Deflation Revisited

Really2

jim83 wrote: »

Current CPI figures still include the largest deleveraging event of all time late last year. I have taken numbers from monthly CPI data (here) and am using January 2009 onwards to form the trend.

Looked at it and I cant see the fit, you have got YOY CPI inflation for mid 2009 as 4% it is clearly not.
Care to post the exact figures you used as their are many ones on the link. The overall figures dhows no massive monthly inflation spikes.

Generali

halight wrote: »

Generali Do you think we will have deflation in the UK over the next next few months/years ?

I wouldn't go as far as to say that. I do think there's a definite risk given that M4 (a measure of the money supply) just doesn't seem to be responding to the huge amount of cash being pumped into the economy by the BoE, as can be seen by the huge increases in M0 (a very narrow measure of the money supply).

I have said many times before (sorry to bore you) that I don't see how this disconnect can continue indefinitely. Either the rises in M0 start to feed through into new lending which could rise very quickly indeed causing a spike in inflation, potentially a very nasty one, or M4 just doesn't respond and deflation results. I just don't see how the BoE can turn the taps on and off with enough subtlety to avoid one or other consequence. Printing money is a pretty blunt tool, albeit the only one they have, given the aim of avoiding deflation.

jim83

Really2 wrote: »

Looked at it and I cant see the fit, you have got YOY CPI inflation for mid 2009 as 4% it is clearly not.
Care to post the exact figures you used as their are many ones on the link. The overall figures dhows no massive monthly inflation spikes.

The graph clearly shows Q2 CPI as ~1.6%.

here is the last 12 months of CPI data:

2008 Aug 109.7
2008 Sep 110.3
2008 Oct 110.0
2008 Nov 109.9
2008 Dec 109.5
2009 Jan 108.7
2009 Feb 109.6
2009 Mar 109.8
2009 Apr 110.1
2009 May 110.7
2009 Jun 111.0
2009 Jul 110.9
2009 Aug 111.4

whilst 111.4/109.7 is indeed 1.55% growth, it is 2.48% from January (111.4/108.7).

To annualise this, you would first need to work out the monthly growth rate which is (111.4/108.7)^(1/7) and then the result to the power of 12... this works out to 4.30%.

All I have done to produce the graph is to assume the rate growth in the CPI will remain the same as so far this year. This is the data I have produced:

2009 Sep 111.79
2009 Oct 112.18
2009 Nov 112.58
2009 Dec 112.97
2010 Jan 113.37
2010 Feb 113.77
2010 Mar 114.17
2010 Apr 114.57
2010 May 114.97

which yields CPI increasing at a rate of 2.44%, 3.80% and 3.86% for the next 3 quarters.

Graham_Devon

My mind is boggling. But thats one of the most researched personal opinions I have seen on here!!

Generali

jim83 wrote: »

The graph clearly shows Q2 CPI as ~1.6%.

here is the last 12 months of CPI data:

2008 Aug 109.7
2008 Sep 110.3
2008 Oct 110.0
2008 Nov 109.9
2008 Dec 109.5
2009 Jan 108.7
2009 Feb 109.6
2009 Mar 109.8
2009 Apr 110.1
2009 May 110.7
2009 Jun 111.0
2009 Jul 110.9
2009 Aug 111.4

whilst 111.4/109.7 is indeed 1.55% growth, it is 2.48% from January (111.4/108.7).

To annualise this, you would first need to work out the monthly growth rate which is (111.4/108.7)^(1/7) and then the result to the power of 12... this works out to 4.30%.

All I have done to produce the graph is to assume the rate growth in the CPI will remain the same as so far this year. This is the data I have produced:

2009 Sep 111.79
2009 Oct 112.18
2009 Nov 112.58
2009 Dec 112.97
2010 Jan 113.37
2010 Feb 113.77
2010 Mar 114.17
2010 Apr 114.57
2010 May 114.97

which yields CPI increasing at a rate of 2.44%, 3.80% and 3.86% for the next 3 quarters.

I can't fault the maths (and I teach this maths to Uni students so hopefully you have it right as that's what I teach!).

Just to point out however, if you take the highest change from a fairly noisy set of data then you are likely to end up with a high number at the end. In part what you have done is self fulfilling.

Try reworking the calculation as if you'd taken the data from Sept 08 - Jan 09 if you want to see what I mean.

Jonbvn

Generali wrote: »

Just to point out however, if you take the highest change from a fairly noisy set of data then you are likely to end up with a high number at the end. In part what you have done is self fulfilling.

This seems to be an overriding characteristic of all economic data ATM. There is just so much volatility, it is difficult to even understand where we are, let alone where we are going.

Anybody into Chaos Theory?

Jonbvn

Generali wrote: »

Try reworking the calculation as if you'd taken the data from Sept 08 - Jan 09 if you want to see what I mean.

-5.7%:eek:
(Note it is negative!!!)

jim83

Generali,

Of course, if we analyse the period of massive deleveraging and retail panic at the end of last year it will produce a downtrend and this is almost my point. That anomaly has affected our yoy CPI for the past 8 months, but come january that event will not affect the numbers at all.

CPI is used as a measure to find how quickly prices are currently rising. Prices are currently rising at a rate of at least 4%/yr and have been for the past 7 months. CPI including what happened last year is not an accurate measure of reality today and is likely not to be an accurate measure of the immediate future as well.

All I'm doing is using the previous 8 data points to form a trend, rather than the usual 13. Obviously the more congruent points the stronger the trend, but I don't think it's particularly disingenuous.

Really2

jim83 wrote: »

Generali,

Of course, if we analyse the period of massive deleveraging and retail panic at the end of last year it will produce a downtrend and this is almost my point. That anomaly has affected our yoy CPI for the past 8 months, but come january that event will not affect the numbers at all.

But is that not still the point we believe we will still be deleveragaing for the next few years also.
That is why even though the figures work out from the data you used I think you have to look at the deleveraging figures also unless you think we are going straight in to boom.

Jonbvn

jim83 wrote: »

Prices are currently rising at a rate of at least 4%/yr and have been for the past 7 months.

Anecdotal evidence indicates that this is just not true.

Money supply figures clearly indicate the delevering is ongoing.
http://blogs.telegraph.co.uk/finance/ambroseevans-pritchard/100001234/does-money-contraction-signal-serious-trouble/