For example with all the new dogs and puppies about you might think that vets were in demand whereas output fell by 2.8%. Also domestic service fell by 13.2% when I would have thought the falls would have come in lockdown.


There was a fair bit going on here and the headline was disappointing.

Monthly production fell by 1.3% between March 2021 and April 2021 leaving it 3.1% below its February 2020 level;

However this was not as it might seem as we it was driven by the maintenance cycle for North Sea Oil and Gas.

The industry within the mining and quarrying sector that contributed most (1.1 percentage points) to the fall in production was extraction of crude petroleum and natural gas, which fell by 18.2%.

Speaking of disappointments there was another one for the Markit PMI survey which had predicted near record growth with its 60.9 for April but now faces a reality of this.

While eight of its thirteen subsectors displayed upward contributions to growth, the manufacturing sector as a whole saw output fall by 0.3%. The reduction in growth was led by the basic pharmaceutical products and transport equipment industries.

Regular readers will be familiar with the erratic nature of the pharmaceuticals with the basic products section falling by 16%. That industry seems to run on either a 4 week or 5 week cycle rather than a monthly one giving what seems much more likely to be a reporting issue than an output one.

One area that saw strong growth was curious because I thought we were all getting sozzled in lockdown and now we are drinking even more to celebrate its winding down?

The main growth area within manufacture of food products and beverages was the manufacture of alcoholic beverages industry, which saw monthly growth of 26.5%, largely because of the reopening of outdoor hospitality across the UK during April 2021. Brewing observed stronger growth than the manufacture of spirits.


There have been more than a few difficulties in normal times in measuring this area which must have been magnified by the pandemic. However such as they are here are the numbers.

Monthly construction output fell by 2.0% in April 2021 compared with March 2021 because of declines in both new work (2.9%) and repair and maintenance (0.6%). Despite the monthly fall, the level of construction remains 0.3% above its February 2020 level.

For a more up to date reading my Nine Elms crane count is 32. Some of the work now is complete as highlighted by the Sky Pool hitting the news wires.


The position here worsened in April

Total imports of goods, excluding precious metals, increased by £1.4 billion (3.9%) in April 2021, with increases seen with both non-EU and EU countries……….Total exports of goods, excluding precious metals, fell slightly by £0.1 billion (0.6%) in April 2021

But the numbers were distorted by the knock-on effects of a famous blockage.

Imports of goods from China fell across many commodity types, including office machinery, cars, general miscellaneous manufactures, and electrical machinery. These commodities are typically transported by ship, and therefore may have been affected by the blockage of the Suez Canal, an important passage for ships travelling between Asia and Europe, at the end of March 2021.

There also seems to be the beginnings of a shift away from the European Union.

Monthly goods imports from non-EU countries, excluding precious metals, were the highest since records began in January 1997.


Whilst recent growth has been strong we should not forget that we still have a road to travel.

 but remained 3.7% below its level in February 2020, which was the most recent month not affected by the coronavirus (COVID-19) pandemic.

We are well ahead of official forecasts and as ever my first rule of OBR Club ( that the OBR is always wrong) has seen even by its standards quite a triumph.

The resurgence in infections, imposition of another lockdown, and temporary disruption to
UK-EU trade are expected to cause output to fall by 3.8 per cent in the first quarter of 2021
(Chart 1.4). This drags the level of output down to 11 per cent below pre-pandemic levels
and slightly below our November central forecast.

It is quite a spectacular effort to in March get the level of output wrong by 5%. These are uncertain times but even so. We have looked at this previously via the public finances which will be on a quite different path to the OBR forecasts.

Should we continue on this sort of path we will be back to pre pandemic levels of output in the autumn. Then we move onto further challenges such as the end of the furlough scheme and the implications thereof as well as the fact that pre pandemic economic growth was weak.


