Mindful Money TV: Don’t let inflation erode your portfolio – a Q&A with Momentum’s James Klempster

17th May 2013

James Klempster, portfolio manager at Momentum Global Investment Management talks to Mindful Money about inflation, why investors need to watch what it means for their portfolios and the firm’s Factor Series of funds designed to help investors manage that inflation risk.

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60 thoughts on “Mindful Money TV: Don’t let inflation erode your portfolio – a Q&A with Momentum’s James Klempster”

  1. Dave Holden says:

    Always though I was missing something on this as it’s always struck me that If “productivity” = GDP/hours worked then illusory pre 2008 GDP (because of a credit boom) = illusory pre 2008 “productivity”.

    1. Anonymous says:

      No! We shall never refer to 2008 as a complete lie. It was *the truth*, the beacon to which we must always lift our eyes.

      1. Anonymous says:

        But it was a moment of truth, just like the busting of the Dutch tulip boom – when the banks were outed from the insolvency closet.

        Iceland had creative destruction of bad banks but Europe prefers to copy Japan’s lost decade(s)

        1. Anonymous says:

          Agreed. There really is a full on insanity to the news now. Reminiscent of the film Brazil. All the talk is of “terrorists” in different countries as the US looks to get a free pass on bombing them to ash. I know people have said this for the last five years but now the newspeak seems far stronger even than 2008.

          1. Anonymous says:

            Hi Guys

            This issue troubles me too as Iraq is showing many of the signs of South Vietnam in the 1970s. A lot of people died to supposedly make it “a better place”. If the videos showing 1700 executions are even partly true what sort of “better place” is it?

  2. dutch says:

    Below is an article on the destruction of decent paying manufacturing jobs in the USA.It poses the question to me of what’s happened to median average incomes in the UK and whether they’d be anywhere near where they are now without the govt running a 5%+ fiscal deficit?

    Aside from the chronic bloat in the SE,most people feel far poorer than 5 years ago and it seems a singular achievement of the govt statisticians of all hues,that they’ve managed to gloss over it by misrepresenting inflation,debt,employment and growth.

    rant over

    http://us.rd.yahoo.com/finance/news/rss/story/SIG=14opkopv4/*http://us.rd.yahoo.com/finance/news/topfinstories/SIG=12l5kd50v/*http://finance.yahoo.com/news/income-gap-widens-american-factories-160206632.html?l=1

    ‘Income gap widens as American factories shut down’

    1. Forbin says:

      I can assure you even here in sunny surrey that theres a growing divide between the haves and have nots

      I cant even afford to buy my own house now ….. if I trying to buy it today that is …..

      good job my popcorn ration has gone up to 2 oz from 4 oz ……

      along with my wages .

      Forbin

  3. Forbin says:

    Hello Shaun ,

    ‘The Bank of England says productivity is 16% below its pre-crisis trend – but says it is at a loss as to why this is….”

    And Charlie Bean been knighted for this ?

    “they are at a loss…..”

    I’m at a loss as to why these bozos are still employed yet alone knighted…..

    and people wonder why the country is such a mess?

    well those ones not playing fantasy football of course….

    ( or fantasy economics….. )

    Forbin

    1. Anonymous says:

      Hi Forbin

      I meant to mention the “K” for Charlie Bean today so thank you for the reminder. I was busy on this subject on Friday/Saturday on twitter.

      He now has a K and a pension pot of £3.96 million according to the Bank of England’s 2013 accounts. For what exactly? Those who defended him on twitter have yet to reply question….

      As to your fantasy economics game it is a good idea. The only catch is how we tell it from reality?!

  4. GusBmth says:

    Hi Shaun

    There is something utterly disingenuous about the Bank’s analysis that:

    ‘In addition, because real wages fell considerably whereas the cost of capital initially increased at the start of the crisis, the relative cost of labour to capital is likely to have fallen.’

    They seem to ignore the fact that the Base rate is the lowest in over 200 years and the Bank made £ billions available to the banking sector through Funding for Lending specifically to reduce the cost and increase the availability of capital to the business sector.

    What it points to is the fact that businesses have struggled to secure medium and long term finance for capital investment on reasonable terms for many years, especially if they are an SME; and that this has got worse over the past few years. Instead, the banks are happy to lend to large highly indebted companies, with business models focussed on maximising financial gains for owners, with the minimum possible capital investment.

