The Bank of Japan begins to face its failures

The last couple of weeks have seen two of the world’s main central banks strongly hint that the path for interest-rates is now lower, or perhaps I should say even lower. So as we open this week my thoughts turn eastwards to what the Shangri-Las would call the leader of the pack in this respect, Nihon or Japan. If we look at the Nikkei newspaper we see that Governor Kuroda of the Bank of Japan has also been conducting some open mouth operations.

TOKYO — Bank of Japan Governor Haruko Kuroda said extra stimulus would be an option if prices refuse to keep rising toward the central bank’s 2% inflation target.

The BOJ “will consider extra easing measures without hesitation” if the economy runs into a situation where momentum toward reaching stable inflation is lost, Kuroda said at a news conference on Thursday in Tokyo after keeping monetary policy unchanged.

There are various problems with this which start with the issue of inflation which has simply not responded to all the stimulus that the Bank of Japan has provided.

  The consumer price index for Japan in May 2019 was 101.8 (2015=100), up 0.7% over the year before seasonal adjustment,   and the same level as the previous month on a seasonally adjusted basis. ( Statistics Bureau).

This has been pretty much a constant in his term ( the only real change was caused by the rise in the Consumption Tax rate in 2014) and as I have pointed out many times over the years challenges Abenomics at its most basic point. If we stick to the monthly report above the situation is even worse than the overall number implies. This is because utility bills are rising at an annual rate of 3.2% but this is offset by other lower influences such as housing where the annual rate of (rental) inflation is a mere 0.1%. Also the services sector basically has virtually no inflation as the annual rate of change is 0.3%. Even the Bank of Japan does not think there is much going on here.

On the price front, the year-on-year rate of change in the
consumer price index (CPI, all items less fresh food) is in the range of 0.5-1.0 percent. Inflation expectations have been more or less unchanged.


On Friday we got the latest wages data which showed that real wages fell at an annual rate of 1.4% in April, This meant that so far every month in Japan has seen real wages lower than the year before. If we look back we see that an index set at 100 in 2015 was at 100.8 in 2018 so now may well be back where it started.

This matters because this was the index that Abenomics was aimed at. Back in 2012/13 it was assumed by its advocates that pushing inflation higher would push wages even faster. Whereas that relationship was struggling before the credit crunch and it made it worse. Indeed so strong was the assumed relationship here that much of financial media has regularly reported this it has been happening in a version of fake news for economics. The truth is that there has been an occassional rally such as last summer’s bonus payments but no clear upwards trend and the numbers have trod water especially after Japan’s statisticians discovered mistakes in their calculations.

Problems for economics

Back when QE style policies began there was an assumption that they would automatically lead to inflation whereas the situation has turned out to be much more nuanced. As well as an interest-rate of -0.1% the Bank of Japan is doing this.

With regard to the amount of JGBs to be purchased, the Bank will conduct purchases in a flexible manner so that their amount outstanding will increase at an annual
pace of about 80 trillion yen……….The Bank will purchase exchange-traded funds (ETFs) and Japan real estate
investment trusts (J-REITs) so that their amounts outstanding will increase at annual
paces of about 6 trillion yen and about 90 billion yen, respectively…….As for CP and corporate bonds, the Bank will maintain their amounts outstanding at
about 2.2 trillion yen and about 3.2 trillion yen, respectively.

Yet we have neither price nor wage inflation. If we look for a sign of inflation then it comes from the equity market where the Nikkei 225 equity index was around 8000 when Abenomics was proposed as opposed to the 21,286 of this morning. Maybe it is also true of Japanese Government Bonds but you see selling those has been something of a financial widow maker since around 1990.

Misfire on bond yields

2019 has seen yet another phase of the bond bull market which if we look back has been in play since before the turn of the century. But Japan has not participated as much as you might think due to something of a central planning failure.

The Bank will purchase Japanese government bonds (JGBs) so that 10-year JGB yields will remain at around zero percent. While doing so, the yields may move upward
and downward to some extent mainly depending on developments in economic activity and prices.

That was designed to keep JGB yields down but is currently keeping them up. Ooops! We see that bond yields in Germany and Switzerland have gone deeper into negative territory than in Japan. If we compared benchmark yields they go -0.31% and -0.51% respectively whereas in Japan the ten-year yield is -0.15%.

Economic Growth

On the face of it the first quarter of this year showed an improvement as it raised the annual rate of economic or GDP growth to 0.9%. That in itself showed an ongoing problem if 0.9% is better and that is before we get to the fact that the main feature was ominous. You see the quarterly growth rate of 0.6% was mostly ( two-thirds) driven by imports falling faster then exports, which is rather unauspicious for a trading nation.

If we look ahead Friday’s manufacturing PMI report from Markit posted a warning.

June survey data reveals a further loss of momentum
across the manufacturing sector, as signalled by the
headline PMI dropping to a three-month low. Softer
demand in both domestic and international markets
contributed to the sharpest fall in total new orders for
three years. A soft patch for automotive demand…..

The last few words are of course no great surprise but the main point here is the weaker order book. So Japan will be relying on its services sector for any growth. Also there is the issue of the proposed October Consumption Tax hike from 8% to 10% which would weaken the economy further. So we have to suspect it will be delayed yet again.


To my mind the Abenomics experiment never really addressed the main issue for Japan which is one of demographics. The population is both ageing and shrinking as this from the Yomiuri Shimbun earlier this month highlights.

The government on Friday released a rough calculation of vital statistics for 2018, revealing that the number of deaths minus births totaled 444,085, exceeding 400,000 for the first time.

