France does not like being told higher inflation is good for it

This weekend has seen a further escalation in the Gilet Jaune or yellow jacket protest in France. This has so unsettled Bloomberg that it is running a piece suggesting it could happen in the UK perhaps as a way of mollifying the bankers it has suggested should go to Paris. However, let us dodge the politics as far as we can as there is a much simpler economic focus and it is inflation. From the Financial Times.

Mr Macron introduced the increases in fuel taxes last year, as part of a package intended to attract investment and revitalise economic growth. They were also intended to support his ambition of setting France on course to ban sales of petrol and diesel cars by 2040. The tax is rising more sharply for diesel fuel, to bring it into line with the tax on petrol, as Mr Macron’s government argues that the advantage it has enjoyed is unjustified. Since the Volkswagen emissions scandal, it has become more widely accepted that diesel vehicles do not have the advantage in environmental impact over petrol engines, although manufacturers are still defending the technology.

Let us analyse what we have been told. How do you revitalise economic growth by raising costs via higher taxes? Perhaps if that was your intention via this move you would reduce taxes on petrol instead of at least reduce petrol taxes by the same amount you raise the diesel ones. As to the point about diesel engines I agree as I am the owner of what I was told was a clean diesel but has turned out to be something polluting both my and other Londoners lungs. Not President Macron’s fault of course as that was way before he came into power and of course he is the French President. But no doubt they encouraged purchases of diesel vehicles ( by the lower tax if nothing else) as we note that when the establishment is wrong it “corrects” matters by making the ordinary person pay. This especially hits people in rural France who rely on diesel based transport.

The details of the extra tax are show by Connexions France from October 2017.

Tax on diesel will rise 2.6 cents per litre every year for the next four years, after MPs voted in favour of the government’s draft budget for 2018.

As this from the BBC shows this is as well as higher taxes on petrol.

the Macron government raised its hydrocarbon tax this year by 7.6 cents per litre on diesel and 3.9 cents on petrol, as part of a campaign for cleaner cars and fuel.

The decision to impose a further increase of 6.5 cents on diesel and 2.9 cents on petrol on 1 January 2019 was seen as the final straw.

If we look at the November CPI data for France we see that it is at 1.9% but is being pulled higher by the energy sector which has annual inflation of 11.9%. In a piece of top trolling Insee tells us this.

After seven months of consecutive rise, energy prices should fall back, in the wake of petroleum product prices.

If we look at this via my inflation theme we see that as well as energy inflation being 11.3% that food inflation is 5%. So whilst central bankers may dismiss that as non-core and wonder what is going on? We can see perhaps why the ordinary person might think otherwise. Especially if they like carrots.

 Vegetable prices rose by 15.2% over one year with prices going up for salads (+15.6%), endives (+19.5%), carrots (+76.7%) and leeks (+54.2%). In contrast, tomato prices went down by 12.3% over one year.  ( Insee October agricultural prices)


This morning saw the monthly series of Markit purchasing manager’s indices on manufacturing published.

November data pointed to the softest improvement in French manufacturing operating conditions for 26 months. The latest results reflected falling new orders and job shedding…….Manufacturing output was unchanged since October. That said, the latest reading represented stabilisation following a drop in production in the previous month.

It used to be the case that Markit was downbeat on France but these days it is very cheery. If we look at the last two months then production is lower as are jobs and new orders yet we are told this is an improvement! In reality the zone 49-51 represents unchanged and 50.8 is in that, although I do note that the 53.1 of the UK is apparently “lacklustre”. Anyway here is the view of the French situation.

However, any negativity towards unchanged output could be misplaced given it represented stabilisation after October’s decline.

Moving to prices they hinted that the protests might not be about to end any time soon.

On the price front, input costs continued to rise in
November. The rate of inflation was the strongest for nine
months, following two successive accelerations. Panellists
overwhelmingly blamed higher cost burdens on increased
raw material prices.
Survey respondents noted that part of the additional cost
burden was passed onto customers, with charges rising
solidly again in November.

Official data

On Friday we saw that September seems to have seen a slow down in the French economy.

In September 2018, the sales volume in overall trade fell back sharply (−2.1%) after an increase in August (+1.8%)…..In September 2018, the turnover turned down sharply in the manufacturing industry (−2.3%) after a strong increase in August (+2.8%). It also went down in industry as a whole (−1.9% after +2.8% in August)……In September 2018, output in services was stable after a strong increase in August (+2.9%).

As you can see all measures saw weakening in September and eyes will be on the services sector. This is because whilst the national accounts do not present it like this the 1% growth for the sector was what made it a better quarter. So let us also dig into the situation further.

According to business managers surveyed in November 2018, the business climate in services is stable. At 103, it remains above its long-term average (100).

Otherwise, the indicator of October 2018 has been revised downward by two points because of late businesses’ answers that have been taken into account.

Considering this revision, the turning point indicator stands henceforth in the area indicating an unfavourable short-term economic situation.

The Bank of France remains optimistic however.

According to the monthly index of business activity (MIBA),
GDP is expected to increase by 0.4% in the fourth
quarter of 2018 (first estimate).


We often discuss the similarities between France and the UK but the ECB has this morning given us another insight, as according to its capital key France is virtually unchanged in relative terms over the past five years if we look at GDP and population combined. I will leave readers to decide for themselves if the Euro area average is good or bad as you mull the official view.


