UK macro is really quite boring at the moment, and I cannot be happier to report that news. Of course boring events do not get reported as “news”, but that’s why we have blogs. Sure, there is a lot of debate about Scotland and so on which is related to macroeconomics – but UK macro events are not really capturing the headlines. UK GDP updates, labour market news… well, there’s a war on… let’s talk about Putin.
Contrast with the Eurozone. Mario Draghi is exciting! He is doing things. Pulling levers! Fiddling with interest rates. Easing credit conditions, improving financial conditions. Trying to get that CPI rate up… maybe. Oh, and allowing inflation expectations to collapse. That’s news.
Mark Carney expressed a worthy ambition in his statement to the Treasury Select Committee in 2013, that he “would like to achieve an exit in 2018 that is less newsworthy than my entrance”. I think he is well on the way to achieving that. This is how it should be. Central banking should be boring – nominal stability should be boring. If the nominal economy is stable, all the “news” will be “real”, in the sense of being supply-side.
For the first time in years I could not be bothered to watch the Inflation Report live last month, but skipping through the recording, the Broadbent, Carney and Shafik show is delightfully dull. Carney even takes pleasure from his own boringness:
What we’re putting emphasis on, and I know it’s boring and repetitive and it doesn’t clip into a new headline, we’re focusing on the path, the likely path of rates, the limited and gradual adjustment in those rates over the medium term, because of the headwinds that are facing this economy.
First and foremost it’s about the path for rate increases. I know it’s dull, I know it’s repetitive, but that’s the problem with consistency, it’s dull and repetitive.
Bravo Dr. C, bravo. And the annoying cricket metaphors are gone too.
This is what short-term inflation expectations (from gilt yields) looked like when UK macro events were newsworthy:
Quite the roller-coaster. I use the 3.5 year measure because it’s the most complete time series. Note this is RPI not CPI, and RPI at 3% is roughly equivalent to CPI at 2%.
Here is the last year and a bit:
What a dull, dull graph. Carney and the rest of the MPC deserve the highest praise for making macro policy boring.
There is an interesting asymmetry in how people read the macro data.
For a given increase in aggregate nominal spending (income) I think it would be generally agreed that “what we want to see” is a higher volume of output and not much inflation. Does anybody disagree? Anybody out there who would prefer the trade-off shifts towards higher inflation and lower output growth? No?
OK. For a given increase in aggregate nominal income (spending) we can consider the same trade-off between employment and wages. I had taken it as given that we had a depressed labour market and so “what we want to see” is that increases in aggregate income will translate primarily into higher employment.
What we have seen over the last year looks quite amazing. Over the year to the March-May 2014 period, hours worked has risen 3.7%. We only have nominal data for Q1, but that showed a 4.1% rise in nominal aggregate labour income. In other words, the increase in aggregate income has translated almost entirely into a higher volume of labour employed and there is no inflation – nominal wage growth is maybe just positive.
Yet this is seen somehow as a bad thing, see, for example the Guardian here, which puzzles me. Do you have a sticky wage model of the labour market, in which AD shocks can raise/lower employment, or not? Is higher employment in 2014 a good thing, or not? These questions have simple answers for this simpleton blogger.
6.5% is a good news story, and let’s hope they keep coming.
A quick note, file under “Relentless Attack on Inflation”. Thanks to some kind soul on twitter (whose name I’ve forgotten), I discovered that Eurostat have time series which split “administered prices” out of the HICP (= UK CPI).
I have discussed the effect of “administered prices” on the CPI here before, and I don’t have much to add. When energy prices go up because of increasing regulatory costs is that an “administered price” shock which should be ignored, or not? There are no “right” answers, it depends on your views on the appropriate goals for macro policy.
(It would be interesting to drill down into the divergence of the HICP from the HICP ex AP between 2004 and 2008. Tuition fees again?)
I want to clarify since I always feel a bit dirty after doing pessimistic posts about the supply-side:
1) I have very low confidence in any views about “potential output” and whether the productivity data is “correct”. That is doubly true for my own half-baked views.
2) I think the productivity data should have a 0% weight in setting monetary policy. Zero, zip, nada, zilch. And I think nominal wages
and/or incomes should have a 100% weight.
It is this second point which made me particularly angry at Carney’s (latest) hawkish move: the new data this year is telling us that nominal wage inflation is at record lows. Hence we need tighter monetary policy because…? Well, it’s not clear.
It is half true that the UK is looking more like Japan in 2014 than ever before. The CPI rate is below target and now looking kind of “low“. Nominal wage growth is dead. Tax revenues are sluggish; there is a gigantic fiscal deficit and public sector debt is heading up to the moon. The currency is looking pretty strong – something which plagued pre-Abe Japan regularly. Almost everybody is a supply-side pessimist. Our central bankers are hawkish. And even Her Majesty’s Loyal Opposition has been campaigning on the basis that “prices are too high”. (Maybe Ed Balls read all the Japan ZLB literature sitting on his head?)
But that is not the whole picture. I still don’t see any convincing sign that nominal GDP growth is slowing from around 4-5% y/y, a rate which should normally be consistent with the Bank’s mandate. The “low CPI rate” today is as useless a demand-side indicator as the 5.2% CPI rate was in September of 2008 or 2011. Inflation expectations are very stable and consistent with hitting that 2%. Confidence indicators are at multi-decade highs. I think “steady as she goes” would be a pretty reasonable monetary policy if you do want to take the inflation target seriously.