    In essence, part of the reason for the poor productivity growth is a classic mis-allocation of capital by the banking sector. The shocking thing is that the State is a major owner of the banking sector and yet the situation has got worse, not better.

    1. Anonymous says:

      Hi Gus

      You are entirely right. Ordinarily I am a fan of consistency but this aspect of the Bank of England’s behaviour where it ignores the consequences of its own actions is not far off shameful. The changing role of central banks means that their analysis is as partial as that of broking firms now. I am trying to think which of the science fiction novels covers your own past being invisible to you…

    2. Noo 2 Economics says:

      I think they’ve been sparing with the truth. If memory serves the base rate was steadily increasing until late 2007 at which point it began falling. Some places consider the depression began in Autumn 2007 for the UK but even though base rate started falling in late 2007 business/personal lending rates continued up until early 2008.

      Therefore they can get away with saying “the cost of capital initially increased at the start of the crisis”. I think a lot of thought went into that comment before it was written down, at the end of the day these are civil servants and pedants to a (wo)man……

    3. Paul C says:

      Gus,
      I hear you, the state and banks share the same interest to maintain the status quo and “protect” homeowners/voters from themselves. Real production or output is a sideshow to the elephant in the room, the gross and extensive refocus towards bubble asset markets and their perpetuation.
      I am traditional in my thinking, without risky investment in new physical productive machiney and enterprise then our society and economy has little long term future. The current “modus operandi” actively avoids such behaviour.
      The Banks, the State and in coerscion the general public are drawn into a great theatre of disception. Talking about productivity is as Shaun alludes – a very 20th century pre-occupation.
      Paul C

  5. Jim M. says:

    Hi Shaun,

    WRT the difficulties you identify with the numbers on self-employment, I would suggest we adopt the approach of the ONS that you so kindly led us to the other day… replace non-existent and inconvenient data-sets with more convenient guesstimates and Robert’s your mother’s brother!

    Problem solved… a little massaging and the economy will soon be as right as rain!

    Or we could perhaps just pray that Amen Corner take over at the BoE?

    “Bend me, shape me, anyway you want me
    As long as you love me it’s all right
    Bend me, shape me, anyway you want me

    you got the power to turn on the light”

    https://www.youtube.com/watch?v=DCYmDqsJjvk

    1. Anonymous says:

      Hi Jim M

      I fear that some if not much of the data we have (including the official data) will send us in the wrong direction. This is a major factor in my view that “fine-tuning” of the economy will inevitably disappoint. Before we get to the rights and wrongs of individual decisions the data does not stand up to such scrutiny.

      As for the song I have not hear it for ages. Those 1960s videos are quite something aren’t they?

    2. Anonymous says:

      Thanks for the link, Jim M. I liked the other song by the Amen Corner that you could listen to if you followed your link very much as well.

  6. Eric says:

    Hi Shaun,
    If I remember rightly, “temporary” morphed into “temporary albeit protracted” at some stage in the annals of the bank; but I can’t locate the exact quote.

    The whole thing is a puzzle to me. For example, 5 years of ZIRP should have produced a roaring economy. How many 1970s economic students would have correctly described the effect of ZIRP?

    When your foot is on the floorboards and the engine is screaming but the car is only crawling along you have to conclude that something is seriously wrong even if the mechanic is “at a loss”. – Worse still, the dials and flashing lights on the dashboard only generate more confusion.

    Maybe the mechanic himself had something to do with it.
    As Dickie Valentine said – “The Finger of Suspicion points at you”

    1. Anonymous says:

      Hi Eric as to your question I would suspect on those on a really bad trip!

      As to Bank of England explanations they did some research recently which suggests that the base rate cuts boosted GDP by between 2.5% and 3%. Under their rule of thumb the 2007/08 fall in the value of the pound £ had a similar effect. Then there is QE which Martin Weale told us boosted us by say 3%.

      So our economy apparently went through the roof whilst also flatlining? It may be that it is not only physicists who speculate on alternative universes..

    2. therrawbuzzin says:

      “When your foot is on the floorboards and the engine is screaming but the car is only crawling along you have to conclude that something is seriously wrong …”
      Gearing.