Switching back to France it has not been a great year economy wise even if the Bank of France is correct about this quarter. But its establishment seems to be up to the games of those elsewhere whilst is to push its policies via punishment ( higher taxes ) rather than encouragement. These days though more have seen through this and hence the current troubles.

Weekly Podcast


What is going on at the Bank of England these days?

Yesterday saw the publication of Brexit forecasts from HM Treasury and the Bank of England. The former was always going to be politically driven but the Bank of England is supposed to be independent, although these days we have to ask independent of what? There is little sign of that to be seen. Let us take a look at the Bank of England scenarios.

The estimated paths for GDP, CPI inflation and unemployment in the Economic Partnership scenarios are
shown in Charts A, B and C. The range reflects the sensitivity to the key assumptions about the extent to
which trade barriers rise, and how rapidly uncertainty declines. GDP is between 1¼% and 3¾% lower than
the May 2016 trend by end-2023. Relative to the November 2018 Inflation Report projection, by end-2023 it is 1¾% higher in the Close scenario, and ¾% lower in the Less Close scenario.

After singing its own fingers last time around it is calling these scenarios rather than forecasts but pretty much everyone is ignoring that. The problem with this sort of thing is that you end up doing things the other way around. Frankly the answers are decided and then the assumptions are picked to get you there. We do know some things.

Productivity growth has slowed, sterling has depreciated and the increase in inflation has squeezed real incomes.

However really the most certainty we have is about the middle part of a lower UK Pound £ and even there the Bank of England seems to omit its own part ( Bank Rate cut and Sledgehammer QE ) in the fall. That caused the fall in real incomes as we see how policy affected the results.

If we move wider the Bank of England attracted fire from both sides as for example this is from the former Monetary Policy Committee member Andrew Sentance who is a remain supporter.

The reputation of economic forecasts has taken a bad blow today with both UK government and appearing to use forecasts to support political objectives. Let’s debate – which I strongly oppose – rationally without recourse to bogus forecasts.

Why would he think that?

Well take a look at this.

The estimated paths for GDP, CPI inflation and unemployment in the disruptive and disorderly scenarios
are shown in Charts A, B and C. GDP is between 7¾% and 10½% lower than the May 2016 trend by end 2023.
Relative to the November 2018 Inflation Report projection, GDP is between 4¾% and 7¾% lower by
end-2023. This is accompanied by a rise in unemployment to between 5¾% and 7½%. Inflation in these
scenarios then rises to between 4¼% and 6½%.

It is the latter point about inflation and a claimed implication of it I wish to subject to both analysis and number-crunching.

How would the Bank of England respond to higher inflation?

Here is the claimed response.

Monetary policy responds mechanically to balance deviations of inflation from target and output
relative to potential. Bank Rate rises to 5.5%.

Let us see how monetary policy last responded to an expected deviation of inflation above target to back this up.

This package comprises:  a 25 basis point cut in Bank Rate to 0.25%; a new Term Funding Scheme to reinforce the pass-through of the cut in Bank Rate; the purchase of up to £10 billion of UK corporate bonds; and an expansion of the asset purchase scheme for UK government bonds of £60 billion, taking the total stock of these asset purchases to £435 billion.

As you can see the mechanical response seems to be missing! Unless of course you count the mechanical response of the mind of Mark Carney as he panicked thinking the UK was going into recession. The other 8 either panicked too or meekly fell in line. The point is further highlighted if we look at the scenario assumed for the exchange-rate of the UK Pound £.

And as the sterling risk premium increases, sterling falls by 25%, in addition to the 9% it has already fallen
since the May 2016 Inflation Report.

Let us examine the reaction function. Let us say that the £ had fallen by 10% when the Bank of England took action then if it ” responds mechanically” we would expect this time around to see a 0.625% reduction in Bank Rate and some £150 billion of extra QE as well as another Term Funding Scheme bank subsidy of over £300 billion.

Instead we are expected to believe that the Bank of England would raise and not cut interest-rates and would do so by 4.75%! There is also an issue with the timing as the forward guidance of the Bank of England has been for Bank Rate rises for over 4 years now and we have had precisely 0.25% in net terms. So at the current rate of progress the interest-rate increases would be complete somewhere around the turn of the century.

Actually there is more because other interest-rates would go even higher it would appear.

Uncertainty about institutional credibility leads to a pronounced increase in risk premia on sterling
assets, including a 100bps increase in the term premium on gilts.

So an extra 1% on Gilt yields although this is only related to a particular piece of theory as we skip what they would be apart from an implication of maybe 6.5%. A particular catch in that is the current ten-year yield is a mere 1.33% and over the past 24 hours it has been falling adding to the previous falls I have been reporting for a while now. Markets do of course move in the wrong direction at times but Gilt investors seem to be placing their bets on the Gilt market and ignoring the Bank of England scenario.

But wait there is more.

Overall, interest rates on loans to households and businesses rise by 250bps more than Bank Rate.

Can this sort of thing happen? Yes as we saw it in the build up to the credit crunch as UK interest-rates disconnected from Bank Rate by around 2%. Also yesterday we were noting such a thing via the fact that Unicredit of Italy has found itself paying 7.83% on a bond which was yielding only 1% as recently as yesterday. But there are two main problems of which the first occurred on Mark Carney’s watch as we note that they way he “responds mechanically” to such developments is to sing along with MARRS.

Pump up the volume
Pump up the volume
Pump up the volume
Get down

Actually such a response by the Bank of England was typical before the advent of Governor Carney. Recall this?

For instance, during the financial crisis the exchange rate
depreciated around 30% initially but settled to be around 25% below its pre-crisis peak in the following
couple of years.

