In the opening section of Article 16 I explain the various measures of inflation used in the UK. It might be useful to illustrate the main two definitions with reference to the latest inflation data which was published today. The headlines will be dominated by the Retail Price Index (RPI) which fell to 0% in February on an annual basis compared to 0.1% in January. This is a wide measure of inflation that includes housing costs. The sharp fall in mortgage rates in the last year has driven this measure of inflation to the lowest level in nearly 50 years. However, the annual rate did not turn negative as many commentators had predicted.
The Government's preferred measure is the Consumer Prices Index (CPI) and this actually rose unexpectedly from 3% to 3.2%. As a result the Bank of England's head Mervyn King will have to write again to the Chancellor (Alistair Darling) explaining why inflation is more than one percentage point above the government's own 2% target.
Against this background the FT-SE 100 index has fallen back slightly this morning which is not that surprising as we have seen a strong rebound in the UK equity market in the last few days.
Tuesday, March 24, 2009
Tuesday, March 3, 2009
Falling oil prices (revisited)
In parallel with the World's stock markets oil prices continue to slide with UK's Brent crude falling to just over $40/barrel. This is very much a reflection of the strong expectation that the global economy will remain depressed for many months ahead. Any hopes of a speedy recovery have been firmly rebuffed by a series of gloomy economic and corporate stories unveiled this week. The message is now clear that demand for oil will remain weak for the foreseeable future. In response OPEC is desperately trying to reduce the supply of crude oil. Indeed the oil producers' cartel has already acted to reduce production by millions of barrels a day in a vain attempt to underpin prices. However, it is becoming clear that the action taken so far will not be enough to halt the slide. We can expect OPEC to act soon to make further reductions in production levels at their next meeting which takes place on the 15 March.
Thursday, February 12, 2009
Obama's new economic stimulus package
The new Obama administration has unveiled an extra package of some $2trillion with the aim of saving the US banking system from total collapse. The Treasury Secretary (Timothy Geithner) set out the dire position in very plain language:
"The US was in the midst of its worst economic crisis in generations with a challenge more complex than any our financial system has faced".
Such a pessimistic view has inevitably spooked the financial markets with the Dow Jones falling sharply as a result. Indeed the index fell 200 points during the 30 minutes of the speech! This can be hardly the response he was hoping to see.
The need for such a comprehensive package of measures was re-enforced by the latest US employment figures which were released last Friday. They showed that almost 600,000 jobs had been lost in January 2009. This resulted in the unemployment rate hitting 7.6% which is the highest in 17 years. (if you want to see the significance of this data see Article 17, page 118 of my book).
The Obama package includes:
1) Plans to buy from the US banks billions of dollars worth of their so caled "toxic" assets. These are the mortgage backed securities and other high risk derivatives.
2) Extra resources will be used to try to keep homeowners in their properties.
3) The US Treasury will use $1trillion to guarantee loans from high street financial institutions to help finance cars, mortgages and various other projects.
The reaction to the Obama package has been mixed. Some feel that the latest bail out plans are too little too late. Indeed it has been estimated that even with this extra effort we could see up to 1000 US banks fail over the next 3-5 years. These are indeed worrying times!
"The US was in the midst of its worst economic crisis in generations with a challenge more complex than any our financial system has faced".
Such a pessimistic view has inevitably spooked the financial markets with the Dow Jones falling sharply as a result. Indeed the index fell 200 points during the 30 minutes of the speech! This can be hardly the response he was hoping to see.
The need for such a comprehensive package of measures was re-enforced by the latest US employment figures which were released last Friday. They showed that almost 600,000 jobs had been lost in January 2009. This resulted in the unemployment rate hitting 7.6% which is the highest in 17 years. (if you want to see the significance of this data see Article 17, page 118 of my book).
The Obama package includes:
1) Plans to buy from the US banks billions of dollars worth of their so caled "toxic" assets. These are the mortgage backed securities and other high risk derivatives.
2) Extra resources will be used to try to keep homeowners in their properties.
3) The US Treasury will use $1trillion to guarantee loans from high street financial institutions to help finance cars, mortgages and various other projects.
The reaction to the Obama package has been mixed. Some feel that the latest bail out plans are too little too late. Indeed it has been estimated that even with this extra effort we could see up to 1000 US banks fail over the next 3-5 years. These are indeed worrying times!
