The Jackson Hole symposium should embace lower inflation

Later this week the world’s central banks will gather at the economics symposium of the US Kansas Federal Reserve at Jackson Hole in Wyoming. The description can be found below.

The 2017 Economic Symposium, “Fostering a Dynamic Global Economy,” will take place Aug. 24-26, 2017.  (The program will be available at 6 p.m., MT, Aug. 24, 2017).

It is appropriate that they do not yet know the program as the world’s central bankers find themselves at a variety of crossroads which they are approaching from different directions. It is also true that after all their expansionary monetary policy and “masters ( and mistresses) of the universe” activities over the last decade or so they now approach one of the most difficult decisions which is how to exit these programs. For some this will simply mean a slowing of the expansion. This all looks very different to when a speech on Forward Guidance was eagerly lapped up by a receptive audience and quickly became policy in many countries. After all Open Mouth Operations make a central banker feel both loved and important as we all hang on every word. Oh and there is a clear irony in the title of “Fostering a Dynamic Global Economy” for a group of people whose propping up of many zombie banks has led to anything but. That is of course assuming anyone knows what the phrase means in practice!

The inflation issue

The issue here is highlighted by this from Bloomberg today.

The world’s top central bankers head to Jackson Hole amid growing unease about low inflation.

Of course central bankers and those in the media subject to their brainwashing program may think this but the ordinary worker and consumer will be relieved. Should any of the central bankers suffer from stomach problems no doubt they will be delighted to discover this from CNBC.

Hikma Pharmaceuticals Plc’s U.S. subsidiary has raised the price of a common diarrhea drug by more than 400 percent and is charging more for five other medicines as well, the Financial Times reported on Sunday……The average wholesale price of a 60 ml bottle of liquid Atropine-Diphenoxylate, a common diarrhea drug also known as Lomotil, went from about $16 a bottle to $84, the FT reported.

Central banker heaven apparently and what needs looking into in my opinion is the clear examples of price gouging we see from time to time. Also more mundane products are seeing price rises. From Mining.com last week.

The iron ore price is now trading up a whopping 43% from its 2017 lows struck just two months ago.

According to Yuan Talks the Dalian futures contract rose 6.6% today before price limits kicked in. It is not alone as the Nikkei Asian Review points out.

Three-month zinc futures were at their highest level in 10 years, at about $3,100 per ton, rising 26% over the same period.
Aluminum also rose 10% over the same period.

So as well as raising a smile on the face of the heads of the central banks of Canada and Australia there are hints of some commodity inflation about. This provides a counterpoint to the concerns about low inflation which in the Euro area and the US is not that far below especially when we allow for the margin of error.

Does QE lead to inflation?

Some care is needed here as of course we have seen waves of asset price inflation across a wide range of countries. But of course the statistical policy across most of the world is to avoid measuring that in consumer inflation. Then it can be presented as growth which for some it is but not for example for first time buyers. However one of the building blocks of economics 101 is that QE ( Quantitative Easing) leads to inflation. Yet the enormous programs in the US and the ongoing one in the Euro area have not got consumer inflation back to target and the leader of the pack in this regard Japan has 0% inflation. After all the money involved has it simply led to price shifts? That is especially awkward for Ivory Tower theorists as they are not supposed to be able to happen with ~0% inflation so I guess they sent their spouse out to fill up the car as the petrol/diesel price fell.

More deeply whilst the initial effect of QE should have some inflationary implications is there something in it such as the support of a zombie business culture that means inflation the fades. It could of course be something outside of the monetary environment such as changing demographics involving ageing populations. Perhaps it was those two factors which broke the Phillips Curve.

As to future prospects there are two issues at play. The US Federal Reserve will start next month on an exit road which I remember suggesting for the Bank of England in City-AM some 4 years ago. If you do not want QE to become a permanent feature of the economic landscape you have to start somewhere. The issue for the ECB is getting more complex mostly driven by the fiscal conservatism of Germany which means that a supply crunch is looming as it faces the prospect of running out of German bonds to buy.

Currency Wars

There are two specific dangers here which relate to timing ( during thin summer markets) and the fact that markets hang on every central banking word. Eyes will be on the Euro because it has been strong in 2017 and in particular since mid April when it did not quite touch 93 on its effective ( trade-weighted) index as opposed to the 98.7 the ECB calculated it at on Friday. It has put another squeeze on the poor battered UK Pound £ but of more international seriousness is yet another example of a problem for economics 101 as interest-rate rises should have the US Dollar rising. Of course there is a timing issue as the US Dollar previously rose anticipating this and maybe more, but from the point of Mario Draghi and the ECB there is the fear that cutting the rate of QE further might make the Euro rally even more. Although one might note that in spite of the swings and roundabouts along the way the Euro at 98.7 is not far away from where it all began.

The Bank of Japan is also facing a yen rallying against the US Dollar and this morning it briefly rose into the 108s versus the US Dollar. Whilst it is lower than this time last year the trend seemed to change a few months back and the Yen has been stronger again.

Comment

It is hard not to have a wry smile at a group of people who via Forward Guidance and Open Mouth Operations have encouraged markets to hang on their every word now trying to downplay this. If you create junkies then you face the choice between cold turkey or a gradual wind down. Even worse you face the prospect of still feeding addiction number one when a need for number two arises as sooner or later an economic slow down will be along. Or creating fears about low inflation when the “lost decades” of Japan has shown that the world does not in fact end.

