Browse by Tags

Global Economic Watch » All Tags » inflation (RSS)

KnowNOW!

Global Economic Watch

Syndication

Recent Posts

Tags

View more

Other Useful Blogs

Archives

  • FINRA Foundation Survey/Test Shows a Lack of Financial Literacy

    The Great Recession did not make us smarter about our finances. At Real Time Economics , Brenda Cronin writes about a test the Financial Industry Regulatory Authority Investor Education Foundation conducted on ordinary citizens' financial know how. The results aren't pretty. Respondents did worse than in 2009, dropping from a D- to an F, on average, showing little understanding of financial risks and inflation. Cronin: It isn’t surprising that the worst downturn in the U.S. since the Great Depression hasn’t produced better personal financial habits, said Annamaria Lusardi, who was part of the team that designed the questions for the Finra test and survey. Although the tattered economy often was front-page news throughout the recession, she said, simply reading about markets and the economy is no substitute for financial-literacy education at school or work. “It’s not that people learn because we’re in a financial crisis,” said Ms. Lusardi, a professor at George Washington University and director of the school’s Global Center for Financial Literacy. “We can’t expect people to learn about inflation by osmosis.” She emphasized that young people in particular need education not only on asset and wealth-building, but on managing debt. The study found that debt remains an acute problem for those with lower incomes and less education — as well as the young. Among young people ages 18 to 34 years old, 43% have used often high-cost methods of borrowing, such as pawn shops or rent-to-own establishments, Ms. Lusardi said, compared with about 30% of the entire population. “That means… young people are basically becoming accustomed to financial transactions that require non-bank institutions and that are also high-cost,” Ms. Lusardi said. Read the full post, here . And take the test yourself, here .

  • Marketplace Whiteboard: Fiat Currency Explained

    Here's a basic lesson in currency from Marketplace 's Paddy Hirsch . When the U.S. government moved away from the gold standard, there was a risk that people would not believe in the value of currency. This is where fiat currency comes in. And no, Hirsch points out, no cars are involved:

  • Shoppers Looking to Make Deals, Fear Their Purchasing Power is Eroding

    Just because inflation hasn't hit doesn't mean consumers feel like they have purchasing power. A lot of consumers, in fact, may be feeling that their dollars aren't going as far as they should. At Marketing Profs , Ayaz Nanji points us to a recent Parago survey in which 42% of consumers responded that they have lost purchasing power over the last year. To be honest, we're not so sure their sentiment is accurate, but it does seem to have an impact on their decisions. From Parago: With this perception of lost power, consumers are looking for more deals. That makes sense. And they want to receive those deals in the places they hang out. Those places are online: Look at more survey results from Paragon here . And read Ayaz Nanji's summary, at Marketing Profs, here .

  • What the End of QE Might Look Like

    Antonio Fatas wants us to consider the not-so-distant future, when the red line (short term interest rates) in the chart below catches up with the blue line (long term interest rates). At that point--or shortly before--the Fed will announce an end to Quantitative Easing. Fatas: What will we learn the day Ben Bernanke announces that we are starting that path towards normalization? It might be that we simply learn that he is becoming optimistic about growth in the US. This will be good news. It might not be a surprise to some who expected that type of growth going forward, but it could be a positive surprise to others that thought growth would never come back. In this scenario, it is difficult to think about such an announcement as bad news. We know that QE will end one day, we know that short-term rates will have to increase, so if the announcement was to be a surprise in the sense that it is coming too early, it would mean that there is a positive surprise in terms of growth happening early than expected -- and this has to be good news. There is a second and more pessimistic scenario: the day Ben Bernanke announces that QE is ending we learn that the economy is not doing much better but that the FOMC has simply changed their mind. That they do not care about low growth, that they want to be tough and that they are ready to stop QE to signal a change in policy. This would be bad news because it represents a change in policy and not a change in our expectations about growth. Understanding what will happen to markets when QE ends requires to decide about which of the two scenarios above is more likely. I personally see the first scenario more likely than the second one. I do not see a policy reversal in the near future but I do see the end of QE as good news accumulate. But this is my view, what matters is how the stock market will read the communications of the central bank. The words chosen to communicate their actions at that point as well as their credibility will make a great difference. Read Looking forward to the end of QE here .

