The ONS have looked at spending patterns in the economy and decided to change the basket of goods which the CPI is measures by.
Remember that the CPI is based on the change in the prices of the representative basket of goods. The goods in the basket are based on the share of total expenditure of the average household.
Each good is given a weight according to its share of the total basket. If the average household spends 10% on a good then its weight (share) of the CPI basket is 10%.
Well almost. Not every good is included, only those which are significant enough and only about 700 goods make it.
The ONS have changed the basket to take account of changing spending over the last year. The BBC explains what is in and what is out in the article below.
Tuesday 12 March 2013
Policy options? Blue sky thinking
The Budget will take place next week and this year the calls for radical policy options are louder than usual.
The reason for this is that after over four years of economic stagnation people are getting desperate. Usually recessions end quickly and life returns to normal, the pain of recession concentrated on the unfortunate few.
It is difficult to find anyone who has not been affected by the current crisis. Lower real wages and lost purchasing power of savings has lead to the pain being spread widely. Of course those who have lost their jobs, or left education and failed to find one, have been really hurt.
So what could be done? The BBC have a survey of some interesting alternatives. George Osborn is unlikely to listen.
The reason for this is that after over four years of economic stagnation people are getting desperate. Usually recessions end quickly and life returns to normal, the pain of recession concentrated on the unfortunate few.
It is difficult to find anyone who has not been affected by the current crisis. Lower real wages and lost purchasing power of savings has lead to the pain being spread widely. Of course those who have lost their jobs, or left education and failed to find one, have been really hurt.
So what could be done? The BBC have a survey of some interesting alternatives. George Osborn is unlikely to listen.
Saturday 23 February 2013
Credit rating downgrade - does it matter and who does it help?
Moody's, one of three 'Credit Ratings Agencies' has downgraded the UK governments credit standing from AAA (the best rating meaning 'very safe' to lend to) to AA1 (meaning 'pretty much safe' to lend to).
So what difference does this make? All loans require a rate of interest to be paid. The rate charged is made up of several elements, such as a 'pure' element - the profit to the lender - an 'inflation protection' element - the lender gets back what they lent in real terms - and a 'risk of default' element. The last one means the premium charged to protect the lender against the chance of not being repaid. The credit rating is about that element. When a country or firm has a AAA rating then this element can effectively be zero; there is no risk of default.
To the extent that the UK government will always repay its debts then there is no risk of default. So AA1 shouldn't really make a difference to lenders. But if it did and lenders started demanding higher interest rates then this will increase the already significant interest rate bill to be paid by taxpayers each year (currently about £50 billion).
Further if the government has to pay more to borrow so will everyone else. Lenders will be attracted to lend where rates are highest. To get them to lend to mortgage borrowers the interest rate will also have to rise, otherwise they will lend their money to safe governments. So, as the Chancellor has been at pains to point out, the government paying more interest affects all borrowers.
If firms and consumers have to pay higher interest rates then Consumption and Investment will not rise as fast as hoped and recovery will be further delayed.
Ed Balls blames the government and says it is all their fault for not borrowing more. If they had done then the economy would have grown faster and this problem would have been avoided. (Moody's blame slow growth for the downgrade).
The Chancellor says had the government not cut the deficit (well tried to) then this downgrade would have come much sooner.
It is not clear which version of events is right. Balls has the problem that a credible deficit reduction plan is essential to keep the credit rating and must contend with the ineffectiveness of stimulus policies generally. Osborne faces a rising deficit and missed targets with very poor growth.
Whoever is right the downgrade will make little difference in reality. France and the USA continue to borrow at record low interest rates despite being downgraded already. Two of the three rating agencies have not yet downgraded the UK.
Perhaps the most obvious point to make is that these same rating agencies stamped the mortgage backed securities that turned out to be worthless and caused the Global Financial Crisis 'Triple A'. Their credibility is pretty low and one of them is currently being taken to court by the US government for their role in misleading investors.
