Tag Archives: inflation

Was Gold a hedge against inflation? When? For how long?

Recent research has begun to cast some doubt upon the inflation Hedge capacity of gold. When you think of it, the inflation experience over the last 40 years, since gold began to float freely, has been very mixed. In the 1970s we were concerned in relation to inflation, perhaps even fears of hyperinflation; not the talk is of deflation or disinflation.  So was gold a hedge against inflation? Is it now? Continue reading

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Helicopters, Money and Mines…

I have been thinking a lot about helicopters lately. Mostly this is down to the regular reminders to Santy not to forget to bring a helicopter, with doors that open and close and a winch to rescue boats.. Partially its down to the increasing debate that is taking place on helicopter money, which is not something you give to Fisher Price…
Continue reading

Europe’s InDeflation problems

The FT has today weighed in with the argument that there is a danger of deflation in the Eurozone. And there is. We are at low and declining rates of inflation.  Deflation is for a whole bunch of reasons more scary than (mild) inflation. The IMF have warned against it. Olivier Blanchard the IMF chief economist notes that for countries experiencing deflation

“On the one hand it would certainly improve their competitiveness and help exports but on the other hand it would increase the real interest rate and the real value of debt and so reduce domestic demand.”

And he concludes that the second effect will dominate.

However, it is quite possible to have the phenomena of “indeflation” – where certain sectors or regions or both experience inflation while others experience deflation.

The common measure for inflation in Europe is the HICP – harmonized index of consumer prices, published monthly by Eurostat. Below are some tables showing number of months we have seen falling prices, (measured on a moving average 12m rate of change) over the last 6 years (actually last 73 months). Look at where deflation has been happening and when. The weights of the sectors vary – but a general trend is food then housing then transport.

So for inflation as a whole we see not a huge problem…apart from Ireland where in 1 month in 3 we have seen overall consumer prices fall, and this has now reversed. Mind you Greece seems to be falling into deflation , quelle surprise

So, some tables. Feel free to interpret.

All-items HICP
Since  1/08 Since 1/13
EU (de jure) 0 0
Euro Area (de jure) 0 0
Belgium 3 0
Bulgaria 0 0
Czech Republic 0 0
Denmark 0 0
Germany 0 0
Estonia 5 0
Ireland 21 0
Greece 6 6
Spain 4 0
France 0 0
Croatia 0 0
Italy 0 0
Cyprus 0 0
Latvia 10 0
Lithuania 0 0
Luxembourg 2 0
Hungary 0 0
Malta 0 0
Netherlands 0 0
Austria 0 0
Poland 0 0
Portugal 10 0
Romania 0 0
Slovenia 0 0
Slovakia 0 0
Finland 0 0
Sweden 1 0
United Kingdom 0 0

When we dig a little deeper however this pattern masks a lot of variation. Take Food and drink for example. With the notable exception of Ireland almost  no deflation in drinks prices and that some time ago. Similarly in food – no recent deflation.  As food transport and household are the things people spend most money on if we do not see deflation here people will not feel that there is deflation, and where it matters to them there wont be.

Food and non-alcoholic beverages Alcoholic beverages, tobacco and narcotics
Since  1/08 Since 1/13 Since  1/08 Since 1/13
EU (de jure) 4 0 0 0
Euro Area (de jure) 10 0 0 0
Belgium 0 0 0 0
Bulgaria 14 0 5 0
Czech Republic 14 0 0 0
Denmark 12 0 0 0
Germany 12 0 0 0
Estonia 13 0 0 0
Ireland 22 0 17 0
Greece 7 0 0 0
Spain 16 0 0 0
France 6 0 0 0
Croatia 12 0 0 0
Italy 0 0 0 0
Cyprus 3 0 1 0
Latvia 13 0 0 0
Lithuania 11 0 0 0
Luxembourg 0 0 0 0
Hungary 0 0 0 0
Malta 0 0 0 0
Netherlands 10 0 0 0
Austria 10 0 0 0
Poland 0 0 0 0
Portugal 17 0 0 0
Romania 0 0 0 0
Slovenia 6 0 0 0
Slovakia 15 0 0 0
Finland 14 0 0 0
Sweden 0 0 0 0
United Kingdom 0 0 0 0

Clothing and footwear by comparison has been hammered – and bear in mind that a lot of these come now from outside the EU.  The union, it seems, should be on the plane to Prague or Warsaw or better yet coming here for their spring collections.. A pattern emerges in clothing and footware, where we have peripheral countries in persistent deflation. That bodes ill for the high street drapers in every Irish or Czech or Portugese small town. Housing remains mostly inflationary.

