Really enjoyed the discussion lads. I agree the central bank approach to combating energy and food cost inflation is completely nonsensical. And it’s going to deliver a lot of pain for everyone.
Is the problem really the narrow mandate of central banks? They are already making up their economics as they go along. Surely we don’t want them making up their own objectives too!
Is the issue with how the inflation target is set? And how little thought went into it? Are the politicians guilty of setting an arbitrary limit on the most commonly used inflation index and assuming that’s all grand? Who came up with that idea?
CPI is supposed to capture the overall inflation in the economy whereas with a bit more thought we would probably be indifferent to inflation or deflation in certain components of that index. That’s noise that should be stripped out in my opinion to create some sort of sticky inflation index more suitable to be tracking.
If we want central bankers to ignore energy costs for example, why given them an inflation index to target that includes energy costs?
If we look back at the previous decade of zero interest rates, we saw globalisation and automation erode the cost base of many goods and services. That’s a good thing, no? So why did we need record low interest rates to cause inflationary pressures in other costs (like accommodation costs) just to offset those deflationary pressures and in aggregate hit this arbitrary target? I would imagine the ordinary Joe in his 20’s would have been quite happy living with the deflation in runners and flight costs without suffering the offsetting inflation in accommodation costs.
Thanks Sean. Agreed, they shouldn’t set their own objectives, that’s the job of politicians.
Most economists think inflation and deflation are equally evil. Your point, I think, is essentially that the mandate/target should be focussed on domestic costs/inflation. Get a proper measure of that and let imported inflation alone. If that all adds up to a rising/falling aggregate price level then so be it. I guess the central bank response would be to argue that you can’t separate in this way, at least not for long. Imported inflation/deflation will eventually leak/spread into domestic costs. In addition, they like simplicity. Once you start down the road of excluding certain things, you will,get, potentially, all sorts of people arguing their costs should be included/excluded. Ordinary Joe might be happy with falling prices but the companies/workers in those industries might have a different view.
We pretend the world is simpler than it is. We have to do that because there are idiots in abundance. But sometimes that means we come badly unstuck. Such as now. Right now, we should distinguish between imported and domestic inflation and deal with the complexities. But we are not set up for that.
I agree it could be a can of worms in practice. It would take years to negotiate a sticky inflation index target. And who knows, we could end up with some questionable things chucked in there.
On the spill over domino effect of the aggregate price level, by all means central banks should look at all the data could inform on those dominos. But I’m suggesting they shouldn’t target all inflation.
I don’t have all the answers for what should and shouldn’t be in that index. But I think we could benefit from more science being applied than this arbitrary limit on CPI. And some clarity of mission by figuring out what we really want to achieve by our monetary policy.
Deflation can indeed be bad for companies and it could lead to some job losses. It’s all about balance in this difficult world of trade offs. I have argued quite a lot over the last decade that we should be living with a bit more deflation rather than letting property and rent costs runaway from us. There has been a massive political fallout from that being allowed to happen.
And there is also the bias toward positive inflation that is imparted by the existence of debt. Lots of (nominal) debt issuers more than happy with 10% inflation. You don’t want to issue lots of debt and then see your own product prices fall. The U.K. just seems to have made every possible cock-up. A big big issuer, historically, of index’s linked debt.
So sorry to learn of the abuse you recently suffered on Twitter. Outrageous , undeserved, inappropriate and unacceptable. The “orchestration” of the vitriol is concerning. I hope you can put this to one side but personal abuse is not easy to deal with. Brian
Brian, thank you very much for that message. I was climbing a few mountains in Madeira. I just ignore most of it, but it does eat into one's sense of wellbeing.
Hi Brian, Jim is away for a bit so I’ll reply here. Many thanks for your kind words. It’s a simple fact of life these days that putting oneself in the public’s eye guarantees abuse. It goes with the territory.
I have only recently come across your podcasts. Your evidence and fact based analysis is compelling and your style of communication is a hallmark of old. Well done to you both for the forthright richness of your prolific productions. B
Spot on. All good with me thanks 👍
Really enjoyed the discussion lads. I agree the central bank approach to combating energy and food cost inflation is completely nonsensical. And it’s going to deliver a lot of pain for everyone.
