Inflation is coming, well, it could be, or, it might happen, gosh …

One could make a pastime observing the way that so-called ‘expert’ commentators change their commentary as the data unfolds. As one rather lurid prediction fails, their narrative shifts to the next. We have seen this tendency for decades when we consider the way mainstream economists have dealt with Japan. The words shift from those implying immediacy (for example, of insolvency), to those such as ‘could’, ‘might’, ‘perhaps’, ‘under certain conditions’ and more. The topics shift. The commentariat were obsessed with ‘this time is different’ during the GFC and the ‘debt insolvency threshold’ rubbish that the likes of Reinhardt and Rogoff propagated. That is, until they were sprung for spreadsheet incompetence. More recently, we have apparently forgotten how many governments were about to go broke and the mania has shifted to inflation. The data shows some price spikes earlier in the year which set of the dogs. Now, things might be shifting again. It is a pastime following all this. Short memories, no shame is the only requirement that is required to be a mainstream economics commentator. Prescient knowledge is not included in that skill set.

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Inflation rises in Australia – but transitory factors and natural disasters are the reason

Today, my on-going inflation watch turns to Australia, given the release today (July 28, 2021) of the latest – Consumer Price Index, Australia – for the June-quarter 2021. The data is consistent with what we are seeing across many nations as supply chains are disrupted by the pandemic. Energy prices are adjusting back upwards and because the base from which we are judging these quarterly rises was lower as a result of price suppression during the downturn, the recovery in the pre-pandemic price levels deliver larger than usual price increases (when the base is higher). In Australia’s case, a major recent flood and a long drought before that have also complicated matters by driving up food prices. All these impacts are transitory. The CPI rose by 0.8 per cent in the June-quarter 2021 and over the 12-months to June 2021 it rose 3.8 per cent. But the key to understanding the trends in the data is to appreciate that the less volatile series were still rising at rates below the RBAs inflation targetting range – the Trimmed Mean rose just 0.5 per cent and the Weighted Median rose 0.5 per cent. So nothing to see here. The most reliable measure of inflationary expectations are flat and below the RBA’s target policy range.

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The central banks don’t seem to be worrying about inflation

It’s Wednesday and I have been tied up most of the day with commitments. So we will have to be content today with a couple of snippets. The first about the on-going inflation mania and the way in which the ECB seems oblivious to it. The second about the gross incompetence of the Australia government, who has put the health of the nation at risk and forced state governments to invoke rolling lockdowns as only a small number of us are vaccinated and cases keep seeping out of a flawed quarantine system (the latter being the federal responsibility). And once the anger subsides from that little discussion, we have the usual Wednesday music offering to restore peace.

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New Australian inflation measures help us dig deeper into distributional consequences

On November 11, 2020, the Australian Bureau of Statistics published a very interesting new experimental dataset – Non-Discretionary and Discretionary Inflation – which was derived from the standard Consumer Price Index data. It provided us with new insights and a richer knowledge of the impacts of inflation, particularly in distributional terms. Last month (May 25, 2021), the ABS published a followup article – Measuring Non-discretionary and Discretionary Inflation – which summarised some of the key findings. After receiving feedback, the ABS has refined the data series and will publish them on an on-going basis from the September-quarter 2021 as part of the “regular quarterly CPI release”. This new approach to measuring inflation will help us considerably assess the implication of wage movements on the real living standards of Australian workers.

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Rising prices equal an inflation outbreak (apparently) but then the prices start falling again

In my daily data life, I check out movements in commodity prices just to see what is going on. As I wrote recently in my UK Guardian article (June 7, 2021) – Price rises should be short-lived – so let’s not resurrect inflation as a bogeyman – the inflation hysteria has really set in. I provided more detail in this blog post – Price rises should be short-lived – so let’s not resurrect inflation as a bogeyman (June 9, 2021). Yes, I stole the title of my article for the blog post if you are confused. The inflation hysteria really reflects the fact that mainstream economists are ‘lost at sea’ at present given the dissonance between the real world data and the errant predictions from their economic framework. They cannot really understand what is happening so when they see a graph rising it must be inflation and that soothes them because rising deficits and central bank bond purchases have to be inflationary according to their perverted theoretical logic. The financial market press then just repeats the nonsense with very little scrutiny. But given many graphs are falling again, this Pavlovian-type response behaviour must be really doing their heads in. I have no sympathy.