So in a broad sweep in line with the new worst case scenario especially as we recall that inflation went above 5% on both main measures. So Bank Rate went to 5.5%? Er now it was slashed by over 4% to 0.5% and we saw the advent of QE that eventually rose in that phase to £375 billion.


The first comment was provided by financial markets as we have already noted the Gilt market rally which was accompanied by the UK Pound £ rallying above US $1.28. The UK FTSE 100 did fall but only by 13 points. If there is anything a Bank of England Governor would hate it is being ignored.

Actually the timing was bad too. For some reason the report was delayed from 7:30 am to 4:30 pm but due to yet another problem it was another ten minutes late. This means that very quickly eyes turned to this by Federal Reserve Chair Jerome Powell.

Stocks ripped higher on Wednesday after Federal Reserve Chairman Jerome Powell said interest rates are close to neutral, a change in tone from remarks the central bank chief made nearly two months ago. ( CNBC )

Roughly that seems to take 0.5% off the expected path of US interest-rates and has led to the US ten-year Treasury Note yield falling back to 3%. Also trying to convince people about higher inflation is not so easy when the oil price ( WTI) falls below US $50.

Me on Core Finance TV






Where next for the world of Bitcoin?

The world of Bitcoin and indeed all the other altcoins has seen quite a reversal as 2018 has progressed. The days of “free money” have gone and they have been replaced by this according to MarketWatch.

Bitcoin is breaking all sorts of records at the moment, most of them unwanted, and in a few days it will equal a milestone not matched in four years.

Not since October of 2014 has the price of bitcoin   seen four consecutive monthly declines, and a negative close for the month of November, which now seems a foregone conclusion, would match this feat having fallen every month since August, according to Dow Jones Market Data.

So a clear change although in the fast moving world of Bitcoin it is still over ten times higher than it was back then. If anything the fall seems to be picking up the pace.

After opening November above $6,500, bitcoin is down more than 40%, and since the four-month streak began on Aug. 1, the value of the world’s most famous digital currency has more than halved.

As I type this the Bitcoin price is at US $3763.7 which is down some US $282 or a bit under 7%. I note that just to add to the confusion there is also now a Bitcoin Cash. This was created by a fork out of Bitcoin.

Bitcoin cash was one of the marvels of the bitcoin bubble. It is a fork from bitcoin. A fork of a cryptocurrency takes place when someone, anyone declares that a blockchain is going to be transferred to a new set of rules and network infrastructure. ( Forbes)

It did lead to what was free money for a while.

When the fork came out, bitcoin did not fall and bitcoin cash went through the roof rising from the low hundreds to shoot quickly above $1,000. It was free money for bitcoin holders who could get their hands on their bitcoin cash by navigating the technical issues, which were mighty. ( Forbes)

But the gains were short-lived.

The central bankers revenge

From a central banking point of view the altcoin world is a disaster as they have no power to set interest-rates and no control over the total amount of it. Even worse it bypasses “the previous” and in the bull market days saw very heavy disinflation as the price of goods and services became much cheaper. At the limit it would make them be an anachronism and then irrelevant.

John Lewis of the Bank of England put it like this on the 13th of this month.

Existing private cryptocurrencies do not seriously threaten traditional monies because they are afflicted by multiple internal contradictions. They are hard to scale, are expensive to store, cumbersome to maintain, tricky for holders to liquidate, almost worthless in theory, and boxed in by their anonymity. And if newer cryptocurrencies ever emerge to solve these problems, that’s additional downside news for the value of existing ones.

There are of course issues there but being “almost worthless in theory” is a critique that could be pointed at central bank fiat currencies which also rely on an act of faith to have value. Also the bit about new companies would have applied to the proliferation of railway companies back in the day. Whereas we know that whilst many failed the railways are still with us. Those suffering commuters who use Southern Rail may wish that they didn’t but they do.

Let us look at his paradoxes or as he might have put it seven deadly sins.

The congestion paradox

But cryptocurrency platforms are different. Their costs are largely variable, their capacity is largely fixed. Like the London Underground in rush hour, crypto platforms are vulnerable to congestion: more patrons makes them *less* attractive.

The storage paradox

Each user has to maintain their own copy of the entire transactions history, so an N-fold increase in users and transactions, means an N-squared fold increase in aggregate storage needs.

The mining paradox

Rewarding miners with new units of currency for processing transactions leads to a tension between users and miners.  This crystalises in Bitcoin’s conflict over how many transactions can be processed in a block. Miners want this kept small………But users want the exact opposite: higher capacity, lower transactions costs and more liquidity, and so favour larger block sizes.

The concentration paradox

This starts in intriguing fashion.

 97% of bitcoin is estimated to be held by just 4% of addresses, and inequality rises with each block.

However this critique is also applicable to the central banking enthusiasm for higher house prices and the “wealth effects”

An asset is valued by the market price at which it changes hands. Only a fraction of the stock is actually traded at any point in time. So the price reflects the views of the marginal market participant.

You can’t all sell at once and certainly not at that price. The list below is somewhat breathtaking in the circumstances.

But for cryptos they are much larger because i)Exchanges are illiquid ii) Some players are vast relative to the market iii) There isn’t a natural balance of buyers and sellers iv) opinion is more volatile and polarised.