The latest numbers on Thursday showed yet another fall in children (0-15) to 12.1% of the population and yet another rise in those over 85 to 4.7%. In many ways the latter is a good thing which is why economics gets called the dismal science. The demographics are weakening as Japan continues to borrow more with a national debt of 238% of GDP.

The size of the national debt is affordable at the moment for two reasons. The first is the low and at times negative level of bond yields. Next Japan has a large amount of private savings to offset the debt. The rub is that those savings are a buffer against the demographic issue and there is another problem with Abenomics which I have feared all along. Let me hand you over to a new research paper from the Bank of Japan.

The reversal interest rate is the rate at which accommodative monetary policy
reverses and becomes contractionary for lending. Its determinants are 1) banks’
fixed-income holdings, 2) the strictness of capital constraints, 3) the degree of passthrough to deposit rates, and 4) the initial capitalization of banks.

So it looks like they are beginning to agree with me that so-called stimulus can turn out to be contractionary and there is more.

The reversal interest rate creeps up over time, making steep but short rate cuts preferable to “low for long” interest rate environments.

Exactly the reverse of what Japan has employed and we seem set to copy.


An economic tsunami is hitting Venezuela

Last night a 7.3 magnitude earthquake hit the nation of Venezuela that must feel like it has the four horsemen of the apocalypse on its case right now. Fortunately there does not seem to have been major damage but we cannot say that about the economic earthquake that has been hitting it in recent times. As ever I will do my best to avoid politics in what has become a politically charged area and merely point out that it is another case of a country being held up as an economic model and then seeing trouble hit just like we have seen with Turkey. However the problems here are on a much larger scale.

If we go back to the 7th of November 2013 then Mark Weisbot told us this in the Guardian.

Will those who cried wolf for so long finally see their dreams come true? Not likely.

But how can a government with more than $90bn in oil revenue end up with a balance-of-payments crisis? Well, the answer is: it can’t, and won’t. In 2012 Venezuela had $93.6bn in oil revenues, and total imports in the economy were $59.3bn……… This government is not going to run out of dollars.

Hyperinflation is also a very remote possibility.

And then perhaps the denouement.

Of course Venezuela is facing serious economic problems. But they are not the kind suffered by Greece or Spain, trapped in an arrangement in which macroeconomic policy is determined by people who have objectives that conflict with the country’s economic recovery.

With one bound it could be free.

Venezuela has sufficient reserves and foreign exchange earnings to do whatever it wants, including driving down the black market value of the dollar and eliminating most shortages.

Sadly for Venezuela that analysis has turned out to be a combination of wishful thinking and castles in the sky. Let us start with what should be the jewel in the crown which is oil production as I recall back in the day London Mayor Ken Livingstone planning a big oil deal with Venezuela. From the BBC in February 2007.

Ken Livingstone has signed an oil deal with Venezuela – providing cheap fuel for London’s buses and giving cut price travel for those on benefits.

Now we see very different times as Venezuela seems unable to get the oil out of the ground and to markets as reported on Monday.

Venezuela’s oil production continues to decline. In July, output fell to just 1.278 million barrels per day (mb/d), down 500,000 bpd from the fourth quarter of last year and down nearly 1 mb/d from two years ago. A growing number of analysts see output dipping below the 1-million-barrel-per-day mark by the end of 2018.

This is a big deal for an economy that was summarised like this by Forbes last November.

Venezuela’s oil available for export is at its lowest level since 1989. The lost revenue devastates: Oil sales are 50% of Venezuela’s GDP and 95% of its export revenue.

We can do a rough calculation as according to the Latin America Herald Tribune this is the price of oil there.

According to Venezuelan government figures, the average price in 2018 for Venezuela’s mix of heavy and medium crude for 2018 which Caracas now prices in Chinese Yuan is now $59.41.

So as a rough rule of thumb it has been losing some US $60 million a day so far  in 2018. Also I do not know about you but if your largest customer is US oil refineries then trying to price your oil in Yuan does not seem well thought out! Actually what we might call the potential loss is extraordinary as the Herald Tribune continues.

In 1998, the year prior to Hugo Chavez becoming president, Venezuela was producing 3.5 million bpd and had plans to increase that production go 6 to 8 million bpd by 2008.

There are two main consequences here as we note the impact on Venezuela itself which is highly deflationary and on the rest of us which is inflationary. This is because it is this lack of production which has helped drive oil prices higher as Venezuela is a long way short of its OPEC quota.

Money Money Money

There is plenty of this and in theory much more as Reuters hinted at on Friday.

Jittery Venezuelans on Friday rushed to shops and lined up at gas stations on concerns that a monetary overhaul to lop off five zeros from prices in response to hyperinflation could wreak financial havoc and make basic commerce impossible.

Sadly the website of the Central Bank of Venezuela cannot be reached so Bloomberg takes up the tale.

The official rate for the currency will go from about 285,000 per dollar to 6 million, a shock that officials tried to partly offset by raising the minimum wage 3,500 percent to the equivalent of just $30 a month……..The devaluation comes at the same time the government is redenominating the currency by lopping off five zeros and introducing new bills and a name change. So instead of the new minimum wage being 180 million strong bolivars, it will be 1,800 sovereign bolivars. Banks were closed and busy trying to adopt ATMs and online platforms to the new currency rules.

My financial lexicon for these times would of course have warned about any currency with “strong” in its title and the strong Bolivar has behaved as the novel 1984 would suggest. As to inflation please do not adjust your sets ( or screens).

One likely outcome is that inflation, which already was forecast to reach 1 million percent this year, will get fresh fuel from the measures. Prices are currently rising at an annualized rate of 108,000 percent, according to Bloomberg’s Café con Leche index.

If I was there I would only be able to help by providing an inflation index for prisoners as for quite some time it has been illegal to try to measure inflation. If we step back for a moment the numbers here do evoke images of Weimar Germany and the hyperinflation then.