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Krugman’s cockroach views on Brazil and hyperinflation

Today, I am publishing a special guest post from four authors working in the Modern Monetary Theory (MMT) tradition about inflation in Brazil. They are examining recent claims by Paul Krugman that the Brazilian experience ratifies basic Monetarist theory that links excessive monetary expansion with inflation (and hyperinflation). It turns out that the reality is quite different which is no surprise when it comes to confronting Krugman’s assertions with facts. Over to Daniel and co …

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Price rises should be short-lived – so let’s not resurrect inflation as a bogeyman

It’s Wednesday and I am somewhat besieged. So just a few reflections today before we delve into our latest music offering. I had an Op Ed published in the UK Guardian today (my time) which analysed the latest inflation scares that have been dominating the popular media. More and more mainstream macroeconomists are coming out and asserting that economies will overheat. The usual gold bugs have been delighted by this shift in the narrative back to the obsessions and manias that keep them occupied on a daily basis. What was interesting to me was the responses of the commentators to the Guardian Op Ed. If the sentiments expressed represent the state of macroeconomic knowledge (presumably mostly in the UK) then we have a long way to go before Modern Monetary Theory (MMT) and the sensible policies that it might inform gain any serious traction. Given the GFC, the stagnation in the aftermath, 30 years of Japanese history, the pandemic, which have all combined to demonstrate why the mainstream approach is dysfunctional and provides no guidance to what might happen in the real world, the commentators continued to rehearse these failed ideas about inflation, interest rates, bond markets etc. Quite dispiriting.

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The inflation mania is growing – but manias are manias

The other day I gave a talk to the ‘investment’ community in Melbourne and they wanted to talk a lot about inflation, which seems to be their foremost concern at the moment. Tomorrow, I am giving a similar presentation in Sydney and I expect a similar line of questioning. Think about it. Wages growth is projected to be so low over the next several years that real wages will decline for at least 3 to 4 years. The Output gaps are still significant and were significant even before the pandemic. Households were already cutting back consumption spending growth, given record levels of indebtedness and no prospect of wages growth. Where pray tell are the inflationary pressures going to come from? I also keep reading of similar fears from economists and central bankers. The latest I saw came from Britain, where the outgoing chief economist from the Bank of England started beating on the inflation drum. There are some areas of our economies that will experience price pressures in the coming period given the disruptions in supply and various administrative pricing decisions by governments (reversing pandemic assistance in areas like rents, energy, child care etc). But these pressures in some segments of the economy are unlikely to instigate a major shift to high generalised inflation rates because the capacity of workers to defend their real wages is diminished now. Fiscal policy has a long way to go yet in reducing unemployment and underemployment from their elevated levels before that capacity becomes functional again.

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No inflationary trends evident in Australia – latest data

I have been seeing a lot of crazy predictions that inflation is about to accelerate because of the elevated levels of government spending, record low interest rates and substantial government bond purchases by the Reserve Bank of Australia. It is almost as if the conservative, deficit-haters want that to happen so they can say “We told you so” as they cling on to their flawed macroeconomic theories. Well sorry to disappoint. Today (April 27, 2021), the Australian Bureau of Statistics released the latest – Consumer Price Index, Australia – for the March-quarter 2021, which hoses down the inflation fears. The Consumer Price Index rose by just 0.6 per cent in the quarter (mostly petrol prices) and over the 12-months to March 2021 it rose 1.1 per cent. The less volatile series, Trimmed Mean rose just 0.3 per cent and the Weighted Median rose 0.4 per cent. So nothing to see here. The RBA keeps buying government debt and effectively funding substantial proportions of the fiscal interventions since the pandemic, interest rates remain low and yet inflation is still well below the lower bound of the RBA’s inflation targetting range. The most reliable measure of inflationary expectations are flat and below the RBA’s target policy range.