As central banks have sucked liquidity of out markets with their actions, for example the Japanese government bond market has often been frozen, the opening point is a bit rich. Ditto point ii) if we look at the size of central bank balance sheets and of course there was no natural balance between buyers and sellers when they surged into markets. For example some of the recent turmoil in the Italian government bond market has been caused by the “unnatural” buying of the ECB being reduced. As to the last point, well maybe, but so many things are polarised these days.

The valuation paradox

The puzzle in economic theory is why private cryptocurrencies have any value at all.

Fiat currencies anyone?

The anonymity paradox

The (greater) anonymity which cryptocurrencies offer is generally a weakness not a strength. True, it creates a core transactions demand from money launderers , tax evaders and purveyors of illicit goods> because they make funds and transactors hard to trace.

This is both true and an attempted smear. After all the recent money laundering spree undertaken in the Baltics by customers of Danske Bank seems to have been at 200 billion Euros or so much larger than the altcoin universe in total.

Of course for a central banker it needs central bankers.

 Keep a cryptocurrency far from regulated institutions and you reduce its value, because it drastically restricts the pool of willing transactors and transactions. Bring it closer to the realm of regulated financial institutions and it increases in value.

The innovation paradox

Perhaps the biggest irony of all is that the more optimistic you are about tomorrow’s cryptocurrencies, the more pessimistic you must be about the value of today’s.

Odd though that this sort of logic is not applied to forward guidance.

Expect it to be worthless in the future, and it becomes worthless now.


There is a lot to consider here and let me start by offering some sympathy for those who did this back in the day. From CNBC.

Bitcoin is in the “mania” phase, with some people even borrowing money to get in on the action, regulator Joseph Borg said. “We’ve seen mortgages being taken out to buy bitcoin. … People do credit cards, equity lines,” he said. Bitcoin has been soaring all year, starting out at $1,000 and rocketing above $19,000 on the Coinbase exchange last week. ( CNBC )

Hard to believe that was the 11th of December last year as it feels like a lifetime ago. Also yes I do feel sorry for them even though it was pretty stupid. A fortnight or so earlier we were looking at some of the issues above.

That statement is true of pretty much every price although of course some have backing via assets or demand. So often we see a marginal price used to calculate a total based on an average price that is not known………This leaves us with the issue of how Bitcoin functions as a store of money which depends on time. Today’s volatility shows that over a 24 hour period it clearly fails and yet if we extend the time period so far at least it has worked rather well as one.

As to the store of value function that still holds as early buyers have still done really rather well but more recent ones have taken a bath and a cold one at that. Looking ahead it does not look as though the market has capitulated enough to find the ground to rally, But in the background there are still flickers of good news.

Ohio appears set to become the first state to accept bitcoin for tax bills, a show of support for a technology that has garnered lots of hype but failed to gain traction as a form of payment. ( WSJ)


Central banking forward guidance ignores the rules of probability

Today we can continue our journey into the world of central bankers which is a cosy international club. It was hard as the New York Federal Reserve Bank reported in glowing terms the visit of its President John Williams to the Bronx not to recall a previous effort from his predecessor William Dudley. From Reuters in 2011.

He then stretched for a real world example. The only problem was he chose the Apple’s latest tablet computer that hit stores on Friday, which may be more popular at the New York Fed’s headquarters near Wall Street than it is on the gritty streets of Queens.

“Today you can buy an iPad 2 that costs the same as an iPad 1 that is twice as powerful,” he said.”You have to look at the prices of all things.”

This prompted guffaws and widespread murmuring from the audience, with one audience member calling the comment “tone deaf.”

“I can’t eat an iPad,” another said.

That of course echoed around the world. This event by the Tweet storm looks more controlled in terms of audience so he may have avoided questions like this.

“When was the last time, sir, that you went grocery shopping?” one audience member asked.

Equilibrium Unemployment

Last night Michael Saunders of the Bank of England gave a speech to the CBI and as early as the fourth sentence he was pontificating about the theory that just will not die and about a number he cannot possibly know.

In the last 10-15 years, these effects from population ageing have been fairly benign, reducing the equilibrium jobless rate and neutral interest rate.

Let me now take you back just over five years when David “I can see for” Miles was giving us forward guidance on the equilibrium unemployment rate.

we will not tighten monetary policy until a recovery is strong enough and sustained enough that it has made a meaningful dent in unemployment so that it at least falls to 7 per cent…….. that linking the horizon over which an exceptionally expansionary monetary policy continues to support demand to the rate of unemployment has merit.

It is easy to forget now that we were being steered away from using GDP for monetary policy and towards the unemployment rate along these lines. Poor old David must wish he had never uttered the words below.

I suspect this is largely because the weight of money is behind a view that the significant positive news on the economic outlook means that the 7% unemployment level might be reached within around eighteen months………

Actually the unemployment rate plunged such that by the New Year these words were even more embarrassing.

If that is so unemployment is likely to fall rather more
slowly than would be usual.

Putting it another way the equilibrium unemployment rate is now 4.25% according to the Bank of England via 4.5%,5%, 5.5% and 6,5%. They may have guided to 6% as well but I do not recall it and these things tend to get redacted. Imagine you went to an engineer who guided you towards 7000 revs in your car then a few years later decided it was 4250! This sort of thing can only happen because central banking is a closed shop where the establishment appoint the same old “independent” crew.

Returning to Michael Saunders and yesterday he loses the plot more here.

Over the last 25 years, the share of the 25-64 age population with tertiary level (ie university or
similar) education has risen from 19% to 43%, a bigger rise than in most advanced economies (see figure
4).ix The tertiary education share among people aged 25-40 years is now around 50%, and the rise in this
measure has slowed in recent years.