Is the problem really the narrow mandate of central banks? They are already making up their economics as they go along. Surely we don’t want them making up their own objectives too!
Is the issue with how the inflation target is set? And how little thought went into it? Are the politicians guilty of setting an arbitrary limit on the most commonly used inflation index and assuming that’s all grand? Who came up with that idea?
CPI is supposed to capture the overall inflation in the economy whereas with a bit more thought we would probably be indifferent to inflation or deflation in certain components of that index. That’s noise that should be stripped out in my opinion to create some sort of sticky inflation index more suitable to be tracking.
If we want central bankers to ignore energy costs for example, why given them an inflation index to target that includes energy costs?
If we look back at the previous decade of zero interest rates, we saw globalisation and automation erode the cost base of many goods and services. That’s a good thing, no? So why did we need record low interest rates to cause inflationary pressures in other costs (like accommodation costs) just to offset those deflationary pressures and in aggregate hit this arbitrary target? I would imagine the ordinary Joe in his 20’s would have been quite happy living with the deflation in runners and flight costs without suffering the offsetting inflation in accommodation costs.
Thanks Sean. Agreed, they shouldn’t set their own objectives, that’s the job of politicians.
Most economists think inflation and deflation are equally evil. Your point, I think, is essentially that the mandate/target should be focussed on domestic costs/inflation. Get a proper measure of that and let imported inflation alone. If that all adds up to a rising/falling aggregate price level then so be it. I guess the central bank response would be to argue that you can’t separate in this way, at least not for long. Imported inflation/deflation will eventually leak/spread into domestic costs. In addition, they like simplicity. Once you start down the road of excluding certain things, you will,get, potentially, all sorts of people arguing their costs should be included/excluded. Ordinary Joe might be happy with falling prices but the companies/workers in those industries might have a different view.
We pretend the world is simpler than it is. We have to do that because there are idiots in abundance. But sometimes that means we come badly unstuck. Such as now. Right now, we should distinguish between imported and domestic inflation and deal with the complexities. But we are not set up for that.
I agree it could be a can of worms in practice. It would take years to negotiate a sticky inflation index target. And who knows, we could end up with some questionable things chucked in there.
On the spill over domino effect of the aggregate price level, by all means central banks should look at all the data could inform on those dominos. But I’m suggesting they shouldn’t target all inflation.
I don’t have all the answers for what should and shouldn’t be in that index. But I think we could benefit from more science being applied than this arbitrary limit on CPI. And some clarity of mission by figuring out what we really want to achieve by our monetary policy.
Deflation can indeed be bad for companies and it could lead to some job losses. It’s all about balance in this difficult world of trade offs. I have argued quite a lot over the last decade that we should be living with a bit more deflation rather than letting property and rent costs runaway from us. There has been a massive political fallout from that being allowed to happen.
And there is also the bias toward positive inflation that is imparted by the existence of debt. Lots of (nominal) debt issuers more than happy with 10% inflation. You don’t want to issue lots of debt and then see your own product prices fall. The U.K. just seems to have made every possible cock-up. A big big issuer, historically, of index’s linked debt.
Indexed
Hi Jim.
So sorry to learn of the abuse you recently suffered on Twitter. Outrageous , undeserved, inappropriate and unacceptable. The “orchestration” of the vitriol is concerning. I hope you can put this to one side but personal abuse is not easy to deal with. Brian
Brian, thank you very much for that message. I was climbing a few mountains in Madeira. I just ignore most of it, but it does eat into one's sense of wellbeing.
Hi Brian, Jim is away for a bit so I’ll reply here. Many thanks for your kind words. It’s a simple fact of life these days that putting oneself in the public’s eye guarantees abuse. It goes with the territory.
Hi Chris & Jim.
I have only recently come across your podcasts. Your evidence and fact based analysis is compelling and your style of communication is a hallmark of old. Well done to you both for the forthright richness of your prolific productions. B
Thanks Brian. Hope all good.
Your words ‘of old’ made me think that we were acquainted in the past. If so, nice to hear from you again. Hope all is well.
Thanks Brian. Much appreciated.
Hi Chris & John, I really enjoy the podcast. Looking forward to conversing with yourselves.
Pat.
Thanks for sharing guys.