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Governments will always let inflation accelerate – apparently

Today the UK Guardian editorial – The Guardian view on Rishi Sunak: time to create jobs, not anxiety – endorsed the introduction of a Job Guarantee to alleviate the terrible unemployment situation that Britain will create in the coming 12 months. Existing programs from the British government are “too small and too reliant on private companies to help much”. Even after the pandemic is solved (hopefully via vaccine) “the unemployment crisis will remain”. That is a positive step from the Guardian. And, it runs counter to the way many progressives are viewing the solution box, with UBI still figuring among their main options. The problem is that the UBI cannot deliver on its promises to everyone. But this blog post is not about UBI. As the Job Guarantee gains more profile in the public debate, several mainstream economists are now taking aim at it. The latest attempt, which I choose not to link to because it is not worth reading in full, invokes one of the arguments that mainstream economists developed in the late 1970s and early 1980s to justify their attacks on discretionary fiscal policy and elevate rules-based monetary policy to become the primary, counter-stabilisation tool. It was, of course part of the neoliberal putsch that has seen sub-optimal outcomes ever since for most of us and superlative outcomes for the top ends of the income distribution. The reason I note this argument is because it is general in nature and should be understood. In other words, I do not have to talk about the paper that introduces this attack on the Job Guarantee, because it just mimics the standard criticisms of government policy making that have been around for ages. So any time some new government policy approach is proposed, these characters just whip out this tired old defense. But it is useful for my readers to be on the lookout for it.

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Inflation is not necessarily due to excessive spending

Yesterday’s data from the Australian Bureau of Statistics (October 28, 2020) – Consumer Price Index, Australia – for the September-quarter 2020, illustrates what a lot of people do not fully grasp. Inflation can be driven by administrative decisions and can be curtailed or restrained by varying those decisions. No tax rises or cuts to government spending are needed. The data also reflect on the reasons that predictions from mainstream (New Keynesian) economic models fail dramatically. Mainstream economists claim that monetary policy (adjusting of interest rates) is an effective way to manage the economic cycle. They claim that central banks can effectively manipulate total spending by adjusting the cost of borrowing to increase output and push up the inflation rate. The empirical experience does not accord with those assertions. Central bankers around the world have been demonstrating how weak monetary policy is in trying to stimulate demand. They have been massively building up their balance sheets through QE to push their inflation rates up without much success. Further, it has been claimed that a sustained period of low interest rates would be inflationary. Well, again the empirical evidence doesn’t support that claim. The Reserve Bank of Australia has now purchased more than $50 billion worth of federal government bonds and a smaller amount of state and territory government debt. And yet inflation is well below the lower bound of the RBA’s inflation targetting range. The most reliable measure of inflationary expectations are flat and below the RBA’s target policy range.

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The long-term unemployed are not an inflation constraint in a recovery

I gave some advice to a politician last week who had read some MMT literature that he said indicated that using the Job Guarantee reduces inflationary pressures in a recovery relative to a situation where a nation had an unemployment buffer stock. I was surprised by the question because the assertions didn’t appear congruent with the facts. It appeared to be rehearsing and endorsing the standard neoliberal supply-side agenda that defined the so-called ‘activation’ approach to unemployment, which militated against job creation programs in favour of training initiatives – the full employability rather than the full employment mindset. The fact is that long-term unemployment always lags behind the overall unemployment movements given it takes time for people to work their way through the duration categories until they get to 52 weeks, after which the national statistician terms a person long-term unemployed. The longer the recession the higher average duration of unemployment becomes and the larger the pool of long-term unemployed as people start to flow into that category. However, the way we think about solutions has been influenced by the myths about the way long-term unemployment behaves, which we summarise as the – ‘irreversibility hypothesis’. This idea has influenced governments to rely on training approaches rather than job creation as solutions to unemployment. And, it has led to the various pernicious unemployment management policies where the victims of the system’s failure to create enough jobs are considered culpable in their own misfortune and shunted through a series of compliance processes in order to receive income support, which do little to get them work.

