Home > Data, Inflation, Monetary Policy > Holy Disinflation, Batman!

Holy Disinflation, Batman!

I’m still trying to stay intensely relaxed about the falling UK CPI rate.  There is more than enough media coverage on that 1.9% number.  What has not been so widely advertised is that the ECFIN Economic Sentiment Indicator rose in January to the highest level since 1997.  The lesson of the last five years is that the CPI rate is not a good proxy for aggregate demand.  Let’s not forget it!

ECFIN Economic Sentiment Indicator

ECFIN Economic Sentiment Indicator. Source: Eurostat Eurostat ei_bssi_m_r2

For what it is worth, the Bank of England think monetary policy is a little too tight to hit their 2% inflation target on the two year horizon, where the median forecast is now 1.9%.  And that is the way we should judge the stance of monetary policy under inflation forecast-targeting.

Bank of England Inflation Forecasts

Bank of England Inflation Forecasts. Source: BoE

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  1. February 18, 2014 at 18:18

    But how is millionaire Bruce Wayne positioned for the UK’s Forward Guidance 2.0? Or is it more FG 1.1?

    I am pleased the MPC is not going to “start considering”raising rates when unemployment goes below 7%, as they had said they might do under FG 1.0.

    Of the 18 economic forecasts they are now considering “economic slack” seems most important. But also seems quite small at just 1.5% of GDP, and Carney says it will all be used up within two years.

    If inflation forecasts remain low and the slack is all used up, inflation should accelerate, obviously. What if it doesn’t? I suppose Carney’s estimate of “slack” would be too low, then.

    Slacks are very 1970s, don’t you think?

    • February 18, 2014 at 20:13

      I understood FG 1.0 in terms of clarifying the reaction function. I’m not they are doing “forward guidance” any more.

      1-1.5% of “economic slack”… that is an embarrassment. All these years of arguing about fiscal stimulus and the crack team of macro experts at the Bank says we have a 1% output gap.

      • February 20, 2014 at 08:42

        I think it was Fisher the other morning who was going on about the quality of the Bank’s agents in the field (and therefore of their ability to gauge the output gap). Yet this is the same network that missed the dramatic fall in NGDP at the outset of the crisis.

        Isn’t the NGDP gap the ‘gap’ to steer by?

  2. February 20, 2014 at 08:25

    Strong nominal growth with low inflation surely means strong productivity growth is coming back.

    • February 20, 2014 at 08:52

      Not “surely” – it depends on the change in labour input. The Q4 productivity data is not as bad as hoped, but the story of the last 18 months is still fast demand growth, fast growth of labour input, and productivity is dead.

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