A triumph according to Michael except he ignores the fact that this accompanies a really poor period for real wages. Indeed if the workforce is indeed more qualified, then real wages are even lower on a like for like basis. Are qualifications now required for lower skilled jobs and frankly what value are they? These are the real questions central bankers ignore as they pose the question how did we get here? That of course has been driven by their policies.

The attempt to use demographics as a smokescreen clears quickly as we compare the number below with the 2.75% error.

 This shift in workforce composition away from age groups that tend to have high jobless rates has cut the equilibrium jobless rate by about 0.3 percentage point since 2007.


Neutral Interest-Rate

We now move on to one of the central banking obsessions of our times. The so-called neutral interest-rate is examined below.

However, the MPC judges that, in practice, population ageing currently is lifting the stock of household assets, both in the UK and globally – and hence is pushing the equilibrium level of global real interest rates lower, and will continue to do so for some time.

Interesting ( sorry). If we look at the UK real interest-rate are low because the Bank of England put them there! It then thought bond yields were too high so QE was used to help lower them. Even this was not enough so it used credit easing to reduce mortgage rates. On the other side of the coin it has had two main phases of what it calls “looking through” rises in inflation. The first in 2010/11 when both main consumer inflation measures peaked above 5% per annum and then more recently after the EU leave vote.

The fundamental issue here is something that I learnt during my days as an option trader. On the quiet days we spent many hours discussing how to measure low probability events or what we would call  far out of the money options. One company called CRT built quite a empire based on the view that low probability events were undervalued and therefore bought them and counted the profits. Those of you who have followed the collapse of the company called OptionsSellers last weekend might note that it appears ( it has been vague on the details) to have done the reverse and accordingly according to the CRT theory has lost money. In this instance all of it.

Bringing this back to central bankers lets us note that Bank Rate is presently 0.75% and the estimate of the neutral rate is say in the range 2.5% to 3%. Because that is far away and also because interest-rate changes have been so rare that is an extraordinarily low probability event. An intelligent man or woman would therefore conclude that they are likely to know little or nothing about it until there is more evidence ( like some actual interest-rate rises). By contrast central bankers regularly opine about it and attempt to present it as a fact when in fact the rest of us are singing along to Ivan Van Dahl.

Oh tell me why
Do we build castles in the sky?
Oh tell me why
Are the castles way up high?


I would like to look at something I think we can all agree with.

For most of the last 10 years, the economy has generally had significant amounts of spare capacity.

But look where it then goes.

Now, with the economy having grown above its modest potential pace for six or seven years that spare
capacity has been used up, with supply and demand in the economy broadly in balance.

Really? A more intelligent statement would be to say that the quantity measure (employment) has been strong but wage growth has been disappointingly weak. The failures around the “output gap” have led to claims wage growth is on the turn for many years from this crew. The reality is that the two main real wage falls have come when they have “looked through” inflation.

Anyway he saved the best to nearly last. If so how come we are where we are then?

BoE research suggests that this is not the case for the UK so far, and that the total impact of interest rate changes on growth and inflation is similar to the pre-crisis period.xlv The easing in mid-2016 seemed to provide the expected boost to the economy.

There are a couple of escape clauses in the second sentence such as “seemed to” and “expected” ( by who?) but we seem to be in “the operation was a success but the patient died” territory to me.






The fall in the price of crude oil is a welcome development for UK inflation

One of the problems of official statistics is that we have to wait to get them. Of course numbers have to be collected, collated and checked and in the case of inflation data it does not take that long. After all we receive October’s data today. But yesterday saw some ch-ch-changes which will impact heavily on future producer price trends as you can see below.

Oil traders’ worries over record supplies arriving in Asia just as the outlook for its key growth economies weakens have pulled down global crude benchmarks by a quarter since early October. Ship-tracking data shows a record of more than 22 million barrels per day (bpd) of crude oil hitting Asia’s main markets in November, up around 15 percent since January 2017, and an increase of nearly 5 percent since the start of this year.

Not only is supply higher but there are issues over likely demand.

China, Asia’s biggest economy, may see its first fall in car sales on record in 2018 as consumption is stifled amid a trade war between Washington and Beijing.

In Japan, the economy contracted in the third quarter, hit by natural disasters but also by a decline in exports amid the rising protectionism that is starting to take its toll on global trade.

And in India, a plunging rupee has resulted in surging import costs, including for oil, stifling purchases in one of Asia’s biggest emerging markets. India’s car sales are also set to register a fall this year.

You may note along the way that this is a bad year for the car industry as we add India to the list of countries with lower demand. But as we now look forwards supply seems to be higher partly because the restrictions on Iran are nor as severe as expected and demand lower. Does that add up to the around 7% fall in crude oil benchmarks yesterday? Well it does if we allow for the fact that it seems the market has been manipulated again.

Hedge funds and other speculative money have swiftly changed from the long to the short side.

When the bank trading desks mostly withdrew from punting this market it would seem all they did was replace others. Of course OPEC is the official rigger of this market but its effort last weekend did not cut any mustard. So we advance with Brent Crude Oil around US $66 per barrel and before we move on let us take a moment for some humour.

As recently as September and October, leading oil traders and analysts were forecasting oil prices of $90 or even $100 a barrel by year-end.

Leading or lagging?

