Relevant and even prescient commentary on news, politics and the economy.

The Phillips Cure

House spending cuts hurt U.S growth -Goldman Sachs

By Richard Cowan

WASHINGTON | Wed Feb 23, 2011 4:50pm EST

[fair use skip]

“Under the House passed spending bill, the drag on GDP growth from federal fiscal policy would increase by 1.5pp (percentage points) to 2pp in Q2 and Q3 compared with current law,” according to Alec Phillips, who signed the analysis that is dated Tuesday.

Various intelligent bloggers have expressed doubt that the effect could be so large (no links). I think they are not just puzzled but Posnered, that they have made a factor of 16 error in their informal calculations. They seem to think that Phillips is assuming a huge gigantic multiplier since 2% of GDP is many times 61.5 billion.
Yes Phllips talks about quarter growth of quarterly GDP but don’t the two factors of four cancel ? No they multiply.

In forecaster speak 1.5% less growth for two quarters means growth at an annualized rate which is 1.5% lower for two quarters, that is GDP which is 0.75% lower in the second of the two quarters. Growth “in” a quarter doesn’t mean growth during that quarter but that quarter’s level compared to the previous quarter’s level (GDP is measured over a quarter). So Phillips is saying that GDP in the third quarter of 2009 will be 0.75% lower if the Republicans get their way than it would be if Obama gets his way.

That is 0.75% of quarterly GDP not of annual GDP so third quarter GDP will be lower by less than $ 30 billion. If the spending cuts were evenly spread over the 7 remaining months of fiscal 2011, then 3rd quarter public spending would be lower by more than $26 billion. The simple static multiplier (effect on GDP_t)/(change of G_t) is around one, which is not absurdly high. By the same assumption on spending, the multiplier for the second quarter would be about 0.5.

In fact it is hard to cut planned spending quickly, so if Phillips’s model were static (which it isn’t) then the multipliers would both be less than one.

Of course Phillips is using a dynamic model in which there is a hump shaped response to a demand shock with GDP gradually rising, peaking and returning to roughly where it would be (only roughly because of possible crowding out or hysteresis or whatnot but usually assumed to be exactly when modelling). The multiplier isn’t a relationship between Government consumption in a quarter and GDP that quarter — it is a dynamic effect which grows and dies out. But the implied summary multiplier is perfectly standard among Keynesians and “Everyone hoping to make money selling economic analysis”

By the way, Speaker Boehner’s office has made a wonderfully boneheaded assertion for the second day in a row.

A spokesman for House Speaker John A. Boehner of Ohio said the Goldman Sachs report represented “the same outdated Washington mind-set,” comparing it to the thinking behind the 2009 Recovery Act

Someone better gently remind that spokesman that Goldman Sachs is based in New York not Washington. Oh and if they’re so dumb, why are they rich ? Finally aren’t Republicans supposed to trust the private sector ?

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What IR can learn from the NHL

Both Gary and Rebecca cited Marc Lynch recommending “intervening” in Libya:

The appropriate comparison is Bosnia or Kosovo, or even Rwanda where a massacre is unfolding on live television and the world is challenged to act. It is time for the United States, NATO, the United Nations and the Arab League to act forcefully to try to prevent the already bloody situation from degenerating into something much worse.

I petulantly asked whether Mark Lynch had ever seen an intervention he didn’t like.

The answer, of course, is yes, which a moment’s thought about pseudonyms would have made clear. My social radar remains a perfect contraindicator.

But that leaves several questions, not the least of which is “with what Army”? Certainly not the U.S. one, which is overextended in battles of—let us be polite&dubious optimal cost.

NATO and The United Nations suffer similar issues, along with “institutional inertia” (unlike the U.S., they do not jump into wars without a strategy, a purpose, and a plan).


This leaves the Arab League, which has several members—Egypt, Lebanon, Somalia, Bahrain, Iraq, Libya (being the issue at hand), Yemen, the Sudan, Tunisia, and possibly Saudi Arabia and Jordan come immediately to mind—that are rather preoccupied themselves.

It’s not just that the very sharp Mr. Lynch conflates genocides with civil war; it’s that he chooses the wrong strategy for ending the process.