  7. David Lilley says:

    Shaun,
    I may be wrong but I think I have a contribution to the productivity puzzle.
    All that you say above is true but we have to put some more detail into the differences between 2008 and today and explain why 2008 was out of the ordinary and not the best baseline to make comparisons with.
    If the productivity puzzle is “How come employment has gone up considerably yet we are only producing the same as we were in 2008?” Or as one on your commenters put it “labour productivity is GDP/hours worked”. In numbers, GDP is back to the 2008 level whilst hours worked is up 16%.
    Stephanie Flanders of the BBC first introduced the productivity puzzle to me some two years ago ” How is it that employment has risen considerably yet GDP is flat, does it take more workers to do the same amount of work as last year?” Her best answer was “hoarding of labour” which is plainly rubbish.
    The big difference between what many (and if I may say, idiots) call the boom years, 1997-2007, and the last six years is that we have moved from leveraging to deleveraging. GDP was artificially inflated in the “Nice Decade” by borrowing from future income and spending it today. GDP is deflated in the last four years as net debt (personal, corporate and sovereign) is reduced.
    Productivity has gone up rather than down. Ask any private sector worker, and even some public sector workers, if they are working harder today than they were in 2008. The deadwood has gone, often replaced by more productive guest workers, and sickies have crashed. Employers, the only UK humans to live in a survival of the fittest environment, cannot hoard labour and have only retained the most productive. Productivity has increased, real GDP has increased. The only thing to decline has been artificial GDP, that portion of GDP that was due to leverage. We should go forward measuring real GDP stripped of leverage and deleverage.
    Below is what I posted at the time of the 2010 election on our incredible leverage in the 1997-2007 period.
    “They (our servants) borrowed £30-£40b every year since 2003, grabbed £15b pa from pension funds (forcing employers to scrap their defined benefit schemes or fund the missing £15b from profits which in turn takes £15b from investment in UK wealth creation), drove people into property as the FTSE
    suffered the loss of £15b pa, ran up an off-balance sheet debt of £300b in PFI, allowed mortgage debt to sky-rocket to £1.2t, allowed £400b of home equity release and allowed banks to multiply their lending reserve by as much as 30 times deposits.

    The result is that today we have personal debt of 1.06 x GDP, corporate debt of 1.26 x GDP and sovereign debt of 89% of GDP. All affordable when interest rates are low but all having to be paid back.

    Debt is where you go when you cannot make ends meet. It is bringing forward future earnings. It is like earning £100 per week and taking a one-week sub and telling everyone you are on £200 per week.

    GDP is measured in three ways that all give the same answer. It is basically the summation of all transactions. It peaked at £1.5t in 2007, as did personal debt (£1.2t of which was mortgages).

    Nevermind GB’s claim of 53 quarters of growth and the best chancellor ever. Just looking at a simple model; personal debt rising from 0 to equal to GDP between 1997 and 2007, and assuming it is linear, it takes real GDP from +3% to –7%. We were spending money and providing jobs that derived from home equity release, PFI, mortgages and personal, corporate
    and sovereign loans.”
    Please bear in mind that these numbers are vintage 2010 and that my simple model is simple in that it assumes zero debt in 1997.
    The big take-home from these numbers is that we certainly were not having a nice decade in 1997-2007 but we are doing a lot better than we think we are today because we are doing it in a deleveraging environment.
    Please give me some negative comments.

    1. Noo 2 Economics says:

      Afraid I can only agree with you David, I was having the same thoughts earlier this year but it looks like you beat me to it by about 4 years.

      Actually, I can argue about employers being unable to hoard labour, I’m sure you understand that any monopolist (BOC) or oligopolist (the banks) with high barriers to entry in their respective disciplines can afford to hoard labour as there is no effective competition.

      I know banks are a bad example as they have shed labour, but only because they made such a mess they’ve ended up on income support from the DWP, excuse me, I mean they have been benefitting from QE and funding for lending alongside simply being bought out lock stock and failing asset so they have to look like they’re doing something in case their personal banker (the tax payer) starts getting a bit fractious.

      Anecdotally and now I’m starting my rant which is nevertheless applicable to this question), I’ve noticed that basket case of a supermarket – Morrisons has a lot more new staff/managers running about now with bluetooth like apparatus attached to their heads shouting down their speaker phones frantically as they pretend to be organising the store staff and ensuring more efficient allocation of labour resource, whilst the aisles are wider and they carry less lines.