In Venezuela, the old bolivar bills could be seen muddied and crumpled up on the street, so worthless that not even street beggars picked them up. ( Wall Street Journal).

Or to put it another way pictures of cash in wheelbarrows from back then have been replaced by pictures like this.

In theory the currency has backing but in practice we will have to wait and see.


What we are seeing here is the breakdown of basic economic concepts. Let us start with the simple concept of how to price things.

Many shopkeepers said they had no idea how much to charge customers ( WSJ)

This has a lot of consequences. Firstly how can they operate and sell anything? Basic concepts such as value of stock break down and the value of the business. So it is no surprise that many shops have shut. The concept of a price has broken down which means so has inflation.

Next there is the issue of what Abba called money,money money. As it too loses much meaning. For example the person quoted below in the Wall Street Journal has not been able to get cash for five months!

When Henrique Rosales got to the automated-teller machine on Tuesday to withdraw Venezuela’s new currency, he found it dispensed a maximum of 10 sovereign bolivars a day, the equivalent of 15 U.S. cents.

“This money is going to disappear out of my hands in no time,” said the 29-year-old waiter, who said he hasn’t seen cash in five months. He hasn’t been able to pay for bus fare and walks several miles a day from his hilltop slum to the seafood eatery where he works.

In such a situation the concept of a money supply breaks down as well as if we are in trouble with the cash or high-powered money element what about the rest? If we look at the UK we see that narrow money is about 3% and the other 97% we can summarise as bank lending. But how can banks in Venezuela lend right now? Do they even have the faintest idea what the bank is worth let alone whether it is wise to lend to the customer?

The truth is that numbers like GDP and the like become pretty much meaningless at a time like this as if we do not even have a price the whole theoretical structure breaks down. What we will see are toe factors at play. There must be an element of barter going on and probably a large one and irony of ironies a lot of transactions must be in US Dollars. Back at the height of the Ukraine crisis I pointed out that we needed a US Dollar money supply as well and let us bring things really up to date as we may well need to measure this too.

Cryptocurrency Dash is seeing a surge in new merchant sign-ups and wallet downloads in Venezuela as hyperinflation in the country runs wild………..”We are seeing tens of thousands of wallet downloads from the country each month,” Ryan Taylor, the CEO of the Dash Core Group, told Business Insider. “Earlier this year, Venezuela became our number two market even ahead of China and Russia, which are of course huge into cryptocurrency right now.” ( Business Insider)

At a time like this we perhaps get the clearest guide from other indicators.

Over the past three years about 3,000 Venezuelans have entered Colombia every day and the country has granted temporary residence to more than 800,000.

Peru says that last week alone, 20,000 Venezuelans entered the country. ( BBC)

Meanwhile the Economist Intelligence Unit does give us a clue as to a cause of the hyper inflation.

The government heavily relies on monetisation to fund its deficits,

Why are we told some inflation is good for us?

A major topic in the world of economics is the subject of inflation which has been brought into focus by the events of the past 2/3 years or so. First we had the phase where a fall in the price of crude oil filtered through the system such that official consumer inflation across many countries fell to zero per cent on an annual basis and in some cases below that. If you recall that led to the deflation scare or it you will excuse the capitals what much of the media presented as a DEFLATION scare. We were presented with a four horsemen of the apocalypse style scenario where lower and especially negative inflation would take us to a downwards spiral where wages and economic activity fell as well along the line of this from R.E.M.

It’s the end of the world as we know it.
It’s the end of the world as we know it.

I coined the phrase “deflation nutter” to cover this because as I pointed out, Greece the subject of yesterday suffered from quite a few policy errors pushing it into depression and that on the other side of the coin for all its problems Japan had survived years and indeed decades of 0% inflation. Indeed on the 29th of January 2015 I wrote an article on here explaining how lower consumer inflation was boosting consumption across a range of countries via the positive effect it was having on real wages.

 if we look at the retail-sectors in the UK,Spain and Ireland we see that price falls are so far being accompanied by volume gains and as it happens by strong volume gains. This could not contradict conventional economic theory much more clearly. If the history of the credit crunch is any guide many will try to ignore reality and instead cling to their prized and pet theories but I prefer reality ever time.


Relative prices

The comfortable cosy world of central bankers and theoretical economists told us and indeed continues to tell us that we need positive inflation so that relative prices can change. That leads us to the era of inflation targets which are mostly set at 2% per annum although of course there is a regular cry for inflation targets to be raised. However 2015/16 torpedoed their ship as if we just look at the basic change we saw a large relative price adjustment for crude oil leading to adjustments directly to other energy costs and a lot of other changes. Ooops! Even worse for the theory we saw two large sectors of the economy respond in opposite fashion. A clear example of this was provided by my own country the UK where services inflation barely changed and ironically for a period of deflation paranoia was quite often above the inflation target. But the goods sector saw substantial disinflation as it was it that pulled the overall measure down to around 0%.

We can bring this up to date by looking at the latest data from the Statistics Bureau in Japan.

  The consumer price index for Ku-area of Tokyo in October 2017 (preliminary) was 100.1 (2015=100), down 0.2% over the year before seasonal adjustment, and down 0.1% from the previous month on a seasonally adjusted basis.

So not only is there no inflation here there has not been any for some time. Yet the latest monthly update tells us that food prices fell by 2.4% on an annual basis and the sector including energy fuel and lighting rose by 7.1%. Please remember that the next time the Ivory Towers start to chant their “we need inflation so relative prices can adjust” mantra.


