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

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

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

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

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

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

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

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

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

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

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

Problems. Problems,Problems

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

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

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

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

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

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

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

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

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

The New Governor Has A Headache

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

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

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

Negative Interest-Rates in the UK Klaxon!

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

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

There is trouble ahead

There are serious issues I have raised with the ONS.

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

Also this feeds into another issue.

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

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

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

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


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

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

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

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

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

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

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

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

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




The inflation problem is only in the minds of central bankers

Yesterday we looked at the trend towards negative interest-rates and today we can link this into the issue of inflation. So let me open with this morning’s release from Swiss Statistics.

The consumer price index (CPI) remained stable in December 2019 compared with the previous month, remaining at 101.7 points (December 2015 = 100). Inflation was +0.2% compared with the same month of the previous year. The average annual inflation reached +0.4% in 2019.These are the results of the Federal Statistical Office (FSO).

The basic situation is not only that there is little or no inflation but that there has been very little since 2015. Actually if we switch to the Euro area measure called CPI in the UK we see that it picks up even less.

In December 2019, the Swiss Harmonised Index of Consumer Prices (HICP) stood at 101.17 points
(base 2015=100). This corresponds to a rate of change of +0.2% compared with the previous month
and of –0.1% compared with the same month of the previous year.

Negative Interest-Rates

There is a nice bit of timing here in that the situation changed back in 2015 on the 15th to be precise and I am sure many of you still recall it.

The Swiss National Bank (SNB) is discontinuing the minimum exchange rate of CHF 1.20 per euro. At the same time, it is lowering the interest rate on sight deposit account balances that exceed a given exemption threshold by 0.5 percentage points, to −0.75%.

If we look at this in inflation terms then the implied mantra suggested by Ben Bernanke yesterday would be that Switzerland would have seen some whereas it has not. In fact the (nearly) 5 years since then have been remarkable for their lack of inflation.

There is a secondary issue here related to the exchange rate which is that the negative interest-rate was supposed to weaken it. That is a main route as to how it is supposed to raise inflation but we find that we are nearly back where we began. What I mean by that is the exchange-rate referred to above is 1.084 compared to the Euro. So the Swiss tried to import inflation but have not succeeded and awkwardly for fans of negative interest-rates part of the issue is that the ECB ( European Central Bank) joined the party reminding me of a point I made just under 2 years ago on the 9th of January 2018.

For all the fire and fury ( sorry) there remains a simple underlying point which is that if one currency declines falls or devalues then others have to rise. That is especially awkward for central banks as they attempt to explain how trying to manipulate a zero-sum game brings overall benefits.

The Low Inflation Issue

Let me now switch to another Swiss based organisation the Bank for International Settlements  or BIS. This is often known as the central bankers central bank and I think we learn a lot from just the first sentence.

Inflation in advanced economies (AEs) continues to be subdued, remaining below central banks’ target
in spite of aggressive and persistent monetary policy accommodation over a prolonged period.

As we find so often this begs more than a few questions. For a start why is nobody wondering why all this effort is not wprking as intended? The related issue is then why they are persisting with something that is not working? The Eagles had a view on this.

They stab it with their steely knives
But they just can’t kill the beast

We then get quite a swerve.

To escape the low inflation trap, we argue that, as suggested by Jean-Claude Trichet, governments
and social partners put in place “consensus packages” that include a fiscal policy that supports demand
and a series of ad hoc nominal wage increases over several years.

Actually there are two large swerves here. The first is the switch away from the monetary policies which have been applied on an ever larger scale each time with the promise that this time they will work. Next is a pretty breathtaking switch to advocacy of fiscal policy by the very same Jean-Claude Trichet who was involved in the application of exactly the reverse in places like Greece during his tenure at the ECB.

Their plan is to simply add to the control freakery.

As political economy conditions evolve, this role should be progressively substituted by rebalancing the macro
policy mix with a more expansionary fiscal policy. More importantly, social partners and governments
control an extremely powerful lever, ie the setting of wages at least in the public sector and potentially
in the private sector, to re-anchor inflation expectations near 2%.

The theory was that technocratic central bankers would aim for inflation targets set by elected politicians. Now they want to tell the politicians what to so all just to hit an inflation target that was chosen merely because it seemed right at the time. Next they want wages to rise at this arbitrary rate too! The ordinary worker will get a wage rise of 2% in this environment so that prices can rise by 2% as well. It is the economics equivalent of the Orwellian statements of the novel 1984

Indeed they even think that they can tell employers what to do.

Finally, in a full employment context,
employers have an incentive to implement wage increases to keep their best performing employees
and, given that nominal labour costs of all employers would increase in parallel, they would able to raise
prices in line with the increase of their wage bills with limited risk of losing clients

Ah “full employment” the concept which is in practical terms meaningless as we discussed only yesterday.