  • Central Bankers Failing to Hit Inflation Targets

    With the CPI release last week showing prices in the U.S. have risen just 1.1 percent over the last year, The Washington Post 's Neil Irwin notes that there is an inflation problem in developed economies around the globe. Inflation, Irwin writes, "is too low." The below-trend inflation is partly attributable to falling commodities prices, and just as policy shouldn’t overreact when a short-term commodity blip causes inflation, it shouldn’t make the same mistake in reverse. But even excluding food and energy, U.S. CPI was up only 1.7 percent, still below the level of inflation the Federal Reserve is aiming for. And the situation in Europe is particularly worrisome; if the euro zone is going to have any hope of rebalancing its economy without a prolonged depression, it will need higher inflation in core European countries like Germany and France, offset by lower inflation in countries like Greece and Spain. Instead, prices are rising too slowly even in the core, and there is deflation, or falling prices, in Greece. The biggest conclusion to draw from all of this is that warnings that massive quantitative easing efforts would spark explosive inflation are turning out to be as wrongheaded as can be. In the United States and Japan, central banks now have open-ended policies of printing money to buy assets. But while the money seems to be finding its way into asset markets, such as for stocks and corporate debt, it isn’t being circulated so widely as to drive up prices for consumers. This is the opposite of what the currency war alarmists have warned about. Instead of creating rounds of vicious inflation while trying to expand the money supply in a race to the bottom, central banks are all trying to get inflation up to their target and coming up short. Deflation is looking like a greater risk that inflation, despite the extensive hand-wringing over the latter in the last several years. It’s a currency war in which almost every country is losing. Read Surprise! Inflation is too low almost everywhere on earth here .

  • CPI Drops Again in April

    After a bit of a jump earlier this year, the Consumer Price Index for All Urban Consumers dropped for the second month in a row in April. A drop in the gasoline index was key as CPI decreased 0.4%. The index is up 1.1% over April 2012. Fom the Bureau of Labor Statistics release: As was the case in March, a sharp decrease in the gasoline index was the primary cause of the decline in the seasonally adjusted all items index. The fuel oil index also declined while the electricity and natural gas indexes increased; the net result was a 4.3 percent decrease in the energy index. The food index, unchanged in March, rose 0.2 percent in April. The index for all items less food and energy increased 0.1 percent in April, the same increase as in March. The indexes for shelter, used cars and trucks, new vehicles, and tobacco all increased in April. These increases were partially offset by declines in the indexes for apparel, airline fares, and recreation. The all items index increased 1.1 percent over the last 12 months, the smallest 12-month increase since November 2010. The index for all items less food and energy increased 1.7 percent over the span; this was its smallest 12-month increase since June 2011. The food index rose 1.5 percent while the energy index declined 4.3 percent. Here's a look at the CPI for All Urban Consumers over the last year: Read the full release here .

  • The Impact of Risk Averse Bankers on Inflation

    In their latest World Economic Outlook , IMF analysts pointed out that inflation "has become less responsive to cyclical conditions." This prompted Simon Wren-Lewis to consider valid explanations. At his Mainly Macro blog, he puts forward one that has to do with banks, risk, and sacrificing long term strategy because of short term fears: The story I want to tell involves firms’ pricing behaviour, and the role of more risk averse banks. Suppose a firm sees demand for its output fall. Its profits are lower, but it calculates that it can reduce that decline in profits by cutting its price, if that price cut increases demand. There are two risks involved in doing this. First, the price cut might raise demand by much less than expected, with the consequence that profits fall further still. Once the firm realises this it can always put prices back up again, but in the short run profits will decline. Second, it may take time for the price cut to feed through into higher demand: those buying competing products may not immediately realise that they should switch. So although profits might rise eventually, they could fall in the short run. So in both cases, there is a risk that profits in the short run might suffer as a result of the price cut. In normal times firms would be prepared to take those risks, either because the risks are symmetric (maybe demand will increase by more than expected), or because they represent an investment with a positive eventual payoff (as customers switch products). Critically, even if the short run might actually bring losses rather than profits, the firm’s bank will cover the losses because it is taking a long term view. However, since the financial crisis, the firm may have noticed that the behaviour of its bank has changed. It refused the business down the road any credit, even though by all accounts its difficulties were clearly temporary. Although the firm would like to cut prices in the expectation that this will eventually raise profits, if the price cutting idea does not work out and the bank plays tough that could mean bankruptcy. The idea is that the aftermath of the financial crisis, by raising the risk of bankruptcy associated with short term losses, has lead to greater price rigidity. In addition, there are two related effects that could actually lead to higher inflation in the short run. First, the firm does not like the fact that it can no longer depend on the bank to cover any short term losses. Who knows what might happen. So although a price increase might reduce profits if sustained (as customers gradually switch), in the short run profits will rise, and that allows the firm to pay off those debts which would otherwise keep its owners awake at night. This is the firm as a precautionary saver. Second, firms might be keeping prices low not because of existing competition, but because of the threat that a new start-up might emerge and steal some of its business. The one silver lining of the financial crisis for existing firms is that new start-ups are much less likely to get any money from the bank, so this diminished threat of new entry allows the firm to safely increase its profit margins. Read the full post here .