If we move onto the concept of a total eclipse then I am jealous of those in the United States today. From Scientific American.

Someone said that it is like suddenly being in some sort of CGI of another world or maybe like a drug-induced hallucination that feels (and is) totally real.

No they have not switched to central banking analysis but if the excellent BBC 4 documentary ”  do we really need the moon?” is any guide we should enjoy solar eclipses whilst we still have them. Meanwhile of course there is Bonnie Tyler.

I don’t know what to do and I’m always in the dark
We’re living in a powder keg and giving off sparks.

 

 

 

 

Expensive times are ahead for UK railway travellers and commuters

Before we even get to the latest UK inflation data some worrying data has emerged. What I mean by this is that Sweden has announced its inflation data which makes its monetary policy even more mind-boggling.

The inflation rate according to the Consumer Price Index (CPI) was 2.2 percent in July 2017, up from 1.7 percent in June. The Swedish Consumer Price Index (CPI) rose by 0.5 percent from June to July 2017

If we look back to the July Minutes we see that the forecasting skills of the Riksbank are unchanged.

several board members emphasised that it was not sufficient for inflation to temporarily touch the 2 per cent mark.

Actually they are considering a switch of target but in fact that poses even more of a problem.

The inflation rate according to the CPI with a fixed interest rate (CPIF) was 2.4 percent in July, up from 1.9 percent in June. The CPIF rose by 0.6 percent from June to July 2017.

So let us leave the Riksbank to explain why it has an interest-rate of -0.5% and is adding to its QE bond purchases with inflation as above and the economy growing at an annual rate of 4%? This inflation rise added to the rise in India yesterday and in terms of detail was driven by package holiday (0.3%) and air fare ( 0.2%) price rises. Transport costs rises are a little ominous on the day that we find out how much UK rail fares will rise next January.

CPIH

This is the new UK inflation measure and is described thus.

CPIH is our lead measure of inflation and offers the most comprehensive picture of how prices are changing in the economy.

As it uses imputed rents for the housing sector I have challenged them on the use of “comprehensive” so far without much success but you may note the use of “lead” where I have had more success. Efforts to call it “headline” or “preferred” have been extinguished. Meanwhile this happened at the end of July.

On behalf of the Board of the Statistics Authority, I am pleased to confirm the re-designation of CPIH as a National Statistics.

I wish to challenge this by concentrating on the issue of rents. There are two issues here the first is the fantasy economics  that owner-occupiers rent out their homes and the second is the measurement of rents has problems.

  1. There is an issue over the spilt between new lets and existing ones which matters as new let prices tend to rise more quickly.
  2. There is an issue over lags in the data which has been kept under wraps but is suspected to be as long as 18 months so today’s data for July is actually last year’s.
  3. There is the issue that we are being reassured about numbers they confess to not actually knowing.

    “. I acknowledge the efforts by ONS staff to provide reassurance around the quality of the Valuation Office Agency (VOA) private rents microdata, which are currently unavailable to ONS. “

There are alternatives which dissidents like me are pressing such as Household Costs Index designed originally by John Astin and Jill Leyland under the auspices of the Royal Statistical Society. This aims to measure what households experience in terms of inflation and thereby includes both house prices and interest-rates rather than fantasy calculations such as imputed rents. Officially it is in progress whereas in practice an effort is underway to neuter this such as the suggestion from the Office for National Statistics ( ONS) it would only be produced annually.

Why does this matter? Well look at the numbers and below is the housing section from CPIH.

The OOH component annual rate is 2.0%, unchanged from last month.  ( OOH = Owner Occupied Housing costs)

Now here are the ONS house price numbers also released today.

Average house prices in the UK have increased by 4.9% in the year to June 2017 (down from 5.0% in the year to May 2017). The annual growth rate has slowed since mid-2016 but has remained broadly around 5% during 2017.

As you can see they are quite different in spite of the slow down in house price rises. Also we took the CPI numbers to align ourselves with Europe which is using house prices in its own plans for a new measure. This is a familiar theme where rationales are pressed and pressed but then dropped when inconvenient a bit like the RPIJ inflation measure.

Today’s data

We learnt something today I think.

The all items CPI annual rate is 2.6%, unchanged from last month…….The all items CPIH annual rate is 2.6%, unchanged from last month.

Firstly we have detached a little from the recent international trend which may well be because we have been seeing higher inflation here. Also you may note that the fanfare of CPIH is currently rather pointless as it is giving the same result! Added to this there is a completely different picture to Sweden.

Transport, in particular motor fuels. Fuel prices fell by 1.3% between June and July 2017, the fifth successive month of price decreases. This contrasts with the same period last year, when fuel prices rose by 0.7%.

I checked air fares too and they fell.

Looking Ahead

There was a continuation of the good news on this front from the producer price indices.

The annual rate of inflation for goods leaving the factory gate slowed for the third time this year, mainly as a result of 2016 price movements dropping out of the annual comparison.

Much of the effect here comes from the change in the exchange rate where the post EU leave vote is beginning now to drop out of the annual data comparisons. Below are the latest numbers.