Also as someone who studied the “social contracts” or what revealingly were called “wage and price spirals” in the UK the BIS presents in its paper a rose tinted version of the past. Some might say misleading. In the meantime as the economy has changed I would say that they would be even less likely to work.

Putting this another way the Euro area inflation numbers from earlier showed something the ordinary person will dislike but central bankers will cheer.

Looking at the main components of euro area inflation, food, alcohol & tobacco is expected to have the highest
annual rate in December (2.0%, compared with 1.9% in November),

I would send the central bankers out to explain to food shoppers how this is in fact the nirvana of “price stability” as for new readers that is what they call inflation of 2% per annum. We would likely get another ” I cannot eat an I-Pad” moment.


Let me now bring in some issues which change things substantially and let me open with something that has got FT Alphaville spinning itself into quicksand.

As far as most people are concerned, there is more than enough inflation. Cœuré noted in his speech that most households think the average rate in the eurozone between 2004 and last year has been 9 per cent (in fact it was 1.6 per cent). That’s partly down to higher housing costs (which are not wholly included in central banks’ measurement of inflation).

That last sentence is really rather desperate as it nods to the official FT view of inflation which is in quite a mess on the issue of housing inflation. Actually the things which tend to go up ( house prices) are excluded from the Euro area measure of inflation. There was a plan to include them but that turned out to be an attempt simply to waste time ( about 3 years as it happened). Why? Well they would rather tell you that this is a wealth effect.

House prices, as measured by the House Price Index, rose by 4.2% in both the euro area and the EU in the
second quarter of 2019 compared with the same quarter of the previous year.

Looking at the situation we see that a sort of Holy Grail has developed – the 2% per annum inflation target – with little or no backing. After all its use was then followed by the credit crunch which non central bankers will consider to be a rather devastating critique. One road out of this is to raise the inflation target even higher to 3%, 4% or more, or so we are told.

There are two main issues with this of which the first is that if you cannot hit the 2% target then 3% or 4% seems pointless. But to my mind the bigger one is that in an era of lower numbers why be King Canute when instead one can learn and adapt. I would either lower the inflation target and/or put house prices in it so that they better reflect the ordinary experience. The reason they do not go down this road is explained by a four letter word, debt. Or as the Eagles put it.

Mirrors on the ceiling
The pink champagne on ice
And she said: “We are all just prisoners here
Of our own device”

The Times They Are A-Changing For Inflation Targeting

The concept of inflation targeting had its roots in the abandonment of the gold standard in 1971. The world of fiat money requires some sort of anchor and we have seen various ways of providing this such as fixed exchange-rates and controlling the money supply. None of those were entirely satisfactory and some were complete failures so in the 1990’s we saw the concept of inflation targeting begin and a combination of Canada and New Zealand saw us end up with one of 2 per cent per annum. It is important to note that 2% per annum was chosen because it seemed right not that there was any particular logical thought process. Also it is important to note that the definition of inflation varies much more than you might think and in some cases quite widely. So for example 2% per annum in the United States is very different to 2% per annum in the Euro area as the former has owner-occupied housing costs ( albeit via the Imputed Rent route) and the latter does not.

Price Stability

Central bankers have tried to push the line that 2% per annum is price stability. For example Mario Draghi of the ECB told us this only yesterday at the ECB press conference.

Our mandate is price stability

This is quite an Orwellian style abuse of language and let me illustrate this with Mario’s own words.

On the inflation side, we basically saw inflation which is below our aim and we see projected inflation that says that convergence is further out in time, though as I’ve said on another occasion, the informational content of market-based inflation expectations has to be assessed, taking into account certain technical conditions of these markets. However also in the SPF, the Survey of Professional Forecasters, inflation expectations have gone down so that’s what led the Governing Council to these proposals, to the various proposals.

As you can see “inflation which is below our aim” would give Euro area workers and consumers more price stability but Mario and the ECB do not want it. This is why he was hinting so strongly at policy action in September although there is a catch in that. After all he only stopped QE in December and we still have negative interest-rates in the Euro area yet inflation is doing this.

Euro area annual HICP inflation increased to 1.3% in June 2019, from 1.2 % in May…….Looking through the recent volatility due to temporary factors, measures of underlying inflation remain generally muted. Indicators of inflation expectations have declined.

So here are a couple of thoughts for you. We are being told price stability is the objective when they are doing the opposite and they are using methods which in spite of extraordinary sums ( 2.6 trillion Euros of QE) have not had much impact. Care is needed with the latter conclusion because we know so many asset prices have surged but the Euro area in particular has gone to a lot of effort to keep them out of the consumer inflation numbers. They spent the last 2/3 years promising to put house prices in the numbers and then in December did a handbrake turn, which was so transparent as being what they planned all along. Or if you prefer another version of kicking that poor battered can into the future.