So what difference does this make? All loans require a rate of interest to be paid. The rate charged is made up of several elements, such as a 'pure' element - the profit to the lender - an 'inflation protection' element - the lender gets back what they lent in real terms - and a 'risk of default' element. The last one means the premium charged to protect the lender against the chance of not being repaid. The credit rating is about that element. When a country or firm has a AAA rating then this element can effectively be zero; there is no risk of default.
To the extent that the UK government will always repay its debts then there is no risk of default. So AA1 shouldn't really make a difference to lenders. But if it did and lenders started demanding higher interest rates then this will increase the already significant interest rate bill to be paid by taxpayers each year (currently about £50 billion).
Further if the government has to pay more to borrow so will everyone else. Lenders will be attracted to lend where rates are highest. To get them to lend to mortgage borrowers the interest rate will also have to rise, otherwise they will lend their money to safe governments. So, as the Chancellor has been at pains to point out, the government paying more interest affects all borrowers.
If firms and consumers have to pay higher interest rates then Consumption and Investment will not rise as fast as hoped and recovery will be further delayed.
Ed Balls blames the government and says it is all their fault for not borrowing more. If they had done then the economy would have grown faster and this problem would have been avoided. (Moody's blame slow growth for the downgrade).
The Chancellor says had the government not cut the deficit (well tried to) then this downgrade would have come much sooner.
It is not clear which version of events is right. Balls has the problem that a credible deficit reduction plan is essential to keep the credit rating and must contend with the ineffectiveness of stimulus policies generally. Osborne faces a rising deficit and missed targets with very poor growth.
Whoever is right the downgrade will make little difference in reality. France and the USA continue to borrow at record low interest rates despite being downgraded already. Two of the three rating agencies have not yet downgraded the UK.
Perhaps the most obvious point to make is that these same rating agencies stamped the mortgage backed securities that turned out to be worthless and caused the Global Financial Crisis 'Triple A'. Their credibility is pretty low and one of them is currently being taken to court by the US government for their role in misleading investors.
Monday 18 February 2013
Fighting the fat
Denmark's 'Fat tax' has been repealed but doctors are pushing for a similar tax in the UK backed up with supporting measures.
For doctors in the UK the big problem is fizzy drinks, which are basically water and sugar. They want a tax which will arise prices by 20%.
Of course the PED of these drinks might be quite inelastic, but with so many potential substitutes, from juice to water, we might be pleasantly surprised by the effectiveness of such a tax. (However you can see the dentists getting ready to warn us against the effect of acid in fruit juice.)
The problem of fatty and high calorie foods is that they are 'imperfect information goods' and impose significant costs on the consumer and negative externalities on society who must treat their weight related diseases.
So using a price rise alone isn't enough. It is necessary to improve knowledge and directly intervene, such as banning advertising of unhealthy foods and closing take-aways near schools.
The problem of obesity is the 'new smoking'. The 1970's saw us begin to tackle the evils of smoking, but today the threat to peoples health from eating too much is just as serious.
It will take a broad range of measures to solve this. Some will cause a movement along the demand curve, but most will attempt to move the demand curve to the left.
For doctors in the UK the big problem is fizzy drinks, which are basically water and sugar. They want a tax which will arise prices by 20%.
Of course the PED of these drinks might be quite inelastic, but with so many potential substitutes, from juice to water, we might be pleasantly surprised by the effectiveness of such a tax. (However you can see the dentists getting ready to warn us against the effect of acid in fruit juice.)
The problem of fatty and high calorie foods is that they are 'imperfect information goods' and impose significant costs on the consumer and negative externalities on society who must treat their weight related diseases.
So using a price rise alone isn't enough. It is necessary to improve knowledge and directly intervene, such as banning advertising of unhealthy foods and closing take-aways near schools.
The problem of obesity is the 'new smoking'. The 1970's saw us begin to tackle the evils of smoking, but today the threat to peoples health from eating too much is just as serious.
It will take a broad range of measures to solve this. Some will cause a movement along the demand curve, but most will attempt to move the demand curve to the left.