The long and great depression affecting Greece

Later today we get the policy announcement from the ECB or European Central Bank but I am not expecting much if anything. Perhaps some fiddling with the monthly purchases of the emergency component ( called PEPP) of its QE bond buying scheme. They have been buying around 80 billion Euros a month. But no big deal. So let us look at a strategic issue for the ECB and one which has its fingerprints all over it. We get a perspective from this.

If anyone had doubts about why I keep calling it a great depression the graph explains it. In the west we had got used to economic growth but Greece has replaced that not only with a lost decade but a substantial decline over 14 years. Back in 2007 people might reasonably have expected growth and indeed we have kept receiving official Euro area projections of annual growth of 2% per annum. Including one which (in)gloriously metamorphosed into a 10% decline. Along the way we get a reminder that economic output in Greece is far from even throughout the year.

It is intriguing that Yanis has chosen nominal rather than real GDP for his graph of events. Perhaps it flatters his period in office. If he replies to me asking about that I will post it. But it does open a door because it does provide a comparison with the debt load as most of it ( Greece does have some inflation -linked bonds) is a nominal amount. Of course Greece does not have control over its own currency as it lost that by joining the Euro. Along the way it has seen its debt soar as its ability to repay it has reduced.

National Debt

According to the Greek Debt Office this was 374 billion Euros for central government at the end of 2020 or up some 18 billion. It was more like 150 billion when this century began and really lifted off as a combination of the credit crunch and then the Euro area crisis hit. In 2012 some 107 billion Euros or so was lopped off by the Private Sector Involvement. or haircut although in a familiar pattern debt according to the official body only fell by around 50 billion. The ECB was involved here as it essentially was willing for anyone except itself to see a haircut ( regular readers will recall it insisted all bonds were 100% repaid).

This has meant that the debt to GDP ratio has soared, Initially a target of 120% was set mostly to protect Italy and Portugal  but that backfired hence the PSI. Then there was a supposed topping out around 170% but now we are told it ended 2020 at 205.6%.

There is a structural difference in the debt because so much is in what is called the official sector as highlighted below.

The majority (51%) of Greek debt is held by the European Stability Mechanism and this ensures low interest rates and a long repayment period.

Whilst it has exited in terms of flow the IMF is still there and with the various other bodies means the official sector now holds 80% of the stock.

That 80% is both decreasing and increasing. What do I mean? Well Greece is now issuing bonds again and here is this morning’s example.

The reopening of a 10-year bond issue by Greek authorities on Wednesday attracted 26 billion euros in bids and the interest rate of the issue was set 0.92 percent (Mid Swap + 82 basis points), down from an initial 1.0%. (keeptalkinggreece )

The actual issue is some 2.5 billion Euros and for perspective is much cheaper than the US ( ~1.5%) and a bit more expensive than the UK ( ~0.75%). A vein which the Greek Prime Minister is keen to mine.

Another sign of confidence in the Greek recovery and our long-term prospects. Today we issued a 10-year bond with a yield of approximately 0.9%. The country is borrowing at record low interest rates.

If only record low interest-rates were a sign of confidence! In such a world Greece would soon be surging past the US. Meanwhile we can return to the factor I opened with which is the ECB.

When it comes to ECB QE, Greece is different. The ECB has bought €25.7bn in GGBs under the PEPP so far, which is about €24bn in nominal terms, or 32% of eligible debt securities (GGB universe rose by €3bn in May, and by €11bn ytd). So, what happens next? ( @fwred )

As you can see Greece has been issuing new debt but overall the ECB has bought more than it has issued. There are two ironies here as its purchases back in the day were supposed to be a special case and here it is back in the game. Also Greece is not eligible under its ordinary QE programme. Probably for best in technical terms because if it was it would be breaking its issuer limits.


This is a really thorny issue because this remains the plan for Greece.