      They have also invested in a ridiculous dry ice cooler for the fresh fruit which was strategically placed under the climate control machines just inside the main entrance where, of course, said machines are always blasting down hot air onto the dry ice cooler (and fresh fruit) as the automatic doors are always opening allowing colder air from outside in.

      Here is a concrete example of falling productivity, labour hasn’t been hoarded, rather, it has been increased whilst less is sold because less lines are carried due to widened aisles and running costs are up due to the fiasco described above re the interaction of climate control machines with dry ice coolers and automatic doors at the main entrance.

      I’m sure you know about Morrisons’ losses and their share price. It’s causes are called poor management and I’m sure there are many other examples like this which would go some way to explaining falling productivity, although I entirely agree your central point that pre crisis growth was illusory due to excess debt and it is pointless to make comparisons to pre crisis trends as they were not sustainable due to the arguments you have rehearsed earlier.

      1. David Lilley says:

        Noo,
        I can’t handle compliments. I asked for negative comments to give me the opportunity to argue like Socraties. What else is there but argument? I want to be corrected and learn from debate.
        But thank you never-the-less. I also want to be read.
        On a different subject. 160,000 dead in Syria and 1,000 young men executed in Iraq. All I see is uneducated people who failed the test “just because man can ask a question like “is there as absolute being” does not mean there is an answer (Kant)”. Ask a silly question like “what is your favourite number and you get a silly answer like 7”. Die and you are dead just like the insect you trod on.

        1. therrawbuzzin says:

          Ok. Yer a miserable sod. 😉

      2. Paul C says:

        Noo,
        I like your Morrison’s example. Having been brought up in the North, I enjoyed Morrisons near Bradford in the 1980’s before it went National. Indeed it was once a truly effiicent and low cost supermarket, your critical appraisal is one that recognises how “corporate thinking” can trash any well run little business by applying “common practices” ala Tesco and look what you get, unaccountable suits, all harvesting their own bonuses and pension payments. There is unproductivity everywhere, but the folk being told to “just do it” think it is a job…..

    2. Anonymous says:

      Great post. Really I don’t understand why economists (Shaun excluded) don’t try to “back out” from their calculations the fake growth. We have “temporary” exclusions to make our deficit look plausible so if we can exclude the bailout money why not back that out of GDP estimates via revisions?

      It’s clear 1997 to 2008 was a complete fantasy of pulling forward demand.

      I’ll take your excellent analysis and then project forward. The UK can’t create genuine growth and will fail.

    3. Anonymous says:

      Very well said. Any GB claim has to be taken with a mountain of salt, because he also claimed to have “ended boom and bust”

      But we could be doing much better now. UK runs a deficit. The unaccountable EC spending needs cutting & accountabilty or EC exit. Vast sums are wasted on agricultural subsidies, bank subsidies, grossly overpaid bureaucrats and qangos and excessive rent subsidies.

      With some creative destruction and some private sector style of chopping the deadwood from the public sector, and the UK could have a surplus and a very positive outlook. Also as I posted previously, creative options to build affordable homes for younger generations is essential. Affordable homes = higher standard of living.

      1. Paul C says:

        Affordable homes for younger generations. I like that idea, is it something we could do only for them? I mean that would be OK to just make such things affordable to younger people alone, in an ageist approach. After all you could argue that only older people were afforded the opportunity to buy homes that cost £3,700 and 25 years later are worth £465,000. In a kind of ying and yang we could offer young people homes for £68,000 as long as they were under 25?
        What do you think?

        1. Anonymous says:

          Recently I suggested using a mutual structure to build blocks of flats in places like London. Alternate designs could compete for pre-registration and once a high level is achieved progress to off-plan sales, with deposits and buyers funding vetted.

          Sold off plan reduces risky finance and reduces barriers to entry. Sold off plan before starting construction prevents massive speculative build by highly leveraged developers. It prevents excessive unsold inventories. I don’t envisage any age restrictions, and restrictions on multi-property ownership can be debated. Adequate construction supply would reduce BTL yield – buyer beware. Equal tax on empty properties & second homes may discourage speculating investors.

          A friend in rural Germany bought a village building plot, 900m2 for 17,000 euro complete with road, electric, water and sewer infrastructure. Adequate housing supply helps affordability.