This is that central banks are in the main failing to reach their inflation targets. For example if we look at the US economy the Federal Reserve targets the PCE ( Personal Consumption Expenditure) inflation measure which was running at an annual rate of 1.6% in September and even that level required an 11.1% increase in energy prices.

So we see central banks and establishments responding to this of which the extreme is often to be found in Japan. From @lemasabachthani yesterday.


Poor old Governor Kuroda whose turning of the Bank of Japan into the Tokyo Whale was proving in his terms at least to be quite a success. From the Financial Times.

Trading was at its most eye-catching in Japan. Tokyo’s Topix index touched its highest level since November 1991, only to end down on the day after a volatile session. At its peak, the index reached the fresh high of 1,844.05 with gains across almost all major segments, taking it more than 20 per cent higher for the year to date. But it faded back in late trade to close at 1,817.75.

It makes me wonder what any proposed new Governor would be expected to do?! QE for what else?

Whereas in this morning’s monthly bulletin the ECB ( European Central Bank) has told us this.

Following the decision made on 26 October 2017 the monthly pace will be further reduced to €30 billion from January 2018 and net purchases will be carried out until September 2018. The recalibration of the APP reflects growing confidence in the gradual convergence of inflation rates towards the ECB’s inflation aim, on account of
the increasingly robust and broad-based economic expansion, an uptick in measures of underlying inflation and the continued effective pass-through of the Governing
Council’s policy measures to the financing conditions of the real economy.

So we see proposals for central banking policy lost in  a land of confusion as the US tightens, the Euro area eases a little less and yet again the establishment in Japan cries for more, more, more.


There is a lot to consider here as we mull a world of easy and in some cases extraordinarily easy monetary policy with what is in general below target inflation. Of course there are exceptions like Venezuela which as far as you can measure it seems to have an inflation rate of the order of 2000% + . But in general such places are importing inflation via a lower currency exchange rate which means that someone else’s is reduced. Also we need to note that 2017 is looking like a good year for economic growth as this morning’s forecasts from the European Commission indicate.

The euro area economy is on track to grow at its fastest pace in a decade this year, with real GDP growth forecast at 2.2%. This is substantially higher than expected in spring (1.7%)…… 2.1% in 2018 and at 1.9% in 2019.

So then of course you need an excuse for easy monetary policy which is below target inflation! Of course this ignores two technical problems. The first is that at the moment if we get inflation it is mostly from a higher oil price as we mull the likely effects of Brent Crude Oil which has moved into the US $60s. The second is that there is inflation to be found if you look at asset prices as whilst some of the equity market highs we keep seeing is genuine some of it is simply where all the QE has gone. Also there is the issue of house prices where even in the Euro area they are growing at an annual rate of 3.8% so if they were in an inflation index even more questions would be asked about monetary policy.

In a world where wages growth is not only subdued but has clearly shifted onto a lower plane the obsession with raising inflation will simply make the ordinary person worse off via its effect on real wages. Sadly this impact is usually hardest on the poorest.

Me on Core Finance TV




Fears of deflation turn to fears of inflation

The world inflation picture has changed in 2016. It is hard to note that without a wry smile as there was no shortage of so-called expert opinion that when inflation headed towards zero and in some cases to below it that sang along with REM.

It’s the end of the world as we know it.
It’s the end of the world as we know it.

If we think back all sorts of downwards spirals were predicted from the lower inflation but in fact as I pointed out there were benefits such as improvements in real wages leading me to sing along with the next line of the song.

It’s the end of the world as we know it, and I feel fine.

Many workers and consumers will have been singing along with that too. Also the truth was that we were mostly seeing a relative price shift as commodity prices and in particular the oil price fell and reduced overall inflation. This was something which the Ivory Towers had told us could not happen as we apparently needed some inflation for relative price shifts to happen! Another fail for them. So let us take a look at where we are now.

The inflation base provided by services

There always was some inflation beneath the surface which was swamped by the effects of the oil and commodity price fall. Mostly it was to be found in the service sector. For example if we go back to September 2015 in the UK we see that whilst headline official CPI inflation dipped to -0.1% this was also true.

The CPI all services index annual rate is 2.5%, up from 2.3% last month.

Twelves months on in our latest reading it is in fact pretty more ignoring what has gone on elsewhere.

The CPI all services index annual rate is 2.6%, down from 2.8% last month.

A not dissimilar pattern has been found in the Euro area where is we go back to the preliminary forecast for March inflation an overall rise from -0.2% to -0.1% was accompanied by this.

services is expected to have the highest annual rate in March (1.3%, compared with 0.9% in February),

In essence services inflation has been running at an annual rate of around 1% in the euro area for a while.

If we move to the United States then last September this was reported.

The Consumer Price Index for All Urban Consumers (CPI-U) decreased 0.2 percent in September on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today

However services inflation was running at an annual rate of 2.3%. A year later when headline inflation has risen services inflation is 3% and there is now focus on it although mostly because of this issue.

The index for prescription drugs increased 0.8 percent (on the month).

So as you can see in the UK and US in particular services inflation never went away and if we move from consumer measures to the wider economy that sector is of course the largest. The Euro area had the same experience but of a milder level.

Asset Prices

The whole deflation mythology rather ignored the fact that in more than a few places asset prices were rising. In the UK that was particularly noticeable in the rise of house prices which have become increasingly unaffordable whilst the official CPI measure ignores owner-occupied inflation. But there have also been concerns about house price rises in some of Europe, China,Canada, Australia and the US.

What about the oil price?

This was the main game changer for inflation and recently we have seen it rise. Indeed from the lows of below US $30 in January we have seen the price of Brent Crude Oil rise to US $51.73 as I type this. This puts it just under 8% up on a year ago which means that as this feeds into producer prices and then consumer prices the downwards influence from it will fade and then end. We are already seeing some of this effect as for example the energy price component of consumer inflation has seen its annual rate rise from just under -9% to -3% in the Euro area.