Achieve a primary surplus of 3.5% of GDP over the

That is from the Enhanced Surveillance Report of this month. That is the opposite of the new fiscal policy zeitgeist. Not only is it the opposite of how we started this week ( looking at the US) but even the Euro area has joined the game with its recovery plan and funds. The catch here is that everything is worse than when the policy target above was established.

The Greek economy contracted by 8.2% in 2020,
somewhat less than expected, but still considerably more than the EU as a whole, mainly on
account of the weight of the tourism sector in the economy……Greece’s primary deficit monitored under enhanced surveillance reached 7.5% of GDP
in 2020.

In terms of the deficit more of the same is expected this year and then an improvement.

The authorities’ 2021 Stability Programme
projects the primary deficit to reach 7.2% of GDP in 2021 and 0.3% of GDP in 2022.


There is a clear contradiction in the economic situation for Greece. The austerity programme which began according to US Treasury Secretary Geithner as a punishment collapsed the economy, By the time the policy changed to “solidarity” all the metrics had declined and the Covid-19 pandemic has seen growth hit again and debt rise.  The debt rise does not matter much these days in terms of debt costs because bond yields are so low and because so much debt is officially owned. The problem comes with any prospect of repayment as the 2030s so not look so far away in such terms now. That brings us back to the theme I established for the debt some years ago, To Infinity! And Beyond!. But for now the Euro area faces a conundrum as the new fiscal opportunism is the opposite of the plan for Greece.

We can find some cheer in the more recent data such as this an hour or so ago.

The seasonally adjusted Overall Industrial Production Index in April 2021 recorded an increase of 4.4% compared with the corresponding index of March 2021……..The Overall Industrial Production Index in April 2021 recorded an increase of 22.5% compared with April 2020.

Although context is provided by this.

The Overall IPI in April 2020 decreased by 10.8% compared with the corresponding index in April 2019

Plenty more quarters like this would be welcome.

The available seasonally adjusted data
indicate that in the 1st quarter of 2021 the Gross Domestic Product (GDP) in volume terms increased by 4.4% in comparison with the 4th quarter of 2020, while in comparison with the 1st quarter of 2020, it decreased by 2.3%.

For a real push tourism would need to return and as we are already in June the season is passing. But let us end on some good cheer and wish both their players good luck in the semi-finals of the French Open tennis.



The UK inflation debate is heating up

The last 24 hours have seen quite a pick-up in the debate over likely levels of infation in the UK. The starting gun was fired by a letter to the Financial Times from Baron King of Lothbury although I note it is described as coming from Mervyn King. Actually the opening is really rather curious.

Price stability is when people stop talking about inflation. It is a long time since inflation was a talking point and memories of an inflationary past are short.

That is because much of 2021 in financial markets has revolved around talk about inflation. Indeed whilst I doubt the word “transitory” is used on the modern equivalent of the Clapham omnibus those who follow financial markets will be aware of its significance. We have inflation building in the world financial system and central bankers are ignoring it because they claim it will fade quickly. The headline case of this comes tomorrow with the US CPI numbers for May. But perhaps such matters do not get discussed at the House of Lords.

Our member of the most noble order of the garter is on much warmer ground here I think.

First, the large monetary and fiscal stimulus injected in the advanced economies is out of all proportion to the magnitude of any plausible gap between aggregate demand and potential supply.

Whilst in many areas we have little idea of potential supply the stimulus has been so large he has a case which is also true about the area below.

The silence of central banks on current high growth rates of broad money has been deafening.

This is a subject to which a blind eye has in general been turned. Actually central bankers will be keen on part of the formal monetarist argument here. That is that the broad money growth flows straight into nominal GDP ( Gross Domestic Product) growth with a lag. They are hoping this will happen much more quickly than the 18/24 month lag of traditional theory. Also their swerve if you will, is assuming it will turn into real growth rather than inflation. The latter is the rub and if history is any guide we will see some and as the push has been large the risk is that the inflationary impact is large too.

The next bit meshes several arguments together.

