As some readers, and maybe more of my Twitter followers will know, Prof David Blanchflower of Dartmouth College (who is always known as Danny) and I have maintained a friendly banter and rivalry over our respective number of Twitter followers over quite a number of years. Over the same period we have also taken regular opportunity to discuss macroeconomics, in particular.
We did so yesterday, Danny was in Florida. I was in Ely. The theme was consistent, and that was that neither of us see any chance that those new predicting inflation in the major economies of the world are right. Despite this, discussion on this issue is now commonplace in the FT, almost daily.
So why were we so comfortable that they are wrong?
We both agreed on one key issue, and that is that unemployment data is straightforwardly wrong. In the UK the figure excludes 4.7 million on furlough right now, by no means all of whom will be back at work when furlough ends, as is now predicted for June. On top of that there is the massive disguised unemployment amongst the self employed, for many of whom business has simply dried up since lockdowns began. The scale of underemployment in the economy is massive, and the unemployment data simply does not reflect that. Until that slack is picked up there is no chance of inflation.
Second, the data on earnings may also be seriously wrong because much of the data collection has been seriously impeded by Covid, and this has most impacted those now not working, who the surveyors have had serious problems reaching in the last year. Earnings data in the US, in particular, is apparently seriously skewed and wrong as a result. I suspect there is a similar trend in the UK.
Third, we both agreed that the ‘Haldane' response to this is utterly bizarre. Andy Haldane is chief economist of the Bank of England, where Danny used to be on the Monetary Policy Committee, and where he was the sole voice there to get the 2008 crisis right.
Haldane has predicted that the UK is like a coiled spring, just waiting to spend. As I have said before, maybe he and his rich mates in the City are. But they are not representative of the population at large. As data on the sectoral balances used in my talk for Keele last night shows, consumers took more than five years to recover their confidence after 2008. This has been a much more severe downturn, and for many the economic shock has yet to arrive. Unemployment is, almost inevitably, going to rise this year, and not fall. The chance that, once holidays have been taken and friends have been caught up with (I pray with masks still in place, but doubt it), there is going to be wild consumer spending is remote, in both our opinions. People in fear of losing their jobs don't spend like that.
Of course I could be wrong. So too could Danny, who knows more about macro than I ever will. But neither of us see the Phillips Curve kicking in right now with upward inflationary pressure resulting, simply because the data on which those who use that curve to make inflation predictions are pumping false unemployment and consumer optimism data into their models.
We continue to live in a fundamentally weak economy, harmed still further by Covid, where hollowed-out firms sit on the brink of tottering into extinction without state aid. That's not an inflationary environment. And QE is going to be with us for a long time to come.
Danny and I both have the advantage of having called 2008 right. I think we are right again.
Time will tell, but I am pretty confident. You only have to look at what is really happening and not false data to realise the current trajectory. Inflation is not a risk in the real world.
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Always liked Danny’s ideas – the BoE is poorer for his absence.
30 year US Treasury yields are up to 2.30% and it has taken some of the froth off markets. (In the last 6 months the UST 1.25% May 2050 has fallen in price terms from 100 to 77 – quite a significant move that might surprise some that think of bonds as “low risk”.)
It is strange how inflationary fears have suddenly become more widespread but the doubling of the copper price (a bellwether industrial commodity) has set people chattering. I suspect this is due to the demand we will see from the electrification of the global economy (and the “Shanghai Whale”) rather than a huge increase in construction that typically drives copper.
I don’t fear inflation because demand is weak and the key inputs to the vast majority of products (labour and ideas) are in plentiful supply. That will not change anytime soon.
What people don’t realise is that things like this copper price change impact inflation for a year….and then usually that it is it. They fall out of the index again
It’s as if economists did not understand maths
Or math as Danny might now have it since he’s been in the US for a while
yes – it always amazes me that “change” and “absolute level” are so often confused by people that really ought to know better.
Is that the same David Blanchflower that Bill Bryson wrote about going snowmobiling with in Notes From A Big Country?
I don’t know
But it would not surprise me
The powers that be want inflation to go up so they can raise interest rates and get more unearned income. They probably see that piling money into property and the stock market like there is no tomorrow can’t last and they may get bloody noses if there is another crash.