As an aside I have regularly warned about these over time and am pleased that the ECB is finally admitting this.

the informational content of market-based inflation expectations has to be assessed,

It is somewhere between slim and none which is very different to the impression the ECB has previously created.

The Times They Are A-Changing

The ECB interest-rate announcement told us this and the emphasis is mine.

Accordingly, if the medium-term inflation outlook continues to fall short of its aim, the Governing Council is determined to act, in line with its commitment to symmetry in the inflation aim.

That was brand new off the blocks so to speak and as you can imagine led to speculation about what the ECB planned next. For example, as it has been below its 2% per annum target for some time would it plan some “catch-up” in the manner suggested in the past by some members of the US Federal Reserve? So a type of average inflation targeting.

Yet a bit more than 45 minutes later ( Mario was late) there has been some ch-ch-changes.

the continued sustained convergence of inflation to levels that are below, but close to, 2% over the medium term.

As one cannot be symmetrically below there is a problem here. Unusually for Mario Draghi he got into quite a mess explaining this.

On the other point: no, there isn’t any change really.

Yet he then confessed there was one.

In fact, it’s true it’s not there in the first page; it’s in the fourth page, it’s just what it is.

The idea that the change just appeared there is laughable and we then found out more about the state of play.

But we had a discussion about symmetry and there is a sense in the Governing Council that there should be a reflection on the objective: namely is it is close to but below 2%, or, should we move to another objective?

There you have it as they had for a while created the impression they had changed it. For clarity the ECB target is unusual in that it sets it for itself. The more common procedure is that the relevant government sets it for the central bank in the way that the Chancellor of the Exchequer does for the Bank of England. The present ECB target has been in place since 2003 and perhaps the advent of Christine Lagarde has Mario wanting to restrict how much damage she can do. After all it was apparent that the gushing praise she received, somehow in an inexplicable oversight omitted her competence for the role,

Whatever the rationale Mario was somewhat discombobulated.

 In the meantime, however, the main thing in this introductory statement is that the Governing Council – I think I have said this many times, but now it’s in the introductory statement – reaffirmed its commitment to symmetry around the inflation aim, which in a sense is 1.9 – it’s close to, but below, 2%.

So he was trying somewhat unconvincingly to sing along with Maxine Nightingale.

Ooh, and it’s alright and it’s coming along
We gotta get right back to where we started from



So we see that the ECB is joining an increasingly global trend to change its inflation target and typically for Ivory Tower thinkers they are missing the main point. After all the advent of the credit crunch which is still causing economic after-effects posed serious questions for the whole concept. Yet the main driver we are seeing is heading towards even easier monetary policy as opposed to a revision of the concepts involved. The same monetary policy that has failed to create much consumer inflation at all and may even have weakened it, although this comes with the caveat that much of this comes from the way inflation is measured.

The establishment remains determined to ram this home. Let me hand you over to the Wall Street Journal.

A higher Federal Reserve inflation target ahead of the 2007-09 recession likely would have given the central bank more room to lower interest rates and resulted in a “substantially” faster economic recovery, a group of economists has found.

If the Fed had set its inflation target above its current 2% level, that would have led to higher inflation over time, which would have caused interest rates to climb higher than they did before the recession, according to a paper by economists Janice Eberly, James Stock and Jonathan Wright.

Missing is anybody pointing out that the higher inflation would have made us all poorer. No doubt in the Ivory Tower scenario the wages fairy would have rescued us but we know in the real world that he or she is always hard and sometimes impossible to find these days.

That is before we get to the point I started with which never quite seems to be received in the thin air at the top of the Ivory Towers that the inflation measures used are at best an approximation and at worst simply wrong.





What should be the mandate of the Bank of England?

This issue was raised yesterday by the Shadow Chancellor John McDonnell in his speech to the Labour party conference. Already there have been a lot of misconceptions so it is time to take a look again at the mandate of the Bank of England. First let us consider his speech.

I will also be setting up a review of the Bank of England.

That seems perfectly reasonable as it has in my opinion been shown up as flawed by the credit crunch era. However we hit choppy water early.

Let me be clear that we will guarantee the independence of the Bank of England.

There are two major problems here. The first is demonstrated by the £375 billion of Quantitative Easing or QE and its remit letter. You see it required the Chancellor Alistair Darling to not only authorise the concept but also the amount (£150 billion back then). How independent is that? We may also have a reason why the present Bank of England Governor seems not to be keen on QE.