Second, a combination of political pressure to assist in financing budget deficits, unwise central bank promises not to tighten policy too soon and an expansion of central bank mandates into political areas such as climate change, all threaten to weaken de facto central bank independence leading to a slow response to signs of higher inflation.

It is nice to agree with him for once as the bit suggesting central bank “independence” has effectively morphed into keeping bond yields low is true. The mission creep argument is also true as central banks get out tins of green wash. The Bank of England got out another tin yesterday.

Today we launch an exercise to find out how climate-related risks could affect large UK banks and insurers. Our Climate Biennial Exploratory Scenario investigates the effects of taking climate action early, late or not at all.

Considering the problems they have had with economic models which is supposedly an area of expertise then if I was them I would steer clear of scenarios about which it must know even less.

Our climate scenarios help us to understand the risks UK banks and insurers may face from a hotter world. In our scenario where no additional action is taken, global warming reaches 3.3 °C.

As to the mention of unwise central bank promises our Merv is on weaker ground as he made his own.

Finally we end as we started.

It is when central banks stop talking about inflation that we should be concerned.

The issue is summarised by the use of the word “transitory” again. It is being talked about meaning it is the assumed conclusion that is the problem. It leads us to one of the core central banking problems which is if you dither and delay you will be too late. That leads us to the suspicion that this is an excuse not to act as it feeds the “It’s too late now” line of Sir Humphrey Appleby in Yes Minister.

Andy Haldane

Proof that central bankers are discussing inflation was provided this morning by the Bank of England’s chief economist.

Bank of England Chief Economist Andy Haldane said on Wednesday there were already “some pretty punchy pressures on prices” and the central bank might need to turn off the tap of its huge monetary stimulus.

“If both pay, and costs are picking up, inflation on the high street isn’t very far behind. And that’s something, you know, people like me are paid to keep a close eye on and we are,” ( Reuters)

He was on LBC Radio and frankly that could have been from a script written by Baron King of Lothbury. As was this.

“And that may mean that at some stage we need to start turning off the tap when it comes to the monetary policy support we have been providing over the period of the COVID crisis.”

Although even he is being rather vague “at some stage” albeit to be fair he did vote to reduce the planned amount of QE bond buying of which there will be another £1.15 billion today.

This bit is really rather confused.

He has previously warned of the risk of a jump in inflation as the economy bounces back from its lockdown crash.

Haldane told LBC that there was still a need to encourage households to spend which might be made easier if companies paid their workers more.

How can you encourage people to spend in a boomlet ( Bloomberg quote him saying the economy is “going gangbusters”) without risking inflation? The inflation risk rises further if he gets the higher wages he wants.

The final punchline according to Reuters was this.

“The risks at the moment for me are that we might overshoot that number for a bit longer than we’ve currently planned,” Haldane said.


There are several issues here and let’s start with our former Governor. He claims there has been no debate when in fact there has been one but that is the issue as it has been one-sided. Also he has two skeletons in his own cupboard. Back in 2010/11 he “looked through” a rise in UK inflation ( both CPI and RPI) went above 5% and even more significantly that led to a decline in real wages we have never really recovered from. Also in spite of claiming he wanted owner-occupied housing costs in the inflation measure it was on his watch ( the switch from RPI to CPI) they were removed and even more significantly have never been replaced after nearly two decades. So news like this from Monday points straight at him.

“House prices reached another record high in May, with the average property adding more than £3,000 (+1.3%) to its
value in the last month alone” ( Halifax)

If we now switch to our “loose cannon on the deck” Andy Haldane there is the issue of wages. These have been struggling in the UK for more than a decade. Recent evidence albeit from the US is that firms have resisted raising wages in response to shortages. Also some workers have found the furlough schemes to be a disincentive. Thus the picture here is both cloudy and complex.

But there is something behind this because the central banks have ignored history and seem determined to continue doing so.