  • A Tale of Two Central Banks and Two Economic Histories

    At Project Syndicate , Barry Eichengreen argues that the Federal Reserve and the European Central Bank are guilty of too much analogical reasoning. Or at least of focusing their reasoning too much on a particular analogy. In evaluating potential economic dangers, the Fed focuses too much on the Great Depression and is "hyperactive" in its response. The ECB, meanwhile, remembers the hyperinflation of the post WWI period, and "is unflappable." Eichengreen: The Fed might also consider policy in 1924-1927, when low interest rates fueled stock-market and real-estate bubbles, or 2003-2005, when interest rates were held down in the face of serious financial imbalances. At a minimum, the Fed might develop a “portfolio” of analogies, test them for fitness, and distill their lessons, as President John F. Kennedy famously did when weighing his options during the Cuban missile crisis in 1962. Similarly, the ECB might consider not only how monetary accommodation allowed governments to run large budget deficits in the 1920’s, but also how central bankers’ failure to respond to the financial crisis of the 1930’s fed political extremism and undermined support for responsible government. Again, rigorous analysis requires testing these historical analogies for fitness with current circumstances. Anyone who does so will find it hard to defend the ECB and its stubborn inaction in the face of events. There is exactly zero evidence in Europe today that inflation is just around the corner. And, if current European governments are not committed to austerity and fiscal consolidation, then which governments are? When I consider the European economy, the ECB’s failure to provide more monetary support for economic growth appears to be directly analogous to Europe’s disastrous monetary policies in the 1930’s. The political consequences could be similarly devastating. Europeans should ponder why the inflationary 1920’s, rather than the politically catastrophic 1930’s, have become the historical lodestar for current monetary policy. On the other hand, when I contemplate the US economy, I conclude that recovery from the Great Depression, and not 1924-1927 or 2003-2005, is the episode that most closely resembles current circumstances. Only in the 1930’s were interest rates near zero. Only in the 1930’s was the economy digging itself out from a major financial crisis. Read The Use an Abuse of Monetary History here .

  • Long Term Drivers of the Commodity Super-cycle

    Commodity prices remain high, and Dambisa Moyo says we better get used to it. Moyo, author of Winner Take All: China’s Race for Resources and What it Means for the World , has a piece at Project Syndicate in which she outlines how long term factors will continue to drive commodity prices. One key factor: the rise of emerging economies and their growing hunger for oil, copper, iron, and other commodities: Worst-case estimates have China’s real GDP growing at around 7% per year over the next decade. Meanwhile, the supply of most commodities is forecast to grow by no more than 2% annually in real terms. All else being equal, unless China’s commodity intensity, defined as the amount of a commodity consumed to generate a unit of output, falls dramatically, its demand for commodities will be greater this year than it was last year. As long as China’s commodity demand grows at a higher rate than global supply, prices will rise. And the rapid economic growth that China’s leaders must sustain in order to lift enormous numbers of people out of poverty – and thus prevent a crisis of legitimacy – places a floor under global food, energy, and mineral prices. To be sure, intensity of use has fallen for some commodities, like gold and nuclear energy; but for others, such as aluminum and coal, it has risen since 2000 or, as is the case for copper and oil, declines have slowed markedly or stalled at high levels. As the composition of China’s economy continues to shift from investment to consumption, demand for commodity-intensive consumer durables – cars, mobile phones, indoor plumbing, computers, and televisions – will rise. There is also the issue of the so-called reserve price (the highest price a buyer is willing to pay for a good or service). The reserve price places a cap on how high commodity prices will go, as it is the price at which demand destruction occurs (consumers are no longer willing or able to purchase the good or service). For many commodities, such as oil, the reserve price is higher in emerging countries than in developed economies. One explanation for the difference is accelerating wage growth across developing regions, which is raising commodity demand, whereas stagnating wages in developed markets are causing the reserve price to decline. By implication, if nothing else, global energy, food, and mineral prices will continue to be buoyed by seemingly insatiable emerging-market demand, which commands much higher reserve prices. Read Commodities on the Rise here .