Factory gate prices (output prices) rose 3.2% on the year to July 2017, from 3.3% in June 2017, which is a 0.5 percentage points decline from their recent peak of 3.7% in February and March 2017……Prices for materials and fuels (input prices) rose 6.5% on the year to July 2017, from 10% in June 2017; as per factory gate prices, the drop in July’s rate is due to 2016 price movements dropping out of the annual comparison.

In the detail there is something which will only be welcomed by farmers and central bankers ( who for newer readers consider food and energy inflation to be non-core)

Food production continued to be the main source of upward contributions to input and output price inflation fuelled by rising prices for home food materials and food products respectively.

We get a little more detail but not much.

Within home food materials the largest upward contribution came from crop and animal production, with prices rising 12.3% on the year to July 2017.

Comment

We see a welcome development in that the pressure for UK inflation rises has faded a bit. But commuters and rail travellers will be noting that my theme that the UK is a country with administered inflation is in play here.

The all items RPI annual rate is 3.6%, up from 3.5% last month.

You see the “Not a National Statistic” Retail Prices Index is suddenly useful when setting things like rail fares or mobile phone contracts. A rough summary is that the ordinary person pays using the higher RPI but only receives ( pensions, tax allowances indexation) the lower CPI. This reminds me that the gap is 1% which gets little publicity. Indeed the gap between our old inflation measure and the new one continues to be much wider than the change in the target.

The annual rate for RPIX, the all items RPI excluding mortgage interest payments (MIPs) index, is 3.9%, up from 3.8% last month.

As a final note UK new car prices edged higher as used car prices nudged lower. I mention this because there are falling prices in the US leading to worries about the car loans situation.

 

The pensions dilemma for millennials and UK Retail Sales

The credit crunch era has been essentially one where central banks have tried to borrow spending and resources from the future. In essence this is a Keynesian idea although their actual methods have had Friedmanite style themes. We were supposed to recover economically meaning that the future would be bright and we would not even notice that poor battered can on the side of the road as we cruised past it. Some measures have achieved this.

Indeed some central banks are involved in directly buying stock markets as these quotes from the Bank of Japan this morning indicate.

BOJ’s Kuroda: ETF buys are aimed at risk premiums, not stock prices. Overall ETF holdnig small proportion of overall equity ( DailyFX).

Some think it has had an impact.

Nikkei avg receiving an agg boost of c.1,700 points after curr ETF policy was adopted. The Nikkei average added 2,150 points in fiscal 2016 ( @moved_average )

Such moves were supposed to bring wealth effects and in a link to the retail sales numbers higher consumption. This would be added to by the surge in bond markets which is the flip side of the low and in many cases negative yields we have and indeed still are seeing. This is why central bankers follow financial markets these days so that they can keep in touch with something they claim is a strong economic boost. In reality it is one of the few things they can point to that have been affected and on that list we can add in house prices.

Millennials

I am using that word broadly to consider younger people in general and they have much to mull. After all they are unlikely to own a house – unless the bank of mum and dad is in play – so do not benefit here. In fact the situation is exactly the reverse as prices must look even more unaffordable of which one sign this week has been the news that more mortgages are now of a 35 year term as opposed to 25 years.

They also face a rather troubling picture on the pension front. From the Financial Times.

 

People entering the workforce today face a “monumental savings challenge”, the International Longevity Centre-UK said in a report published on Thursday. According to the report, young workers in the UK will need to put away 18 per cent of their earnings each year in order to have an “adequate retirement income” — a higher proportion of their earnings than their counterparts in any other OECD country. Adequate retirement income is defined as around two-thirds of a person’s average pre-retirement salary.

To my mind the shock is not in the number which is not far off what it has always been. Rather it comes from finding that after student loan repayments and perhaps saving for a house which comes after feeding yourself, getting some shelter ( rent presumably) and so on. Of course some will feel that their taxes are financing the triple-lock for the basic state pension which is something which for them is getting ever further away. From the BBC.

UK state pension age increase from 67 to 68 to be brought forward by seven years to 2037, government says.

There were two clear issues with this. The first is the irony that this came out as the same time as a report suggested that gains in lifespan are fading. The other is the theme of a good day to bury bad news as the summer lull and the revelations about BBC pay combined.

Oh and tucked away in the Financial Times report was something that will require a “look away now” for central bankers.

A combination of low investment returns

You see those owning equities and government bonds have had a party but where are the potential future gains for the young in buying stock and bond markets at all time highs?

UK Retail Sales

This has not been one of the areas which has disappointed in the credit crunch era. If we look at today’s release we see that in 2010.11 and 12 not much happened as they were 98-99% of 2013’s numbers. Then something of a lift-off occurred as they went 104% (2014), 108.5% (2015), and 113.8% (2016). This fits neatly with my views on the Bank of England Funding for Lending Scheme as we see that a boost to the housing market and house prices yet again feeds into consumer demand. Actually to my mind that overplays the economic effect of FLS as it may have provided a kick-start but the low inflation levels as 2015 moved into 2016 provided the main boost via higher real wages in my opinion.

What happened next?

The first quarter of 2017 saw the weakest period for UK retail sales for a while with several drivers. One was the nudge higher in inflation provided by the lower value for the UK Pound £. Another was that the numbers could not keep rising like they were forever! Let us now look at today’s release.