It’s actualy the opposite. They want this loose monetary, low interest regime to continue. It’s sustained low interest rates that are driving the inflation of asset values and the over-leveraged debt-financing of investments in these assets. The objective is to prevent the slow rebalancing of fical and monetary policy that is taking place with governments being more proactive in public spending and investment. What they fear is central banks being spooked in to raising interest rates if they sense economies might be overheating. This could generate a bear market and push their over-leveraged investments under water. This could be either triggered or exaggerated by the hedgies, vampire squids and disaster capitalists shorting government bonds.
They simply want to maintain the dominance of the finance and real estate sectors in the advanced economies and to keep governments in their box – and crying wolf about inflation serves their purpose perfectly.
The other argument to throw into the mix is a mutating Covid virus which means as a species human beings may be chasing their tail for quite sometime before we gain herd immunity. The Covid virus exists because it needs to draw energy from the cells of certain vulnerable species including our own. It’s strategy for doing this is perverse in the sense of ceaselessly hopping from one individual to another rendering some of them dead unable to resist its aggressive processes. This situation creates serious investment uncertainty and therefore more of a deflationary economic environment not inflationary. The inflationary churning of Bitcoin ought to be telling lightweight pundits like Andy Haldane that!
could it be the case that there are multiple dimensions of an economy at work here, in what is such a stratified society?
There are many of us, the ‘professionals’ class, by no means wealthy but have a mortgage, a secure job and are ‘qualified’ in something, who have been completely unaffected by this entire thing.
That has manifested itself in increased spending (Amazon’s financial performance last year was a result of this), people relocating to take advantage of home working (the corresponding house price boom again reflecting this, not just some ‘pent up’ demand), the service industries that deliver technical expertise across an array of sectors, IT, engineering, all of which have been, for the most part unaffected.
Like with everything, it’s the people on low incomes (<25k) who have been hit the hardest, but these are not the people who spend as much as the next level of people (say, 40-60k incomes and above) who are the ones that do the most consumption, before it tails off again (marginal propensity), which again, is evidenced by record sales in the companies who home deliver.
I haven't looked properly at the data on income distribution for 2019, and i will, but in a country where home ownership is 60%, people are still reasonably well off relatively speaking (in absolute terms), and if there is going to be a drop in aggregate demand, it seems to be that it'll only be in that bottom 5th of the income scale, who will get royally shafted by this pandemic.
The economy, in theory anyway, has been merely on pause.
My point is……i still don't understand why people cling to this deflationary perspective. Not that i'm saying there'll be massive inflation either, on the contrary, it's a complex subject with many drivers………but from my own selfish perspective, houses are more expensive than ever, consumer goods are more expensive than ever, and so on!
what am i missing?
For people in this 'lower middle class but comfortable' bracket, prices have risen – homes or rent, the cost of living (utilities, internet), cars, online shopping, shortages in consumer electronic components causing price hikes, etc….. the demand increased, not worsened, and the prices have risen. From this perspective there has been inflation, well above any wage increase.
“That has manifested itself in increased spending (Amazon’s financial performance last year was a result of this),”
That may have contributed but the temptation has to be to ascribe much of Amazon/Ebay’s success to people shopping online rather than risk infection in the local shops, many of which would have been closed by order of the govt anyway.
It’s many years since A levels, but how can inflation be a figment? My house cost £60,000 when I bought it, the identical house next door was bought for £220,000 a couple of years ago. How is that a figment?
I think I answered that in what I wrote
@ John Walker
Ah but that house price inflation (of five decades duration now) can’t be real inflation can it according to the prevailing right-wing conventional wisdom (currently having a death grip on the economy) because it’s private sector bank created money not government created money or should I more correctly say borrowed money!
And most of the English think they’re “exceptional”! In what I’d beg to ask!
So, something like “real prices” wee should be discussing “real inflation”. Divide all the numbers by some constant to get the “real” inflation figure. A house is still a house, so my £220,000 house is still just my £60,000 house, so we need to divide everything by 36.6 to get the real inflation.
That gives great liberation for economic policies. If the argument is “but it will cause inflation” you just answer “yes, but a loaf of bread is still a loaf of bread, the number attached to it is irrelevant, it’s still a load of bread”.
All indices have a use….my point was that they have to be understood
I think the risk of sustained inflation in the 2020s is miniscule. While there is some pent-up demand and a possibility of a slight uptick in inflation when the current lockdown eases up and things become a bit more normal, that’s all it will be – a slight uptick, if that. CPI inflation is currently 0.7% on the latest annual figure, so it might rise to 2 or 3%. So what? I would then expect it to fall back below target after a few months. You and Danny are absolutely right on this. It’s a storm in a teacup, being propagated by the same inflation hawks who have been consistently wrong ever since 2009 in predicting a massive increase in prices.