Digital Currencies are on their way accompanied by negative interest-rates

The issue of a digital currency is something that is increasingly occupying both the minds and the attention of central bankers. This morning has given another example of that because as I was about to look at a couple of developments this appeared on the news wires.

Hong Kong monetary authority says it will explore issuing an e-HK dollar ( @PriapusIQ )

It would be simpler if we got a list of central banks that are not looking at it! They all have the two main drivers for this. The first is that digital currencies provide a challenged to the banks or as central banks see it “The Precious! The Precious!”. The next is their fear of the consequences of what they call the lower bound for interest-rates. Whilst this has clearly got lower to the embarrassment for example of Governor Carney of the Bank of England who assured us several times it was 0.5% in the UK and then helped to reduce it to 0.1%. There are fears in the central banking community that many have got close to if not at as low as they can go. There is a reason the ECB has not cut its deposit rate below -0.5%. So we move onto their plans for in some cases negative interest-rates in the next recession ( UK) and deeper ones ( Euro area)

Money Money Money

The issue here is the role of banks in the creation of money. Here is the Bank of England explaining this yesterday.

In the modern economy,most money takes the form of bank deposits. The principle way these deposits are created is through commercial banks creating loans.

We see here much of the reason for the central banking view that banks are “The Precious! The Precious!” and it continues.

Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money. For example, when a bank extends a mortgage to someone to buy a house, it does not typically do so by giving them thousands of pounds of bank notes. Instead, it credits their bank account with a bank deposit the size of the mortgage. At that moment money is created.

It is revealing I think that that they choose a mortgage as an example rather than business lending. But the real point here is the vital role of banks in most money creation in our monetary system. It is this that is the real “high powered money” rather than the version in the theories of economics text books which focused on central banks. If that had been right QE would have launched economies forward and we would not be where we are.

Banks are not limited as many think by some rule in the form of a money multiplier. The UK has not had anything like that for some decades. There is a limit from this.

Banks are limited in how much they can lend if they are to remain profitable in a competitive banking system.

Although that has had quite a bit of trouble as banks have in modern times struggled to make much if any profit at all. They have required quite a bit of help and some collapsed quite spectacularly with large losses. Another potential limit is prudential regulation which as I am sure you have spotted ties the banks ever more closely to the central bank.

In some ways the main restriction these days comes from us.

for instance they could quickly “destroy” money by using it to repay their existing debt.

This has been happening in the world of UK unsecured credit as highlighted a few days ago.

Individuals have made significant net repayments of consumer credit since March 2020 (Chart 2). The further net repayment of £0.4 billion in April this year was, however, less than seen on average each month over the previous year (£1.7 billion).

It is rarely put like this but money has been “destroyed”. How very dare they! Won’t anybody think of The Precious?

For a central bank replacing this with Facebook’s currency or one from any of the other tech giants in existence or about to start does not bear thinking about. It may even have been a string factor in the new apparent enthusiasm for taxing them.

Negative Interest-Rates

This is the fantasy world of central bankers thus we find that the road to negative interest-rates is described as one with higher ones.

In response to deposits migrating to new forms of digital money, banks are assumed to compete for deposits. And they do this by offering higher interest rates.

Actually Bank of England policy ( Funding for Lending Scheme and the various Term Funding Scheme’s) has been designed to avoid this for some time. Indeed this has not really happened since our favourite Charlie Professor Sir Charles Bean promised it back in September 2010.

 “It’s very much swings and roundabouts. At the current juncture, savers might be suffering as a result of bank rate being at low levels, but there will be times in the future — as there have been times in the past — when they will be doing very well.

Actually Sir Charles has done really rather well adding the Office of Budget Responsibility and a Professorship at the LSE to his RPI-linked pension. Savers meanwhile have been stuck on the roundabouts.

Returning to its scenario the Bank makes various assumptions which lead us to this.