Clothing and footwear Housing, water, electricity, gas and other fuels
Since  1/08 Since 1/13 Since  1/08 Since 1/13
EU (de jure) 30 0 0 0
Euro Area (de jure) 0 0 6 0
Belgium 0 0 17 6
Bulgaria 20 9 6 2
Czech Republic 73 13 0 0
Denmark 24 0 0 0
Germany 0 0 8 0
Estonia 0 0 9 0
Ireland 73 13 19 0
Greece 14 0 9 0
Spain 14 0 0 0
France 6 0 1 0
Croatia 50 13 0 0
Italy 6 0 9 0
Cyprus 59 13 15 5
Latvia 48 12 13 2
Lithuania 58 0 0 0
Luxembourg 9 0 10 0
Hungary 11 3 7 7
Malta 40 3 2 0
Netherlands 30 0 13 0
Austria 0 0 0 0
Poland 73 13 0 0
Portugal 54 13 0 0
Romania 0 0 0 0
Slovenia 41 4 7 0
Slovakia 20 0 7 0
Finland 6 6 0 0
Sweden 9 1 0 0
United Kingdom 40 2 3 0

In household furniture and white goods Ireland stands alone – persistent deep rooted deflation. Not only will the drapers be gone bust but the small electrical retailer and the local homestore will follow. The future of Irish white goods retail is, horrific as it may seem, Harvey Norman… Greece seems set to follow tipping into deflation in this area in the last year.

Furnishings, household goods etc Miscellaneous goods and services
Since  1/08 Since 1/13 Since  1/08 Since 1/13
EU (de jure) 0 0 0 0
Euro Area (de jure) 0 0 0 0
Belgium 0 0 0 0
Bulgaria 24 1 0 0
Czech Republic 56 13 0 0
Denmark 2 2 1 1
Germany 0 0 3 3
Estonia 13 0 0 0
Ireland 73 13 9 2
Greece 20 13 13 13
Spain 0 0 0 0
France 0 0 0 0
Croatia 4 0 0 0
Italy 0 0 0 0
Cyprus 16 13 0 0
Latvia 49 13 17 0
Lithuania 22 0 0 0
Luxembourg 0 0 0 0
Hungary 5 0 0 0
Malta 0 0 0 0
Netherlands 0 0 0 0
Austria 0 0 0 0
Poland 0 0 0 0
Portugal 16 13 6 6
Romania 0 0 0 0
Slovenia 12 12 0 0
Slovakia 39 1 0 0
Finland 0 0 0 0
Sweden 31 13 0 0
United Kingdom 0 0 0 0

What can one say about communications, except what on earth is going on in Cyprus and Romania?

Transport Communications
Since  1/08 Since 1/13 Since  1/08 Since 1/13
EU (de jure) 8 0 63 13
Euro Area (de jure) 10 0 73 13
Belgium 15 3 61 13
Bulgaria 14 4 72 13
Czech Republic 21 5 72 13
Denmark 14 5 50 13
Germany 12 2 70 13
Estonia 17 6 54 13
Ireland 19 5 17 13
Greece 13 6 48 13
Spain 12 0 61 13
France 10 0 62 13
Croatia 17 4 73 13
Italy 10 0 65 13
Cyprus 14 0 2 0
Latvia 17 8 73 13
Lithuania 11 3 73 13
Luxembourg 15 3 59 13
Hungary 8 3 22 0
Malta 21 3 51 13
Netherlands 9 0 40 9
Austria 14 2 41 4
Poland 14 5 54 10
Portugal 19 5 40 0
Romania 0 0 7 3
Slovenia 13 0 44 13
Slovakia 28 4 16 1
Finland 12 0 63 13
Sweden 10 5 73 13
United Kingdom 2 0 21 0

Having had a torrid time, suffering the longest run of deflation in their sector in Europe, Irish restauranteurs have now begun to recoup with price rises.  It is startling that in the face of a massive slump in disposable income we have not seen until recently deflation in Greece in this area and in culture etc

Recreation and culture Restaurants and hotels
Since  1/08 Since 1/13 Since  1/08 Since 1/13
EU (de jure) 8 0 0 0
Euro Area (de jure) 11 0 0 0
Belgium 10 0 0 0
Bulgaria 34 13 0 0
Czech Republic 37 0 0 0
Denmark 15 1 0 0
Germany 3 0 0 0
Estonia 11 0 15 0
Ireland 47 9 33 0
Greece 23 13 9 9
Spain 41 0 0 0
France 63 6 0 0
Croatia 12 0 10 5
Italy 0 0 0 0
Cyprus 13 4 0 0
Latvia 32 4 21 0
Lithuania 26 0 15 0
Luxembourg 0 0 0 0
Hungary 0 0 0 0
Malta 44 0 5 4
Netherlands 34 0 0 0
Austria 0 0 0 0
Poland 26 0 0 0
Portugal 21 0 0 0
Romania 0 0 0 0
Slovenia 24 7 16 0
Slovakia 8 0 0 0
Finland 12 1 2 0
Sweden 48 13 0 0
United Kingdom 26 0 0 0