Glad we agree….more on Haldane soon…..I should hav e not read his speech from yesterday before getting up this morning
Food costs have definitely seen an increase since Brexit. I’d imagine there are equally significant price rises in all other products entering the country from the EU, down to increased transport and processing costs. Food and commodities make up a not insignificant proportion of the ‘basket’ of goods used to measure inflation, so I would not be surprised to see a higher rate of inflation in 20201 than we have done for the last few years, simply because of Brexit.
[…] mentioned my opinion of Haldane in my comments on inflation, made yesterday. Haldane's comments yesterday were in a paper entitled 'Inflation: A Tiger by the Tail?' He […]
Inflation is an incredibly complicated phenomenon. In my view it is rarely created by an increase in money supply. Money supply increases are fuelled by inflation not the other way around.
Inflation is most likely to occur when input costs rise. Increases in demand are rarely significant enough to create an increase of major proportions in general inflation.
In the 1970’s, which was the only significant/extreme inflation event there has been in this Country for 60 years, the initial impetus was the arbitrary increase in oil prices that raised the cost of all goods and services. This was further exacerbated by spiraling wage demands which kept adding fuel to the inflation fire. Businesses simply passed the increase in costs on in the prices they charged.
Inflation is not one single thing. There can be many inflations. Bubbles can occur and these tend to be lead by demand changes or restrictions in supply. House price inflation is normally created by arbitrarily stimulating demand without a sufficient increase in supply. In the 70’s and 80’s this was created by changes in mortgage lending rules such as interest only, higher earnings multiples and changes in joint incomes eligibility. Currently it is fuelled by stamp duty holidays and higher savings. Boris Johnson’s bizarre attempt to turn “generation rent into generation buy” will fail unless there is a huge increase in property building. Without it the subsidy will simply go into higher house prices and house builder profits as was seen with the stamp duty holiday which only benefited buyers if they were mid transaction when the holiday was announced. After that sellers simply increased their prices to collect the subsidy.
Rising food prices are normal caused by supply issues such as a bad harvest or as can be currently seen the increased costs of doing business caused by Brexit.
General price inflation of all goods and services (the type people tend to worry about) is in fact a rarity and also impacts the general population weakly. Unemployment is by contrast catastrophic for those it happens to. That is why we should focus far more on achieving employment or economic stability for those that need it and focus much less on spurious debt.
I see that Larry Elliott has reported on Haldane’s speech at a little length in today’s (Saturday 27 Feb) Guardian; page 39. It prompts me to ask Richard, if you would comment on my question/comment below: Why does the Bank of England wish to reduce the size of its balance sheet through Quantitative Tightening, the sale of bonds back in to the market? Andrew Hauser’s speech to the European Bank for Reconstruction is relevant;
Full text: https://www.bankofengland.co.uk/speech/2019/andrew-hauser-speech-hosted-by-the-afme-isda-icma-london.
Hauser suggests a target balance sheet size of about £275 Bn to £375 Bn to include bank notes and other non-reserve items (page 11) based on a survey of major finance houses and what their Preferred Minimum Range of Reserves (PMRR) is.
It seems the BoE WANTS to move interest rates up because it is in the interests of the finance sector. By talking inflation risks up Haldane helps to make it so. I know the rest of the MPC is not of the same view as Haldane – or so at least we are told – but is it not difficult to imagine that Haldane is speaking as he does without some degree of license? If this IS their rationale then an objective assessment and argument that there is no NEED to sell bonds back or to push rates up falls; the only NEED the BoE is interested in are the needs of the finance sector, not productive business and not citizens. If it is not growth in the financial sector’s profit landscape, then what reason DOES the BoE have for wanting to reduce its balance sheet? Could one argue that fear of inflation is what what the BoE and Haldane SAY is driving their talk about QT, when in fact what they are aiming for is higher interest rates by any means possible with the re-invigorated return to the rentier part of the economy, which this implies?
That was the speech of a clueless private sector banker who appeared no have no clue about the role of a central bank
It was also pre Covid
My house is now worth about twice my lifetime earnings.
I don’t think it makes any sense to see London House price inflation in any way linked to averages.
When we bought the road was a family road now it’s been pretty well completly taken over by landlords. Converting each house to 4 flats and charging average monthly rents of 2k.
Many tenants are graduates drawn to London for the jobs.
Unlikely in the current market to get on the mortgage trail. I often wonder if we have any readers in that group!