Tag Archives: inflation

UK Growth and Inflation News

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The UK economy is still very much hanging in the balance between going up and going down IMHO. The latest BoE growth estimates, coupled with not especially good employment numbers, and indications that inflation may be coming down (and hence interest rates may follow) has caused a noteable pressure on the pound sterling. BoE governor Mervyn King has put it like this: there are “substantial risks” both to the outlook for inflation and growth. The risks are “broadly balanced” so that the eventual outturn is ” just as likely to be stronger or weaker than the forecast”.

Inflation in the UK has fallen for the first time in more than a year, increasing the chance that the next move in interest rates will be down. The annual consumer price index, which is the Bank of England’s target measure, fell from 2.5 per cent in September to a weaker-than-expected 2.3 per cent in October, according to official figures.
Source: Financial Times

Unemployment in the UK continued to rise in October, but there was little evidence of inflationary pressure on pay as the growth in average earnings and bonuses fell slightly, according to official figures published on Wednesday. The claimant count, which measures unemployment as those out of work and claiming benefit, increased by 12,100 to 890,100 in October, the ninth consecutive month it has nudged higher.
Source: Financial Times

Between A Rock And A Hard Place

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US Economist Arnold Harberger once asked what Thailand, the Dominican Republic, Zimbabwe, Greece, and Bolivia had in common that merited their being placed in the same growth regression analysis. I can’t help having the same feeling about Germany, France, Italy and Spain. As I indicated in a post on A Few Euros More yesterday, its sometimes hard to see the common thread.

Be that as it may, this post is only about one of the ‘big four’: Italy. As I say in the Afem post, Italy is bucking the trend. Unfortunately it is bucking it in the wrong direction.
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Issing Gives Inflation Warning

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More evidence today of how the Central Bankers and their economic advisers are doing their best to sound the inflation alarm. This time it is ECB Chief Economist Otmar Issing:

European Central Bank Chief Economist Otmar Issing said a surge in oil prices may lead to higher-than- expected inflation in 2006, as the bank edges closer to raising interest rates for the first time in five years.

“Rising oil prices are not only affecting current inflation rates but they’re also overshadowing next year,” Issing said in an interview on Oct. 14 at a banking event in Frankfurt. “It can’t be ruled out that risks for price developments will deteriorate that much over the medium term that we might have to expect the annual inflation rate to slightly exceed 2 percent.”

The comments were the second in three days suggesting the bank may raise its inflation estimate of 1.9 percent for 2006. The bank projects the level this year at about 2.2 percent. ECB President Jean-Claude Trichet said at a briefing after the annual meeting of the Group of 20 industrial and developing near Beijing yesterday that he can’t exclude inflation being “over and above” the bank’s 2 percent ceiling.

My view: this very much depends on the evolution of oil prices. There is little evidence of any strong impact on ‘core prices’ at this point, there is plenty of evidence of growth weakness. There is thus little justification from a purely eurozone perspective for any short term increase in interest rates, and certainly no justification whatsoever in the case of Germany.

Growth and Inflation in the UK

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Following-up on my post earlier this week on interest rate policy I see Graham Searjeant has a piece in the Times today arguing that Mervyn King has the balance wrong between fighting inflation and stimulating growth.

In a sense I think that Searjeant is not entirely fair when he says:

Growth has become even more vital to support an ageing population. The Governor may deny responsibility. The rest of us cannot.

Evidently this is the case, but equally I am sure that Mervyn King is well aware of the fact. However since it is long term *sustainable* growth we are talking about here, and since I don’t doubt this is what he (King) is aiming at, even if his efforts, and the reasoning behind them remain obscure (and here I do think we can blame King) I really don’t think Searjeant’s point sticks in the way he wants. The issue is whether short-term growth is being needlessly sacrificed, and if so, to what?

Short-term growth is being sacrificed IMHO to the god of global imbalances, and the campaign to correct them, and it is these, and not inflation, which are King’s real target. (continued).
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UK Jobless Upward Trend Continues

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U.K. jobless claims rose for an eighth consecutive month in September, extending the longest period of increases in almost 13 years, “as growth in Europe’s second- biggest economy slows”. This adds just a little more evidence to the fact that all is not necessarily currently all for the best in the land of John Stuart Mill. However as NTC research point out, not all is totally bad either:

Meanwhile, annual average earnings growth held steady at 4.2 percent in the three months to August, signalling that higher inflation is still not feeding through to wages.

So earnings continue upwards at a healthy clip, but not above trend. No evidence of ‘secondary effects’ here then. Which makes you wonder why the normally reasonable Mervyn King is currently being so evidently unreasonable. You can find my explanation for this here (and in the comments).

Mervyn King on Tuesday night signalled he was not convinced of the case for lower interest rates and could see many reasons why the rise in oil prices might increase inflationary pressure.
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German Inflation Revised Down

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I like this title. I have, I unashamedly admit, lifted it straight from NTC research (where it was in any event hardly the most creatively original of headers). I like it since it seems to run counter in spirit to all those admonishing lectures we are currently getting about the dangers of ‘secondary inflation’ and pass-through. The headline refers to the fact that Germany’s EU-harmonised annual inflation rate (HICP) for September was revised down to 2.6 percent from an initial 2.7 percent, the Federal Statistics Office announced on Wednesday. Actually this revision is something of a statistical freak as the reading in question was the harmonised consumer price index for Germany, which is calculated for European purposes. In fact AP runs a different headline: German Inflation Rate Climbs in September, which doesn’t really prove that there are lies, damn lies and statistics, but rather that we have a labyrinth of statistical indices at work – AP quote the straight national CPI, and not the harmonised index. Anyway, if you can battle your way through all this, well good luck to you!

