Economics Nerd Central/ The Global Inflation Thread

How bad boy

Full Member
FT 16-05-22 Adam Posen.

Brexit reality bites as stagflation looms Bank of England will have to raise rates higher than it has forecast and even more than markets have priced in

The UK outlook for stagflation of rising prices and slowing economic growth this year and next reflects the realities that Brexit has wrought. Of course, the Covid pandemic, the difficulties of reopening the economy, and now energy and food price surges are not caused by Brexit. But the UK’s vulnerability to those shocks, and therefore the amplification of their inflation impact, is largely due to Britain’s departure from the EU. This is why the Bank of England will end up having to raise interest rates over the next year more than it forecast this month, and even more than markets have already priced in. Given the very hard Brexit, the Bank of England and the UK economy have been dragged part way back to the 1970s. By that, the Bank’s Monetary Policy Committee is no longer able to look past external economic shocks as they did during the 1992 European Exchange Rate Mechanism exit or 2009 sterling depreciation. In these cases, they had the luxury of setting monetary policy solely in terms of hard domestic forecast data. But after Brexit, the MPC would have to worry more about the “spillover” of international events into inflation expectations. This is due to a combination of the UK being a smaller economy on its own, less buffered by its integration in the EU, and an erosion of trust in UK governments to run disciplined economic policies. Hence, any shocks are likely to result in higher and more lasting inflation than they did before Brexit. Additionally, because the UK has waged a trade war on itself, Brexit has a direct effect on inflation. There is a down shift in purchasing power — a one-time but significant move that is taking some years to play out as various aspects are implemented. This takes the form of administrative costs and regulatory barriers as well as tariffs and diminished policy choices. There also has been a reduction in both the level of labour supply and its elasticity with the effective exclusion of European migrant workers. Labour is a differentiated good with no simple substitution when workers in a given industry, skill set or region are no longer available. Critically, this has meant a growing mismatch of available workers to jobs, as well as the perceived bargaining power of domestic workers in certain sectors. The UK avoided the US’s 2021 mistake of distributing too much fiscal stimulus in too brief a period when the economy was recovering but short of labour; if anything, fiscal policy was too austere. The UK, like the EU, also avoided Washington’s error in tying Covid aid to workers laid off or fired, by instead subsidising jobs and furlough schemes. Yet, the UK inflation rate is high, similar to US levels, and has been for some time. It is higher than the rate for the eurozone, even though price rises accelerated across the bloc predominantly as a result of Russia’s war in Ukraine. It is Brexit wot done it. Because of the limitations of today’s UK labour market, the British economy faces much the same worker shortages and wage pressures as the US. UK price rises reflect, in part, the idiosyncrasies of Britain’s natural gas and food markets. However, the lack of sourcing supply options for agricultural labour and fuel made those inflationary effects worse and more persistent. Implementing trade barriers and new standards between the UK and the EU single market only compound the problem. I do not share the MPC’s assessment that the forecast decline in real incomes and the planned monetary tightening will be sufficient to bring inflation back to target within two to three years. Monetary policy has to be exercised because in a small closing economy with an inflationary trend — similar to Britain in the 1970s — inflation does not self-correct with general movements in demand. Wage increases are not keeping up with inflation but this is precisely why monetary policy has to tighten further now, not wait. Preserving the real income for working households is exactly why the Bank should be fulfilling its mandate to maintain stable prices around the 2 per cent target.
 

Meridian

Full Member
FT 16-05-22 Adam Posen.

Brexit reality bites as stagflation looms Bank of England will have to raise rates higher than it has forecast and even more than markets have priced in