Tuesday 12 February 2013
Inflation remains at 2.7% for fourth month
Inflation stability is the aim of the policy makers. It allows for certainty in business, anchors inflationary expectations and brings confidence back to households.
So the news that inflation has remained at 2.7% for the fourth month in a row is good news?
Of course there are some prices rising faster and some slower, but stability is good news in many ways. However at 2.7% it is 'above the 2% target, while still within the +/- 1% band that causes the MPC to explain themselves.
The greatest concern about 2.7% inflation is that earnings are going up more slowly. This means in real terms most people are worse off.
There are some other concerns. The inflationary pressure is mainly cost-inflation. Ironically some demand-pull inflation would have been nice as it would represent a return to growth. Also the recent devaluation of the pound will lead to higher import prices and this will feed directly into the CPI.
So the news that inflation has remained at 2.7% for the fourth month in a row is good news?
Of course there are some prices rising faster and some slower, but stability is good news in many ways. However at 2.7% it is 'above the 2% target, while still within the +/- 1% band that causes the MPC to explain themselves.
The greatest concern about 2.7% inflation is that earnings are going up more slowly. This means in real terms most people are worse off.
There are some other concerns. The inflationary pressure is mainly cost-inflation. Ironically some demand-pull inflation would have been nice as it would represent a return to growth. Also the recent devaluation of the pound will lead to higher import prices and this will feed directly into the CPI.
Saturday 2 February 2013
The difficulty with supply-side
This is for the Grecians who have recently looked at the Irish model for Supply-side success.
The problem with supply-side policy is that there is no guarantee of success and the mechanism by which they work is uncertain.
To use a fairly clumsy analogy, you start with a ball of wool that you want to become a sweater, but it is quite possible for the amateur knitter to end up with a bad scarf.
The article below is from 2010, but has some important lessons on the short comings of Irish supply side policy.
The problem with supply-side policy is that there is no guarantee of success and the mechanism by which they work is uncertain.
To use a fairly clumsy analogy, you start with a ball of wool that you want to become a sweater, but it is quite possible for the amateur knitter to end up with a bad scarf.
The article below is from 2010, but has some important lessons on the short comings of Irish supply side policy.
Tuesday 29 January 2013
Practicalities defeat 'Fat tax'
Denmark introduced the worlds first 'Fat Tax' just over a year ago. It was covered in this blog and got one of the highest number of hits of any post to date.
Now Denmark is scrapping the tax. They say its because it has cost jobs, caused people to go into Germany to shop and inflated prices.
Well taxes do raise price! That's the point. This is a disappointing move as it represents a victory political expediency over economic policy.
It would be nice to find out how much the tax changed behaviour, especially in areas a long way from the German border.
If there is an important lesson to learn it is that a country acting alone can disadvantage itself. This has often be said of acting on carbon emissions and pollution. If you impose higher costs on domestic firms in a market with few barriers to international movement then the result maybe that firms move. So perhaps the answer is a European Fat Tax; good luck convincing David Cameron on that one.
Now Denmark is scrapping the tax. They say its because it has cost jobs, caused people to go into Germany to shop and inflated prices.
Well taxes do raise price! That's the point. This is a disappointing move as it represents a victory political expediency over economic policy.
It would be nice to find out how much the tax changed behaviour, especially in areas a long way from the German border.
If there is an important lesson to learn it is that a country acting alone can disadvantage itself. This has often be said of acting on carbon emissions and pollution. If you impose higher costs on domestic firms in a market with few barriers to international movement then the result maybe that firms move. So perhaps the answer is a European Fat Tax; good luck convincing David Cameron on that one.
Friday 25 January 2013
It's Demand stupid
The UK economy shrank in the last three months of 2012. The cause is partly due to recession in the EU, they simply can't afford to buy more of our goods.
Ed Balls tries to claim he saw it coming, which he didn't and should be ridiculed as a naive opportunist who got lucky. But his view that there isn't enough demand in the economy is fundamentally correct.
Yet the Chancellor George Osbourne refuses to see to point. He wants to continue his deficit reduction plan, cutting public spending and raising taxes. While the deficit may shrink, so will Aggregate Demand.