The interest rate banks pay on long-term wholesale funding is typically higher than on deposit funding. Other things equal, replacing lost deposits with more long-term wholesale funding therefore implies an increase in banks’ overall funding costs.

This leads us to banks charging more which many people will be familiar with. After all banks are perfectly capable of managing that without all the assumptions and intellectual innovation displayed in the discussion paper.

Under this assumption, both funding costs and bank lending rates rise by around 20 basis points.

In fact a 0.2% increase on overdraft rates which these days are 30% plus would hardly be noticed nor on credit cards. Commercial borrowing is something that may act differently mostly I think due to scale.

Under the illustrative scenario, it is assumed that some corporate borrowers find it cheaper to take advantage of credit opportunities in the non-bank sector. For example, medium-sized UK companies who were previously unwilling to accept costs associated with non-bank sources of credit, but who now find it cheaper to do so than borrowing from a bank.


This is another step on the road to ever lower interest-rates combined with central bankers twisting and turning to find a future for the banks. This is because the system as it stands suits them both.

Monetary policy is mainly implemented by setting the interest rate paid on reserves held at the central bank by commercial banks. This interest rate is known as Bank Rate.

Or at least that is their view because as we look around we see that it has in fact become less and less relevant.

Towards the end of the paper – and thus less likely to be reported- we end up at our destination though.

If it was preferred to cash, a central bank digital currency could also soften the lower bound on monetary policy.

Here is the Bank of England version of this.

In principle, a CBDC could be used, in conjunction with a policy of restricting the use of cash. If the interest rate on the CBDC could go negative, this could soften the effective lower bound on interest rates and lower the welfare loss associated with the opportunity cost of holding cash.

Actually you just set an exchange-rate between the two as the IMF suggested and Hey Presto! You have -2% or -3% and a strict form of financial repression.




Secretary Yellen shifts the fiscal policy goal posts

The weekend just gone brought with it a clear hint of economic policy ahead. It came from the US Treasury Secretary Janet Yellen who is in the process of making something of a transition. Like Mario Draghi in Italy she is making the switch from supposedly independent central banker to politician. Both as they have emerged from their chrysalis have become advocates for fiscal policy but Janet is taking things a step further.

G7 economies have the fiscal space to speed up their recoveries to not only reach pre-COVID levels of GDP but also to support a return to pre-pandemic growth paths. This is why we continue to urge a to shift in our thinking from “let’s not withdraw support too early” to “what more can we do now.” Not just to end the pandemic, but to use fiscal policy to invest in addressing generational issues like climate change and inequality.

She has clearly gone further than this below which we had become used to.

Fiscal policy has an important role to play in responding to crises and supporting the recovery. The IMF projects that the U.S. will be the first G7 economy to return to its pre-pandemic output level. That’s in part due to our rapid vaccine rollout, but also ambitious fiscal support in policies like the American Rescue Plan.

So as well as the fiscal plan to get the US economy going again we can expect “More,More, More” from the Biden administration. Indeed in her replies to the press Secretary Yellen offered the same prescription to everyone else.

And we think that most countries have fiscal space, and have the ability to put in place, fiscal policies that will continue promoting recovery and deal with some of the long-run challenges that all of us face when it comes to climate change and inclusive and sustainable growth, and we urge countries to do that.

This is a challenge to what we were told at the end of last month by the President of the German Bundesbank Jens Weidmann.

“It must be clear to all that we are not putting monetary policy into the service of fiscal policy,” the Bundesbank President said. “It is essential to keep fiscal assistance measures targeted and temporary to reduce the likelihood of conflicts arising between monetary and fiscal policy.”

Indeed Jens then if anything went further here.

Mr Weidmann also cautioned against letting the current high degree of government intervention in the economy become the new normal.

A Worldwide Move

As well as the promises of US action and urges for other developed nations to do the same there was this.