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Eurozone inflation heading negative as the PEPP buys up big – don’t ask the mainstream to explain

Governments save economies. Never let a mainstream economist tell you that government intervention is undesirable and that the ‘market’ will sort things out. Never let them tell you that large-scale government bond purchases by central banks lead to inflation. Never let them tell you that the government, when properly run, can run out of money. There is unlimited amounts of public purchasing capacity. The art is when to apply it and how much to release. That can only be determined by the behaviour of the non-government spending and saving and the state of idle capacity. It can never be determined by some arbitrary public debt threshold or deficit size. And the central bank can always buy however much debt they choose. At present the ECB is buying heaps and keeping the Member States solvent. That is not its state role but given there is no other institution in the Eurozone that can serve the fiscal function effectively and ‘safely’, it has to do that. Otherwise, the monetary union would quickly dissolve. I would take their bond buying programs further and write off all the debt they purchase. Immediately. Go on. Just type some zeros where they have recorded large positive Member State debt holdings. That would be something good to do in a terrible situation.

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Inflation hysteria as central bankers discuss yield curve control

I am in London today (Monday) and have two events. First, I am doing a ‘Train the Trainers’ workshop for – The Gower Initiative for Modern Monetary Studies – where we will work through some techniques and concepts to help activists educate others about Modern Monetary Theory (MMT). Second, I am meeting with some Labour Party Members of Parliament who are keen to learn more about MMT and incorporate its insights into their political work. Get the drift? People wanting to learn and setting up pathways where that learning can occur. Which means they take advantage of access to one of the founders of MMT to find out what it is about, rather than adopt a superficial version of our work, which they might have heard about when Joe told Aalia, who had picked it up from Eddie, who had been having a conversation with Robyn about something that Abdul had told Amelia, who had read it in some Tweet that was reporting an article written by Kenneth ‘Mr False Spreadsheet’ Rogoff criticising MMT. That is the way to learn.

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Australian inflation data defies mainstream macro predictions – again

One of the on-going myths that mainstream (New Keynesian) economists propagate is that monetary policy (adjusting of interest rates) is an effective way to manage the economic cycle. They claim that central banks can effectively manipulate total spending by adjusting the cost of borrowing to increase output and push up the inflation rate. The empirical experience does not accord with those assertions. Central bankers around the world have been demonstrating how weak monetary policy is in trying to stimulate demand. They have been massively building up their balance sheets through QE to push their inflation rates up without much success. Further, it has been claimed that a sustained period of low interest rates would be inflationary. Well, again the empirical evidence doesn’t support that claim. The evidence supports the Modern Monetary Theory (MMT) preference for fiscal policy over monetary policy. Even though the Reserve Bank of Australia has not pursued a QE program (fiscal policy saved our economy from recession during the GFC), it has persisted with very low historic interest rates. And as yesterday’s latest inflation data from the Australian Bureau of Statistics – Consumer Price Index, Australia – shows, the RBA is struggling to push it inflation rate into the so-called target policy range of 2 to 3 per cent. The data shows that the All Groups CPI grew by 1.9 per cent in the 12 months to September 2018 and the so-called core analytical series – Weighted Median and Trimmed Mean – used by the RBA to assess whether interest rates should shift or not grew by less than that. The most reliable measure of inflationary expectations are flat and below the RBA’s target policy range.

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Australian inflation outlook benign – room for fiscal stimulus

Central banks around the world have been demonstrating how weak monetary policy is in trying to stimulate demand. They have been building up their balance sheets (massively) by creating reserves in return for government and corporate paper in an attempt to push their inflation rates up. But the data suggests their efforts are in vain. Which should inform all those who think that if the government stopped issuing debt to match their deficits there would be horrible inflation to think again. Progressives should be calling for their governments to abandon the gold standard practice of issuing debt, which would change the political dialogue considerably. Australia is also struggling to push it inflation rate into the so-called policy range of 2 to 3 per cent. Last week’s Australian Bureau of Statistics inflation data release – Consumer Price Index, Australia – data for the September-quarter 2017 showed that the September-quarter inflation rate was 0.6 per cent with an annual inflation rate of 1.8 per cent (down from 1.9 per cent last quarter). The headline inflation rate has been below the Reserve Bank of Australia’s lower target bound of 2 per cent for nearly two years now. Clearly, within their own logic where an inflation rate within the 2 to 3 per cent band reflects successful monetary policy, the RBA is failing. The RBA’s preferred core inflation measures – the Weighted Median and Trimmed Mean – are also now below the lower target bound and are not showing signs of moving up. The most reliable measure of inflationary expectations has also fallen quite sharply. With the labour market data demonstrating weakness and the economy stuck in this low inflation malaise, it is clearly time for a change in policy direction.