Some care is needed here as the oil price has established something of a habit of falling in the latter part of the year. OPEC seems to be doing its best to stop that at the moment but we do not know how that will play out. Should the oil price merely remain around here then we will see the annual rate of price inflation from it rise.

Commodity Prices

These are less clear-cut because a rally in the first half of 2016 has been followed by a decline since. If we look at the CRB ( Commodity Research Bureau) Index it opened 2016 at 373 rose to a peak just below 421 and is now just below 400.  There have been two quite contrary trends at play here where firstly the price of metals surged ( from 540 to 720) whilst foodstuffs at first followed this but then fell over the summer and are now lower than when they started 2016.

The US Dollar

This matters to everyone who does not have the US Dollar as their currency because the vast majority of commodity prices are in US Dollars. So this from does echo on the inflation front.

The dollar index was up 0.10% at 98.74 at 02:45 E, off a high of 98.81, its highest level since early February.

The interest-rate rise that is supposed to be driving this has been supposedly around the corner for all of 2016 but after a dip in April towards 93 the US Dollar Index has been rising since. It has even pushed the strong Japanese Yen back above 104 more recently.

Some of this is individual moves such as the post EU leave fall for the UK Pound but more generally we have seen the Euro decline a little recently and the Chinese continue to fix the Renminbi lower (6.77 today).


The winds of change are blowing through the inflation landscape as we wait to see what the main mover the crude oil price does. Whilst technically it is a relative price shift it is picked up as inflation (or disinflation), and to be fair it does trigger price changes elsewhere. How much inflation will now rise depends on what it does but as I have explained there are factors in the background where the band never stopped playing as we were supposed to be hitting an iceberg. Oh and it means I would far rather be the Austrian government and taxpayer than an investor in this. From Bloomberg.

Austria’s 30-year bund yields were little changed at 1.01 percent as of 10:32 a.m. London time…….The initial price talk for the 70-year bond sale was 60 basis points more than the yield on the February 2047 security, the person said.

So 1.6% for 70 years? No thanks after all we are living in an era of this.

Meanwhile I note that according to FT Alphaville this has been the state of play on the inflation front.

inflation predictions are back in a big way and after more than eight years of being proved wrong time and time again, the inflationistas may finally get to have their day in the sun.

Actually if we look back I was right to suggest that UK inflation would rise back in 2010 as it then on both measures ( CPI & RPI) rose to above 5%. That is an extraordinary thing to have amnesia about as via its disastrous impact on real wages it is one of the most significant phases in post credit crunch UK.

Oh and you may note that for all the hot air (Open Mouth Operations) of central bankers and indeed their QE their efforts have had very little impact here. Of course that is partly to do with the fact that they impact on asset prices which are kept out of most official measures of consumer inflation. It is also partly to do with the fact that devaluing your currency is overall a zero sum game which may give to some but also takes away from others. However this paragraph needs to come with a so far…….


Falling prices have provided quite an economic boost for the UK,Spain, Ireland and now France

Today as we observe in particular the consumer inflation numbers from the Euro area gives an opportunity to look again at one of the main themes of this website. That is my argument that low/no inflation provides an economic boost via higher real wages and hence domestic consumption and demand. Back on the 29th of January 2015 I pointed out this.

However if we look at the retail-sectors in the UK,Spain and Ireland we see that price falls are so far being accompanied by volume gains and as it happens by strong volume gains. This could not contradict conventional economic theory much more clearly.

I also pointed out that those in love with inflation and who claim that against all the evidence that it provides an economic boost – in spite of all the evidence to the contrary – would look away now.

If the history of the credit crunch is any guide many will try to ignore reality and instead cling to their prized and pet theories but I prefer reality ever time.

There are more than a few people around in the UK establishment for example who would like the consumer inflation target to be raised to 3% or 4% from the current 2% per annum.

The orthodoxy challenged

This has been provided by that bastion of orthodoxy the Financial Times already today.

Deflationary pressure persists in France

This gives the impression that something bad is happening there. It is based on this morning’s data release.

Year-on-year, consumer prices should decline by 0.1% in May 2016……..On all markets (French market and foreign markets), producer prices fell back in April 2016 (-0.3% following +0.2%). Year over year, they decreased by 3.9%, mainly due to plummeting prices for refined petroleum products (-30.9%)

The “end of the world as we know it” impression however was contradicted by the data released yesterday.

In Q1 2016, GDP in volume terms* increased by 0.6%, thereby revising the first estimate slightly upwards (+0.5%).

So the best quarter for economic growth driven by “consumption and investment”. Indeed we see this.

Household consumption expenditure recovered sharply (+1.0% after +0.0%).

This rather challenges the way the FT uses “headwinds remain” to describe something that I see as a benefit. Oh and they have used the wrong inflation number as regular readers will be aware of the way it rejects RPI and pushes to CPI in the UK. Well what we call CPI did this.

Year-on-year, it should be stable after a slight decrease during the three previous months (-0.1%).

Oh dear.


The Emerald Isle was one of the countries I expected to do well in response to lower inflation so let us take a look again. From the Central Statistics Office.

The  volume of retail sales (i.e. excluding price effects) increased by 0.8% in April 2016 when compared with March 2016 and there was an increase of 5.1% in the annual figure.

This happened when we note that there was a fall in consumer inflation of 0.2% according to the Euro area standard and heavy price falls in the retail sector.

There was an increase of 0.4% in the value of retail sales in April 2016 when compared with March 2016 and there was an annual increase of 2.5% when compared with April 2015.