The G7 reiterated our support for a new allocation of IMF Special Drawing Rights to boost global reserves and provide additional liquidity as IMF members confront the crisis. We strongly support the IMF providing clear, tailored guidance to countries on how best to utilize their new SDRs, as well as proposals to increase transparency in and accountability for how SDRs are used.

There is a merging of monetary and fiscal policy here. At the start this is an expansion of the world money supply via an increase in SDRs. But it will quickly become fiscal policy as the IMF spends the funds that have just been raised. Politicians love this sort of thing because it is near to a “free lunch” they will get because there is no-one with any ability to object such as those pesky voters.

We wait to see how much of an increase there will be in this.

So far SDR 204.2 billion (equivalent to about US$293 billion) have been allocated to members, including SDR 182.6 billion allocated in 2009 in the wake of the global financial crisis.

The US Treasury has previously suggested this.

To this end, Treasury is working with IMF management and other members toward a $650 billion general allocation of SDRs to IMF member countries.

As you can see it would be quite an expansion and perhaps at some point they will key us know who needs global reserve assets? Apart from them of course.

Addressing the long-term global need for reserve assets would help support the global recovery from the COVID-19 crisis

Back in the USA

Before we reach the international environment there are a couple of elephants in the room as we note the subject du jour appearing again.

Q: I guess some people would say seeing U.S. inflation where it is, seeing the serious sheer size of the public deficits, not just in your country but around Europe, you’re now saying go even further.

Which got this response.

SECRETARY YELLEN: Well, we have in recent months seen some inflation. And we, at least on a year-over- year basis will continue, I believe through the rest of the year, to see higher inflation rates, maybe around 3 percent.

If she is a De La Soul fan then there is some logic to this.

That’s the magic number
Yes it is
It’s the magic number

But in reality she is trying to get away with as small a number as she can. Also I am sure you were all waiting for this bit.

But I personally believe that this represents transitory factors.

As everything ends she will be right but we may all be poorer well before then. Also she seems to be doing some cherry-picking.

 without affecting the underlying inflation rate

Like house prices which do not appear in either of the 2 main inflation measures? Ignoring something rising at over 10% per annum and replacing it by something rising at more like 2% helps you tell people inflation is low. The problem comes when they have to actually pay their bills.

In essence Secretary Yellen is saying the US government is targeting this.

Look, we still have over 7 million fewer jobs right now than we had pre-pandemic.

The catch is the assumption that fiscal policy fixes all ills. No doubt some will benefit but if the numbers are a result of structural changes in the economy others may not.


When interviewed by Bloomberg Secretary Yellen gave a different perspective.

“If we ended up with a slightly higher interest rate environment it would actually be a plus for society’s point of view and the Fed’s point of view,” Yellen said Sunday in an interview with Bloomberg News during her return from the Group of Seven finance ministers’ meeting in London.

This is an issue we looked at on the 5th of May when Secretary Yellen also seemed to think she still had her old job as head of the Federal Reserve. Actually whilst we did see a shift upwards in bond yields earlier this year they have if anything retraced a little in the last couple of months.


There is a clear attempt here to open a path to more expansionary fiscal policy outside the US. Whilst it does not get a mention ( with may be very revealing) this is an issue for a fiscal stimulus.

The U.S. monthly international trade deficit increased in March 2021 according to the U.S. Bureau of Economic Analysis and the U.S. Census Bureau. The deficit increased from $70.5 billion in February (revised) to $74.4 billion in March, as imports increased more than exports.

Expansions elsewhere and hence more demand for US exports would help with this.

The next issue is inflation as we get told that any response will be too late.

And while we’re seeing some inflation, I don’t believe it’s permanent. But we will watch this very carefully. I don’t want to say, “this is mind absolutely made up and closed.” We’ll watch this very carefully, keep an eye on it and try to address issues that arise if it turns out to be necessary.

It looks as though we will be discussing the fiscal multiplier ( how much bang you get for your buck) quite a bit over the next year or two.