In the 3 months to June 2017, the quantity bought (volume) in the retail industry is estimated to have increased by 1.5%, with increases seen across all store types…….Compared with May 2017, the quantity bought increased by 0.6%, with non-food stores providing the main contribution.

As to what caused this well as summer last time I checked happens every year it seems the weather has been looked at favourably for once.

Feedback from retailers suggests that warmer weather in addition to the introduction of summer clothing helped boost clothing sales.

If you recall last autumn we got a boost from ladies and women purchasing more clothes, is their demand inexhaustible and do we own them another vote of thanks?

Also I note that better numbers have yet again coincided with weaker inflation data.

Average store prices (including petrol stations) increased by 2.7% on the year following a rise of 3.2% in May 2017; the fall is a consequence of slowing fuel prices.

Or to be more specific less high inflation.

Comment

If we look at the retail sales data we have Dr. Who style returned to the end of 2016.

The growth for Quarter 2 (Apr to June) 2017 follows a decline of 1.4% in Quarter 1 (Jan Mar) 2017, meaning we are broadly at the same level as at the start of 2017.

Unlike many other sectors it has seen a recovery and growth in the credit crunch era. In addition to the factors already discussed no doubt the rise in unsecured credit has also been at play. For the moment we see that it will provide a boost to the GDP numbers in the second quarter as opposed to a contraction in the first.

But there are issues here as we look ahead. With economic growth being slow we look for any sort of silver lining. But of course the UK’s reliance on consumption comes with various kickers such as reliance on an ever more affordable housing market and poor balance of payments figures.

Also from the perspective of millennials there is the question of what they will be able to consume with all the burdens bearing down on them? Mankind has seen plenty of period where economic growth has stagnated as for example the Dark Ages were not only called that because of the weather. But we have come to expect ever more growth which currently looks like quite a hangover for them. They need the equivalent of what is called “something wonderful” in the film 2001 A Space Odyssey like cold nuclear fusion or an enormous jump in battery technology. Otherwise they seem set to turn on the central bankers and all their promises.

 

 

Welcome relief for UK real wages from lower inflation numbers

Today is inflation day in the UK as we get the official data for consumer, producer and house price inflation. In case you were wondering why they all come out on one day  meaning that some details get ignored in the melee ( mostly producer price inflation) well that is the point! Previously when the data were released separately there were potentially three days of embarrassment for the government and establishment which they have reduced to just one. Job done in a way.

However even before we get today’s numbers the subject is in the news in several ways. From the BBC.

Motorists are being saddled with the fastest year-on-year rise in insurance premiums since records began five years ago, the industry has warned. Average car insurance premiums have gone up by 11% in the past year, according to the Association of British Insurers (ABI). The typical bill for an annual policy is now £484, it said.

One of my themes which is institutionalised inflation is on the march here.

The ABI says the change in the discount rate is the main reason behind the rise, but also blames the latest increase in insurance premium tax which went up from 10% to 12% on 1 June…….That is why the government reduced the discount rate to -0.75%.

I have included the discount rate as it is a consequence of the way Bank of England QE has driven real bond yields into negative territory. Oh what a tangled web, and that is before we get to the plague of false claims and deliberate accidents which mar this area and drive up premiums.

Buttering us up

An odd feature of the current phase is high butter prices which stretch well beyond the UK as this from @Welt indicates.

price has risen this week in Germany by another 30 Cent or 20% to 1.79€, highest price ever after WWII.

In France there are worries about rises in croissant prices and maybe even a shortage of them. The causes are in essence the farming boom/bust cycle combined with a rise in demand as the Financial Times explains.

 

The combination of falling milk output in key producing countries and adverse weather sent the international butter price to a record high in June, according to the UN Food and Agricultural Organization…..

 

Raphael Moreau, a food analyst at Euromonitor, says that butter consumption has been lifted by demand for “natural” products among shoppers as they move away from spreads such as margarine. “In the UK, butter consumption has also been supported by the home-baking boom,” he says.

So far this has yet to be fully reflected in consumer prices but as supply is inelastic or inflexible in the short-term this could carry on for the rest of 2017.

The other side of the coin

On the 13th of June I pointed out this about the trend for producer prices.

Fortunately we see that the main push is beginning to fade.

Also adding to this is that the UK Pound has been improving against the US Dollar. Friday’s surge that took it to US $1.31 is of course after today’s numbers were calculated but the lower UK Pound will be a decreasing effect as we go forwards.

Today’s Numbers

There was a very welcome change today.

The Consumer Prices Index (CPI) 12-month rate was 2.6% in June 2017, down from 2.9% in May 2017.

The drivers of this were as follows.

Fuel prices fell by 1.1% between May and June 2017, the fourth successive month of price decreases. This contrasts with the same period last year, when fuel prices rose by 2.2%. Taken together, these movements resulted in prices for motor fuels making a large downward contribution to the change in the rate………Recreational and cultural goods and services, with prices overall falling by 0.1% between May and June 2017, compared with a rise of 0.6% a year ago.

If we look at the pattern actually there was no inflation in the month itself.

The all items CPI is 103.3, unchanged from last month.

Oh and the period where the oil price drove goods prices lower is over as we see that goods and services inflation are now pretty much the same.