Wednesday, January 21, 2009
Quantitative easing explained
In these worrying economic times the official authorities (made up of governments and the central banks) have done much to try to stimulate their anaemic economies. We have seen the governments act with several fiscal stimulus packages with a combination of higher official spending and lower taxes. At the same time the central banks have cut short-term interest rates to record lows. In the latest case the European Central Bank cut their main rate to just 2% last week. Sadly despite these measures the world economy looks to be on the verge of a deeply worrying meltdown. As a result the authorities are now considering yet more desperate measures. One of these is called quantitative easing. So what does this mean?
To put it simply the central bank injects extra money into the economy as a means of expanding the money supply. This is normally done through the process of the central bank acting to buy various types of government securities in the international bond market. The intention of this activity is to drive down the rate of longer-term interest rates to match the reductions already made in short-term rates. You should remember that the interest rate on the bond (or yield as it is normally called) goes down as the price increases in response to the extra government-induced demand for these securities. This would also tend to cause other long-term interest rates to fall including some mortgage rates and most importantly the corporate lending rates. In addition the banks will end up with extra cash resources to lend to either individuals or companies as they swap their bonds for cash which they receive from the central banks.
The downside of this policy is the risk that it can be seen to be increasing inflationary pressures especialy when the economic activity eventually picks up again. At the moment this looks like a risk that the authorities will be prepared to take.
If you go to see my latest blog for "Reading and Understanding the Financial Times" I will tell you more about this policy tool.
To put it simply the central bank injects extra money into the economy as a means of expanding the money supply. This is normally done through the process of the central bank acting to buy various types of government securities in the international bond market. The intention of this activity is to drive down the rate of longer-term interest rates to match the reductions already made in short-term rates. You should remember that the interest rate on the bond (or yield as it is normally called) goes down as the price increases in response to the extra government-induced demand for these securities. This would also tend to cause other long-term interest rates to fall including some mortgage rates and most importantly the corporate lending rates. In addition the banks will end up with extra cash resources to lend to either individuals or companies as they swap their bonds for cash which they receive from the central banks.
The downside of this policy is the risk that it can be seen to be increasing inflationary pressures especialy when the economic activity eventually picks up again. At the moment this looks like a risk that the authorities will be prepared to take.
If you go to see my latest blog for "Reading and Understanding the Financial Times" I will tell you more about this policy tool.
Tuesday, January 6, 2009
The fall and fall of UK House Prices
According to the latest survey by the Nationwide Building Society UK house prices fell by nearly 16% in 2008. As a result the average price has now hit a little over £153,000. This time last year most economists had expected some fall in house prices in the coming year. However, it should be said that the actual reduction has been far more dramatic than anticipated. The main reason for this development has been the change in the availability of mortgages. Gone are the days when banks and building societies lent money with almost no regard to the ability of the households to repay their debts. We have gone back to the pattern of the 1970s when lenders have to beg financial institutions for new mortgage funds. With the lack of available funds the demand for houses has collapsed. These tighter lending conditions look set to remain in place for much of 2009. In addition with more and more people being made redundant on a daily basis it is hard to see any confidence returning to the UK housing market in the foreseeable future.
You can access information on this house price data if you follow this link...
http://www.nationwide.co.uk/hpi/
You can access information on this house price data if you follow this link...
http://www.nationwide.co.uk/hpi/
Monday, December 22, 2008
OPEC responds...
In Article 2 in the book I discuss the role of OPEC in the spring of 2008 when oil prices were well over $110/barrel. In the last part of my analysis of the article from the Financial Times I conclude with the following:
"Against this background the economic power of OPEC looked as strong as ever and consumers would seemingly have to get used to permanently high petrol prices".
Sometimes it is just best to hold your hands up and admit you were wrong. And this is a perfect example. At the time of writing that part of the book it was widely expected that oil prices would remain high driven by limited supply and high demand. A few months later that view crumbled in the face of rising supply and in particular falling demand. The slowdown in World economic activity led to a collapse in the demand for crude oil. As a result prices have fallen back to less than $50/barrel.
Last week we saw the response of OPEC who are:
"the most important example of a cartel operating in practice. This is where a group of suppliers come together to create a formal agreement to control the volume delivered into the market. The members of OPEC have been meeting in Vienna since the mid 1960s to set the level of their output and to influence the level of world oil prices. Each OPEC member is allocated a specific quota that they are allowed to produce. Their members include Algeria, Indonesia, Iran, Iraq, Saudi Arabia and Venezuela".
