Costas Milas, a professor of finance at the University of Liverpool, had an article in the FT yesterday.
I admit that I am not sure that all of it managed to differentiate causation and correlation. I would therefore take all of it with a pinch of salt, but three conclusions stood out. One was:
Money growth has been found to predict UK growth quite well, and more so when UK growth is quite weak. In fact, very weak annual GDP growth rates since mid 2022 (annual growth in the second quarter was just 0.4 per cent) are directly associated with the big drop in money ... [supply].
This is what I had a problem with: the change in money supply has to be very big and the growth rate already very small for this effect to be noticed. Is that just a coincidence then without there being causal link in that case?
Much more interesting was this:
The... BoE's inflation quantitative models could benefit from considering [the] public's expectations for inflation because the latter potentially caries the same or even better predictive power than the Bank's own inflation forecasts. Such expectations certainly matter: they increase worker demands for higher wages and, therefore, add to inflationary pressures.
From this, he concluded:
Public expectations of inflation have a better explanatory power than the Bank's own forecasts in dictating UK inflation movements. This is clearly a problem for the Bank's policymakers, whose forecasts are (supposed to be) more sophisticated than those formed by the public.
To put it another way, walk about and talk to people to find out what is going on. That, when it comes to economic forecasting, is much more important than anything that the Bank of England does by sitting in it ivory tower with all its financial models.
The reality is that people make up the economy, and not finance.
Will the BoE listen? I doubt it.
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Yes, you can’t understand and run something if you don’t get out there! I’ve learnt this from both phases of my life.
From the trading floor, if the boss wants to know what’s going on, try your hand at management by walkabout instead of hiding behind the desk in your office believing what your minions are telling you.
And from ‘life’ now. If I, supposedly the expert on life in the parishes I serve, have learnt anything it’s better to go for a haircut where my hairdresser tells me far more than ever I would hear in the confessional!
All this begs the question of politicians’ favoured phrase, ‘What I’m hearing on the doorstep is …’ Hhhmmm! If they are not lying, how come this doesn’t inform policy? I think we might know the answer to that … (sarcastic emoji) …
🙂
This highlights what has always struck me as absurd about much of traditional economics. I’m an engineer, not an economist, and to me it’s obvious that economics is the study of human nature. Money doesn’t exist, it’s a construct of human society, so it reflects human behaviour. Inflation is a consequence of human expectation about the value of money, so it’s hardly surprising that public sentiment is the best predictor.
Public Expectations!
It reminds me of the the Rational Expectations theory beloved of academic economists.
I had that quoted at me on social media last month.
Interesting article here about people rather than growth.
https://www.bylinesupplement.com/p/a-hot-mess-growth-is-not-the-answer?utm_source=post-email-title&publication_id=1162849&post_id=135627732&isFreemail=true&utm_medium=email
It was actually published last year but nobody in power has taken any notice of it, probably because it was written by a university ecological economist rather than a think tank advising governments.
The FT is reporting that UK data suggests ‘greedflation’ is not driving price rises
Valentina Romei in London
The profitability of UK private non-financial companies remained flat in the first quarter at below pre-pandemic levels, according to official data on Thursday that suggests higher corporate profit margins are not pushing up inflation.
Figures from the Office for National Statistics showed that companies made a net rate of return of 9.9 per cent in the three months to March 2023, largely unchanged from the 9.8 per cent in the previous three months and below the prevailing rate before the onset of the coronavirus pandemic.
The data supports the view expressed earlier in the year by policymakers at the Bank of England that “greedflation”, where businesses drive up inflation by raising prices beyond the extent that their own price pressures would demand, is not responsible for driving up the rate of inflation.
I have just given a comment to the Guardian saying I disagree: increasing the margin suggests massive greedflation by some companies and hard times for others