Posts tagged 'Inflation'

You show me your inflationary impulse and I’ll show you mine

You may consider the below as a series of questions that need answering in the face of recent hopes (that’s the right word, yeah?) for a return of inflation — that’s healthy inflation as opposed to stagflation or this being another false alarm, or dawn if we were to go for continuity, which we’re clearly not. Read more

More on the return of advanced economy inflation

Inflation is creeping back into the advanced economy macro environment due to base effects, commodities and EM growth constraints, says Citi’s Willem Buiter. While disinflationary forces are still out there, it does feel increasingly like something has changed in terms of the global outlook. Read more

Australia’s inflation target: “more like guidelines”

You might think a central bank looking at inflation significantly below its target, a relatively weak jobs market, and a policy interest rate well above zero would be keen on loosening up. In the case of Australia, however, you would be wrong. Read more

Have we crossed the inflation Rubicon?

From tech billionaires going around recommending loss-leading tech companies finally start raising prices and Spotify looking to restrict free streaming, *something* seems to be happening.
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Breakevens and the Great British Peso

While we’re waiting for everyone to flail through the ocean of FX crash causality, this is worth paying attention to….

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Your new RBI, not quite like the old RBI?

Raghuram Rajan is out. Pushed perhaps by some in the Indian political establishment who were unhappy with his outspoken views on matters non-monpol –“in the land of the blind, the one-eyed man is king” being a prime example — and by some who thought he wasn’t putting enough emphasis on growth when making his interest rate decisions.

Urjit Patel is in. He was supposed to signal policy continuity, more policy continuity and some more policy continuity. The kind of policy continuity only available if Rajan had *cough* just stayed on *cough* After all, Patel was a deputy governor at the RBI under Rajan and the architect of the RBI’s inflation targeting framework.

But is that prophesied continuity actually showing up? Read more

Richard Koo’s chart to explain the past 200 years

It may take a few minutes to wrap your head around it, but this chart from Richard Koo, borrowing heavily from the insights of W. Arthur Lewis, is a pretty good framework for understanding the history of the world since the start of the industrial revolution:

For most of human history, technological progress was achingly slow, especially when it came to agricultural productivity. Unable to boost yields, populations couldn’t expand unless additional farmland were brought under cultivation. There were about as many people alive on Earth in the age of Caesar as there were more than a thousand years later. When that finally changed, farmers moved to urban factories and joined the proletariat. Read more

Guest post: What a UK macro-financial framework should look like as Brexit is negotiated

Peter Doyle, a former IMF staffer, advises the UK government not to delay rewriting the fiscal and macro-financial rules for the Brexit era… Read more

Of elections and inflation in India

Here’s something to consider while we wait (and wait) for India to announce who is going to replace the outgoing, inflation fighting, Raghuram Rajan at the Reserve Bank.

And perhaps something for whoever does that replacing (in September) to keep in mind too, particularly if he or she is met at their desk by a clamour for rate cuts. Read more

Guest post: Helicopter drop? Just drop the idea

This post is from Gerard MacDonell, an economist at Point72 Asset Management, formerly SAC, from 2004 through 2015…


With the risk of recession and a return to the zero bound now prominent, there is renewed discussion of the Fed and Treasury coordinating to deliver a helicopter drop of money.

This would not work in the US because the inflationary implications of it would be too dire and because the Fed would predictably renege on its side of the bargain. Here’s why, as I see it. Read more

Is America’s tightening cycle almost over?

A quick reminder that we’ll be hosting a special edition of Macro Live today at 1:55pm to cover the release of the FOMC statement and subsequent presser.

There’s only a 3.4 per cent chance the Federal Reserve will raise rates today, according to Bloomberg’s WIRP function and the prices of overnight index swaps.

As recently as the end of December 2015, market prices implied odds of at least one rate hike by tomorrow at more than 40 per cent:

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Sweden’s central bank Riks-rolls the market

Imagine someone told you about a country where real output per person is at an all-time high and growing at an increasingly rapid pace, its employment rate is at the highest level in decades, the country’s housing sector is on fire, and its current account surplus is about 6 per cent of GDP. In the absence of other information, would you say this country should be:

  • Worried about the costs of a (slightly) higher exchange rate?
  • Concerned by the slow rate of (headline) inflation?
  • Cutting interest rates deeper into negative territory?