  8. therrawbuzzin says:

    Hi Shaun,
    The problem is,if they knew what they don’t know, there would be no mystery left, and a full explanation would have to be given, not just of what they don’t know, but the effects the “unknown” has on what they do know.
    As TPTB have an absolute disinterest in having to fully explain what they DO KNOW, let alone what might be thrown up by investigation of what they don’t, then it becomes clear (ahem) why they don’t want to know what they don’t know, as the unknown performs a very valuable function for them.

  9. Paul C says:

    Shaun,
    Always a day late I am afraid but this day’s item pokes at the real issues behind the headlines. I suggest that we a living in an artifice economy using made-up money where assets appreciate regardless of their true underlying value (we all know that buildings depreciate without timely maintenance & updating).
    Productivity will of course plummet because capital & focus is mis-allocated in the new theatrical nature of the UK. Without a fair and market driven cost of money the cash is manipulated in all manner of perverse ways.
    I work in the 3rd sector, between Government and Charity, a large portion of all daily activities are spent on spinning the message, managing the flow of information, maintaining the staus quo and controlling the workforce. This is the new “productivity”, unfortunately is has no measureable value…..

  10. dutch says:

    http://globaleconomicanalysis.blogspot.co.uk/2014/06/wages-vs-real-wages-over-time-how-fed.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed:+MishsGlobalEconomicTrendAnalysis+%28Mish%27s+Global+Economic+Trend+Analysis%29

    Mish discusses real wages dropping in the USA

    ‘Congratulations to Republicans and
    Democrats alike. On a chained-dollar adjusted basis (but not counting
    sales taxes, property taxes, fees, home prices, etc.), real average
    hourly earnings are back to a level seen in 1968.’

    1. Guest says:

      All part of that destruction of the middle classes I suppose. There appears to be enough temporarily embarrassed millionaires to maintain the status quo. Defence always seems to be that we have

    2. Patrick, London says:

      (Apols for the repeat post)
      All part of that ‘inevitable’ destruction of the middle classes I suppose. There appears to be enough temporarily embarrassed millionaires to maintain the status quo.

      Defence from current capitalist/globalisation supporters always seems to be that we have croney capitalism, and not true capitalism, but those voices often seem to be the same folks arguing for full scale deregulation as a result. The same deregulation that seems to have consistently lead to the large scale abuses that keep putting back into the same, or similar messes.

      Anyone know of a way in which you can have non crony capitalism, that is free from regulation, that won’t ultimately lead to unfettered corporate entities gaining too much market control, and being able to exploit their position? Would a simple lowest to highest earnings ratio keep things in check?

      1. dutch says:

        There’s an old saying that you can’t take the boom and bust out of capitalism…and nor should you.(Perhaps one of the more learned economists here could expound on ‘creative destruction’?)

        However,we could do a lot better at cutting out the fraud.

        The reality is that true unfettered free markets would lead to some sort of monopolistic,however,it wouldn’t take a great deal of regulation to keep them mvoing in a fair manner.

        The issue now is that the 1% have the political class firmly in their pockets and the people who were put in a position to do something about it-FSA/BoE have been asleeep at the wheel.

        1. Patrick, London says:

          Recent opinion suggests it’s the 0.01% rather than the 1%. :)

          I can get my head around the creative destruction idea, but positive outcomes from it seems something of a double edged sword.

          At a micro-economic scale of individuals and companies, I can see how creative destruction will lead to innovation, but all too often things go t**s up when it happens on a macro-economic scale. …and the move from micro to macro seems to be an inherent part of capitalism… only the strongest survive.

          With regulation comes corruption and lobbying, faux restricted oligopolies and monopolies. Without regulation, in comes unrestricted oligopolies and monopolies.

          What’s the scenario where it actually works as it’s supposed to in the ‘literature?’

          1. dutch says:

            where it works in the real world is when you get to pick up a little factory space for next to nothing off an over leveraged bank.you can then risk your capital to make shoes/clothes etc instead of risking it on an extortionate full repairing 20 year lease.

            at the moment those factories are empty but sat on a bloated nationalised banks balance sheet marked at par so that the pension funds can appear solvent.

          2. Anonymous says:

            you need a political system that works for the people, like Iceland, Norway or Switzerland.