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Inflation abating in the Eurozone signals failure of ECB ideology

The latest inflation data from the Eurozone tells us once again how wrong mainstream monetary theory is. Eurostat released its latest estimates (June 30, 2017) – Euro area annual inflation down to 1.3% – which has according to the press confounded the ECB, who has been trying to push the inflation rate up to around 2 per cent (a soft target). Like many economic things that confound the pundits, if you are familiar with Modern Monetary Theory (MMT) you won’t be surprised at all. All the baying at the moon that the ECB has been doing (courtesy of mainstream monetary textbook) won’t shift the inflation rate. Expanding bank reserves won’t shift the inflation rate. The real cause of the declining inflation rate is a lack of spending relative to productive capacity. And it is clear that the ECB has limited capacity to influence that gap. That is a matter for fiscal policy, which remains in austerity mode in the Eurozone as the leaders continue to talk about nothing.

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Inflation rises in Euro Area – but don’t claim it is the ECB’s doing

Eurostat released the latest inflation data for the Eurozone last week (March 2, 2017) for February 2017 – Euro area annual inflation up to 2.0%. As the title reveals the Euro area inflation rate rose from 1.8 per cent in January 2017 to 2 per cent in February 2017. The mainstream narrative is already emerging – ‘see we told you that all that central bank bond purchasing would (eventually) be inflationary’ – type of stories. Bloomberg (March 5, 2017) waded in early with the headline – Draghi Seen Keeping Cool on Stimulus Drive Amid Inflation Surge. I expect a bevy of mainstream economists who haven’t worked out yet they have nothing sensible to add to the public debate will chime in like those wind-up toys that children play with and argue they ‘knew it all along’ – QE would be inflationary. Well I am sorry to say that the data tells us if a significant element of the cost structure rises so will inflation – simple as that. The slight uptick in inflation in the Euro area does not support the mainstream argument that building bank reserves will flood the economy with ‘money’, which then drives inflation.

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Helicopter money is a fiscal operation and is not inherently inflationary

There was a Project Syndicate article (September 2, 2016) – The Unavoidable Costs of Helicopter Money – claiming that “In fact, there are major downsides to helicopter money”. Hmm. Should I read this article was my thought at the the time. Waste a few minutes of my life. I wondered if I could pen the article in advance and then check to see how close I was. The theme would be inflation. In that I was correct. But the author really innovated a bit and, in doing so, undermined his own argument. What we learn is fairly straightforward. If a government continues to increase nominal spending growth ahead of the growth in productive capacity then there will be inflation. The argument presented is, in fact, nothing to do with the monetary operations that accompany government spending – helicopter or otherwise. The inflation risk is in the spending. If private investment expenditure outstripped the capacity of the supply-side to produce the capital equipment demanded then the same outcome. Should we caution against such expenditure? Should be make it taboo? Obviously not.

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Australian inflation rate – trending down and reflecting a weak economy

The newly-elected conservative Australian government has resumed office with further calls for public spending cuts. Today’s Australian Bureau of Statistics inflation data should disabuse them of this idea. The Australian Bureau of Statistics released the Consumer Price Index, Australia – data for the June-quarter 2016 today and showed that the June-quarter inflation rate was 0.4 per cent (-0.2 per cent) with an annual inflation rate of 1.0 per cent (down from 1.3 per cent last quarter). The headline inflation rate has been below the Reserve Bank of Australia’s lower target bound of 2 per cent for nearly two years now. Clearly, within their own logic where an inflation rate within the 2 to 3 per cent band reflects successful monetary policy, the RBA is failing. The RBA’s preferred core inflation measures – the Weighted Median and Trimmed Mean – are also now below the lower target bound and are trending sharply downwards. Various measures of inflationary expectations are also falling quite sharply, including the longer-term, market-based forecasts. With the labour market data demonstrating weakness and the economy stuck in this low inflation malaise, it is clearly time for a change in policy direction. I won’t hold my breath!

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