Archive for July 24th, 2008

Inflation stable at 11.9%???

July 24, 2008

I can understand some layman making such a statement, but not a leading business newspaper. The headline of this respected newspaper says:

Inflation seen moderating over previous week level at just below 11.9 per cent, versus last week’s 11.91 per cent .

How can you say inflation at 11.9% as stable or moderate?? It is still more than double Indian economy’s comfort zone – 5% – 5.5% . I actually noticed such news items last week as well where instead of the expected 12% plus, it came to 11.91%. It is important that the media covers events properly and uses appropriate words.

I also noted that before Q4 2007-08 GDP figures were released, media said  growth will slowdown and be around 8% – 8.5% (It was finally noted at 9%). I mean how can you say 8%-8.5% is slowdown? Even now the same thing continues.

PS. I have also been noticing that the same newspaper gets the inflation figures before the official statement is released. Y’day also it reported inflation seen at 11.9% and it came at 11.89%. I am wondering what is going on here.

The inflation has always been released on Friday and recently govt changed it to Thursday evening. I don’t know the exact reason but may be it was because of the leaks. I am not seeing it has stopped even with the Thursday move. I do not understand all this media hype over weekly inflation numbers. It will be best to make it a monthly figure.

Zimbabwe introduces 100 billion note

July 24, 2008

I pointed Zimbabwe’s currency carries an expiry date. One of the comments told me that it is actually like a bearer’s cheque.

Zimbabwe’s inflation has  been increasing at a crazy rate and it keeps coming out with higher and higher denomination currency notes. In January, Z$10 million note, followed by a Z$50 million. By June the denominations had reached tens of billions.

Now, with official inflation at  2.2 million % per annum,  Zimbabwe has launched a Z$ 100 billion note which carries an expiry date of 31 December 2008. 100 bn Z$ can buy you 2 loaves of bread or 3 eggs or 4 oranges!! The $Z 100 bn note is available at ebay for $80 as a collector’s item.

Further this article says million dollar notes are worthless:

Notes in the millions of dollars are useful only as toilet paper and it’s cheaper to light a fire with low denomination bills than with newspaper.

This is how inflation just gets out of hand and becomes a spiral.

Dissecting the food consumption pattern of Indian Households

July 24, 2008

I worte a research paper analysing the food consumption pattern of Indian households. The analysis is absed on NSS Surveys and points out some very interesting (and expected) results.

Let me know your comments.

RBNZ goes the BoE way

July 24, 2008

After months of deliberations, RBNZ does go the BoE way. I had mentioned earlier that RBNZ had not been raising rates despite rising inflation and is more concerned with falling growth. It had paused its interest rate stance and finally gave to the falling growth pressures. It has cut its interest rates in its latest meeting from 8.25% to 8.00%.

Allan Bollard, Governor explains:

“more unpleasant international news has emerged since the June Monetary Policy Statement, and there is a risk that the domestic economy will slow further. Moreover, the cost of funds raised abroad by banks has been rising in recent months as the international financial situation has deteriorated.  Today’s cut will help to mitigate the effect of these increases on the actual borrowing costs paid by firms and households. 

Though inflation is expected to continue breaching the 1% – 3% target:

Recent oil and food price increases mean that annual CPI inflation should peak around 5 percent in the September quarter of this year.

However, just like BoE, RBNZ expects declining growth to moderate inflation:

 However, we expect that inflation will return inside the target band in the medium term. The weaker economy is expected to reduce pressure on resources, making it more difficult for firms to pass on costs and for higher wage claims to be agreed.

It also indicates strongly that future rate cuts are highly likely:

Consistent with the Policy Targets Agreement, the Bank’s focus will remain on medium-term inflation. In this regard, it is important to note that monetary policy has been reasonably tight for some time, and is now restraining activity and medium-term inflation pressures. Provided that the outlook for inflation continues to improve and there is no excessive exchange rate depreciation, we would expect to lower the OCR further.

I had mentioned earlier and had praised RBNZ for continuing to fight inflation. However, had also indicated it will be interesting to see if RBNZ goes BoE way or carries on with its inflation fighting ways. There are couple of points to ponder:

  • How can the inflation targeting central banks can walk away from their inflation targets and instead concentrate on falling growth. I can understand if inflation is declining but it isn’t. IMF recently raised its inflation projections for 2008 in most countries.
  • RBNZ says it will look at inflation in the medium term and expects it to decline in that term. Now medium term is nothing but a sum of short-terms and if inflation persists in the short-term, it is expected to be the same in the medium term as well. The reason is inflationary expectations thern creep in the inflation numbers and  what we see is an inflation spiral.
  • I am really confused with the numerous projections going around. IMF in its recent forecasts has revised growth projections upwards for most countries, though RBNZ expects a slowdown in NZ. The economic activity numbers for US have been surprisingly positive and this has led to revision of forecasts. I am wondering whether same could also be the case for NZ as if US picks up, so would other economies.

It is fascinating to see the IT Central Banks function in these times. It surely makes you question their role and actions. I think we claimed success of IT Central Banks too early. These times should make them (and us) rethink of the current framework.

Assorted Links

July 24, 2008

1. WSJ Blog points McD is the latest victim of inflation

2. Ajay Shah points to pending reforms

3. Blattman on irrelevancy of dev eco

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