It’s Wednesday and so I write less on the blog to allow me to write more elsewhere. And, we get a chance to savour some music – today some of the best vibraphone playing that was recorded. Simon Jenkins wrote a column in the UK Guardian on Monday (August 8, 2022) – Who knows if Truss or Sunak is right on the cost of living crisis – where are all the economists? – which runs the line that my profession has gone to ground as the two Tory leadership hopefuls come out with diametrically opposed views as to how to fix the ‘cost of living crisis’ in the UK. Well, he could have answered his own question. Who would want the opinion of the ‘economists’ by which I mean the mainstream macroeconomists given they have an appalling record of prediction anyway. The majority are supporting the Bank of England’s kamikaze interest rate increases because they think monetary policy is an effective solution to inflationary pressures and they agree that unemployment should be a policy tool rather than a policy target. He might also have noted in his article that who gets a platform in the public debate about economic matters is heavily biased against those who might offer an alternative view. Try getting an Op Ed in the UK Guardian, for example, if you are non mainstream and not part of the ‘progressive, pro-Europe’ network in London. And on those cost of living pressures, no mainstream economist that the UK Guardian is likely to publish would propose nationalising energy supply, public transport, water supply and telecommunications anyway. Which is the best long-term solution to protect workers and low-income consumers. Further, the latest data from the US indicated that inflation has peaked and inflationary expectations are falling sharply. Did anyone mention the word ‘transitory’ around here?
Where are all the economists?
Well, in answer to the question that Simon Jenkins poses, he should be happy that they “have gone AWOL” because otherwise the debate would become derailed.
Suffice to say, the mainstream New Keynesian macroeconomists, even those who support the Labour Party, would be happy that the Bank of England is back in action using unemployment to stifle aggregate demand in their futile quest to bring the inflationary pressures down.
Futile – because it is not an aggregate demand problem as I have explained several times over the last year or so.
When New Keynesians see inflation, they propose interest rate increases.
That is it.
The current leader’s debate in the UK is juxtaposing Sunak who wants to reduce the fiscal deficit but target financial assistance to the lowest-income household and Truss who wants to give tax cuts that favour the highest income groups, who hardly need any special government assistance at this time.
Sunak also appears to favour tax cuts for the high income earners.
Truss wants to expand demand and push the GDP growth rate up.
Simon Jenkins writes:
Two members until recently of the same cabinet seem at opposite extremes of the economic spectrum. Both studied economics at Oxford. They must have attended similar lectures and read the same books. What’s their problem?
The problem Simon is that they both studied economics at Oxford and attended similar lectures and read the same books.
Most of which was a poor preparation for a professional life as a Chancellor or Prime Minister for that matter, if the aim is to introduce progressive policies that deal with the poly crisis facing the world.
The macroeconomics taught at Oxford is not educative. It is indoctrination into the world of Groupthink designed to defend a failed paradigm.
Simon Jenkins writes:
The latest dispute between Rishi Sunak and Liz Truss turns on whether the cost of living crisis is best met with caution and help for the neediest, or by slashing taxes and “going for growth”. Both cannot be right.
Of course, both are wrong.
And if the UK Guardian allowed for a diversity of economic opinion from professional economists then I could explain why.
The ‘cost of living’ crisis has structural dimensions – the privatised essential services etc which has spawned profiteering at the expense of service quality and scope and has been a problem for several decades now.
It also has a temporary dimension – Covid is still ravaging the labour force and stopping supply chains from returning to something like ‘normal’.
And then there is OPEC.
The best solution is to use fiscal policy to protect the poor in the short-term and to stop putting up interest rates, which just make the cost of living problems worse, without address either the longer-term and short-term factors driving the problem.
The inflation will dissipate.
But if a recession is deliberately created then the residual negative consequences will haunt Britain for a long time.
Going for growth is also not the solution because that will just come up against the supply constraints and introduce further problems.
At present unemployment is low in Britain and although the quality of jobs and pay needs to improve dramatically at least people have work.
So the government should just be ensuring that the ridiculous energy price rises I have read about that will chime in soon do not hurt those who cannot afford to pay them.
And then be working to nationalise the sectors that supply essential goods and services to ensure they return to public service and not profit gouging.
The other question Simon Jenkins avoids is who gets a platform in the public debate.
He should be arguing for more diversity within his own paper for a start.