Finally in education and health Greece and Spain lead the pack. Despite the constant refrain that Irish healthcare costs are skyhigh the sector is resistant to change. Greece continues its slip into deflation

Education Health
Since  1/08 Since 1/13 Since  1/08 Since 1/13
EU (de jure) 0 0 0 0
Euro Area (de jure) 0 0 2 2
Belgium 3 0 33 0
Bulgaria 0 0 6 6
Czech Republic 0 0 9 0
Denmark 0 0 6 0
Germany 40 5 9 9
Estonia 3 3 5 2
Ireland 5 0 0 0
Greece 30 13 21 13
Spain 0 0 47 0
France 0 0 6 6
Croatia 32 5 0 0
Italy 0 0 0 0
Cyprus 3 3 10 10
Latvia 25 13 21 0
Lithuania 0 0 0 0
Luxembourg 0 0 15 0
Hungary 8 0 8 0
Malta 0 0 0 0
Netherlands 0 0 11 0
Austria 25 0 0 0
Poland 0 0 0 0
Portugal 0 0 30 8
Romania 0 0 14 0
Slovenia 0 0 10 10
Slovakia 0 0 0 0
Finland 0 0 2 0
Sweden 0 0 12 0
United Kingdom 0 0 0 0

Who really knows the rate of inflation (hint – not government) ?

Much talk around Europe is on the worries of inflation or deflation. Part of the problem in assessing this is that inflation statistics are stale. They are collected on the basis of representative baskets of goods and are published with a delay. For Ireland the basket of goods was updated in 2007 and then again in 2012. Basket composition issues can lead to changes in the apparent inflation rate.

Wouldn’t it be nice if we had realtime inflation? Where we could see, on a day to day basis, inflation and deflation in key sectors? Well, we can, IF we pay. A company collects these data, for a vast number of countries and for a large amount of sectors. Ireland is included. In fact, in 2009 the originator of this gave a talk at a conference in Ireland.

But we don’t know. State Street in the IFSC know. They are partners with the company. But written responses from the government are clear : the Irish state does not collect nor does it purchase these data. Why is that?

Bundes-boobery

One of the first ever pieces of non academic work which I wrote was, shortly after leaving the central bank of Ireland in 1992, to suggest that we should consider ditching the then Irish punt and adopting the then Deutsche Mark. The arguments revolved around a (in retrospect astonishing naive) view that doing so would bind our political system to behave.
At the time, and for a long time thereafter, I was a great admirer of the Deutsche Bundesbank. Throughout decades they kept the flame of a stable German currency burning, soothing the population with folk memories of the hyperinflation et seq of the 1930s. Alas, it’s no longer possible to admire the Bundesbank, at least for me. one of the things we know from behavioural economics is that success rather than breeding success can breed overconfidence. Recent events and speeches from the BuBa make me wonder if their thought processes have ossified to the extent that what was then a sensible economic policy, strong stable money, has now ossified into theological rigidity.
The most recent bundesboobery comes from board member Andreas Dombret. Reported on Bloomberg he states “Putting too much weight on short-term, demand-side risks misjudges the root cause of the current crisis, namely a profound loss of confidence in markets,” and goes on to caution about the desire to loosen monetary policy and slack off austerity.
This is almost 100%wrong, and that such frank nonsense can be spouted from a senior policy maker makes one shudder. There are massive issues in the euro, and they are problems of imbalances. Peripheral counties are not regions of Germany, but independent democratic states. Faced with depression era indicators of unemployment, and in some cases economic collapse states are being urged to cut their way out of a debt hole. The market confidence or lack of same in Greece, Spain etc is not the problem. It is the symptom of national debt levels that are either unsustainable (Greece), at the brink of sustainability (Ireland) or unsustainable absent some massive growth spurt (Italy, Spain, Portugal). The solutions are bifold: debt reduction and growth stimulation. The firmer can come from write offs and restructuring (markets have a conniption, but get over it), inflation (the BuBa/ECB has a conniption), or growth. This comes from the reduction of state and private debt levels to a level that will allow consumer/business confidence and the diversion of monies from savings/debt repayment to investment and consumption and from structural reform.
To confuse rational market skepticism on the ability or willingness of the core (read, Germany) to allow inflation or write offs, combined with the slooow reforms in many peripheral countries coupled with broken banking systems (caused by core, read german, desires to see no bank fail) is to demonstrate myopia. To smugly suggest Spain with 24% unemployment or Ireland, drowning in zombie bank debt,mor the shattered remnants of the Greek economy must carry all the burden of adjustment is frankly nuts.