  • CPI Stays Unchanged in January as Lower Energy Costs Offset Slight Rise in Other Indexes

    The Consumer Price Index for All Urban Consumers was flat in January. Lower gasoline, natural gas, and fuel oil costs offset a rises for shelter and apparel costs. From the Bureau of Labor Statistics release: The index for all items less food and energy increased 0.3 percent in January. This increase offset another decline in the gasoline index and resulted in the seasonally adjusted all items index being unchanged, as it was last month. Increases in the indexes for shelter and apparel accounted for much of the increase in the index for all items less food and energy, with advances in the indexes for recreation, medical care, and airline fares also contributing. The energy index fell 1.7 percent in January. Along with the gasoline index, the natural gas and fuel oil indexes also declined, while the electricity index increased. The index for food was unchanged in January after increasing in each of the previous ten months. The food at home index was unchanged with major grocery store food group indexes mixed. The all items index increased 1.6 percent over the last 12 months; the 12-month change has been slowing since its recent peak of 2.2 percent in October. The index for all items less food and energy rose 1.9 percent over the last 12 months, the same figure as the last two months. The food index has risen 1.6 percent over the last 12 months while the energy index has declined 1.0 percent. Here's a look at the CPI for All Urban Consumers over the last 12 months: Read the release here .

  • Yoram Bauman: The Underworld's Inflation Problem

    Inflation does not appear to be much of a problem at the moment for the globe's dominant economies. In Europe, Euro zone inflation hit a two year low today (Reuters) . But there is one place that is dealing with a big inflation problem. At the American Economic Association annual meeting last month, Yoram Bauman delivered this report on hyperinflation in Hell:

  • European Central Bank Keeps Record Low Interest Rate

    Now to the actual European policymakers. The European Central Bank today announced that it will keep its key interest rate at the record low 0.75 percent . ECB president Mario Draghi said that brighter (though it might be more accurate to say "less cloudy") skies are on the horizon for later this year, but Europe's economic weakness will carry well into 2013. From Draghi's press conference: Let me now explain our assessment in greater detail, starting with the economic analysis. Following a contraction of 0.2%, quarter on quarter, in the second quarter of 2012, euro area real GDP declined by 0.1% in the third quarter. Available statistics and survey indicators continue to signal further weakness in activity, which is expected to extend into this year, reflecting the adverse impact on domestic expenditure of weak consumer and investor sentiment and subdued foreign demand. However, more recently several conjunctural indicators have broadly stabilised, albeit at low levels, and financial market confidence has improved significantly. Later in 2013 a gradual recovery should start, as our accommodative monetary policy stance, the significant improvement in financial market confidence and reduced fragmentation work their way through to private domestic expenditure, and a strengthening of foreign demand should support export growth. The risks surrounding the economic outlook for the euro area remain on the downside. They are mainly related to slow implementation of structural reforms in the euro area, geopolitical issues and imbalances in major industrialised countries. These factors have the potential to dampen sentiment for longer than currently assumed and delay further the recovery of private investment, employment and consumption. According to Eurostat’s flash estimate, euro area annual HICP inflation was 2.2% in December 2012, unchanged from November and down from 2.5% in October and 2.6% in August and September. On the basis of current futures prices for oil, inflation rates are expected to decline further to below 2% this year. Over the policy-relevant horizon, in an environment of weak economic activity in the euro area and well-anchored long-term inflation expectations, underlying price pressures should remain contained. Risks to the outlook for price developments are seen as broadly balanced over the medium term, with downside risks stemming from weaker economic activity and upside risks relating to higher administered prices and indirect taxes, as well as higher oil prices. Turning to the monetary analysis, the underlying pace of monetary expansion continues to be subdued. The annual growth rate of M3 remained broadly unchanged at 3.8% in November 2012, after 3.9% in October. M3 growth continued to be driven by a preference for liquid assets, as M1 growth increased further to 6.7% in November, from 6.5% in October, reflecting inflows into overnight deposits from households and non-financial corporations. Following our non-standard monetary policy measures and action by other policy-makers, a broadly based strengthening in the deposit base of MFIs in a number of stressed countries was observed. This allowed several MFIs to reduce further their reliance on Eurosystem funding and helped to reduce segmentation in financial markets. M3 growth was also supported by an inflow of capital into the euro area, as reflected in the strong increase in the net external asset position of MFIs. Read the full transcript of Draghi's address here .

