The CPI and points-of-purchase, revisited

Apropos my cracking wise about the PNC Christmas Price Index having a better-updated point-of-purchase surveying methodology than the Bureau of Labour Statistics; this piece in today’s Guardian:

… shoppers will continue to switch their spending away from the high street in favour of online purchases, Experian said. They can also expect to see deeper discounts than last year, as retailers battle to win their share of festive spending.

According to Experian’s November Retail FootFall Index, the Christmas rush has finally started on the high street, “but with a whimper, not a bang”. Although it recorded the highest month-on-month rise in shopper numbers this year, the boost is later than expected and overall numbers are still trailing behind 2006 by nearly 3%.

But Experian’s web-tracking company, Hitwise, recorded a 22.4% jump in online visits to all shopping and classified sites during November, suggesting that the relatively poor show on the high street is due to shifting channel choice rather than declines in spending.

Experian’s Martin Davies said: “The boom in online activity shows that UK consumers are still determined to celebrate this Christmas. Despite fragile financial markets, uncertainty about house prices and the likelihood of rising utility bills, consumer spending this Christmas is likely to exceed that of last year.”

I shall be interested to see (a) pressure build up for the CPI figures to deal with this, somehow; (b) a decent analysis in the media of how the costs of Christmas shake out, with price-hunting online purchasing being a method employed by households to beat inflation, related to (c) some analysis of how Christmas purchasing may advance while seasonal employment slumps to a new Christmas low, as retailers take enormous hits out on high street (this goes for the US, as much as – or more than – for the UK).

The 2007 Christmas Price Index

You know your students are paying attention when one tells you that PNC’s Christmas Price Index (of which I had told them) for 2007 is out:

The significantly higher price of gold and increased compensation for minimum wage workers will make Christmas more expensive this year, according to the PNC Christmas Price Index. The tongue-in-cheek economic analysis by PNC Wealth Management is based on the cost of gifts in the holiday classic, “The Twelve Days of Christmas.”

According to the 23rd annual survey, the cost of “The Twelve Days of Christmas” is $19,507 in 2007, a 3.1 percent increase over last year. The rise in gift prices mirrored the U.S. government’s Consumer Price Index – a widely used measure of inflation calculated by the Bureau of Labor Statistics. The Consumer Price Index is up 3.5 percent so far this year.

I hope he’s getting an A (the student). I don’t think it needs to be that tongue-in-cheek, honestly. It makes a contribution, via its (odd) specificity, to our comprehension of the costs of living. I’d like to see one based specifically on a basket of Christmas goods, to pick up the actual cost-increases for those participating in the season (the price of Christmas trees in Australia, for example, has appreciated dramatically, following the worsening drought). The cost of the birds and gold, for example, are worth seeing in a real context, vis. appreciating food and other commodities prices.

Interestingly, the PNC CPI replicates itself for online purchases (3%, vs. the 3.1% for meat-space purchasing. That’s right, you heard me). So they’re updating their point-of-puchase surveys better than the Burea of Labour Statistics themselves (the BLS updates every 10 years, next year being the next update. Keep an eye out for that story, to see how online commerce is intergrated into the method by which our urban nuclear household purchases its basket of goods).

Oil

I missed this one, yesterday:

Crude oil fell below $90 a barrel in the biggest weekly loss in two and a half years on concern slowing economic growth will cut energy demand, and as Saudi Oil Minister Ali al-Naimi said supplies in the market are ”ample.”

Very interesting. I still don’t believe the Saudis, but that’s fine. It’s interesting to get a feel for how much of the oil prices had been speculation, since the decline in US consumption spending doesn’t translate to that sort of drop in oil prices. I don’t like speculators so I view this as positive. The Oil Drum also called a similar thing, earlier in the week.

One wonders how sustained this will be. A colleague had insisted the other day that oil with be in the USD70-something range in no time. I told him only if the US dollar itself jumped back to its old stomping ground, and I don’t see that happening, either. Meanwhile, there is a very legitimate question over how much difference, in the medium-to-long term, the US contraction makes:

OPEC countries will rival China in global oil demand growth through 2008 and beyond, according to a report released Friday by investment firm Lehman Brothers Inc. (LEH).