The CPI all goods index annual rate is 2.6%, down from 2.9% last month. ……..The CPI all services index annual rate is 2.7%, down from 2.8% last month.

Looking Ahead

As we noted last month the pressure coming from higher producer price inflation is looking like it is fading.

Factory gate prices (output prices) rose 3.3% on the year to June 2017 from 3.6% in May 2017, which is the slowest rate prices have increased since December 2016…….Input prices rose 9.9% on the year to June 2017 from 12.1% in May 2017, meaning the annual rate has fallen 10 percentage points since January 2017.

This is mostly about one thing.

Inputs of crude oil is the main driver of the recent slowing of input price inflation as annual price growth for crude oil fell from 88.9% in February 2017 to 9.1% in June 2017.

Two factors are at play here as we see the impact of the oil price no longer falling and the UK Pound/Dollar exchange rate which has risen from its lows of January.

Housing Inflation

We have an official measure that includes imputed rents as a way of measuring housing costs for owner-occupiers. As you can see they are in fact reducing the level of inflation measured.

The all items CPIH annual rate is 2.6%, down from 2.7% in May. …….The OOH component annual rate is 2.0%, down from 2.1% last month( OOH= Owner Occupied Housing Costs)……..Private rental prices paid by tenants in Great Britain rose by 1.8% in the 12 months to June 2017;

The problem for our official statisticians is that few people have bothered much with the change in its headline measure as this from Adam Parsons the Sky News business correspondent indicates.

CPIH – the stat that nobody wants, and nobody quotes

Oh and it is still not a national statistic which were the grounds for demoting RPI but seem to be ignored in the case of CPIH.

Meanwhile house price inflation is rather different to rental inflation.

Average house prices in the UK have increased by 4.7% in the year to May 2017.

This is why they put imputed rents into the new headline inflation measure! It was always likely to give a lower number because house prices can and indeed have been inflated by the way that mortgage costs have been driven lower by the Bank of England. As to troubles here we saw another sign last week. From whatmortgage.co.uk.

The Bank of England has warned mortgage lenders of the possible risks posed by the recent trend of longer loan terms………Woods highlighted the recent trend of mortgage terms rising from 25 years to 35 years or “even longer”.

Comment

First let me welcome the better inflation data which will help with the economic issue of the day which is real wage growth. Or to be more specific it is seems set to be less poor than it might have been. Good.

In terms of inflation I would like to draw your attention to a problem which the UK establishment does its best to try to sweep under the carpet. This is that the old inflation target called RPIX is at 3.8% but the newer CPI is at 2.6% with the gap now being 1.2% which is very significant. Also there is the issue that we pay things at RPI ( Retail Price Index) currently at 3.5% but only receive CPI currently at 2.6% which is quite an establishment scam. This particularly affects students who find that costs in their loans are escalating into the stratosphere with implications for matters such as mortgage affordability if not final repayment as so many of these will never be repaid.

Looking ahead we are certainly not out of the inflation woods as there are still dangers of higher numbers in the autumn as we note the butter and insurance effects discussed earlier. We do not know what the Pound £ and the oil price will do. As to comparisons with Euro area inflation at 1.3% we get a guide to how much the lower Pound £ has affected our inflation rate which has turned out to be pretty much along the lines I suggested back on the 19th of July last year.

I expect a larger impact on the annual rate of inflation than the Draghi Rule implies and estimate one of say 1%.

 

Could the Japanese Government cope with an end to QE in Japan?

It is time for us to look east again to the land of the rising sun or Nihon. It remains in the grip of an extraordinary economic experiment as its central bank continues to offer freshly printed Yen ( albeit electronic rather than paper ones) on a grand scale in return for bonds, commercial paper , corporate bonds, equities and property so just about everything!

With regard to the amount of JGBs to be purchased, the Bank will conduct purchases at more or less the current pace — an annual pace of increase in the amount outstanding of its JGB holdings of about 80 trillion yen — aiming to achieve the target level of the long-term interest rate specified by the guideline. …… 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.

Perhaps it was the scale of all of this that led much of the media to start writing articles that the Bank of Japan would reduce its operations or as it is now called “taper” them. Only on Friday I quoted this from the Wall Street Journal.

Japan shows Europe how to dial back stimulus without spooking investors

The Bank of Japan responds

Sadly for the media the word taper required the word reverse in front of it. From the Nikkei Asian Review only a few short hours later.

At 10:10 a.m. Japan time, the BOJ unleashed what a market manager for a leading brokerage called a “devastating” combination, announcing both a fixed-rate operation, in which the central bank agrees to buy unlimited bonds at a fixed yield, and an increase in the size of regular bond-buying operations. It was the first time the bank had executed such policies simultaneously.

So more is apparently less as we note that this bit could only have come from Japan.

When yields on 10-year Japanese government bonds hit 0.1% on Thursday evening, the central bank was forced to ring up Japan’s leading securities firms for advice.

What would they have done in places like Greece Italy or Portugal in the Euro area crisis or in the early days of my career when longer UK Gilt yields passed 15%?!

By Friday morning, 10-year JGB yields had reached 0.105% — the last straw

We will have to see what happens next but should the Bank of Japan feel the need to keep intervening this could be the state of play.

If the central bank keeps buying up 10-year JGBs as quickly as it did Friday, annual purchases could exceed new issuance, according to Takenobu Nakashima of Nomura Securities, burning through fuel for measures to combat a future yield surge.

