Alex Williams recently wrote “What Is ‘Core PCE Services Ex-Housing’ Anyway?,” which dissects the measure that the Fed is using to get a handle on “underlying” inflation. The most interesting bit (for me) is that about 1/4 of this measure is an imputed price index, based on wages. This means that this component will track wages (giving a convenient analytical relationship) by definition.
Note: This is a draft of a section that will go into my banking primer manuscript.
The debt ceiling is being used a negotiating tool in American politics yet again. My concern with American politics is that most things seem to be over-dramatised, while some disturbing things are shoved under the carpet. The debt ceiling is a great source of hysterics from south of the border. My highly non-informed take is that this debt ceiling drama will end in the usual way, going to the 11th hour before some kind of deal is struck.
I discussed default risk of sovereigns with floating currencies (“currency sovereigns”) in Understanding Government Finance. The formula that I have settled on: floating currency sovereigns are immune to involuntary default for financial reasons. This is not “floating currency governments cannot default,” rather “the so-called ‘bond vigilantes’ cannot force such a government to default.”
Note: Once again, this is a draft of a manuscript section from my banking book. It will be in a chapter on modelling banking.
The usual definition of basis point is that a basis point is 0.01%, or alternatively, 100 basis points equals 1%. (Note: Canadian and British usage prefers writing “per cent,” whereas Americans prefer “percent.” Although I usually stick with Canadian spelling, this is one case where I bow to American cultural imperialism.)
The latest CPI report for the United States suggests that the inflation spike after 2020 was transitory in the rather weak sense that I understood the term “transitory.” I am curling in a bonspiel over the next few days, so I do have a long time to spend on this article, so I just want to outline my thinking on the topic of “transitory.”
The figure above shows the annual inflation rate of the durable goods component of the CPI in the United States. The spike in the inflation rate has reversed to a roughly flat annual inflation rate. This component is somewhat cherry picked, but I think it is a somewhat “clean” sub-component of the CPI. It avoids the construction lag of the housing component of the CPI, and dodges highly erratic energy prices (which we all know about).
For me, the “transitory” nature of inflation was that after the spike subsided, inflation rates would resume at a level similar to the pre-spike levels. This is different than the 1970s. We can see the spike in mid-1970s, and then the inflation rate stabilised around 5% — which was near the peak of the early 1970s. It then marched higher. The problem in the 1970s was not that inflation went up continuously, rather the underlying trend across cycles was higher.
Obviously, the people who argued that inflation would subside in late 2021 — which was a consensus view, including central bankers — were wrong. I certainly had some sympathies with their views — but I am not claiming to be a forecaster, and my view always was that there was massive uncertainty around the post-lockdown economic trajectory. The forecasting issue during the lockdown period was the uncertainty about firm failures — we dodged the massive failures that were possible. Once it was clear that those failures were not going to happen, it was not rocket science to predict that inflation would be perky given the supply chain disruptions.
However, I am not going to say that inflation is dead and buried — the labour market is still relatively tight when compared to the experience of recent decades. We still have “late cycle” inflation concerns, but the inflation prints are likely to remain closer to the rest of the post-1990s experience — and not the 1970s.
At this point, people will want to give central bankers credit for the turn around in inflation. The problem with that is that this requires some selective editing of the 1970s experience — the central bankers did raise rates, the alleged problem was that real rates were negative. Guess what? In this cycle, real rates were massively negative — at least until inflation rates reversed. Even forward nominal rates were below spot inflation, so forward real rates being positive were still predicated on an inflation reversal.
I have another draft section on the recent inflation experience (for my book) in the works, and I hope to get it out relatively soon.
Editorial note: this article is meant to be an introductory section of a chapter on banking in economic theory. I am going to make a bunch of wild assertions that are supposed to be dealt with later in the chapter. I expect that I will have follow up articles filling in details later.
To minimise disorder, the BoJ should be clear about its reaction function and move slowly but deliberately by first further widening the YCC band or targeting a shorter duration. Ultimately, it must [emphasis mine] announce that it is abandoning YCC entirely and will instead aim to minimise rapid changes in debt prices, such as those seen in the UK government bond market in September.