Much more to the point, however, is the detail that , not considering heating oil and motor fuel, the rate of price increase would have been just 1.6%. Inflation scare? Where? Oh yes, I forgot, in Spain and Greece.

As reported by the Federal Statistical Office, the consumer price index for Germany rose by 2.5% in September 2005 on September 2004, and by 0.4% on August 2005. That is the highest year-on-year rate of increase for more than four years (May 2001: +2.7%). In July and August 2005, the year-on-year rates of change were +2.0% and +1.9%, respectively. The estimate for September 2005 based on the results from six Länder was thus confirmed.

The year-on-year rate of price increase was strongly influenced by the sustained price increase for energy in September 2005. In that month, price increases were recorded primarily for mineral oil products again. Not considering heating oil and motor fuel, the rate of price increase would have been just 1.6%. Domestic fuel prices were up 40.0% compared with the same month a year earlier.
Source: German Federal Statistical Office

Feldstein: A Eurosceptic at the Fed?

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Bloomberg this morning has a review of the pros and cons of Marty Feldstein as Alan Greenspan’s successor. One thing they don’t touch on is what the implications might be of having someone at the head of the US Federal Reserve who is pretty much convinced the Euro can’t work.

“Marty has something of a tin ear for politics, and that would be a problem in the Fed chairman’s job,” says William Niskanen, who followed Feldstein as head of the President’s Council of Economic Advisers in 1984 and is now chairman of the Cato Institute, a free-market research group in Washington.

Feldstein finished second only to Ben Bernanke, chairman of the White House Council of Economic Advisers, when 104 financial professionals were asked last month to name Greenspan’s most likely successor. Bernanke got 38 percent of the vote and Feldstein 31 percent in the survey, which was conducted by Stone & McCarthy Research Associates, a Princeton, New Jersey, consulting company. No other candidate received more than 10 percent.
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Hanging In The Balance

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UK property prices have been hovering dangerously around the zero price growth mark for the last couple of months. Year on year growth is of course dropping substantially and we are now just below the 3% annual mark. Definitely one to keep watching.

UK house price inflation fell in August according to the Office of the Deputy Prime Minister, giving further indications of a slowdown in the property market. Annual inflation fell to just 2.8 per cent in August, down from 4 per cent in July and 13.6 per cent a year ago.

The ODPM reported that house price growth in London, which tends to lead overall trends in the market, slowed to 0.8 per cent from 0.9 per cent in July. The average house price in the UK barely changed in August, standing at �186,208 compared with �186,207 in July.

Some analysts have concluded that these numbers suggest that the market might be stabilising at current levels. …But there will be continued concern that as house price inflation on all the main indicators heads towards zero, the current stability in the market will not last. Nervousness is likely to increase as property investors realise they can no longer rely on the prospect of capital gains to offset the reality of low rental yields.

Why Finland?

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I just put up a post on the economic situation of Finland. Now I am putting another. Why the sudden interest? What is there about the Finnish economy which could be of interest to more people than the five million or so who actually live there?
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Something Worries Me About Peter Bofinger

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Really I realise I have been remiss in another important sense. I have long assumed that in fact the decision to reduce deficits was taken due to the coming fiscal pressure from ageing. This certainly was the background to the discussion. However now I look at the details of the SPG this area is not mentioned (as far as I can see) and the other – the free rider and associated – is the principal consideration.

So those who criticize the bureaucratic and infexible nature of the ECB are in the right to this extent. Of course the underlying demographics *should* be part of the pact, but that is another story.

I find myself in a tricky situation, since I am deeply sceptical that the euro can work, and now after the French vote even more so, but since it has been set in motion, the best thing is obviously to try and make it work (even while doubting). So I am thinking about all this. Obviously I should try and write a longer post making this clearer.

The SGP was adopted at the Amsterdam Council 1997. A history of the implementation of the pact, and a summary of the debate over the new pact can be found here. The Stability and Growth Pact was designed as a framework to prevent inflationary processes at the national level. For this purpose it obliges national governments to follow the simple rule of a balanced budget or a slight surplus.

Now if we go back to the origins of the pact, to the communication of the European Commission on 3 September 2004, you will find the following:

“As regards the debt criterion, the revised Stability and Growth Pact could clarify the basis for assessing the “satisfactory pace” of debt reduction provided for in Article 104(2)(b) of the Treaty. In defining this “satisfactory pace”, account should be taken of the need to bring debt levels back down to prudent levels before demographic ageing has an impact on economic and social developments in Member States. Member States’ initial debt levels and their potential growth levels should also be considered. Annual assessments could be made relative to this reference pace of reduction, taking into account country-specific growth conditions.”

Now curiously I have found nothing in Bofingers argument which seems even to vaguely recognise this background.

A good starting point for this topic would be the conference “Economic and Budgetary Implications of Global Ageing held by the Commission in March 2003.

The European Council in Stockholm of March 2001
agreed that ?the Council should regularly review the
long-term sustainability of public finances, including the
expected strains caused by the demographic changes
ahead. This should be done both under the guidelines
(BEPGs) and in the context of the stability and
convergence programmes.?

This document on the history of EU thinking on ageing and sustainability is incredible.
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