So volume up 5.1% but value up 2.5% shows there was both “deflationary pressure” and “headwinds remain” in fact are very strong. So a bit awkward to say the least to explain why volume growth was 5.1%. Actually the figures are very similar to what they were in January 2015 showing that retail sales have done their bit for the Irish economic recovery of the last couple of years.


Here too we have seen an economic recovery so let us look at the retail sales data.

In April, the General Retail Trade Index registered a variation of 4.1% as compared to the same month of 2015, after adjusting for seasonal and calendar effects. This annual rate was three tenths lower than that registered in March. The original series of the RTI at constant prices registered a 6.4% variation as compared to April 2015, standing 2.2 points above the rate of the previous month.

So with a 0.6% rise in the month itself we see that yes this has been a powerful player in the Spanish economic recovery. If we look back we see that the overall pattern does fit the theory whilst retail sales numbers individually can be erratic the overall series began a more positive theme in the autumn of 2014 which fits with the beginning of disinflationary pressure.

Also this is helping with the elevated level of unemployment in Spain.

In April, the employment index in the retail trade sector registered a variation of 1.5%, as compared to the same month of 2015.

Of course there are regional effects as we note one of the strongest growing regions was Comunidad de Madrid (8.3%). Real and Atletico will not be the Champions League finalists every year although they are both in strong patches. I guess for June there will be stronger growth in areas which support Real Madrid.

Again we see evidence of disinflation in the retail sector being much stronger than in the wider economy.

The annual change of the HICP flash estimate is –1.1%

We have to look fairly deeply for disinflation in the retail sector in Spain but when we do we see that volume gains of 5.1% in April are combined with turnover or value gains of 1% so disinflation was of the order of 4%. According to conventional economic theory the Spanish retail sector should be collapsing rather than booming. Will they tell us next that the Madrid clubs cannot play football?

This improved phase for Spanish retail sales is very welcome after a long winter and in spite of this better phase it is below that levels of 2010 by just over 5%.

The UK

We have long learned that the UK consumer needs very little excuse to splash the cash.

Continuing a sustained period of year-on-year growth, the volume of retail sales in March 2016 is estimated to have increased by 2.7% compared with March 2015. This was the 35th consecutive month of year-on-year growth.

Indeed I note that the Office for National Statistics now agrees with and backs up my theme. The emphasis is mine.

Figure 1 shows that the quantity bought remained fairly constant until late 2013, but began to increase steadily as average prices in store started to fall. The amount spent increased steadily during the period, however, as prices in store decreased the amount spent remained steady, implying that as prices fell, consumers bought more goods.

The inflation measure here or implied deflator is at 95.1 where 2012=100 so we see that yet again conventional theory was wrong. Looking forwards it is the return of inflation which troubles me as I fear it will reduce and possibly end retail sales growth via its impact on real wages. Whereas inflationistas will be left yet again scrabbling for excuses and refusing to play Men At Work.

Saying it’s a mistake
It’s a mistake
It’s a mistake
It’s a mistake



There is much to consider in the burst of disinflation which has hit many of the world’s economies. It has mostly been driven by the lower oil price as I note that energy costs in the year to April fell by 8.1% in the Euro area. This is something that Mario Draghi and the ECB (European Central Bank) is trying to end with negative interest-rates and 80 billion Euros a month of QE bond purchases. Yet in Ireland and Spain we have seen a strong rise in retail sales in response to this as purchasing power and real wages rise. What is not to like about that? The central planners and their media acolytes should be quizzed a  lot more on this in my view.

Of course lower prices are not the only thing going on but in economics there is no equivalent of a test-tube experiment. It is also true that the economies which seem to be more in tune with the UK are seeing a stronger effect. But lower prices have led to higher retail sales via higher real wage growth which will presumably reverse when the central bankers get back the inflation they love so much.




The inflation tectonic plates are showing signs of a shift

The last 18 months or so has seen a proliferation of countries reporting first falling rates of inflation and then negative annual rates. The commentariat got themselves into something of a mess on this front invoking “its the end of the world as we know it” before having to U-Turn like they are Mark Carney. We knew better here but I note that for the argument I have satirised as being for the “deflation nutters” there has been some interesting developments this week. This morning produced one from the British Retail Consortium.

Another fall in shop prices was seen in February, down 2.0 per cent compared with a year ago and a further fall on the numbers we saw in January as competition in the industry continues apace. This now marks the 34th consecutive month of price drops and 35th for non-food prices.

So the beat goes on and it was joined by a small drop in food prices. Actually for once the word deflation may be appropriate if we look at their longer-term view of the retail climate.

These effects could mean there are as many as 900,000 fewer jobs in retail by 2025 but those that remain will be more productive and higher earning.

However some care is needed here as a fair bit of this is the shift to the online/digital world and wages will be pushed higher by the National Living Wage. If we return to prices then petrol and diesel prices are at their cheapest for 6 years according to official data. here let me particularly welcome the end of a feature of rip-off Britain where diesel car drivers pay more for fuel as both fuels now cost £1.014 per litre.

The Euro area

We were told this only on Monday.

Euro area annual inflation is expected to be -0.2% in February 2016, down from 0.3% in January, according to a flash estimate from Eurostat, the statistical office of the European Union.

Again we saw a barrage of knee-jerk responses to this which for its own reasons – to justify its planned easing next week – the European Central Bank (ECB) has joined in with this morning. From @livesquawk

Villeroy: Sees Negative Inflation For ‘Several Months’

As you can see this feeds right into the “deflation nutter” zone although of course we are dealing with past trends as the data and the forecast are on the back of what has happened whereas we want to know what happens next and I am increasingly thinking that Florence may be right.

It’s always darkest before the dawn

It is always nice to support someone else who grew up in Camberwell and here lyrics also provide something of a critique for central bankers.

