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.