Watch NHL fights. Here’s a good example (fight starts ca. 0:55):

Note that the fight isn’t ended until half a minute later. The referees (especially the one on the left side of the screen) are paying attention the entire time—fallen gloves get picked up or kicked out of the way—but they don’t even attempt an intervention until the players are on the ice.

The corrolary is that as soon as a player falls to the ice, they intervene.

The question for those advocating military action should be seen in that light: how can we quickly and efficiently get the battle to the point where intervention does not involve getting in the middle of two moving targets.

This is an economics blog, so, yes, you can bet that my answer will be economics-related.

If you want to stop a dictator from killing his people, freeze any of his personal assets that are held out of the country.

In cases where the dictator is likely to fall, it sends a clear signal to other countries. (In cases where the dictator is likely to succeed, the worst case scenario is that banking relationships will be damaged, a consideration that the domestic government would have considered before making the decision to freeze the assets in the first place.)

The purpose of financial in lieu of military intervention is to balance the tradeoff. A dictator whose funds will remain unencumbered no matter how many of his people he kills will not change his behavior. A dictator who stands to lose a large (and increasing) portion of $70 billion faces a scenario where extending his time in office may well appear too costly.

(There is the added signalling benefit of the proliferation of asset-freezings that occur. Since each country and institution that freezes the assets is weighing their decision based on political outcomes, the more places that freeze his assets, the more clear it becomes that his efforts are not expected to succeed.)

Again, I premise this on the idea that Tom Friedman’s basic premise is correct: that economic activity mitigates the chance of military activity. But the idea here is much easier to implement uni-, bi-, or multilaterally than managing the logistics of moving soldiers, machinery, and rations to an area that may have ended activities by the time you can start to have an effect. (Even ignoring if the effect will be negative.)

IR recommendations should follow the lead of NHL referees: make it as easy as possible for the fighters to be separated, but don’t put your body between them until then.

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Ethics code for the Supreme Court

by Beverly Mann

Washington Post writer R. Jeffrey Smith posted a comment to my post yesterday, providing a link to an article by him published in the paper about a letter that a large ad hoc group of law professors sent to the House and Senate Judiciary committees yesterday recommending legislation that would extend to the Supreme Court justices the code of ethics that applies to federal appellate and trial-court judges. The code prohibits certain conduct and requires recusal (nonparticipation by the judge in deciding a particular case or set of cases).

I’m grateful for the law professors’ letter, for the link to the article, and for Mr. Smith’s reportage, which gives extensive background and some details that I didn’t know, especially the financial contributions that the Koch brothers gave in 2007 and 2008 to the Federalist Society, the rightwing bar group that paid the expenses of justices Thomas and Scalia, and Thomas’s wife, for their four-day stays those years at a luxury resort where the Kochs were sponsoring a seminar at which these justices spoke.

The article quotes a Federalist Society official as confirming that the group did pay these justices’ expenses, but hints at the suspicion that the Kochs simply laundered the expense money through that organization. “Asked why Thomas’s reimbursement for a single speech stretched to four days, [the official] said, ‘If you pay for someone to go out, you don’t care when they come back.’ ” Which is true, unless you’re paying for the someone’s accommodations in the interim. Or unless you have reason not to care that you are.

The article notes that the ethics code that applies to the lower-court federal judges and that the law professors want made applicable to Supreme Court justices includes a prohibition against accepting travel reimbursements from outside groups if they “give the appearance of influencing the judge” or “otherwise give the appearance of impropriety.” But the first part of that strikes me as a tautology, and strikes the Koch and Federalist Society officials quoted in the article as itself a loophole, when the judge’s handling of a case will never really be in play because the judge’s ideology is so rigid, his or her sympathies so utterly controlling, that the judge is not really a judge but instead a proxy in a robe.

The issue of the expenses-paid attendance by a slew of federal judges at annual several-day-long seminars at luxury resorts, sponsored by the likes of the Koch brothers, on environmental-law issues, first gained public attention several years ago when a public interest group actually tracked those judges’ later rulings in environmental-law cases and found that several of these judges not only ruled against the environmentalists but that they had used, apparently nearly verbatim, the legal arguments provided at the seminars. In those instances, there appeared to be the genuine influencing of the judge. And there certainly was the appearance of it.

