Home > Data, UK GDP > UK 2014 Q3 GDP: Aggregate Demand Growth at Nine-Year High

UK 2014 Q3 GDP: Aggregate Demand Growth at Nine-Year High

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.

UK GVA Growth

UK GVA Growth.  Source: ONS ABML , CGBV , ABMM


Categories: Data, UK GDP
  1. SK
    December 18, 2014 at 09:14

    Thanks! Nice and very interesting post.

  2. james in london
    December 18, 2014 at 16:34

    It is a wierd world with NGDP growth at a “nine year high” on a two quarter annualised basis (ahem) and employment at record levels but not seeing any pick up in average wage growth or income tax take. It could be we’ve all got smarter at keeping the tax level down, as well as penalising anyone moving to higher wages (as you say elsewhere).

    • December 18, 2014 at 16:38

      I meant to apologise for cherry-picking that measure, two-quarter annualised in the post :) Point taken there.

      It could be the hawks are right about wages, of course.

      • james in london
        December 18, 2014 at 16:41

        I thought it was a new “transatlantic style” statistic, between one qtr annualised and yoy :)

  3. james in london
    December 18, 2014 at 16:39

    Maybe the October data shown in the chart is the golden cross we’ve all been waiting for:

    • December 18, 2014 at 16:41

      The most worrying thing is that the unemployment rate has been flat for three months; coupled with strong NGDP growth that is extremely strange if wages are NOT rising.

      • james in london
        December 18, 2014 at 16:55

        You have to remember that when you read ONS methodology it looks as if UK NGDP numbers are RGDP that are then inflated to get the nominal. Anything could happen in that process. And with resource prices going haywire, “anything” is probably happening.

      • December 18, 2014 at 17:02

        True. There is the 3% NMW hike in October, so it would be surprising if SOME people’s wages are not rising.

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