The 13-nation OPEC plan to cut oil output by some 2m barrels a day. The aim is to reduce the available supply to match the sharply reduced demand. As a result OPEC hopes that this move will see oil prices return to at least $75/barrel. It must be careful that this action does not undermine economic confidence and so force an even deeper slowdown. This will be a tough balancing act for an organisation that owes its primary responsibility to the oil-producing members. I would like to end with a clear forecast for the prospects for oil prices in 2009. However, after my last effort I will keep quiet for now!
"Against this background the economic power of OPEC looked as strong as ever and consumers would seemingly have to get used to permanently high petrol prices".
Sometimes it is just best to hold your hands up and admit you were wrong. And this is a perfect example. At the time of writing that part of the book it was widely expected that oil prices would remain high driven by limited supply and high demand. A few months later that view crumbled in the face of rising supply and in particular falling demand. The slowdown in World economic activity led to a collapse in the demand for crude oil. As a result prices have fallen back to less than $50/barrel.
Last week we saw the response of OPEC who are:
"the most important example of a cartel operating in practice. This is where a group of suppliers come together to create a formal agreement to control the volume delivered into the market. The members of OPEC have been meeting in Vienna since the mid 1960s to set the level of their output and to influence the level of world oil prices. Each OPEC member is allocated a specific quota that they are allowed to produce. Their members include Algeria, Indonesia, Iran, Iraq, Saudi Arabia and Venezuela".
The 13-nation OPEC plan to cut oil output by some 2m barrels a day. The aim is to reduce the available supply to match the sharply reduced demand. As a result OPEC hopes that this move will see oil prices return to at least $75/barrel. It must be careful that this action does not undermine economic confidence and so force an even deeper slowdown. This will be a tough balancing act for an organisation that owes its primary responsibility to the oil-producing members. I would like to end with a clear forecast for the prospects for oil prices in 2009. However, after my last effort I will keep quiet for now!
Thursday, December 4, 2008
Spend spend spend!
Reading the Guardian this morning it was hard to see why the newspapers are so concerned about the fall in advertising expenditure. Today's paper was full of large glossy adverts from various retailers offering special discounts to get consumers back into their stores.
Just look at these headlines:
Laura Ashley: 25% off everything Mega weekend
M&S: One day spectacular with 20% off everything for today
Debenhams: Festival with 20% off for three days.
If this is not enough to get us all spending, the Government's cut in VAT kicks in this week. And finally the Bank of England is expected to follow up last month's 150 basis point cut in the Repo Rate with a further sizeable reduction at lunchtime today. We might even see UK interest rates fall to an all time low. The question is will all these measures work?
If economics was an exact science we could examine some hard evidence of how consumers have reacted in previous recessions to find the precise inducement needed to produce a set increase in consumer spending. Sadly the reality is that even if you employed the top ten economists in the World and paid them a fortune (By the way I am cheap and available!) they could not say with any certainty just how consumers will react. We are all independent and relatively free decision-makers and we might just decide to ignore the inducements and just leave our money in the bank.
For what it is worth (probably not too much!) my own guess is that caution will prevail and consumers will not all rush out to spend what little cash they have. They have been scared by the onset of a severe economic downturn and they fear that theyl could lose their jobs. Against this background any hopes that the British consumer will once again lead the economy out of the wilderness might be dashed. The sensible ones will hold onto their cash because the prices of goods and services on the high street could soon be falling a good deal more.
Just look at these headlines:
Laura Ashley: 25% off everything Mega weekend
M&S: One day spectacular with 20% off everything for today
Debenhams: Festival with 20% off for three days.
If this is not enough to get us all spending, the Government's cut in VAT kicks in this week. And finally the Bank of England is expected to follow up last month's 150 basis point cut in the Repo Rate with a further sizeable reduction at lunchtime today. We might even see UK interest rates fall to an all time low. The question is will all these measures work?
If economics was an exact science we could examine some hard evidence of how consumers have reacted in previous recessions to find the precise inducement needed to produce a set increase in consumer spending. Sadly the reality is that even if you employed the top ten economists in the World and paid them a fortune (By the way I am cheap and available!) they could not say with any certainty just how consumers will react. We are all independent and relatively free decision-makers and we might just decide to ignore the inducements and just leave our money in the bank.
For what it is worth (probably not too much!) my own guess is that caution will prevail and consumers will not all rush out to spend what little cash they have. They have been scared by the onset of a severe economic downturn and they fear that theyl could lose their jobs. Against this background any hopes that the British consumer will once again lead the economy out of the wilderness might be dashed. The sensible ones will hold onto their cash because the prices of goods and services on the high street could soon be falling a good deal more.
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