Home > Data, Inflation, Monetary Policy > Inflation, Inflation… There is No Inflation

Inflation, Inflation… There is No Inflation

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.

Anyway… 1.5%!!!

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  1. W. Peden
    June 17, 2014 at 10:48

    Good post, but-

    “And I think nominal wages and/or incomes should have a 100% weight.”

    – shouldn’t that just be “or”? Multiple targets only makes sense if there is some reason why one target would be inadequate, since there are inherent advantages to singular targeting (simplicity, reduced discretion, clearer grounds for expectations etc.) and I don’t see why that would be the case with nominal wage/nominal income targeting.

    • June 17, 2014 at 10:49

      Yes, you are right! Sloppy writing.

  2. June 17, 2014 at 10:53

    I think Carney’s suddenly-hawkish tone was an attempt to defer rate rises.

  3. June 17, 2014 at 10:56

    I think Carney’s comments are made to defer a rate rise.

    • June 17, 2014 at 11:00

      I agree that is likely to be the *effect* of his comments. I am not at all sure that was his intent.

  4. SK
    June 17, 2014 at 12:01

    Or perhaps the rest of the MPC has turn hawkish? By the end of the month we will have better idea on the votes of the MPC and the meeting notes of the FPC.

    Lots of politics between BoE and HMRC right now. Wonder if Carney’s comment was related to the passing of the hot HTB potato from the government to the BoE.

    • June 17, 2014 at 15:19

      It seems to me that housing is the only inflationary factor at the moment. Public spending cuts over the next few years will be deflationary as will international trade. Wages can’t spike while China et. al export their deflation. If the £ was collapsing then maybe rates would need to firm up, but…

    • June 18, 2014 at 00:07

      It is certainly plausible this is driven by the MPC.

  5. June 17, 2014 at 17:17

    Lucky David Miles only has eleven months left. He wants to vote for a rate rise because he wants to “see how it feels”, having never voted for one yet. Great.
    http://uk.reuters.com/article/2014/06/17/uk-bankofengland-interest-rate-idUKKBN0ES11H20140617
    To be fair, he was still quite dov’ish. His replacement will be interesting. You almost wish for a return of arch-fiscalist Adam Posen.
    http://www.bloomberg.com/news/2014-06-16/carney-rates-remark-may-have-caused-overreaction-posen-says.html

    • June 18, 2014 at 00:09

      Thanks for the link. “heading (off) a risk of a rapid tightening in the stance of policy in the embryonic stage of a recovery” is not exactly what is happening, but they are steering that way. I would like to believe they know what they are doing.

  6. james in london
    July 16, 2014 at 13:39

    Another drop in gorwth of Average Weekly Wages ex Bonuses (3 month average). A new post-recession low of 0.7%. It’s horrible – even if more people are in work and unemployment a tad lower. 6.5% unemployment is still a long way from 4.5%.

    Core CPI “rockets up” to 2.0%,but measures what, exactly? Nothing useful.

    • July 16, 2014 at 14:01

      Sticky wages are sticky! The labour market is soaring up to the sky and soon… or later… wages will rise. In the mean time, anybody want to bet on productivity growth in Q2? I bet it is below 1% and possibly negative.

      • james in london
        July 16, 2014 at 15:39

        I thought wages were meant to be only sticky downwards, not upwards too!

        If trends continue we’ll be at 4.5% unemployment sometime in 2016. Then, maybe, we can see a wage “explosion” back to … err … the normal 5% per annum.

        As long as the central bankers don’t panic at the first signs of the “explosive” growth. On that, good to see both Carney and Yellen talking about wage growth as an important data point. If only they had a target like nominal wages … then we could be more sure they won’t panic at 2%, 3% or even 4% wage growth. But that would be NGDP targeting, more or less, and no one wants that crazy idea.

  7. July 16, 2014 at 14:08

    Honestly, there is no bad news. The single month figure was 6.2%, and it was 7.2% as recently as December; different cohorts there but a 1% drop in unemployment in five months is amazing. Still yes: “MOOOOAR” as Scott said.

  8. July 16, 2014 at 15:57

    Sticky = slow to change in *either* direction – otherwise positive AD shocks would “just” result in higher wages and could not raise employment when the labour market is depressed.

    The question of *when* wages start rising is really interesting… it is very hard to find any good correlation between any measure of labour market slack and wage growth.

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