The UK Pound £

This can be and indeed often is a powerful influence except right now as the film Snatch put it, “All bets are off!” This is because it will be bounced around in the short-term ( and who knows about the long-term) by what we might call Brexit Bingo Bongo. Personally I think the deal was done weeks and maybe months ago and that in Yes Prime Minister style the Armistice celebrations gave a perfect opportunity to settle how it would be presented to us plebs. For those who have not seen Yes Prime Minister its point was such meetings are perfect because everybody thinks you are doing something else. The issue was whether it could be got through Parliament which for now is unknown hence the likely volatility.

Producer Prices

These are the official guide to what is coming down the inflation pipeline.

The headline rate of output inflation for goods leaving the factory gate was 3.3% on the year to October 2018, up from 3.1% in September 2018. The growth rate of prices for materials and fuels used in the manufacturing process slowed to 10.0% on the year to October 2018, from 10.5% in September 2018.

Except if we now bring in what we discussed above you can see the issue at play.

Petroleum and crude oil provided the largest contribution to both the annual and monthly rates of inflation for output and input inflation respectively.

They bounce the input number around and also impact on the output series.

The monthly rate of output inflation was 0.3%, with the largest upward contribution from petroleum products (0.14 percentage points). The monthly growth for petroleum products rose by 0.5 percentage points to 2.0% in October 2018.

Actually the impact is higher than that because if we look at another influence which is chemical and pharmaceutical products they too are influenced by energy costs and the price of oil. So next month will see quite a swing the other way if oil price remain where they are. We have had a 2018 where oil prices have been well above their 2017 equivalent whereas now they are not far from level ( ~3% higher).

Inflation now

We saw a series of the same old song.

The all items CPI annual rate is 2.4%, unchanged from last month……..The all items RPI annual rate is 3.3%, unchanged from last month.

This was helped by something especially welcome to all but central bankers who of course do not partake in any non-core activities.

Food prices remain little changed since the start of 2018 and fell by 0.1% between September and October 2018 compared with a rise of 0.5% between the same
two months a year ago.

Happy days in particular if you are a fan of yoghurt and cheese. The other factor was something which an inflation geek like me will be zeroing in on.

Clothing and footwear, where prices fell between September and October 2018 but rose between
the same two months a year ago.

There is an issue of timing as we are in the Taylor Swift zone of “trouble,trouble,trouble” on that front but this area is a big issue in the inflation measurement debate. Let me look at this from a new perspective presented by Sarah O’Connor of the FT.

Online fast-fashion brands have enjoyed success catering to what Boohoo calls the “aspirational thrift” of young millennials. They sell clothes that are often made close to home so that they can be produced more quickly in response to customer trends. “Our recent evidence hearing raised alarm bells about the fast-growing online-only retail sector,” said Mary Creagh, the committee’s chair. “Low-quality £5 dresses aimed at young people are said to be made by workers on illegally low wages and are discarded almost instantly, causing mountains of non-recycled waste to pile up.”

This is a direct view on the area of fast and often disposable fashion which is one of the problem areas of UK inflation measurement. There are issues here of poverty wages and recycling. But the inability of our official statisticians to keep up with this area is a large component of the gap between CPI and RPI, otherwise known as the “formula effect”.


The fall in the price of crude oil is a very welcome development for the trajectory of UK inflation. Should it be sustained then we may yet see UK inflation fall back to its target of 2% per annum. For example the price of fuel at the pump is some 10 pence per litre higher than a year ago for petrol and 14 pence per litre higher than a year ago for diesel, so the drop is not in the price yet. That may rule out an influence for November’s figures but we could see an impact in December. Other prices will be influenced too although probably not domestic energy costs which for other reasons only seem to go up. But as we looked at yesterday the development would be good for real wages where we scrabble for every decimal point.

Meanwhile I have left the “most comprehensive” measure of inflation to last which is what it deserves. This is because the CPIH measure ignores a well understood and real price – what you pay for a house – which is rising at an annual rate of 3.5% and replaces it with Imputed Rents which are never paid to get this.

The OOH component annual rate is 1.1%, up from 1.0% last month.

But I do not need to go on because the body that has pushed for this which is Her Majesty’s Treasury which plans to save a fortune by using it may be having second thoughts if it’s media output is any guide.


The problems of student debt and loans are mounting

The UK university system is facing trouble on more than a few fronts. Some are struggling full stop as we note talk that they will not be bailed out. That comes on top of the issue of student loans and debt which makes me wonder how useful a degree is these days? Especially at a time of struggling real wages.  Although wages for some do not seem to be a problem. From UK Parliament in June of this year.

A table of vice-chancellors’ salaries in the Times Higher Education in June 2017 showed that Dame Glynis Breakwell, the vice-chancellor of the University of Bath was the highest paid university vice-chancellor in the UK; in 2016-17 she was paid a salary of £451,000. The table showed that vice-chancellors at six other universities also earned over £400,000 in that year.

Average pay was found to be £290,000 including pension contributions. You may recall that the University Superannuation Scheme became a hot topic for a while as there were strikes after suggestions that defined benefits needed to end. That was eventually resolved with higher contributions ( but not as high as originally suggested). Previously the total was 26% of salary split 18% employer and 8% employee.

The panel recommended that DB pensions could continue to be offered with contributions rising to 29 per cent — significantly lower than the 36.6 per cent from April 2020 proposed by USS, based on the valuation as it stands. ( Financial Times)

As an aside it was a shame that the Bank of England was not contacted as its research could be used to show that in fact such pensions have benefited from its policies. In spite of course of that fact that its Chief Economist Andy Haldane confessed to not understanding them. Oh well!