Consumption of oil in countries that are members of the Organization of Petroleum Exporting Countries should grow 4.4% to 370,000 barrels per day in
2008, putting the producer group behind only China in terms of incremental demand growth, according to the report.

More than 50% of this growth will be experienced in Middle East OPEC members, with Saudi Arabia the country with the largest demand of 105,000 barrels of oil per day.

Meaning (a) oil has about 6 months, tops, to depreciate in price, before slack is taken up by everyone else (although China, too, is due for some degree of slower burn in its economy), and (b) when the US picks back up again, the pressure on oil will be very intense indeed. In fact we should think less about the current march in oil prices and more about the next one. Prices for oil, reflecting demand for oil, should be cyclical like anything else. However, with ever-squeezing supplies, the up-cycles are going to become increasingly intense while the down-cycles offer less and less alleviation – just like food prices. As I said (or rather, quoted) previously, the rules of supply and demand never go away.

Excellent FT editorial on the US economy

You can find it here. John Gapper of the Financial Times has much good to say.

Today’s imbalance is less industrial than financial. The US has been running a large trade deficit with the rest of the world, importing manufactured goods from Asia and energy from the Middle East. That has created a savings glut in Asia and boosted sovereign wealth funds set up by states such as Abu Dhabi.

The funds are now flowing back in the form of capital investment. In the past, Arab governments mostly put their petrodollars into Treasury bonds but they are now spreading into equity as well. It is a natural financial rebalancing act but it unnerves some politicians and commentators.

…

But what can the US expect if it lives beyond its means in the way it has in recent years? Its consumption patterns and use of energy have turned other countries into its piggy bank. The credit squeeze has left its financial institutions with weakened capital and in need of equity that Arab funds can provide.

If US consumers had saved more, spent less, and filled up their SUVs less frequently – and US financial institutions had not embarked on their own credit binge – they might not be in such an embarrassing condition. But they acted as they did and must live with a weak dollar.

HowTo: deal with inflationary economic contraction

This is a shorter-than-intended post. WordPress lost the first one, and I’m just not that into doing it all twice.

I mentioned this in class today (going so fast that I’m not sure anybody heard anything, at all – end of semester dash).

Ben Bernanke put the Federal Reserve on a path towards a December rate cut in a speech on Thursday night in which he said the relapse in financial markets had resulted in a “tightening in financial conditions” that had the potential to harm the real economy.

The Fed chairman also said recent data on household spending had been “on the soft side” and warned that the combination of higher petrol prices, the weak housing market, tighter credit conditions and declines in stock prices seem likely to create some headwinds for the consumer in the months ahead.

Fortunately (for me, and probably only for me, and even then only with respect to having been right all semester), the Fed is, by all appearances, openly addressing its conundrum: Fiscal policy having done very little, it is left to Monetary policy to push along the economy – not one of its better uses – but, worse, trying to boost the economy while also containing inflation. This is something we like to call impossible. The short version: here is a business cycle, from the ever-helpful site tutor2u:

Inflation and Unemployment occupy different spaces. In the Slump/Recession part of the cycle, Aggregate Expenditure is low, i.e.:

Aggregate Expenditure = Consumption + Planned Investment + Government Purchases + Net Exports

is less than

GDP = Consumption + Actual Investment + Government Purchases + Net Exports

We have unplanned investment, or an unplanned increase in inventories. Result: people start getting laid off, as we stop selling/making so many goods and services.

Yes, I still hate Economics’ obsession with ”un”. Oh well.

At the other side of the business cycle, the opposite is true. We are selling more goods and services than intended, with an unplanned decrease in inventories. So we hire more people, we pay overtime, we run our factories longer during the night. We have to compete for factors of production: pay higher wages, pay higher input prices. Here inflation is the problem: higher wages, highe input prices mean higher final prices; higher prices mean higher wage demands, etc.