A lot of people seem to agree with me that this is a transitory inflationary episode
On August 8, 2022, the Federal Reserve Bank of New York published a press release – Inflation Expectations Decline Across All Horizons – which informs readers that their latest – Survey of Consumer Expecations (July 2022) – shows that:
Median one- and three-year-ahead inflation expectations both declined sharply in July, from 6.8 percent and 3.6 percent in June to 6.2 percent and 3.2 percent, respectively.
Median five-year ahead inflation expectations, which have been elicited in the monthly SCE core survey on an ad-hoc basis since the beginning of this year, also declined to 2.3 percent from 2.8 percent in June. Expectations about year-ahead price increases for gas and food fell sharply.
Here is the graph for the one- and three-year ahead inflation expectations series.
The Survey also found that:
Median inflation uncertainty—or the uncertainty expressed regarding future inflation outcomes—declined slightly at both the one- and three-year-ahead horizons. Uncertainty at the five-year-ahead horizon decreased more substantially.
Which tells us that people are understanding this is a transitory phenomenon driven by a number of separate causes, but, which no propagation mechanism (like a wage-price spiral) is threatening to perpetuate.
More specifically, the survey found that:
1. “The median expected change in home prices one year from now dropped sharply to 3.5% from 4.4%, its third consecutive decrease and its lowest reading of the series since November 2020.”
2. More significantly:
Expectations about year-ahead price changes decreased sharply by 4.2 percentage points for gas (to 1.5%) and by 2.5 percentage points for food (to 6.7%). The decrease in expected gas price growth was the second largest in the series, just below the 4.5 percentage point decline in April of this year. The decline in food price growth expectations was the largest observed since the beginning of the series in June 2013.
3. The five-year median inflation expectation fell from 3.02 per cent in March 2022 to 2.35 in July.
The meaning of all this is that the supply constraints and energy gouging has pushed up the short-term expectations in line with the CPI pressure but these pressures are expected to dissipate fairly quickly.
To see how different the current situation is I created this graph from the University of Michigan price expectations data which shows consumer expectations of inflation 12 months ahead.
First, the expectation has dropped 0.1 points since April 2022 (hard to tell on this graph).
Second, the decline back to the lower steady expected inflation in the 1979s took several years not months, as appears to be happening this time around as supply constraints ease.
The Federal Reserve Bank of Cleveland also provides an inflationary expectations series back to January 1982.
In October 2009, the Bank released a discussion paper outlining – A New Approach to Gauging Inflation Expectations. It is a non-technical version of this 2011 paper – Inflation Expectations, Real Rates, and Risk Premia: Evidence from Inflation Swaps.
The latest data from the US Federal Reserve Bank of Cleveland released July 13, 2022 – Inflation Expectations – shows that:
1. The 1-year ahead expected inflation rate for July was 3.31 per cent, whereas in June 2022 it was 4.23 per cent – and looks to have peaked at that level.
2. The 10-year expected inflation rate for July 2022 is 2.22 per cent down from 2.4 per cent in June 2022 – that is, falling.
2. Their estimate of the inflation risk premium also fell from 0.47 per cent to 0.37 per cent between June and July 2022.
Thus the ‘financial market’ expects inflation to dissipate over the extended period.
Here is the graph for the 1-year and 10-year expectations from the Cleveland model.
The graphs are interesting because they show that long-term inflationary expectations have remain fairly stable around the Federal Reserve’s 2 per cent anchor.
The shorter term expectations which pick up a lot of the month to month fluctuations in energy and housing prices etc are much more volatile as a consequence and tend to follow the actual CPI series closely.
Music – Lennie Hibbert
This is what I have been listening to while working this morning.
Lennie Hibbert – was a Jamaican vibes player and bandmaster.
He recorded two albums for – Studio One – in Kingston, Jamaica.
This track was originally released by Jamaica’s Studio One on Lennie Hibbert’s 1971 album – More Creation.
The cover of the album contains very no information as to who are the backing musicians. It just says:
A dveoted music lover who masters just any kind of rhythm – rag, bop, ska, calypso, soul, rock-steady, jazz, etc. Lennie, one of today’s hottest Vibist, spent 11 years with the Jamaican Military Band, 15 years as Band Master, with the Alpha Band, and 18 years as an Orchestra Leader … In this newest album, you’ll hear more of the exciting sounds of Lennie Hibbert.
We’re convinced this will be the biggest album yet released by Lennie, and so will you. So stoke up your stereo and treat yourself to a generous helping of today’s most remarkable Vibist, Lennie Hibbert.
Ok, stoke it up.
A great album by the way.
That is enough for today!
(c) Copyright 2022 William Mitchell. All Rights Reserved.