Imagine a policymaker, in whatever area of public policy, who acts in a random and unpredictable fashion. One day they say one thing, the next day they say the complete opposite. Would you expect this kind of policymaking to encourage “stability” in the way people act, in the way people behave in whatever area that policy covers?
Well, welcome to British monetary policy.
Carney gave a speech last night which created an instant swing in financial markets. The FTSE 250 (a good indicator for UK domestic prospects) – is off about 2% this morning, though US markets fell late yesterday so we can’t blame the guvnor for all of that.
Carney and friends think that they can use the tools of macropru to create “financial stability”, whatever that means. They are not even able to formulate and stick to a monetary policy rule which avoids creating “financial instability”.
That should be the simplest thing in the world. 2% IT. 5% NGDPLT. Rules are simple. Automatic. Is the inflation forecast on target? Below, we loosen; above, we tighten. Is NGDP on target? Likewise.
Oh, and the inflation forecast is not on target, by the way. In the May inflation report the mean, median and mode projections of the CPI rate are below the MPC 2% target in every quarter of the forecast based on market interest rate expectations. So it’s “obvious” we need tighter monetary policy, and of course central bank governors should go around giving hawkish messages about rate rises. Governors who know exactly what they are doing, using words which have no doubt been chosen with extreme care, to express the right amount of “nuance”.
And here are four carefully chosen words to strike fear into your heart:
That is why an essential counterpart to our monetary stance is macroprudential vigilance and activism.
“Macroprudential vigilance and activism“? Dear God. Osborne, what monster have you created?
Update: Chris Giles also demonstrates the sharp movements in forward rates. Be in no doubt this was a tightening of policy.
Faisal Islam posted to Twitter some quotes from his book, “The Default Line” (Kindle edition here), which I thought were a fantastic illustration of Nick Rowe’s favourite slogan – I hope Faisal will not mind a transcription here:
It was well known that Greece was running out of cash, in metaphorical terms at least. In June 2011, after months of stalling on its economic reform programme, the foreign Troika that effectively ran the country had run out of patience with the Greek leadership. [...]
But what people did not know was that Greece was literally running out of cash. There were shortages of all denominations apart from the €10 note. Greeks had responded to the uncertainty regarding the Troika’s next move by withdrawing euros from their bank accounts at a record rate. Soon there would be not enough euro notes in the country to cope with the number of Greeks trying to get their hands on their money from cash machines and bank branches. A secret plan was activated. [...]
As it happened, in June 2011 demand for paper currency had nearly trebled. To deal with this crisis, the Greek military cargo planes returned from abroad laden with freshly printed euros. The secret mission was intended not only to preserve Greece’s fracturing social stability, but also to preserve the single currency itself.
I do not think you could ask for a clearer example of a money demand shock. People are literally trying to hoard the monetary base, the physical currency. Of course it is also a nice illustration, perhaps, how financial crises and recessions are intertwined. I think it’s not unreasonable to argue that the chain of causation can go from “banking crisis” to “money demand shock” to “recession”. But monetarists would argue in between those last two steps we have a central bank which refuses to satisfy money demand by printing “enough” money.
I can recommend buying Faisal’s book based on those quotes!
Update: Giles Wilkes has a great post about how money should be central to our macro debates. It’s great that Giles is blogging again!
It’s the boom which isn’t quite a boom. The labour market data today is far more significant than the arbitrary benchmark of a return to the pre-crisis level of output… in aggregate, if not per capita.
The chart above attempts to decompose the loss of UK output versus trend growth into a demand-side and a supply-side component. The demand-side is represented by per capita hours worked. The supply-side is output per hour worked. Both are benchmarked as the deviation from 1997-2008 trend, and on that benchmark the demand-side recovery is now complete. The supply-side, however… not so much.
That is in no way sophisticated; it is fairly primitive. But however you cut the data, the labour market is doing astonishingly well. Which means that the real GDP figures look relatively pathetic – and that has been true since early 2012; the recent weakness of output has been partly or mostly a supply-side not a demand-side phenomenon.
There is really only one hope left for supply-side optimists in my view. Maybe there is still, somewhere, hiding under a bush, some pockets of highly productive but currently idle labour ready to spring into action. Set against that we have seen a massive surge in labour supply from low-skilled workers, which is pulling down average productivity. Maybe that surge is because of welfare reform, migration from the empty deserts which used to be called Spain, Greece, etc; maybe it is because MTRs on low incomes have been slashed and the retirement age hiked. Maybe the data is wrong, and rising numbers of self-employed are lying about their hours in the LFS responses. Then we must also turn a blind eye to the rise in MTRs further up the income scale, and pretend that doesn’t matter. (Check out Figure 2a and 2b in Paul Johnson’s excellent dissection of UK taxation.)
The one data point optimists can cling to is that nominal wage growth is dead dead dead. Completely totally dead. This is growth rate of nominal regular pay divided by average weekly hours, rolling 12m total, used as a proxy for nominal hourly wages (perhaps a poor one):
With a tight labour market and strong nominal GDP growth, we should expect to see nominal wages rising at around the same rate as NGDP, 4-5%, as they did before 2008. That is not happening. Despite amazing Lawson-boom-esque growth rates of hours (or jobs); the labour market is nowhere near tight yet. So we’ll have to wait to see what happens as that slack continues to be used up; only when nominal wages catch up with nominal GDP we will know for sure.
(Also: NO RATE RISES YET, THANKS MPC, KEEP PUMPING, THERE IS NO “INFLATION”.)