Actually if it bought them all that would of itself tend to stop any yield surge. Although of course that is just the flow so there would still be an existing stock albeit one which the Bank of Japan owes a fair bit of.

Massive bond purchases have swollen the BOJ’s balance sheet to roughly the size of Japan’s gross domestic product

Around 90% I think. There are various issues here one of which has been conveniently pointed out by the European Central Bank this morning.

Worsened liquidity in domestic government bond market

They mean in the Euro area but imagine how much worse the state of play will be in Japan. We do know that trading volumes have dropped a lot so should the day come that the Bank of Japan decides to withdraw a lot of Japanese fingers will be crossed that past traders and buyers will return. The truth is we simply do not know.

Oh and I see some looking at the equity capital of the Bank of Japan implying it could go broke. But that misses the fact that not only is it backed by the Japanese Treasury but it is pursuing Abenomics a government policy.

Number Crunching

Currently Japan owes this according to Japan Macro Advisers.

At the end of March 2017, the Japanese general government owed a total of 1270.5 trillion yen in liability, equivalent to 236.4% of GDP. The liability includes 863 trillion yen of JGBs, 115.2 trillion yen of T-bills and 157.5 trillion yen of loans.

The Bank of Japan owns over 400 Trillion Yen of these so in round numbers if it wrote these off it would reduce the debt burden to ~160% of GDP. I am by no means suggesting this but if such a situation led to a lower value for the Japanese Yen well that is government policy isn’t it? Of course the danger of debt monetisation of that form is that the currency falls heavily or plummets in a destabilising fashion like Ghana saw for those who recall when I looked at its woes.

The Yen

This has been drifting lower recently and Friday’s news added to that with it now taking more than 114 Yen to buy one US Dollar. This continues a trend which began in the middle of last month.  A sign of the Yen weakness is that the poor battered UK Pound £ is near its post EU Leave vote highs at 147 Yen.

But none of this is anything like enough to spark off the amount of inflation required by Abenomics.

The Inflation Target

More than 3 years down the road after the Bank of Japan kicked off its QQE ( Qualitative and Quantitative Easing) effort we find ourselves noting this. From Japan’s Statistics Bureau.

The consumer price index for Japan in May 2017 was 100.4 (2015=100), up 0.4% over the year before seasonal adjustment, and the same level as the previous month on a seasonally adjusted basis……  The consumer price index for Ku-area of Tokyo in June 2017 (preliminary) was 99.8 (2015=100), the same level as the previous year before seasonal adjustment, and the same level as the previous month on a seasonally adjusted basis.

This represents not far off complete failure in spite of the rhetoric about defeating deflation as if Tokyo is any guide 0% is the new 2%. Although of course we have seen asset price inflation leaving us mulling how much of the rise in the Nikkei 225 equity index from around 8000 to the current 20000 is growth and how much inflation?

Often policies to raise inflation really mean wages growth so let us look at that. From The Japan Times.

Japan’s real wages in May gained 0.1 percent from a year earlier for the first rise in five months, the government said Friday.
Total cash earnings per worker, including base and overtime pay, increased 0.7 percent to an average ¥270,241 (around $2,300), the second consecutive monthly rise, the Health and Welfare Ministry also said in a preliminary report.

You can look at this in two ways. The first is that it is not much and the second is that it is about as good as it has got over the past decade or so. One area that is different to the West where we are worrying about workers in the gig economy is that wage growth in Japan is centred on part-time work. It appears to be the one area where conventional economics can breathe a sigh of relief.

Comment

The situation continues to see some gains but also some retreats as these two quotes from The Japan Times today indicates.

Japan ‘economy watchers’ sentiment rises in June for third straight month……..Core private-sector machinery orders defied expectations and fell in May, the second consecutive month of decline, due to weakness in the service sector, the government said Monday.

Of course the UK data on Friday reminded us of the problems that sentiment indicators can have as optimism emerged as a fall!

I would like to return to my central theme that Japan has done okay in many ways with 0% inflation especially as we note its demographic problem. So why all the bond buying? Well a debt burden does of course often require some inflation to ease the burden for debtors of which the largest debtor is the government. The biggest beneficiary has been the Japanese government which has been able to do a lot of its borrowing for pretty much nothing for a while. Could it afford a return to normality? At what bond yield would it find things difficult and would it have to apply austerity? A sort of road to nowhere……

 

 

The problems facing inflation targets

Today I wish to discuss something which if it was a plant we would call a hardy perennial. No I do not mean Greece although of course there has been another “deal” which extends the austerity that was originally supposed to end in 2020 to 2060 in a clear example along the lines of To Infinity! And Beyond! Nor do I mean the Bank of Japan which has announced it will continue to chomp away on Japanese assets. What I mean is central bankers and members of the establishment who conclude that an inflation target of 2% per annum is not enough and it needs to be raised. The latest example has come from the chair of the US Federal Reserve Janet Yellen. From Reuters.

Years of tepid economic recovery have Fed Chair Janet Yellen and other central bankers considering what was once unthinkable: abandoning decades-long efforts to hold inflation down and allowing price expectations to creep up.

