The headlines scream twelve-year low for inflation. Meanwhile, UK inflation is at a nine year high. Confused? Tough luck, “inflation” means whatever I want. When Paul Krugman uses the word “inflation” he really means something like “aggregate demand” 99% of the time. When you read Krugman saying “inflation”, imagine Sumner saying “nominal GDP growth”. Same idea, same model. This is Krugman attacking Jürgen Stark making a “low inflation means we can buy more stuff” argument, back in April this year:
So, Stark begins by asserting that low inflation boosts real disposable income. That’s a zero-credit answer on any undergraduate exam: yes, low inflation makes income gains higher for any given rate of increase in nominal income, but low inflation reduces the rate of nominal income growth one for one. The notion that an influential former monetary official doesn’t understand this is breathtaking.
Like the Stark claim that “low inflation boosts real incomes”, Krugman’s argument that “low inflation reduces the rate of nominal income growth one for one” is either wrong or trivial. Stark is saying “positive supply-side shocks increase real income”. Krugman is saying “negative demand-side shocks reduce nominal income”. Well, yes. Both are correct, so let’s take the word “inflation” out of it completely.
In the UK’s “high inflation” period (2008-2013) we also had “low inflation”. We had a high CPI rate, and slow nominal income growth. Which “really mattered”?
Today we have “low inflation” – and also “high inflation”. We have a low CPI rate, and fast nominal income growth. Growth of nominal gross value added over the two quarters to 2014 Q3 is at the highest rate (7.7% annualized) since 2005. Four-quarter NGVA growth at 5.3% is the highest rate since the four quarters to 2008 Q1.
Does the CPI rate going 1% below target “really matter” in a way that going 3% above target “didn’t matter” in 2008 or 2011? You can make that argument, but I say we’re in no bad position right now.
Eagle-eyed reader James noticed earlier this year that the ONS have started releasing a low-level breakdown of GDP which includes current price data even in the “Month 1″ GDP data. The official data in each quarter’s Month 1 estimate only has volume (real) measures of GDP, so previously we had to wait for the Month 2 estimate to get nominal GDP. The low-level breakdown is for GVA so I’ll compare against the official series for nominal GVA:
|Q/Q Growth at Annual Rates, %|
The estimate suggests nominal demand growth has continued at a reasonable pace in Q3, adjusting for the “tyranny of low expectations” which allows me to believe 4% NGDP growth is “reasonable”. Year-on-year growth comparing the low-level data with official nominal GVA:
Thanks to James for finding this data source.
I’m a bit late with this. With the ESA10 revisions integrated into the national accounts we finally got an estimate of nominal GDP for Q2 in the Quarterly National Accounts. The usual data dump: quarter-on-quarter growth at annual rates (US-style):
ONS q/q NGDP growth rates continue to be annoyingly volatile. For the longer view of growth I’ll compare with the OBR forecasts from Budget 2014, which also shows the contrast with the old data before ESA10 revisions:
2012 does not look quite as bad as it did before. There are a number of things which are mysterious about the 2012 data – mainly the fact that real GDP goes nowhere as employment soars. Really, that data is just weird. If there was a betting market in UK GDP revisions I’d bet 2012 can get revised up further. Fast forward to 2014 and we do see nominal GDP growth at slightly above 5% y/y. That is a good place to be.
Real GDP growth also looks less bad. The Bank have been expecting upward RGDP revisions for a while, it will be interesting to see in the Inflation Report whether this matches expectations.
Prior to the revisions it was harder to make the case that the breakdown of GDP-by-income was consistent with what was happening in the labour market – not impossible, but hard. The updated series for total nominal wage and salary compensation is in fact more consistent with happened to employment (hours worked). Four quarter moving averages, growth rates:
The gap between the lines is (roughly) wage inflation: there isn’t any.
Never mind about voting, it’s NGDP day. Usual caveat first: the quarter-on-quarter growth rates for nominal GDP tend to be unreliable in early estimates. That said, the data in the second estimate of GDP for 2014 Q1 has nominal GDP growth slightly slower than in the second half of 2013, but still respectable at a 4.9% growth rate. Here’s the table for q/q growth at annual rates:
2013 Q2 still stands out as particularly weird there, with strong RGDP but massive deflation. It seems possible the ONS has struggled to balance income, spending and output measures in that quarter, with timing of bonuses a distortion due to the higher rate tax cut kicking in.