            The archaic First Past The Post system is well represented by Baldric, MP of Dunny on the Wold

  11. Forbin says:

    Hello Shaun,

    I suspect they’re thinking of asking KSA to open the taps again so as to drop the oil price back to $20 boe

    other than that I suspect they have broken arms from patting themselves on theback for avoiding a 1930’s recession ……. only to get a 1870’s one instead

    lost decade? is unlucky

    lost two decades seem rather careless

    still the show must go on!

    and looks like we;re getting a “unexpected ” events again with Iraq…… oops Iran is our friend now …….

    sit back with some popcorn and enjoy the show , folks !

    Forbin

    1. Jim M. says:

      “lost decade? is unlucky
      lost two decades seem rather careless.”

      Today’s tip for living with Austerity:
      To avoid getting skinned alive at the cinema, take your own popcorn in a handbag.

      “A Handbag??”

      https://www.youtube.com/watch?v=oyuoUwxCLMs

      1. forbin says:

        Lady Bracknell on todays women …..

        ” … we live , I reget to say , today in an age of surfaces …….

        She might as well have been talking about today’s FED or BoE …

        “https://www.youtube.com/watch?v=nMbIu8lRlWw”

        4:14

        Forbin

        PS: it is a film you really have to listen to carefully – so packed ….

    2. Anonymous says:

      Hi Forbin

      It would help the US with its nascent inflation problem.I note that the price of a barrel of Brent Crude has nudged above US $114 tonight which if it persists poses another problem. I have been watching some of the football but in her replies to questions Janet Yellen seems to have suggested that any inflation will be “temporary” which conforms to two stereotypes the central banking dictionary and hers.

      Imagine you had fallen into a coma when Iran was the “evil empire” and you woke up today! Wasn’t in 1984 which predicted that sort of thing or was it Brave New World?

      1. Laughing Gnome says:

        Top reference, it was 1984, an aspect I had forgotten – the main theme being NSA / GCHQ style surveilance. A bureacracy was dedicated to re-writing historic news reports so the coma victim would come to believe he/she had just dreamed the evil empire nonsense.

  12. Anonymous says:

    Excellent analysis, Shaun. Yes, it would be very surprising if the US PCE deflator did not also show an increase in inflation, since it is largely based on the same price data as the CPI-U. If you look at the annualized three-month change in the PCE deflator, it was 1.8% in April, up from 1.4% in March.

    You note : “The PCE number tends to be lower than the CPI one-although officially that is not the reason it is targeted.” In a sense it is. When the US Fed switched to the PCE deflator as the inflation indicator it monitored, it justified making the change because:”[T]he PCE chaintype index is constructed from a formula that reflects the changing composition of spending and thereby avoids some of the upward bias associated with the fixed-weight nature of the CPI.”

    http://www.federalreserve.gov/boarddocs/hh/2000/february/ReportSection1.htm

    More specifically, the US PCE deflator uses a chain Fisher formula rather than the chain Lowe formula used in the US CPI-U. It is, in many respects, a poor choice, as I argued in a 2001 paper:

    http://www.indexmeasures.ca/V6_Ch13_10,09,26_Baldwin_Chain_Vol.pdf

    The chain Edgeworth formula would be superior in most respects. However, in terms of removing the upward bias to be found in the official US CPI-U, they would perform about the same. Both formulas pass the time reversal test, which the Lowe formula fails.

    The most recent detailed reconciliation of the differences between the PCE price index and the CPI-U dates from 2007 and found that this formula difference implied a lower rate of inflation for the PCE price index of about 0.2 percentage points.

    http://bea.gov/papers/pdf/cpi_pce.pdf

    In my view, it was inappropriate for the US Fed to choose a target inflation rate of 2% when it officially became an inflation targeting central bank in January 2012. The 2% target rate was obviously copied from other central banks, like the Bank of Canada, that had chosen the same target rate. But formal consistency with the Bank of Canada implied a logical inconsistency. Effectively, the US Fed was targeting an inflation rate that was about 0.2 percentage points higher than the Canadian target inflation rate, since its inflation indicator had reduced upward bias by at least 0.2 percentage points as compared to the Canadian CPI.

    Andrew Baldwin

    1. dutch says:

      Fascinating insights as ever Andrew.Do you have any links where one could learn more about the various inflation indices and how they’re calculated.I know the basics but would love to understand the reasons why some calculate CPI and then use a deflator etc.

      Thanks if you can help.