Yesterday Oliver Blanchard, Chief Economist at the IMF (a New-Keynsian) said austerity had gone to far and that an easing up on the [plan was called for. It seems like good advice.
The Government could continue with their cost cutting in government, but they need to learn the lessons of their own explanation of the downturn. If Europe can't add to AD by raising our exports then its time Government spending did. A one off investment in infrastructure, something 'shovel ready', such as offering all schools a new building or subsidising new low cost homes as long as they start the work within 2013 will help. Such programmes can be extended if need be.
The VW recession is now a possibility.
Ed Balls tries to claim he saw it coming, which he didn't and should be ridiculed as a naive opportunist who got lucky. But his view that there isn't enough demand in the economy is fundamentally correct.
Yet the Chancellor George Osbourne refuses to see to point. He wants to continue his deficit reduction plan, cutting public spending and raising taxes. While the deficit may shrink, so will Aggregate Demand.
Yesterday Oliver Blanchard, Chief Economist at the IMF (a New-Keynsian) said austerity had gone to far and that an easing up on the [plan was called for. It seems like good advice.
The Government could continue with their cost cutting in government, but they need to learn the lessons of their own explanation of the downturn. If Europe can't add to AD by raising our exports then its time Government spending did. A one off investment in infrastructure, something 'shovel ready', such as offering all schools a new building or subsidising new low cost homes as long as they start the work within 2013 will help. Such programmes can be extended if need be.
The VW recession is now a possibility.
Thursday 24 January 2013
Explaining the rise in employment
After yesterday's unemployment figures I was looking for reasons for the continued rise in employment when the economy is basically flat. I found the article below from October.
In past recessions firms have shed labour and, because the least productive have been allowed to go first, average productivity has risen. This has not happened since 2008.
Because of the much more flexible labour market real wages have fallen for those in work and so firms have not had to reduce their labour force as much as in previous recessions. Therefore the productivity 'jump' has not materialised.
Is that really enough to explain the flat productivity levels reported? Well probably not, but add to this low morale of the workforce given the falling real and nominal incomes and maybe this is enough.
Because of falling wages and no productivity increases firms have had to take on more labour to raise output. They can do this because they can offer lower wages for the higher output levels.
The article compares previous recessions and offers some thoughts.
In past recessions firms have shed labour and, because the least productive have been allowed to go first, average productivity has risen. This has not happened since 2008.
Because of the much more flexible labour market real wages have fallen for those in work and so firms have not had to reduce their labour force as much as in previous recessions. Therefore the productivity 'jump' has not materialised.
Is that really enough to explain the flat productivity levels reported? Well probably not, but add to this low morale of the workforce given the falling real and nominal incomes and maybe this is enough.
Because of falling wages and no productivity increases firms have had to take on more labour to raise output. They can do this because they can offer lower wages for the higher output levels.
The article compares previous recessions and offers some thoughts.
Wednesday 23 January 2013
Unemployment falls and employment rises
The strange course of unemployment continues with a rise in employment and fall in unemployment.
A rule of thumb is that there has to be around 1% growth in the economy to maintain the level of employment. This is because productivity improvements account for about 1% of growth.
The economy is not growing by anywhere near 1% and so the question has to be asked where are the jobs coming from. Sadly the data does not help us much and more work will have to be done here.
A good sign is that full-time jobs grew strongly. Sometimes the growth in jobs is part time and so the benefits are not as great as they seem. On the down side there was a rise in unemployment for the 18 to 24 year old group.
A rule of thumb is that there has to be around 1% growth in the economy to maintain the level of employment. This is because productivity improvements account for about 1% of growth.
The economy is not growing by anywhere near 1% and so the question has to be asked where are the jobs coming from. Sadly the data does not help us much and more work will have to be done here.
A good sign is that full-time jobs grew strongly. Sometimes the growth in jobs is part time and so the benefits are not as great as they seem. On the down side there was a rise in unemployment for the 18 to 24 year old group.
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