But with respect to the Supreme Court justices, what’s really most at issue, I think, is the second part of that prohibition—the “otherwise give the appearance of impropriety” part, whether regarding reimbursements for travel expenses or non-reimbursed appearances and speaking engagements. The article mentions Justice Alito’s attendance or speaking engagements at two annual fundraising dinners sponsored by the extreme rightwing magazine the American Spectator, and notes the ethics code that the law professors want made applicable to Supreme Court justices prohibits judges from participating in fundraising activities or “us[ing] or permit[ting] the use of the prestige of judicial office for that purpose.” The article says a reporter at one of the events quoted Alito as saying his attendance was not important. So I guess he used or permitted the use of the prestige of his office for that purpose just a little bit. Which still would violate the code, if the code applied to him.

What I think these justices miss, or probably don’t miss but also don’t care about, is that when they engage in this sort of thing they’re effectively altering the nature of their office itself. They’re conceding to themselves that their vote in certain cases is not a true judicial vote because it is not based on the legal arguments at all.

Beverly

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Oil prices and consumer spending.

With the recent surge in oil prices I thought it would be useful to look at the potential impact with one set of data I watch. It is energy as a share of personal consumption expenditures or consumer spending. In the 1970s energy consumption rose from about 6% to 9% of spending, or about 50%. In the early 2000s energy rose from about 4% to 7% of consumer spending before it collapsed. As of December energy’s share of consumer spending was already back to 6% of spending, about the level it peaked at in the last cycle before the financial panic generated a drop in other consumer spending. If you look at energy consumption this way it appears that oil consumption was already at the point where futher oil price increases would rapidly impact consumer spending on other items.

One area where higher oil prices clearly impacts consumer spending is autos, as consumer spending on new and used autos and energy have a very strong negative correlation. If rising oil prices generate a drop in real income or standard of living one of the easiest way to compensate is to delay buying a new,or used car. What would have been new monthly auto payments can be used to sustain consumption of other items. In this chart you can clearly see that this happened in both the 1970s and the 2000s. You can also see that spending on energy and autos accounted for about 10% of consumer spending in the 1990s and 2000s.

But the chart also shows that auto consumption was only about 3.5% of consumer spending at the end of 2010 as compared to a 5% to 5.5% norm in the 1990s and 2000s economic expansions. So the consumer does not really have the option to cut back on auto consumption like they did in the previous examples of oil price spikes. These charts suggest that if oil prices remain high or expand well past $100 we are quite likely to see consumer spending suffer across the board. Note that this chart of spending is based on nominal dollars.


Also note that Brent crude is already about $120 while West Texas Intermediate — the US base price — has only increased to about $100. This apparently is due to excess supplies in the Midwest because of a new oil pipeline from Canada. Such a divergence can only last so long, so that if oil supplies are interrupted for very long you can expect West Texas Intermediate to close on the Brent price fairly rapidly.

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Eisenhower as a lefty politico

An opinion piece in the NYT points us to new docs on former President Eisenhower:

LAST week the National Archives released a trove of drafts and notes that shed new light on President Dwight D. Eisenhower’s farewell address, in which he warned America about the “military-industrial complex.”

More can be found here.

On Oct. 31, 1960, another speechwriter, Ralph E. Williams, warned of a “permanent war-based industry” run by former military officials.

Also see a post from Econospeak

The following is a shortened version of Rachel Maddow’s opening monologue from her show on Wednesday on MSNBC:

For the next hour, we begin with the president of the United States addressing the nation and calling for a massive investment in this country’s infrastructure, rebuffing the idea of giant tax breaks for the richest Americans, and warning anyone who would dare touch Social Security to keep their hands off.

You want to talk about red meat for the base? Listen to some of the language the president used. “Workers have a right to organize into unions and to bargain collectively with their employers. And a strong, free labor movement is an invigorating and necessary part of our industrial society.” Wow.

How about this one? “Only a fool would try to deprive working men and women of their right to join the union of their choice.”