      1. Anonymous says:

        Thanks for the kind words, Dutch. Most of the recent
        literature on the subject is somewhat marred by a bias in favour of the so-called superlative indexes. Not an exception is the most recent and useful international manual, “The Practical Guide to Producing Consumer Price Indices”:

        http://unstats.un.org/unsd/EconStatKB/Attachment374.aspx

        If you have the patience to read it, I think my own paper
        provides a lot of information about the formulas, although it is written for people looking for deflators of national accounts, not for people seeking inflation measures.

        My former supervisor Bohdan Szulc wrote a paper relating to producer price indexes that is nonetheless of great value for people considering inflation measures in general: “Longitudinal Price and Volume Comparisons Canadian Empirical Studies”:

        http://www.ottawagroup.org/Ottawa/ottawagroup.nsf/home/Meeting+4/$file/1998%204th%20Meeting%20-%20Schultz%20(Szulc)%20Bohdan%20-%20Effects%20of%20Using%20Various%20Macro-index%20Formulae%20in%20Longitudinal%20Price%20and%20Volume%20Comparisons,%20Canadian%20Empirical%20Studies.pdf

        His paper is mercifully free of the fetishization of superlative indexes. Bohdan noted that the very existence of a collective utility function is in doubt, but if it takes a quadratic form, then the Fisher formula is suitable for calculating a consumer price index. He wrote that It’s a lot like the joke about Homer: no-one knows if the Greek poet existed or not, but we do know that he was blind.

        Unfortunately the paper by Manfred Krtscha that I reference in my own study does not seem to be available online. However, you should be able to find it in a library somewhere. Thank you for your interest. Andrew Baldwin

        1. dutch says:

          Many thanks for your time Andrew,I shall have a look through these tomorrow.I’ve always wondered about these indices and how they’re consttructed.Already learned a few things from the initiasl sift through.
          Good stuff

    2. Anonymous says:

      Hi Andrew

      Thank you for the BEA paper. I wonder if the relationships have changed in the credit crunch era? I read earlier (in the Wall Street Journal I think) that the gap between CPI-U and PCE had averaged 0.5% per annum over the past 25 years.

      As to the 2% target rate for inflation then the new/proposed Bank of England MPC member Kristin Forbes challenged it today in her evidence to Parliament. A welcome development and perhaps she has read this blog! Although there is a darker side which is that international organisations such as the IMF have argued for a 4% target.

  13. Noo 2 Economics says:

    “What will the Federal Reserve think has been happening to the US economy?”

    That it’s been severely affected by one of the worst winters in history, although energy sales should have gone into outer space.

    I don’t get that the housing market is weak. I have family and friends state side and they speak of a solid housing recovery which has slowed temporarily. My take is that there was nothing doing in the housing market for 4 – 5 years, then all the frustrated home starters came out of the wood work and you got 3 – 4 years’ worth of demand in about 18 months as the economy recovered.

    Now lumber futures sag simply because the glut of frustrated demand has been overcome. If the IMF et al are looking to pre recession house sales as the benchmark then they had better think again about cheap money and excess credit as there is a clue there as to where all the pseudo housing demand came from and that’s before I get into the fact that American builders were over building at least since 2000 – that’s why they pressured banks to do cheap sub prime mortgages who, in turn, had to offer them, otherwise they would be left holding the baby on all the credit they advanced to builders who would then go bust.

    I’m expecting growth for the year of 2.5% – 3% despite every one else’s predictions as that was a really bad winter and this time (for a change) the weather was genuinely to blame.

    Have you noticed Shaun that: “the prospect of falling real wages” coupled with ” low growth with an inflation pick-up” is now the theme for nearly all advanced western economies? I blame all the cheap money along with the ease with which low value jobs may be off shored, but it’s just as well we don’t get a reasonable growth spurt – think what that increase in money velocity would do given all the money swilling round the globe now courtesy of the Central Bankers.

    1. Noo 2 Economics says:

      Sorry, I meant “low growth with an inflation fall” i.e. disinflation with a real threat of outright deflation.

      1. Anonymous says:

        Hi Noo2

        Tonight’s news from the US Federal Reserve is that they have moved their expected GDP growth range for 2014 down by 0.7% to 2.1% to 2.3%. The good news for your forecast is that they are usually wrong, the bad news is that they are usually too high.

        I agree that the inflation picture is complex and have written before that whilst a few countries in the Euro area have disinflation and deflation many do not. Back in 2010 and 2011 I opened the years with the prediction that we would see inflation in some areas and disinflation in others. Frankly that has not changed much.