Moving on, payoffs to Vice-Chancellors had become an issue such as the £429,000 payoff at Bath Spa, £230,000 at the University of Sussex, and £186,876 at Birmingham City University. Coming back to pay the HM Parliament research showed that Vice-Chancellor pay had risen at an annual rate of 3.2% when other academic staff were restricted to 0.7%.

Student Debt

A glimpse of a potential future can be seen in the United States. Last night the US Federal Reserve updated us on total student debt at the end of the third quarter and it was US $1.563 trillion. One perspective is provided by the number below it for total motor loans which is a relatively mere £1.142.8 trillion. In terms of past comparisons the number for 2013 was £1.145.6 trillion for US student loans.

Noah Opinion on Bloomberg looked at it like this.

Many educated millennials would likely agree — since 2006, student debt has approximately doubled as a share of the economy……..The increase seems to have paused in the past two years, possibly due to the economic recovery (which allows students and their families to pay more tuition out of current income) and a modest  decline in college enrollment. But the burden is still very large, and interest rates on student-loan debt are fairly high.

His chart shows student debt being around 7.5% of US Gross Domestic Product and I can update his view because unless the US economy is growing at an annual rate of 5.6% then the burden is rising again.

Also the repayment issue is similar to that we have and indeed are experiencing in the UK.

Education researcher Erin Dunlop Velez crunched data that was recently released by the Department of Education, and found that only half of students who went to college in 1995-6 had paid off their loans within 20 years. Given the vast increase in the size of loans since then, repayment rates are likely to be even worse if nothing is done. Velez also found that default rates are considerably higher than had been thought.

There is another familiar feature.

What’s more, student lending has almost certainly contributed to the rise in college tuition, which has outpaced overall inflation by a lot. When the government lends students money, or encourages private lenders to do the same, it increases demand for college, pushing up the price.

In the  UK a lot of the inflation came in one go.

In the 2012/13 academic year, students beginning their studies could be charged up to a maximum fee of £9000 for first year courses compared with a maximum of £3375 in
2011/12 ( Office for National Statistics).

Whilst the weighting for university fees is low the substantial rise had an impact on the overall numbers.

In total, university tuition fees for UK and EU students added 0.31 percentage points to the change in CPI
inflation between September and October 2012. This was the largest component of the rise in the headline rate from 2.2 to 2.7%.

The CPI measure was particularly affected as it includes international and European Union students whereas the RPI only has UK ones meaning that the weight is around three times higher. That becomes quite an irony as we note the invariably higher ( ~ 1% per annum) RPI is used in the interest-rate on student loans. The road from being “not a national statistic” to being useful is short when it is something the public are paying or indeed Bank of England pensioners are receiving.


Let me start with some welcome good news. The Times Higher Education rankings show Oxford University at number one with Cambridge second and Imperial College ninth. My alma mater the LSE slide in at number 26. So we are getting something right as whilst it feels by hook or by crook our universities are highly regarded around the world. I think we do that a lot as we focus on issues ( the impact of the PPE degree course at Oxford on our political class) and maybe lose vision on the wider picture. Our institutions are often highly regarded around the world.

Also many more people are going to university as this from Gil Wyness at the LSE points out.

The UK has dramatically increased the supply of graduates over the last four decades. The proportion of workers with higher education has risen from only 4.7% in 1979 to 28.5% in 2011 (Machin, 2014). Rather than this enormous increase in supply reducing the value of a degree, the pay of graduates relative to non-graduates has risen over the same period: from 39% to 56% for men and from 52% to 59% for women).

However the issue of pay is a complex one as of course overall pay growth has slowed which if the workforce has become better qualified looks even worse. Also there is this which needs some revision I would suggest.

The expansion of universities helped raise growth and productivity (Besley and Van Reenen,

The financing side is much more shambolic though. The upside of the student loans era was supposed to make universities compete more, does anyone believe that now? Next comes the issue that a high interest-rate (6.3%) is used to raise the debt calculated like this by HM Parliament.

Currently more than £16 billion is loaned to around one million higher education students in England each year. The value of outstanding loans at the end of March 2018
reached £105 billion. The Government forecasts the value of outstanding loans to be reach around £450 billion (2017-18 prices) by the middle of this century.

No wonder the Bank of England dropped consumer loans from its credit figures! But more fundamentally debt is supposed to be repaid and yet we know most of this never will be. Yet along the way it will affect those who have it should they look to buy a house or have other borrowing.

The average debt among the first major cohort of post-2012 students to become liable for repayment was £32,000. The Government expects that 30% of current full-time undergraduates who take out loans will repay them in full.

The anthem for this comes from Twenty One Pilots.

Wish we could turn back time, to the good old days
When our momma sang us to sleep but now we’re stressed out
Wish we could turn back time, to the good old days
When our momma sang us to sleep but now we’re stressed out





Turkey sees currency driven inflation beginning to fade as the Lira rallies

A feature of the modern era is the way that we are presented crises but they then fall off the radar screen. An example of this has been Turkey which hit the media heights but has now faded away. Let us update ourselves via the view of Commerzbank on last months central bank meeting.

The Turkish central bank (CBT) left its benchmark interest rate unchanged at today’s meeting. In our view, this was a major policy mistake. CBT commented that it maintains a tight policy stance. But, when the benchmark rate is 24% and inflation is also 24%, how is this stance “tight”? The decision shows that CBT has not morphed into an active inflation-targeting central bank as some government officials have claimed. Rather CBT is simply taking the path of least resistance – since the market is forgiving at the moment, why ruffle political feathers by continuing to hike rates? Given this CB attitude, prepare for more lira volatility down the line.”  ( via FXStreet )

There is a large amount to cover here and let us start with the idea that a major mistake was made. Also that this from the CBRT is wrong.