Listen to the way he goes after the right here. “Should any political party attempt to abolish Social Security, unemployment insurance, and eliminate labor laws and farm programs, you would not hear of that party again in our political history. There is a tiny splinter group, of course, that believes you can do these things, but their number is negligible and”–and the president says–“their number is negligible and they are stupid.”

That is not what Barack Obama said last night. That is way to the left of any national Democrat at this point. That was all Republican President Dwight David Eisenhower. That was all the stuff he said when he was president.

Republican President Dwight Eisenhower, president when the top tax bracket for the richest people in this country was 92 percent. President Eisenhower defended that tax bracket. He said we cannot afford to reduce taxes until, quote, “the factors of income and outgo will be balanced.” Eisenhower insisting there must be a balanced budget and that taxes on the rich are the way to balance it. Dwight Eisenhower, you know, noted leftist.

The Republican Party platform of Eisenhower’s 1956 called for expansion of Social Security, broadened unemployment insurance, better health protection for all of our people. It called for voting rights–full voting civil rights for D.C. It called for expanding the minimum wage to cover more workers. It called for improved job safety for workers, equal pay for workers regardless of sex.

This is the Republican Party circa 1956. The Republican Party.

The story of modern American politics writ large is the story of your father’s and your grandfather’s Republican Party now being way to the left of today’s leftiest liberals. If Dwight Eisenhower were running for office today, he would have to run, I’m guessing as an independent, and not as some Joe Lieberman, in between the parties, independent. He’d be a Bernie Sanders independent.

In 1982, who passed the largest peacetime tax increase in U.S. history? That would be Ronald Reagan.

Who called for comprehensive health reform legislation during in a State of the Union address in 1974, a program that was well to the left of what either Bill Clinton or Barack Obama ultimately proposed? That would be Richard Nixon.

Eisenhower and Reagan and Nixon–they were not the liberals of their day. They were the conservatives of their own time.

But the whole of American politics has shifted so far to the right in the last 50 years that what used to be thought of as conservative, what used to be thought of as a conservative position, is now considered to be off-the-charts lefty.

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The Pentagon Labyrinth

by Mike Kimel

Cross posted at the Presimetrics blog.

I just came upon The Pentagon Labyrinth Its a very readable, very informative collection of essays about national defense in the United States.  The essays are written by ex-defense personnel (some of whom were very influential) and journalists who cover the military, and to top it off, its free!!!!

From the book’s blurbage:

The Pentagon Labyrinth aims to help both newcomers and seasoned observers learn how to grapple with the problems of national defense. Intended for readers who are frustrated with the superficial nature of the debate on national security, this handbook takes advantage of the insights of ten unique professionals, each with decades of experience in the armed services, the Pentagon bureaucracy, Congress, the intelligence community, military history, journalism and other disciplines. The short but provocative essays will help you to:

-identify the decay—moral, mental and physical—in America’s defenses,

-understand the various “tribes” that run bureaucratic life in the Pentagon,

-appreciate what too many defense journalists are not doing, but should,

-conduct first rate national security oversight instead of second rate theater,

-separate careerists from ethical professionals in senior military and civilian ranks,

-learn to critique strategies, distinguishing the useful from the agenda-driven,

-recognize the pervasive influence of money in defense decision-making,

-unravel the budget games the Pentagon and Congress love to play,

-understand how to sort good weapons from bad—and avoid high cost failures, and reform the failed defense procurement system without changing a single law.

The handbook ends with lists of contacts, readings and Web sites carefully selected to facilitate further understanding of the above, and more.

This new publication from the Center for Defense Information (CDI) is being made available for download through our Web site at the following links below. Included are the full e-book, and all individual sections and essays in PDF format.

Its a quick read (vital for me right now!!), and frankly, there isn’t much in here that’s controversial though its clear several of the writers relish being gadflies.  The book is chock full of facts, and it provides a lot of great food for thought about military issues.

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Reposted in its Entirety: Memorial Service for Alison Snow Jones

Just in case anyone didn’t see this, or overlooked it the first time, at Maxine Udall, Girl Economist:

A memorial service and celebration of her life will be held for Alison at 1:00 pm on March 5, 2011 at the Unitarian Universalist Church, 145 West Rose Tree Road, Media PA, 19063.