And I’ve been a fool and I’ve been blind
I can never leave the past behind
I can see no way, I can see no way
I’m always dragging that horse around

The oil price

There are various levels here and the superficial level is simply note that even at US $37 or so per barrel it is down 38% on a year ago. Now I do not know whether the forecasts of a fall to US $16 per barrel will happen but they do sound a bit like the ones projecting a rise to US $200 when the price was above US $100. Or “The only way is up” has been replaced by “down down” on the airwaves.

But whatever happens we are now unlikely to see a continuation of this reported by Eurostat in its consumer prices release.

energy (annual rate) -8.0%, compared with -5.4% in January.

We may see monthly flickers of this because this time last year the oil price saw a bounce which saw it rise to nearly US $70 on the Brent Crude benchmark in early May 2015 but as we move through summer we will be comparing to lower levels. Once the oil price impact begins to fade we will be concentrating on other aspects of inflation.

services is expected to have the highest annual rate in February (1.0%, compared with 1.2% in January),

This would hardly be a surge but it would change the emphasis as we see Euro area inflation rise towards its target.

If we move to the United States then they have an inflation linked bond market called TIPS. The St.Louis Federal Reserve has done some calculations about what oil prices would have to do to justify the current pricing structure. Thank you to Macro Man for the heads up and the emphasis is mine.

According to our calculations, oil prices would need to fall to $0 per barrel by mid-2019 in order to validate current inflation expectations. After that, there is no oil price that would allow our model to predict a CPI path consistent with December 2015 breakeven inflation expectations. This implied path of oil prices is very different from the path of oil prices implied by futures contracts, which rises to more than $50 per barrel by mid-2019.

There are issues with their assumptions but I think you get the gist of their argument in that quote.

Oil and commodity prices

These have been rising recently. Since the 20th of January the price of a barrel of Brent Crude has risen by US $10 per barrel.  As you can see from the chart below then Dr.Copper has for now stopped falling.

The UK

There are other issues here of which one relates to tax. As there are problems with the public finances the temptation to apply something like the old fuel price escalator may prove irresistible. It can ever be presented as helping the Bank of England with its mandate! Although of course it would be punishment for the UK worker and consumer via a reduction in real wages. Whilst a tendency to institutionalised inflation has a British theme a need for tax revenue appears elsewhere so it may not be alone in having such taxing thoughts.

There is also the issue of the UK Pound £ which has been falling in 2016 against the US Dollar which is the currency the majority of commodities are priced in. It is down just over 9% on a year ago with the fall beginning in the late summer of 2015 and picking up speed in 2016.

Also UK services inflation has been more persistent than in the Euro area and currently it matters little which measure you use. Sadly the new ONS website is telling us that the new data will be released on the 16th of February so it is good news that I recall the numbers being 2.3% (CPI) and 2.4% (RPI). So as the oil price effect wears off we will see the UK return to a more normal inflation position.

Also the UK methodology looks in need of a rethink to me. After all services are an ever bigger part of the economy as we have “rebalanced” towards them and I wonder if thus has been fully picked up. The inflation numbers should be better than the 2012 78.6% of GDP that is used for economic growth but may still be inaccurate.

RPI versus CPI

On this subject which many will tell you is a simple issue let me add something from the Royal Statistical Society website where Gareth Jones has posted this.

From 2011 to 2014,  the figures based on CPI indices are quite different to those based on RPI indices.  The CPI based volume shares continue to rise, while the RPI based figures fall.

Given that this period was one of falling real incomes, One would expect a fall in volume share for clothing, as it is to a large extent a form of deferrable capital expenditure.  On this basis, the RPI based figures are more plausible than the CPI based ones.  This adds support to the RPI price indices rather than the CPI price indices.

There are caveats but my argument has been that the debate is one where there are issues on both sides and not just the lazy RPI is bad produced by organisations such as the Financial Times. It was a change to clothing which produced a lot of the debate on UK inflation measurement and the establishment push for a lower number. The more of a case for RPI of whatever variant the more we move away from negative inflation.


The disinflation picture is one which has carried on for longer than expected. The ECB in particular embarrassed itself by missing the trend and then ended up in hot pursuit without catching up a bit like the Sheriff in the Smokey and the Bandit films. However from now they need to look a year or two ahead and after a few months of continued oil price disinflationary pressure we see an increasing chance of inflation rising. As I pointed out back on the 3rd of December then central banks should be beginning to adjust policy in response. Except as we have seen from the ECB and Bank of Japan and expect from the ECB next week they have already eased again and more is expected. The Bank of England could easily join in.

Meanwhile if we added asset prices such as housing to consumer inflation measures we would see a different picture again. There is a Eurostat measure for this where the UK owner occupied housing sector would be registering inflation of 1.9%. It is dreadfully flawed but much better than nothing!

Meanwhile if you prefer to listen rather than read here are some of my thoughts in that format from Share Radio earlier.

trends in the UK – Shaun Richards after another month of shop price


As a last point once you start to think that inflation will stop falling and then rise well where does that leave both low and especially negative bond yields?

Greece remains mired in an economic depression without the promised Grecovery

As we begin to make our way through another year we should not allow our minds to be numbed by past events concerning Greece. There is an element of human nature where we need higher doses of shock and horror to attract our attention and the Greek situation is an example of this. However something did attract my attention this morning and it was something that could be badged as good news. From Reuters.

The European Central Bank lowered the cap on emergency liquidity assistance (ELA) Greek banks can draw from the domestic central bank by 0.1 billion euros to 71.4 billion euros ($79.5 billion), the Bank of Greece said on Thursday.

In fact let me also present the good news bit.