The tight stance in monetary policy will be maintained decisively until the inflation outlook displays a significant improvement…….Accordingly, the Committee has decided to maintain the tight monetary policy stance and keep the policy rate (one week repo auction rate) constant at 24 percent.

There are many ways of measuring such a concept but an interest-rate of 24% on its own in these times makes you think, especially if we recall that it had been raised by 6.25% at the previous meeting. How many countries even have interest-rates of 6.25% right now? The real issue here to my mind is that Commerzbank  lost perspective with this by looking at inflation at the moment rather than looking ahead. If we take the view of the CBRT from back then the outlook was this.

In this respect, inflation is projected to be 23.5 percent at end-2018, and then fall to 15.2 percent at end-2019 and 9.3 percent at end-2020 before stabilizing around 5 percent in the medium term. Forecasts are based on a monetary policy framework that envisages that the tight monetary policy stance will be maintained for an extended period.

On this basis if we look ahead to when we might expect the interest-rate rise to be fully effective we should start with the end-2019 figure of 15.2%. Against that outlook then a real interest-rate of 9% is for these times eye-wateringly tight. Of course caution is required as central banks are hardly the best forecasters, But I am reminded of the template I set out on the third of May for such a situation.

However some of the moves can make things worse as for example knee-jerk interest-rate rises. Imagine you had a variable-rate mortgage in Buenos Aires! You crunch your domestic economy when the target is the overseas one.

My warning was given when interest-rates in Argentina were 30.25%, by the end of that day they were 3% higher and now the LELIQ rate is 68.1%. Sadly they are living out my warning.

Inflation now

Let us bring this up to date from the Hurriyet Daily News.

Turkish annual inflation surged to 25 percent in October, official data showed on Nov. 5, hitting its highest in 15 years……..Month-on-month, consumer prices jumped 2.67 percent, the Turkish Statistical Institute (TÜİK) data showed, higher than the 2 percent forecast in a Reuters poll. Core inflation surged 24.34 annually. October  inflation was driven by a 12.74 percent month-on-month surge in clothing and shoe prices and a 4.15 percent rise in housing prices, the data showed.

On a yearly basis, the biggest price hike was in furnishing and household equipment in October with 37.92 percent.

Initially Commerzbank may think it was right but this is only a small nudge higher in annual terms as the monthly increase more than halves. We also get a reminder that this is inflation which is essentially exchange-rate driven by the way that the core inflation rate is so similar to the headline. This is joined by which sectors are influenced by imports showing it is a bad time to overhaul your wardrobe or redecorate your home. Speaking of homes there will be central bankers reading this thinking that the rise in house prices is a triumph. The wealth effects! The wealth effects! Back in your box please.

The Turkish Lira

There have been changes here as we look to see what influence it will have on inflation trends. Here is @UmarFarooq_

Turkish is regaining some of its loses, looks set to return to pre-sanction days of August. Went from 6.3 to 5.3 versus dollar in one month. Still a ways to go compared to one year ago, when it was 3.8

Some of the move has been in relation to political changes but from our point of view that only matters if they intervene again. The fact is that a lot of inflationary pressure has faded in the move from the peak of 7.21 against the US Dollar at the height of the crisis to 5.34 as I type this.

So whilst there is still inflationary pressure in the system it has faded quite a lot and if you believe World Economics things are still out of line.

The Turkish Lira has an FX rate of 5.7 but a PPP value of 2.72 against the USD. ( PPP is Purchasing Power Parity)

Of course with inflation so high PPP may need a bit of an update.


The exchange-rate is the (F)X-Factor here but the inflation trend is now turning although due to base effects the headline may not respond for a couple of months or so. In some ways like so many things these days events have sped up and it has been like a crisis on speed. Here is the latest official trade data via Google Translate.

Our foreign trade deficit decreased by 92.8% to 529 million dollars in October compared to the same period of the previous year……..October, our exports increased by 13.1% compared to the same month of the previous year and reached 15 billion 732 million  dollars. Our exports increased to the highest level of all time and 
broke the record of the Republican history. 
In October, our imports decreased by 23.5 percent to 16 billion 261 million dollars.

There is an intriguing hint that the Ottoman export performance may have been quite something but we learn several things. Turkey seems to have a very price competitive economy as we see both exports and imports responding in size and in short order. We also have a large slow down and indeed recessionary hint from the size of the fall in imports. Next we admire their ability to have the October figures available on the 1st of November. Also if we look at the year so far you might be surprised at one of the names below.

In January-October period, exports to Germany increased 8.7% to $ 13.5 billion, while exports to the UK increased 17.5% to $ 9.3 billion.

Also Turkey seems to have avoided the automotive slow down which today has spread to Ford suppliers in Valencia.

Thus looking ahead the inflationary episode is now fading as ironically another consequence of the lower exchange-rate which is trade looks to be moving into surplus. For once the real economy is moving as quickly as the financial one. However one aspect that we do not know yet is the size of the slow down or recession partly because a sign of it – lower imports – flatters GDP via trade and often more quickly than the other numbers we receive show the actual cause of it. If you want a Commerzbank style Turkish economy imagine all of the above with another interest-rate increase……