We invite you all to attend. We welcome your thoughts and memories of Alison as we remember her, so please feel free to come prepared share them if you wish.

Please let us know if you plan to come. Email frostys91@hotmail.com

For those who would like to make a gift in Alison’s memory to please consider giving to the FaithTrust Institute or the Alison Snow Jones Memorial Fund at Drexel University. If giving online to Drexel University, please be sure to add “Alison Snow Jones Memorial Fund” in the special instructions field. Call Ray Slater, the director of development at the School of Public Health, at (215) 762-8437 for more information.

-David Pinney, Meredith Frost

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More on the Mortgage Mess

by Linda Beale

More on the Mortgage Mess

As our banking giants engaged more and more in speculation, and as the shadow banking system saw a way to make money off of people’s bad financial decisions by betting against subprime loans, the financial crisis took off.  So redressing the problems that caused the crisis shouldn’t overlook mortgages.

The Treasury has now come out with a “plan” for addressing the government sponsored enterprises Fannie and Freddie, which played a role in the crisis though were not the drivers of the subprime origination mess.  The plan, Reforming America’s Housing Finance Market: A Report to Congress (Treasury and Housing and Urban Development, Feb. 2011), claims that it will “reform America’s housing finance market to better serve families and function more safely in a world that has changed dramatically.”  It also claims that it is intended to limit the government’s primary role to “robust oversight and consumer protection, targeted assistance for low-and moderate-income homeowners and renters, and carefully designed support for market stability and crisis response.”

Both of those claims are worrisome.  First, the alternatives proposed seem better designed to serve the financial services industry than famililes.  Not only is there still no provision for mortgage modification in bankruptcy, but securitization is intended to “continue to play a major role in housing finance”, even though the securitization process has brought a nightmare of foreclosure mills and uncertainties about who owns debt and has the right to foreclose.  While the Administration walks the GOP-favored walk of decreasing government/increasing private markets, it nonetheless leaves government as the one that backstops the private mortgage market, retaining the possibility of private gains and social losses.

Second, the statement that government will be limited to “carefully designed support for market stability and crisis response” means that the government will continue to backstop the securitization losses, as Yves Smith at Naked Capitalism puts it in The 7 Things Really Wrong with the Treasury’s GSE Proposal:

Of the Treasury three proposals, the last is the same as one advanced by the big guns, from the Mortgage Bankers Association, the Fed (both the New York Fed and the Board of Governors), the Financial Services Roundtable and Mark Zandi of Moodys. This alternative preserves too many bad elements of status quo ante, in particular significant and largely hidden subsidies for banks, for anyone to hail it as reform. Although each proposal has some distinctive wrinkles, all call for the creation of “private” entities that would provide insurance to mortgage backed securities that would then be reinsured by the government, with a full faith and credit guarantee.

What is to prevent huge public losses?  The proposal relies on a guarantee fee and higher bank capital requirements.   This isn’t good enough because it builds too much on the status quo ante.  Yves Smith provides her list of the Treasury proposal’s problems:

  1. The most pressing problems related to the crisis of abuses in the housing securitization markets outside of Fannie and Freddie are still not addressed
  2. The plan continues to use a poor tool to address housing goals, by focusing on mortgage financing.
  3. Reliance on the old 30-year fixed rate prepayable mortgage is outdated and fails to address today’s markets.
  4. Continued use of the private (owners of the entities)/public (backers of the entities debts) structure is fated to suffer the same problems with increasing risk and lobbying as Fannie and Freddie
  5. This just props up the housing market; it isn’t really a help to consumers.
  6. The new entities will continue the conflicting roles of the pre-crash Fannie and Freddie of propping up liquidity and making credit decisions.
  7. There’s nothing to keep these new entities from being too big to fail.