Also there is the issue of the institution being taken over by the UK establishment. Last night at the Royal Statistical Society the presentation on the Bean Review on UK Economic Statistics was given by a Vice Chairman of the BBC Trust and a former member of the Government’s Statistical Service. Oh and the Review is led by a former Deputy Governor of the Bank of England Charlie Bean. Every now and then the meeting heard the word “independence” almost chanted whilst I mulled independence from what?

The major plank of the new plan came here.

It is time though to open a debate on the Bank’s mandate that was set by Parliament 18 years ago. The mandate focuses on inflation, and even there the Bank regularly fails to meet its target. We will launch a debate on expanding that mandate to include new objectives for its Monetary Policy Committee including growth, employment and earnings.

The first sentence will come as a surprise to the Governor of the Bank of England as he thought the mandate was changed in March 2013!

Thank you for your letter setting out the new remit for the MPC. It is, in my view, a sensible change to previous remits and contains useful improvements to the framework.

The second sentence I completely agree with and will discuss it later. The last sentence seems as though it is unclear about the current mandate which does include this.

to support the economic policy of Her Majesty’s Government, including its objectives for growth and employment.

So the addition is earnings and let’s face it as I wrote on Friday the Bank of England did do its best for earnings in 2014 by raising the pay of the Financial Policy Committee by 17% and for the board of the Prudential Regulation Authority by 32%. Apart from that what could it do?

What alternatives could come in?

The McDonnell speech looked as though it was affirming the supremacy of inflation targeting so Robert Peston of the BBC has suggested this.

For those critics of Bank inaction, an increase in the inflation target to 3% or so would be a possible solution.

In the past Robert Peston has been well-connected with the Labour party ( he wrote a biography of Gordon Brown) so he may well be an “insider” still but of course the Labour party has changed so we cannot be sure. One interesting facet of the situation is the choice of 3% as a target which to be the best of my recollection is unique. Usually those who want to ease policy choose 4% as those setting inflation targets seem to have a bias against odd numbers! Perhaps they thought that choosing 3% would be the equivalent of scaring the horses and decided on a halfway house compromise.

One of the new economic advisers Simon Wren Lewis has suggested policies along that line.

We should use the monetary and fiscal tools we have at our disposal (and invent some new ones if need be) to do so. There is no magic to raising demand – we have various tried and tested means of doing so. The basic barrier to raising demand has been and always will be inflation, so when that barrier is nowhere in sight (in fact appears to be moving further away) it is a criminal waste not to expand demand.

Is it rude to wonder if the Ivory Tower occupied by Professor Wren-Lewis is next to the one occupied by the Riksbank of Sweden with its -0.35% interest-rates and a fast growing economy. Both seem unable to look down from their towers and see that overheating housing markets are a sure sign of inflation.

Oh and he may well move towards the Nominal GDP targeting that I analysed yesterday.

Nevertheless, what my view implies is that – all other things equal – the case for a nominal GDP target relative to the current regime is rather stronger in the UK than it is in the US right now.

What does he prefer about the US framework. In essence it is considered to have moved towards a dual mandate as described below by the St.Louis Fed.

The FOMC mentioned “maximum employment,” the second part of its dual mandate required by HH, for the first time in its December 2008 policy statement……., the FOMC began stating its objectives in terms of “maximum employment and price stability”

What about Joseph Stiglitz? Well we get a clue from his views on the US.

But, in the current circumstances, higher inflation would be good for the economy. There is essentially no risk that the economy would overheat so quickly that the Fed could not intervene in time to prevent excessive inflation.

So higher inflation is good and central banks can easily control it. If we look at British economic history then neither of those have proven to be true.


Let me welcome the idea of a debate around inflation targeting. In its current form it has plainly failed as it otherwise we would not be where we are. However simply raising the target has a multitude of problems. Firstly how does making everybody worse off in real terms improve things? Secondly currently unless you drive your currency lower there appears to be no way of driving consumer inflation higher with Japan for example making enormous efforts to end up at 0%. Oh well! As Fleetwood Mac put it. Driving your currency lower just makes everybody worse off in another way and if it ignites inflation will for example make them doubly worse off. So there is an element of misleading people by confusing nominal with real changes.

In response I would argue as I did last night at the Royal Statistical Society that our measure of targeted consumer inflation should include asset prices which in the UK would mean house prices. An entirely different inflation picture would be provided right now as we would correctly be looking at falling good prices but rising prices for assets and the service-sector. Rather than 0% we would be looking at more like 1%. So with a nod to the stunning view it provided from Chelsea Bridge last night we need to consider the whole picture and sing along with The Waterboys.

You saw the whole of the moon
The whole of the moon!

Oh and in the section on the UK establishment I  have been unfair on Diane Coyle who has published some interesting and good ideas but my point is that such thoughts are collectively rare in the UK establishment.