If you answered yes to the above questions, congratulations! You’ve just described the behaviour of the Sveriges Riksbank. From their policy announcement on Thursday (our emphasis): Read more

For the world is cold and less full of inflation

So charted by Citi.

As they say, the coolness of global inflation is not just an energy price story:

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Why the RBI cut, charted

I don’t know what you want to call me. Santa Claus is what, eh, [journalist x] called me earlier. You want to call me a hawk.. I don’t know. I don’t go by these things. My name is Raghuram Rajan and I do what I do.

The RBI governor, 29 September

And yes, that’s certainly A reason for why he cut the policy rate 50bps to 6.75 per cent on Tuesday, twice what had been expected.

Here’s another one, via Credit Suisse’s Neelkanth Mishra: Read more

“I’m not in this world to live up to your [inflation] expectations and you’re not in this world to live up to mine”

Many economists think the government can help a weak economy by convincing people the rate of price increases is poised to accelerate. In theory, households will spend more whilst businesses will boost their hiring and investment.

New research presented at the Brookings Panel on Economic Activity, which we attended, suggests this is mostly nonsense. A detailed survey of business executives in New Zealand suggests inflation expectations have basically no direct impact on the way companies make decisions. (Inflation expectations could affect how banks and capital markets charge firms for funding, but that’s an indirect effect.)

When asked what they would do if they learned prices would increase more over the next year than they were currently expecting, 65 per cent of managers wouldn’t raise prices, 75 per cent wouldn’t raise wages, 73 per cent wouldn’t increase employment, and 71 per cent wouldn’t increase investment. Read more

On Nigeria’s ongoing inflation, fuel scarcity challenge

The Central Bank of Nigeria MPC voted eight to four to leave the monetary policy rate unchanged at 13.00 per cent following the conclusion of its two-day meeting on July 24, note Barclays’ emerging market team.

But, in a further signal that the oil producing country, which transitioned to a new government in March after 16 years of rule by the People’s Democratic Party, may be prepping for a sustained period of low petroleum prices the Central Bank stressed the importance of diversifying the economy away from oil and expanding its base of FX receipts. Read more

Goldman goes astray on Grand Theft Auto and productivity

There’s always a danger, when you question official statistics, that you come off sounding like a nutter.

But some forms of scepticism are more respectable than others. At one end of the spectrum, we’ve previously indulged the possibility that seasonal adjustment algorithms inadvertently distorted the GDP and employment figures. At the other, you have people who add fixed constants to the reported growth rate of consumer prices because they disagree with methodological changes from the 1980s and 1990s, but speak as if they are uncovering a conspiracy. Read more

No, stocks aren’t a good inflation hedge. Try bonds (really).

Stocks are basically bonds where the coupons tend to grow faster than the level of consumer prices. That makes equities sound like a great thing to own if you’re worried about inflation, and, in fact, Mr Stocks-for-the-Long-Run made this case a few years ago. While the actual article is more nuanced than the headline and opening paragraph would suggest — he admits that stocks only become immune to inflation over multi-decade periods — it’s still a bit misleading. The last time the rich world had to deal with meaningful inflation, it was bonds that beat stocks.

We’re reminded of all this because of two striking charts from a new report from Goldman Sachs on the implications of negative, long-term real interest rates. Consider the following chart, which compares the returns you would have gotten from buying and holding US stocks versus US 10-year bonds over decade-long periods: Read more

Sweden’s inflation record is less interesting than you think

Inflation indices that include interest payments are dangerous things, especially in countries where most debts have floating rates. An attempt to tighten temporarily causes headline inflation to accelerate, while rate cuts make it look as if inflation has slowed, irrespective of what else is going on in the economy. (This is separate from the intriguing Neo-Fisherian idea pondered by Professor Cochrane.)

These price indices are useful for measuring changes in real spending power, and arguably form a better basis for wage negotiations than ones that exclude debt service costs. But if you want to evaluate the performance of a central bank, or you work at one, you need to make sure you’re using a price index that doesn’t incorporate these swings. Read more

UK deflation not a thing

Remember how inflation in the UK hit zero in February and this is all part of the government’s plan, apparently?