I am not sure if the author has not been keeping up with current events or has been drinking the Kool Aid because since early 2012 the US Federal Reserve has been trying to get inflation up to its 2% per annum target. It managed it for the grand sum of one month earlier this year before it started slip sliding away again. Indeed for a while the inflation target was raised to 2.5% which achieved precisely nothing which is why the change has mostly been forgotten. From December 2012.

inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal,

Of course the Bank of Japan has been trying to raise inflation pretty much since the lost decade(s) began. Anyway here is Reuters again on the current thinking of Janet Yellen.

In remarks on Wednesday, Yellen called an emerging debate over raising global inflation targets “one of the most important questions facing monetary policy,” as central bankers grapple with an economic rut in which low growth, low interest rates and weak price and wage increases reinforce each other.

There is a clear problem with that paragraph as this week’s UK data has reminded us “weak price” increases boosted both retail sales and consumption via the way they boosted real wages. The rationale as expressed below is that we are expected to be none too bright.

The aim would be a change of households’ and businesses’ psychology, convincing them that prices would rise fast enough in the future that they would be better off borrowing and spending more today……..Raising that target to 3 or even 4 percent as some economists have suggested would shift the outlook of firms in particular, allowing them to charge more for goods and pay more for labor without the fear that a central bank would step on the brakes.

They are relying on us being unable to spot that the extra money buys less. Oh and after the utter failure of central bank Forward Guidance particularly in the UK you have my permission to laugh at the Ivory Tower style idea that before they do things consumers and businesses stop to wonder what Mark Carney or Janet Yellen might think or do next!

The theme here is along the lines set out by this speech from John Williams of the San Francisco Fed last September.

The most direct attack on low r-star would be for central banks to pursue a somewhat higher inflation target. This would imply a higher average level of interest rates and thereby give monetary policy more room to maneuver. The logic of this approach argues that a 1 percentage point increase in the inflation target would offset the deleterious effects of an equal-sized decline in r-star.

In John’s Ivory Tower there is a natural rate of interest called r-star.

Meanwhile in the real world

Whilst I am a big fan of Earth Wind and Fire I caution against using their lyrics too literally for policy action.

Take a ride in the sky
On our ship, fantasize
All your dreams will come true right away

You see if we actually look at the real world there is an issue that in spite of all the monetary easing of the credit crunch era we have not seen the consumer inflation that central bankers were both planning and hoping for. The Federal Reserve raised its inflation target as described above in December 2012 because it was expecting “More,More, More” but it never arrived. For today I will ignore the fact that inflation did appear in asset markets such as house prices because so many consumer inflation measures follow the advice “look away now” to that issue.

If we move to the current situation and ignore the currency conflicted UK we see that there is a danger for central bankers but hope for the rest of us that inflationary pressure is fading. A sign of that has come from Eurostat this morning.

Euro area annual inflation was 1.4% in May 2017, down from 1.9% in April.

Tucked away in the detail was the fact that energy costs fell by 1.2% on the month reducing the annual rise to 4.5% from the much higher levels seen so far in 2017. As we look at a price for Brent Crude Oil of US $47 per barrel we see that if that should remain there then more of this can be expected as 2017 progresses. That is of course an “if” but OPEC does seem to have lost at least some of its pricing power.

Actually today’s data posed yet another problem for the assumptions of central bankers and the inhabitants of Ivory Towers. We have been seeing am improvement in the Euro area economy as 2016 moved in 2017 so we should be seeing higher wage increases according to economics 101. From Eurostat.

In the euro area, wages & salaries per hour worked grew by 1.4%…., in the first quarter of 2017 compared with the same quarter of the previous year. In the fourth quarter of 2016, the annual change was +1.6%

What if our intrepid theorists managed to push inflation higher and wages did not rise? A bit like the calamity the Bank of England ignored back in 2010/11. As an aside a particular sign that the world has seen a shift in its axis is the number from Spain which for those unaware is seeing a burst of economic growth. Yet annual wage growth is the roundest number of all at 0%.

Comment

Much has changed in the credit crunch era but it would appear that central bankers are at best tone-deaf to the noise. We have seen rises in inflation target as one was hidden in the UK switch to CPI from RPI ( ~0.5% per annum) and the US had a temporary one as discussed above and a more permanent one when it switched from the CPI to PCE measure back in 2000 ( ~ 0.3% per annum). I do not see advocates of higher inflation target claiming these were a success so we can only assume there are hoping we will not spot them.

The reality is quite simple the logical response to where we are now would be to reduce inflation targets rather than raise them. Another route which would have mostly similar effects would be to put house prices in the various consumer inflation measures.

Oh and something I thought I would keep for the end. have you spotted how the US Federal Reserve sets its own targets? I wonder how that would work in the era of the Donald?!

Music for traders

My twitter feed has been quite busy with suggestions of songs for traders. All suggestions welcome.

 

Imputed Rents do their job of slowing rises in UK inflation

Today we find ourselves reviewing the data on the rise in inflation in the UK in 2017. This has been caused by a couple of factors. The first is something of a world-wide trend where the price of crude oil stopped falling and being a disinflationary influence. The second has been the fall in the value of the UK Pound which accelerated following the vote for the UK to leave the European Union just over a year ago. If we look back a year then the current US $1.269 has replaced the US $1.411 back then. So the inflation which was supposedly dead ( if you recall the Deflation hype and paranoia..) came back on the menu.