The government has two basic sets of policy for macroeconomic management: fiscal and monetary. Fiscal is government purchases – increasing expenditure or cutting taxes (for a slump). Having blown the whole thing on tax cuts it couldn’t afford and a war it couldn’t afford (and one that, bizarrely, is doing very little to help the economy), fiscal policy is pretty-well ‘no-go’ for the time being.

This is already a problematic situation, because one prefers not to have only one policy tool. Particularly since Monetary is not nearly as good at direct boosts to economic activity. It has a long tail, can very easily be overdone – thereby causing the next dis-equilibrium to be worse – and is evermore subject to capital market speculation, domestic and foreign.

Monetary policy is interest rates. The Fed buys or sells treasury bills (or makes myriad other interventions, these days), in order to reduce or increase the level of cash in the economy and, by decreasing or increasing the money supply, increasing or decreasing the interest rate (interest rates are the price of money: increase the money supply and the price goes down, and vice versa). So in a slump, the Fed lowers interest rates, increasing consumption and investment – principally investment, which is more variable than consumption anyway. In a boom period, it does just the opposite.

What does it do when it faces both? It wishes it had never taken the job.

Managing inflation and unemployment simultaneously is practically impossible. Managing it with the same policy tool is impossible. Inflation and unemplyment are not supposed to occur at the same time – one can see the current situation as a combination of endogenous factors – bad macroeconomic management, bad financial sector regulation – and exogenous factors – low agricultural yields, declining oil supplies/exports. The economy just cannot be boosted and restrained at the same time.

This, for example, is my idea of why China is so happy with its low Yuan. It cannot deal with unemployment, so it will accept high inflation, so long as it means 150m Chinese people have the surplus jobs.

In the US, the situation may not be that different. One of the advantages of continuing to use core inflation long after it made much sense is that two interest rate cuts with inflation is daft: 2 interest rate cuts with steady core inflation is fine. It is convenient for the Fed to pretend, as long as possible, that one problem just doesn’t exist, because it’s the only way it can attack the other.

Back to the story, then:

… new revised figures showed the US economy grew at its fastest rate in four years in the third quarter. An export surge fuelled by a weaker dollar and global growth more than offset the impact of the deepening slump in housing.

Gross domestic product grew at 4.9 per cent in the quarter, almost twice the Federal Reserve’s estimate of the maximum sustainable rate for the US economy.

However, a sharp rise in inventories reinforced fears of weak fourth-quarter growth.

Working backwards: A ‘’sharp rise in inventories”: unless that was a planned sharp rise in inventories, I’m going to take that as indicative of further weakness in an already soft economy. Meaning unemployment. Meaning, yes, expansionary macroeconomic policy. Such as it is possible with increasing prices. Hence the next part. A 4.9% increase in GDP: with unplanned increases in inventories, we’re making things but not selling them – so that can’t last.

However. GDP = P x Q. Therefore ΔGDP = ΔP x ΔQ. Some of the change in GDP is ΔQ, but some of it – I’m guessing a significant amount – is ΔP. From the Burea of Economic Analysis:

One can see, first, how Net Exports is becoming more and more important to our economy, these days. This will be why we hear Secretary Paulson always going on about a strong dollar, but never doing anything about it. We’re the new China, you see.

Second, Consumption expenditure is up, but flagging. Given that this includes transport, food, etc., it’s hard to imagine that this decline is that small. My guess is negative ΔQ coupled with positive ΔP – meaning the negative ΔQ will be a lot larger than these numbers appear.

This will be why the Fed is awaiting the latest matching data from the Burea of Labour Statistics: try to figure out how the employment and CPI numbers fit into the GDP data, to see just which of the two problems it should put above the other. Given the way capital markets are acting, and given that corporate profits are still high, overall (i.e. relative to previous history, not just earlier this year), I don’t see why rates should be cut again. Given the need for foreign capital in/by the US, honestly, cutting rates and hitting the dollar a third time is just as likely to hurt the economy, a little farther down the line.

We shall see, I suppose. The next BEA release is in a few weeks. The BLS employment numbers are due in a week (their last employment numbers were hardly positive, though); CPI numbers in a fortnight.