        Do we now fear as well as want growth? That would be ominous as it feels rather like being checkmated in a game of chess.

  14. Noo 2 Economics says:

    “You conclude, based on the above, what is likely to happen to house prices. Let me know what you think.”

    I conclude they’ll go flat but won’t fall Jonathan, because whilst earnings have failed to keep pace with inflation more people are going into employment and a possible explanation for price rises has been one earner households becoming 2 earner households etc. When employment expansion tails off so will housing price increases.

    Re net borrowing, I take heart from this that the UK appears not to be sinking deeper into the debt abyss as you imply in your post dated 26/06/14 – unless you are talking about something different?

    In one way it’s the same ol same ol – new mortgagees are borrowing to the hilt for their first purchases but in another way it’s a different story as established mortgagees are paying down their mortgages – they used to just buy another property and re-mortgage to the hilt again.

    1. Anonymous says:

      Nah, we had rising employment in 1989 and 2007. THAT is the point. We are in the Autumn of the growth period since 2009. Always looks brightest just before the storm, given central banking nonsense.

      The net borrowing is only non govt. I’m sure you know those so-called capitalists are borrowing £100Bns per annum to pretend all is well. We are in the abyss and sinking deeper. You and I may be OK but not our kids.

      There is very little repayment of mortgages. And new buyers have to borrow EVEN MORE – as the Governor explained. Think about that.

      Thank you for your extensive response.

      1. Noo 2 Economics says:

        1989 crash was caused by Thatcher artificially jacking up rates to 15% against a backdrop of 8% inflation. She used a sledge hammer to crack a walnut and in sucking sooo much money out of the economy caused her own UK crash. 2007/8 crash was caused by ultra loose monetary policy and poor underwriting standards (thank you Brown!) plus the imported problems from the US (CLO’s etc but if investors hadn’t been so greedy for investment vehicles they didn’t understand promising the earth….).

        These conditions are not applicable currently and unlikely to be so cannot be compared to what we are faced with today.

        I stand by my prediction as I do my earlier one on your April 30 blog that inflation will start picking up this July/August but will temper it with the caveat that if the GBP continues it’s climb the fateful day will be delayed a few more months – I never expected the GBP to go up so much and it’s that which is keeping inflation down.

        Time will tell if I’m right.

        1. Noo 2 Economics says:

          Clarification- by “ultra loose monetary policy not being applicable currently” I mean money markets aren’t throwing cash at anything that moves as in the lead up to 2007 which was a much bigger problem than QE £375 billion and HTB and whilst not really “monetary policy”, underwriting standards are much higher.

          1. Anonymous says:

            Markets are throwing vast amounts at govts who are squandering them.

            There is even greater malinvestment now than mid 2000s.

            All best

        2. Anonymous says:

          Yes, less Thatcher and more Statist Europhiles like Major.
          Not material the why but that all was well before the Recession – as now. As 1999. As 2007. Plus ca change.

          The reasons are always different. Human behaviour is consistent.

          The UK’s next Recession will not be self-induced. it will be from the next global econ shock and it will unleash a depression.

  15. Anonymous says:

    Hi Dutch

    Thank you for the compliments. I do my best to spread the message and I do get contacted by various areas so it is reaching out. As to why places like the BBC and the FT for example prefer other source matter I think is a matter for them and their consciences.

    I think that the self-employment picture is complex. Plainly some of it is covered by the type of issue you highlight and has a negative theme. However there are also some who chose to do it and this is more positive albeit that some of them have decided that modern employment and management “sucks”. But from the official data we learn little.

  16. therrawbuzzin says:

    As I have previously posted, the two people whom I know, who have zero hours contracts, have them because they wouldn’t be able to claim means-tested benefits because of what their partners earn.

  17. Noo 2 Economics says:

    “albeit that some of them have decided that modern employment and management “sucks”.”

    Second that, I’m one of them – started in Autumn 2007 just as the economy turned doh! Had a tough time the first 18 months and then things got better and better, now I can’t imagine working for any one ever again.

  18. Anonymous says:

    Hi Dutch

    The U-6 numbers are my favourite of the US series and I wish we had something like them in the UK. For those who are not aware of it then it looks to measure underemployment (for example shorter working weeks) rather than unemployment.

    The participation rate drop poses its own problems where did the nearly 5 million people go?

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