The move reflected improving liquidity conditions in Greece’s banking sector, helped by the stabilization of private sector deposit flows, the Greek central bank said.

The obvious issue is that 100 million Euros is not a whole lot of improvement! Indeed we can go further by reminding ourselves that this is “emergency” assistance when the emergency is supposed to be over. Putting that into numbers the amount of ELA which peaked above 90 billion Euros in late summer 2015 still looks rather elevated to me.

Greek bank deposits

The situation in the Greek banking system troubled me back on the 4th of December as shown below.

Business and household deposits dropped by 590 million euros or 0.5 percent month-on-month to 121.08 billion euros ($129.1 billion), to their lowest level since March 2003.

This meant that the state of play back then was this.

Greece saw a 42 billion euro deposit outflow from December to July.

My contention was that the banking system was still in a state of distress and was accordingly in now position to help a sustained economic recovery in Greece contrary to the official rhetoric. Let us bring this up to date with the figures for December.From Macropolis.

The Greek banking system displayed deposit inflows of 2.65 billion euros in December following outflows of 390 million in November,

On the surface this looks good news but as we look deeper we see deposits fell in November which is against the recovery mantra and that they have only reached 123.38 billion Euros. This compares to the recent peak of 171.9 billion and the fact that they remained above 171 billion Euros until November 2014.

We can put this another way which is in terms of the money supply where the wider measure M3 fell by 26% in the year to November 2015. That is a depression and indeed depressing statistic and comes in spite of an official -0.3% interest-rate from the European Central Bank. It finds itself pushing on something of a monetary string in Greece as M1 growth of 11% becomes M2 and M3 contractions of around 26%. The December numbers will be a little better but in essence the beat goes on.

How can the Greek banks help the economy?

We see here that December was better but in this instance did not offset November. From the Bank of Greece.

The monthly net flow of total credit to the domestic private sector was positive at €210 million, compared with a negative net flow of €458 million in the previous month.

This leaves the annual situation as shown below.

In December 2015, the annual growth rate of total credit extended to the domestic private sector stood at -2.0% from -2.2% in the previous month

In other words we are seeing a continuation of the concept of a credit crunch. We hope that December’s improvement signals better days ahead but so far the pattern has been pretty much relentless.

Economic growth

Last week we received this news.

Available seasonally adjusted data indicate that in the 4 th quarter of 2015 the Gross Domestic Product (GDP) in volume terms decreased by 0.6% in comparison with the 3 rd quarter of 2015, while it decreased by 1.9% in comparison with the 4 th quarter of 2014.

If we look back we see that the peak for the Greek economy was the second quarter of 2007 when quarterly economic output reached 63.3 billion Euros at 2010 prices. Those of a nervous disposition might like to look away now as the latest figure was 45.6 billion or some 28% lower. That number just shouts economic depression at us off the page or DEPRESSION.

Let us remind ourselves of what the IMF promised back in 2010. From my update on the 6th of October 2014.

Believe it or not the Greek economy was supposed to return to growth in 2012 (1.1%) and then grow at over 2% from 2013 onwards.

Some still seem to believe this as this from a Vox EU paper by Barry Eichengreen, and Charles Wyplosz shows.

Thus, by the end of 2012, following three years of turmoil, the Crisis was over……..With prices rising by 4% in Germany, rebalancing within the Eurozone proceeded without forcing a disastrous deflation on countries like Greece.

Actually I am teasing as this is plainly satire and well-played to the authors but the point is valid that the official view essentially does believe this. Otherwise how did IMF Managing Director Christine Lagarde get a second term?

As a final point regular readers will recall that I had my doubts about the numbers from early 2015 and I note that they have been revised down heavily.

Deflation too

My definition of deflation is that aggregate demand in an economy falls and Greece has plainly experienced that. The next step is the type of deflation which is a downwards spiral and yesterday we got a reminder that Greece has also experienced that.

The HICP in January 2016 compared with December 2015 decreased by 1.7%…….The Harmonized Index of Consumer Prices (HICP) in January 2016 compared with January 2015 decreased by 0.1%.

The underlying index which peaked at 104 in the spring of 2013 is now 98.3.  So we see that as well as output falling prices have too. We do not have the latest GDP deflator data but we are left with the view that debt dynamics in Greece are deteriorating which of course is exactly what it does not need.

As it stands the debt to GDP ratio is 180% and the problem is that whilst the interest on it is affordable these days the capital burden is not. Whilst the headlines proclaim a ten-year yield in Greece of 10.5% the truth is that the vast majority of its debt is in official hands ( European Stability Mechanism, ECB and the like) allowing Greece to borrow very cheaply. The capital issue is simply the lack of economic growth reinforced by falling prices.


The beat goes on for the economic depression that has been inflicted on Greece. This is illustrated by the fact that the unemployment rate is 24.6% still and sadly after some improvements is showing signs of flatlining. In essence a million workers disappeared and have so far not returned. So we get the occasional flicker of hope but sadly a grim reality replaces it. It was heartbreaking to note that after the farmers protested in January and threw tomatoes at the Greek police people were seen afterwards picking them up and presumably were hungry.

My argument has been all along that the only way out of this is to default and devalue. It is not perfect but it is better than this shambles. From Yannis Koutsomitis.

still disagree on debt relief. IMF wants full Greek NPL sale, warns of more bank recapitalizations: sources via BBG (NPL = Non Performing Loans)

Okay and here is the ECB from Kathimerini on that subject.

“The capital plans have been fulfilled, so there is no need for additional capital requirements. We are in good shape in that respect,” Daniele Nouy, who chairs the Single Supervisory Mechanism, told the Greek newspaper Agora.

All that is before we get to the migrant crisis where Greece yet again finds itself in the front line.