The UK establishment responds

If you do not want the public to realise that inflation is rising but do not wish to introduce any policies to stop it then the only option available to you is to change the way the numbers are measured. Last Autumn the UK statistical establishment began quite a rush to increase the use of rents in  a new headline UK inflation measure. There is of course a proper use for rents which is for those who do rent, however the extension was for those who own their house and do not actually rent it out. So yes imputed rents were required to fill the gap. Here is the official explanation.

However, it does not include the costs associated with owning a home, known as owner occupier housing costs. ONS decided that the best way to estimate these costs is a method known as ‘rental equivalence’. This estimates the cost of owning a home by calculating how much it would cost to rent an equivalent property. A new index based on CPI but including owner occupier housing costs – CPIH – was launched in 2013.

How has that gone?

This new index had some problems in 2014,

Also there is this.

We have still not yet addressed all of the necessary requirements for CPIH to become a national statistic.

So why the rush? Well last week’s numbers on rents from Homelet will have raised a wry smile for many.

UK rental price inflation fell for the first time in almost eight years in May, new data from HomeLet reveals. The average rent on a new tenancy commencing in May was £901, 0.3% lower than in the same month of 2016. New tenancies on rents in London were 3% lower than this time last year…..May’s decrease in average rental values marks a significant moment for the rented property sector. This is the first time since December 2009 the HomeLet Rental Index has reported a fall in rents on an annualised basis.

So rents were rushed in as part of the “most comprehensive measure” of UK inflation just in time for them to fall! Those who believe that rental inflation is related to wage growth will no doubt be thinking that wage growth and hence likely rental growth is lower these days. This is all rather different to house prices where lower mortgage rates can set off more price rises and inflation. I have met those responsible for this and pointed out that the word “comprehensive” is misleading as they do not actually measure the owner occupied housing market they simply impute from the rental one.

Today’s data

We see this.

The Consumer Prices Index (CPI) 12-month rate was 2.9% in May 2017, up from 2.7% in April………The Consumer Prices Index including owner occupiers’ housing costs (CPIH, not a National Statistic) 12-month inflation rate was 2.7% in May 2017, up from 2.6% in April.

So not only is the new measure again below the older one we see that the gap has now widened from 0.1% to 0.2%. As the difference must be the imputed rental section let us take a look.

Private rental prices paid by tenants in Great Britain rose by 1.8% in the 12 months to May 2017; this is unchanged from April 2017.

As you can see whilst the official data does not have the falls indicated by Homelet it is a drag on the overall inflation measure. Sir Humphrey Appleby would have a broad smile on his face right now. Oh and the reason why it is not showing falls is that the numbers are what might be called “smoothed”. The actual monthly  numbers are quite erratic ( which of course would lead to doubts if people saw them) so in fact the numbers are over a period of time and then weighted. The ONS has been unwilling to reveal the length of the period used but it used to be around 18 months. This is of course another reason why this methodology is flawed and a bad idea because rents from a year ago should be in last years indices not this months.

I have argued for a long time ( this debate began in 2012) that house prices should be used as they are of course actually paid rather than being imputed. Also they behave very differently to rents as a pattern and are more timely which is important. So what are they doing?

Average house prices in the UK have increased by 5.6% in the year to April 2017 (up from 4.5% in the year to March 2017).

As you can see house price inflation is currently treble that of rental inflation. Can anybody think why the UK establishment wanted rents rather than house prices used in the consumer inflation measure?

Our past measure

The Retail Price Index used to be used in the UK.

The all items RPI annual rate is 3.7%, up from 3.5% last month.

So the pattern of higher inflation measures being retired continues. Although it does at least serve two roles. The first is for indexation of things people pay such as mobile phone bills as my contract rises by it as of course do student loans. The second is for the indexation of Bank of England pensions where it seems strange that the establishment attack on RPI somehow got forgotten

Looking ahead

Fortunately we see that the main push is beginning to fade.

The annual rate of factory gate price inflation (output prices) remained at 3.6% for the third consecutive month and slowed on the month to 0.1%, from 0.4% in March and April……….The annual rate of inflation for materials and fuels (input prices) fell back to 11.6% in May, continuing its decline from 19.9% in January 2017 following the recent strength of sterling.

There is still momentum to push the annual rate of inflation higher which will not be helped if the post General Election dip in the value of the UK Pound persists. But the main push has now been seen. We should be grateful that the price of crude oil is around US $48 per barrel in Brent Crude terms.

Comment

The latest attempt by the UK establishment to “improve” the UK measurement of consumer inflation is being shown up for what it is, an attempt to manipulate the numbers lower. I guess things we receive will no longer be indexed to CPI they will be switched to CPIH! Also will the Bank of England switch its inflation target? If so it will complete a journey which has lowered the measure from 3.9% ( where what is called RPIX now is) to 2.7% or a 1.2% change when the target was only moved by 0.5%. In these times of lower wage rises, interest-rates and yields then 0.7% per annum matters quite a bit over time.

An answer to this would be to put the asset price which the Bank of England loves to inflate, house prices, in the inflation index. Let me leave you today with the price of a few basic goods if they had risen in line with them.

 

As I am off later to buy a chicken for dinner I am grateful it has not risen at such a rate.