Well, Bank of America Merrill Lynch would like to draw your attention to a chart of consumer price indices in the UK, US and Eurozone since February 2008 (rebased).

One of these things, the bank’s rates and currencies team suggests, is not like the other: Read more

Guess the chart, Japanese inflation edition

Rightly or wrongly, falling consumer prices — or even plain old price stability — is often treated with alarm by monetary economists and policymakers alike. The common view is that deflation, in addition to exacerbating economic weakness, is an indicator of the economy’s failing vigour.

As Ben Bernanke put it back in 2002Read more

Is the Fed bluffing on rate hikes?

It might not be polite to say it overtly, but concerns are growing that the Fed’s rate hiking promises may be nothing more than a big bluff.

The vogue for doubting Fed rhetoric started in earnest on March 11, when Ray Dalio, founder of hedge fund firm Bridgewater Associates, wrote to investors that there was a risk if the Fed raised rates too fast it could create a market rout similar to that of 1937. Read more

Economists agree: deflation is either good, or bad, or irrelevant

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Michael Pettis and perverse monetary policy

A guest post by Simon Cox, Asia-Pacific Investment Strategist, BNY Mellon Investment Management

China’s weak inflation numbers, updated on February 10, underscore why the People’s Bank of China (PBOC) is now easing policy wholesale, after a long sequence of targeted tweaks. (It cut reserve requirements on February 5 less than three months after cutting benchmark interest rates in November.) But does monetary easing work in China the way it works elsewhere? Does it, indeed, work at all? Read more

Fake disinflation?

The fact that inflation is low is not, by itself, bad; with low inflation, you can buy more stuff.

— Mario Draghi, June 6, 2013 Read more

What is the relationship between inflation and investment?

Conventional wisdom says that businesses adjust their investment spending according to changes to the cost of capital. Intuitively, that makes sense: more projects become worthwhile as funding costs go down, while few make the cut when capital is expensive. (In reality, it turns out that interest rates, spreads, and volatility are all irrelevant for capex decisions, but let’s put that aside for now.)

If central bankers want to boost investment to encourage economic activity, conventional theory suggests they should lower interest rates. However, there is a limit to this process because you can’t lower rates below zero without imposing tyrannical controls. Hence the appeal of boosting inflation, which effectively reduces the real cost of capital (assuming risk premia don’t rise) by stealth even when interest rates have hit the floor. Read more

UK disinflation should be cause for cheer

For years, the UK has added more jobs than almost any other country in the rich world even as real incomes plunged thanks to underwhelming productivity growth. Now it seems that a new burden has been added: disinflation. Prices are just 0.5 per cent higher than a year ago.

The BBC’s Robert Peston worries that this “is not much of a buffer against deflation” and that “if we became accustomed to prices falling as the new norm, we would spend less – in that delaying would always make our money go further. And then the economy would sclerotic and stagnant, and desperately difficult to reinvigorate.” Given that UK household debt is already staggeringly high relative to income and projected to rise much further, that could pose serious problems down the road. Read more

China, stimulus and the Chewbacca defense

The thing about the relationship between monetary stimulus and inflation in China is that — much like like a Wookie, an 8ft tall Wookie, living on the planet Endor with a bunch of 2ft tall Ewoks — it does not make sense. At least not if you approach it with a conventional eye.

So says China maven Michael Pettis, who emailed us over the last few days to say we must, at minimum, consider the possibility that there is a reason rapid credit growth in China has failed to do what it’s “supposed” to do. And, by extension, why deflationary pressures in China indicate the probable need for monetary tightening, not loosening. Read more

Deflating China

Here’s what 33 months of negative Producer Price Index inflation in China look like:

Of course, we’re now at 34 months, following December’s print. This clocked a 3.3 per cent year on year fall in the index — the biggest annual fall in more than two years.

Dramatic. But the question is, should we care? Read more

Are some workers “slacker” than others?

We don’t really understand why inflation-targeting central bankers closely monitor the job market.

For starters, there is something unseemly about connecting consumer price inflation to theories of labour market “slack”. The implication of ideas such as the “non-accelerating inflation rate of unemployment” is that innocent people should lose their jobs if the weighted-average nominal cost of goods and services rises a bit faster than an arbitrary target. Read more