The UK outlook for stagflation of rising prices and slowing economic growth this year and next reflects the realities that Brexit has wrought. Of course, the Covid pandemic, the difficulties of reopening the economy, and now energy and food price surges are not caused by Brexit. But the UK’s vulnerability to those shocks, and therefore the amplification of their inflation impact, is largely due to Britain’s departure from the EU. This is why the Bank of England will end up having to raise interest rates over the next year more than it forecast this month, and even more than markets have already priced in. Given the very hard Brexit, the Bank of England and the UK economy have been dragged part way back to the 1970s. By that, the Bank’s Monetary Policy Committee is no longer able to look past external economic shocks as they did during the 1992 European Exchange Rate Mechanism exit or 2009 sterling depreciation. In these cases, they had the luxury of setting monetary policy solely in terms of hard domestic forecast data. But after Brexit, the MPC would have to worry more about the “spillover” of international events into inflation expectations. This is due to a combination of the UK being a smaller economy on its own, less buffered by its integration in the EU, and an erosion of trust in UK governments to run disciplined economic policies. Hence, any shocks are likely to result in higher and more lasting inflation than they did before Brexit. Additionally, because the UK has waged a trade war on itself, Brexit has a direct effect on inflation. There is a down shift in purchasing power — a one-time but significant move that is taking some years to play out as various aspects are implemented. This takes the form of administrative costs and regulatory barriers as well as tariffs and diminished policy choices. There also has been a reduction in both the level of labour supply and its elasticity with the effective exclusion of European migrant workers. Labour is a differentiated good with no simple substitution when workers in a given industry, skill set or region are no longer available. Critically, this has meant a growing mismatch of available workers to jobs, as well as the perceived bargaining power of domestic workers in certain sectors. The UK avoided the US’s 2021 mistake of distributing too much fiscal stimulus in too brief a period when the economy was recovering but short of labour; if anything, fiscal policy was too austere. The UK, like the EU, also avoided Washington’s error in tying Covid aid to workers laid off or fired, by instead subsidising jobs and furlough schemes. Yet, the UK inflation rate is high, similar to US levels, and has been for some time. It is higher than the rate for the eurozone, even though price rises accelerated across the bloc predominantly as a result of Russia’s war in Ukraine. It is Brexit wot done it. Because of the limitations of today’s UK labour market, the British economy faces much the same worker shortages and wage pressures as the US. UK price rises reflect, in part, the idiosyncrasies of Britain’s natural gas and food markets. However, the lack of sourcing supply options for agricultural labour and fuel made those inflationary effects worse and more persistent. Implementing trade barriers and new standards between the UK and the EU single market only compound the problem. I do not share the MPC’s assessment that the forecast decline in real incomes and the planned monetary tightening will be sufficient to bring inflation back to target within two to three years. Monetary policy has to be exercised because in a small closing economy with an inflationary trend — similar to Britain in the 1970s — inflation does not self-correct with general movements in demand. Wage increases are not keeping up with inflation but this is precisely why monetary policy has to tighten further now, not wait. Preserving the real income for working households is exactly why the Bank should be fulfilling its mandate to maintain stable prices around the 2 per cent target.
I take it you got that from The Financial Times, it might as well be written in Arabic as far as the typical Brexitter is concerned as all those big fancy words and meanings would have them all confused, I just like the way the author said " Brexit wot done it. "
 
The UK had a 1% drop in labour force participation, but that was 2020-2021, 2021-2022 is broadly static and it's not as low as it was in 2018, so I'm not convinced there's a huge impact on inflation there: https://tradingeconomics.com/united-kingdom/labor-force-participation-rate#:~:text=Labor Force Participation Rate in the United Kingdom averaged 76.78,percent in March of 1983.
Certainly labour force size post brexit would significantly overwhelm that.
It dropped in the US during Covid but has rebounded strongly: https://tradingeconomics.com/united-states/labor-force-participation-rate
Ireland has a higher Labour Force Participation rate vs pre Covid: https://tradingeconomics.com/ireland/labor-force-participation-rate#:~:text=Labor Force Participation Rate in Ireland averaged 62.73 percent from,the second quarter of 2020.

Yes, the migration would be a factor, but it'd be inflationary in some countries, deflationary in others, e.g. the UK losing all of those Polish truck drivers to other locations would mean a deflationary wage pressure in the receiving countries.

Your point about pent up demand is exactly my point, the velocity rate has changed. You increase the velocity with an elevated money supply = inflation + GDP growth, but GDP growth is slowing.

As for Russia-Ukraine, I get that has an impact, but you have the combination of the velocity and activity catching up, raising the relative prices significantly, but we had oil prices higher than current rates (and significantly higher adjusted for inflation) from 2011-2014 without the massive rises in inflation.
Additionally, the inflation pre-dates the Ukraine war, so while it might be making it worse, I really can't see it as a root cause.



Paywalled but I agree a recession is probably coming in some advanced economies
While there is pent up demand for some goods or services I think the problem is more on the supply side.

After the 2008 recession central banks also printed a truckload of money and large bouts of inflation was expected but never materialised because China stepped into the breach and basically supplied cheap goods to the world.

Fast forward to covid and the printing presses were turned on again, however the difference now is China's zero covid policy and the fact the world in the intervening years became dependant on China for cheap goods. Currently there are 50-700 ships berthed outside Shanghai waiting to load, this adds to the cost of transport enormously and every day lost adds to the cost. Also many factories have been shut down hence we are competing for an ever dwindling supply of goods, so demand doesn't necessarily have to increase for prices to increase.

I read about Hertz in Ireland whereby they sold off upwards to half of their fleet to generate income during covid but now can't replace these cars because of chip shortages, prices for rental cars are now 40% higher than 2019 because demand has increased relative to supply even though this demand is lower than pre covid levels.
 

How bad boy

Full Member
"The ECB increased its key interest rate by 0.5 percentage points to 0.0%"

Yeah, lolz. Not even started. The ECB is a bit behind the curve here.

In the face of 8.6% inflation, they really need to make sure it doesn't run out of control.

The oil price is back down to Feb's level. Natural Gas has shot back up, but 3 weeks ago had dropped back down to September 21 levels.

I'm simply not convinced the high rate is purely due to those shocks, I think in the same way that British journalists seem to be blind to Brexit being at the root of a lot of the economic malaise in the country, I see the same with inflation and the money supply. Sure, there are things going on that are making a significant difference. But the root of the problem, the one thing that is being overlooked, is not properly cleaning up after the printing of money to support covid hit economies.
 

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