  • CPI Drops in November

    The Consumer Price Index for All Urban Consumers declined 0.3 percent (seasonally adjusted) in November, with the dropping gasoline prices pulling the overall index down. The all items index has risen 1.8 percent over the last 12 months (not seasonally adjusted), according to the Bureau of Labor Statistics . Here's a look at the CPI for All Urban Consumers over the last year: Here are some key details from the BLS release: The index for all items less food and energy increased 0.1 percent in November after increasing 0.2 percent in October. The shelter index, which rose 0.3 percent in October, increased 0.2 percent in November, with both rent and owners’ equivalent rent rising 0.2 percent. The index for household furnishings and operations rose 0.4 percent, its largest increase since September 2008. The index for airline fares rose 1.4 percent in November, its third consecutive increase. The new vehicles index increased 0.2 percent after declining in September and October. The indexes for medical care and recreation both rose 0.1 percent in November. In contrast to these increases, the index for apparel turned down in November, falling 0.6 percent after rising the two previous months. The index for used cars and trucks also fell in November; its 0.5 percent decline was its fifth consecutive decrease. The indexes for tobacco and personal care were both unchanged in November. The index for all items less food and energy has risen 1.9 percent over the last 12 months; this figure matches the average annualized increase over the past ten years. All major components have increased over the past 12 months except for used cars and trucks, which has declined 2.3 percent. Read the full release here .

  • CPI Ticks Up in October

    The Consumer Price Index for All Urban Consumers rose 0.1 percent (seasonally adjusted) in October, with the housing costs the key driver behind the increase. The all items index has risen 2.2 percent over the last 12 months (not seasonally adjusted), according to the Bureau of Labor Statistics . Here's a look at the CPI for All Urban Consumers over the last year: Here are some key details from the BLS release: The shelter index increased 0.3 percent, its largest increase since March 2008, and accounted for over half of the seasonally adjusted all items increase. The index for all items less food and energy rose 0.2 percent, as the rise in the shelter index and increases in the indexes for apparel and airline fare more than offset declines in the indexes for used cars and trucks, new vehicles, and recreation. The food index increased 0.2 percent in October with the index for food at home rising 0.3 percent, its largest increase since September 2011. The energy index, which had risen sharply in August and September, declined slightly in October. Major energy component indexes were mixed, with declines in the indexes for gasoline and natural gas more than offsetting increases in the indexes for electricity and fuel oil. Read the full release here .

  • SF Fed President Explains Fed's Use of 'Unconventional' Monetary Policies

    In its efforts to hold ground against the recession, the Federal Reserve has tried some policies that John Williams , president of the San Francisco Fed , refers to as "unconventional." Williams spoke last week at the University of California, Irvine and addressed the two primary unconventional policies the Fed has used: forward policy guidance and large-scale asset purchases (which we have come to know as quantitative easing). Here is an excerpt from that speech. A great deal of research has analyzed the effects of forward policy guidance and large-scale asset purchases on financial conditions and the economy. As I mentioned before, forward policy guidance has proven to be effective at lowering expectations of future interest rates (see Swanson and Williams 2012 and Woodford 2012). Similarly, the evidence shows that LSAPs have been effective at improving financial conditions as well. To be precise, the estimated impact of a $600 billion LSAP program, such as QE2, is to lower the 10-year Treasury yield by between 0.15 and 0.20 percentage point (see, for example, Williams 2011, Krishnamurthy and Vissing-Jorgensen 2011, Hamilton and Wu 2012, Swanson 2011, Gagnon et al. 2011, and Chen, Curdia, and Ferrero 2012). It is around the same magnitude as the effects of forward policy guidance, and about how much the yield on 10-year Treasury securities typically responds to a cut in the fed funds rate of three-quarters to one percentage point (see Chung et al. 2012 and Gürkaynak, Sack, and Swanson 2005). So, by that metric, LSAPs have big effects on longer-term Treasury yields. By pushing down longer-term Treasury yields, forward guidance and LSAPs have rippled through to other interest rates and boosted other asset prices, lifting spending and the economy. For example, mortgage rates have fallen below 3½%, apparently the lowest level since at least the 1930s. Thanks in part to those rock-bottom rates, we’re at long last seeing signs of life in the housing market. Likewise, cheap auto financing rates have spurred car sales. And historically low corporate bond rates encourage businesses to start new projects and hire more workers. In addition, low interest rates help to support asset prices, such as the value of people’s homes and their retirement funds. All else equal, households are more likely to consume if their wealth is growing rather than falling. Stronger asset prices support consumption because they make people feel wealthier and more confident. And that in turn helps boost the economy. Finally, although it’s not our main intention, these unconventional policies have also had an effect on the dollar versus foreign currencies. When interest rates in the United States fall relative to rates in other countries, the dollar tends to decline as money flows to foreign markets with higher returns. One estimate is that a $600 billion program like QE2 causes the dollar to fall by roughly 3 or 4% (see Neely 2011). That helps stimulate the U.S. economy by making American goods more competitive at home and abroad. The full speech is available here .
1 2 3 4 5 Next > ... Last »