The chart below shows year-on-year growth, switching to GVA to factor out the impact of indirect tax changes on prices:
Real output continues to track growth of nominal demand very closely; the broadest measure of “inflation” across all of GDP (the implied deflator) continues to run below 2% year-on-year even as demand growth has picked up.
The ONS published the first nominal GDP figure for 2013 Q4 this week, and so we have calendar 2013 too. Quarterly nominal growth rates continue to be erratic with revisions appearing to move nominal growth around between quarters; so I think we should not to put too much emphasis on the quarterly growth rates. However, the good news is that NGDP growth has picked up to 4.5% over the year to Q4, from a sub-2% low in the second half of 2012.
Here are the annual growth rates for the last six years, nominal, real and deflator growth, with nominal GVA at basic prices (and deflator) included to show the distortions from indirect tax changes:
This graph shows year-on-year quarterly growth:
Contrary indicators do remain for the “strong nominal growth revival” thesis: growth of nominal imports is fairly slow (2.4% ex oil over 12 months to Q4), as is growth of income tax receipts (OBR says 3.2% ex special factors), and the labour market slowed a little in December, though the LFS monthly sampling effects may distort this.
On that last point, Ben Chu tweeted a good chart showing how unemployment has changed for each of the three cohorts surveyed; the headline unemployment rate being a rolling 3m average. The fall in the headline rate is driven by two of the cohorts seeing a 0.6% and 0.7% fall in unemployment over just three months to October and November respectively. Which seems almost too good to be true. The collapse in the claimant count is perhaps the most convincing reason to believe that the labour market really is doing so well.
Looking forward, the ECFIN ESI confidence indicator rose in February to its highest level since 1989. Should we call it the Carney boom… or the Osborne boom? You decide. But where is that 4%+ output growth?
The ONS delivered a variety of Christmas presents this week in the form of the labour market data (which is very good, per Lars), and the Q3 national accounts. There is bad news and good news in the GDP revisions.
First the bad news: the impressive Q3 nominal GDP growth rate has been revised down from 6.9% (q/q annualized) to a still-respectable 5.7%. The good news is that the level of nominal GDP has been revised up for recent quarters. This moves the year-on-year growth rate up from 3.8% to 4.5% over the four quarters to 2013 Q3.
The “double-dip recession” has reappeared at the beginning of 2012, though the latter half now looks better. The revisions make 2012 look even stranger; Q4 nominal GDP was revised up to a growth rate of +5.5% (annualized) and yet real GDP growth is still recorded as falling that quarter!
Here is the data, table at quarterly rates of GDP (annualized), and chart of annual GVA growth, as usual:
There are few things I hate more than reading headlines saying “GDP growth driven by X” – especially where X is usually something deemed “bad” like “consumer spending”, or “household debt”, or “rising house prices”. There is much fallacious thinking packed into these headlines, and it usually plays out in the articles. “Rising spending leads to rising incomes”, “rising incomes lead to rising spending”, “rising employment leads to rising demand”, “consumers can’t spend more with real wages falling”, and so on, and so on.
All these phrases want to take the macro out of macro; incomes rise then spending rises, or vice versa. In aggregate, spending and incomes are always equal by definition at every point in time because “spending” and “income” are just two different ways to record the exchange of goods and services for money.
What really “causes” rising aggregate spending (income)? Well, of course, the expectation that aggregate spending (income) will rise. Expectations above all else… house rules.
Anyway, my point is, Larry Elliot is very confused:
Fears that Britain’s consumer-led recovery is losing momentum are increasing amid signs that the rising cost of living is hitting confidence and high-street spending.
There is no more a “consumer-led recovery” than there is an “household income-led recovery”. Expectations of income (spending) went up and hence income (spending) went up. Forget about the grossly deceptive partitioning. And do you think the falling cost of living is raising confidence in Spain or Greece, Larry? Maybe UK macro policy is just not tight enough for the Guardian econ editor, who is still addicted to the opium marketed as “price stability”?
So here is some “cheerleader for growth blogging” as a counterpoint to media doom and gloom: the EC’s Economic Sentiment Indicator update for November was published today, and it is says UK “confidence” is up slightly on October and still up in “boom” territory.