Monthly Archives: May 2015

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Michael BaxterHaving attended Pete’s talk at the Economics Research Council, Michael Baxter of the Share Centre has posted two blog entries.

The first examines the Great Demographic Shock that will come about for inflation as a result of the declining birth rates around the world.

The birth rate is below replacement levels in pretty much every developed market and has been plummeting in most emerging ones including South America and nearly all SE Asia. For example in Bangladesh birth rate has declined from 6 children per woman in the 1980s to the current level of around 2.

Only in parts of Africa is the birth rate above replacement levels. Even here, I suspect the official projections are under-estimating the decline that we may witness in the coming decades. Recent research suggests that what has lowered the birth rate most is access to TV. Academics argue whether this reduction is caused by changing women’s attitudes (the so called “novella effect”) or just that people then have something else to do in the evenings. But be sure that at some point widespread TV will come to Africa (possibly wirelessly) and with it populations will probably decline as they have done elsewhere in the world.

The second picks up, Pete’s analysis on money supply vs prices since 1900 in the UK. This implies that price have to double from here or the money supply shrink in half to satisfy the basic theory of exchange. The key chart is:

Money supply vs inflation

You can read more about the analysis here.

Pete’s view is that the most likely scenario to resolve this imbalance is some form of deflationary shock caused by something like a sovereign bond market crash. You can read more about this in Chapter 18 of Inflation Matters.

Latest UK inflation data – May 2015

The latest CPI inflation shows deflation of -0.1%. This is the first time there has been any recorded deflation since 1960 (note CPI only goes back to 1996, but ONS have projected it back to 1960). The main reason for the apparent decline says more about price changes a year ago than it does about recent ones.

In fact the latest month-on-month change since March 2015 is an increase in prices by 0.2%. Anyone who has bought petrol or shopped in a supermarket will have noticed the gradual rises e.g. petrol was 114p in April vs 112p in March (and just 108p in February).

In particular what has fallen out of the stats this month are some apparent rises seen in airfares. I say “apparent” as ONS collect that type of data at a fixed time each month and last year it was over Easter, when prices rose. Easter was earlier this year (6th vs 20th April), so the headline decline in prices is probably largely a methodological quirk.

Many goods have declined in price over the last 12 months but some are up eg tobacco (+6.4%).  Overall services are still rising at 2% according to CPI. In particular new car sales (+2.4%)  and maintenance (+2.5%) are contributing to continued inflation as is a number of other areas such as recreation and culture (+2.8%), train fares (+2.5%), education costs (+10%), accommodation services (+3.8%).

But remember that CPI excludes virtually costs related to housing. Today the latest data showed UK house prices up nearly 10%. That is partly why RPI (which includes them) is still nearly 1%. See article here for differences between CPI and RPI.

The big picture for inflation is today’s numbers will probably mark their low point. Last May we saw a decline in prices – we are not going to see that this time. Commodity prices are rising again and this will feed through to the stats. I would not be at all surprised to see CPI back to 0.2% or more next month. It will probably be 1% by Christmas and Mark Carney last week said he expected it would be above 2% within 2 years. Enjoy the brief period of deflation whilst it lasts.

The above said, I don’t think we’ll need to wait another 55 years for deflation again. See here for why.

More details on the latest numbers can be found in the full ONS report.