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Supreme court justice conduct and conflict of interests

I sent this Salon article on the Supreme Court justice Clarence Thomas The bigger Clarence Thomas scandal by Ben Adler to Beverly Mann asking her what she thought of the article. The article discusses the possible conflict of interest regarding Judge Thomas’s ruling on Citizen’s United and his failure to disclose his wife’s earnings:

Experts on legal ethics don’t all agree on whether Thomas should have recused himself in Citizens United and whether he will be honor bound to do so for healthcare reform. But they are unanimous in their condemnation of Thomas’ dishonest filings on his disclosure forms. “Since it went on for six years [2003-2007 and 2009] it’s especially troublesome,” says Stephen Gillers, a prominent expert on legal ethics at NYU law school. “It’s impossible to claim it’s an oversight.”

The article makes clear that the rules such as the Code of Judicial Conduct do not apply to Supreme Court Justices, and suggests we take take a look at the matter.

Beberly Mann responds to my query on what she thought of the article:

What a terrific article. Thanks for pointing it out to me.

One thing that jumped out at me was that the expenses for Thomas’s trip to Palm Springs to attend a conference sponsored by the Koch brothers, and which Thomas reported as being paid by the Federalist Society, might have come from Koch Industries instead. I knew that there was a discrepancy between one of Thomas’s versions of events (that he only popped into the conference for a few minutes) and a more recent version (that he attended all four days of the conference. The latter version was given after there were questions raised about the propriety of Thomas’s accepting airfare and four days’ hotel costs from the Federalist Society if he only popped into the conference for a few minutes.

But I didn’t know that there’s some suspicion that it actually was Koch Industries rather than the Federalist Society that paid his expenses. That would be breathtaking, in my opinion, especially if he lied about the source of the money on his disclosure statement.

As for Thomas’s having filed false disclosure statements for at least six years (somewhere, I read that the number of years is greater than six) concerning his wife’s income, a friend of mine has suggested that it violates a particular criminal statute, 18 U.S.C. § 1001, titled “Statements or entries generally. My friend also says, “The DoJ said that the statute was aimed at willful failure to make proper EIGA disclosure.” The EIGA is the Ethics In Government Act of 1978, which is the statute that requires disclosure statements.

This is not my area of expertise, so I can’t (or at least shouldn’t) comment more on this. It is the Department of Justice’s Public Integrity Section’s area of expertise, though, and if the filing of knowingly false disclosure statements does violate that or another criminal statute, then I would hope the DoJ will investigate. I also hope that if it is, the lawyers who work on the matter include Republicans, maybe even a Federalist Society member or two, as well as non-Republicans. This should be entirely apolitical. It really, really bothers me that this justice apparently simply decided to not comply with that law, and that he just presumed that because of his position as a controversial justice he was untouchable because it would cause too much political controversy to actually investigate him under the criminal law (I’m assuming here that this does violate a criminal statute, although, as I said, I don’t really know.)

If the Doj does investigate, it would be done secretly, at least initially.

Another thing mentioned in the article that I didn’t know—but am absolutely ecstatic to hear—is that Grassley had reintroduced a bill to establish an office of inspector general for the federal courts. I know that that was something that was proposed by House and Senate Republican Judiciary Committee members back before the Republicans lost control of both houses in the 2006 election—and it was the single thing on which I agreed with the Republicans rather than the Dems. It was, of course, very controversial. High-profile members of the judiciary, present and retired, complained publicly that this was an assault on the independence of the judiciary.

I absolutely disagree, if it’s set up properly and with meaningful safeguards. To avoid separation-of-powers problems, it would have to be part of the judicial branch, just as the various executive-branch offices of inspector generals, such as the one Justice Department’s Office of Inspector General, are part of the executive branch. But an obviously key part of the setup is that they operative independent of the executive branch hierarchy.

Beverly

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The UK faces a serious inflation issue if oil pops!

Bond markets are pricing in rate hikes this year by the ECB and the BoE. Both are inflation targeters, so which one should react first to a possible spike in oil prices? What’s your answer?

(1) Neither. As FX appreciation and fiscal austerity pass through to domestic prices, the core will drag down the headline. If they hike, stagflation will result.

(2) The ECB, because it is the most hawkish of all central banks, in my view. The ECB mandates a rigid targeting scheme compared to that of the BoE. Since the January 2005, the BoE has successfully targeted inflation slightly under 2% just 27% of the time, while ECB has done so 61% of the time.

(3) The UK. The January 2011 UK inflation rate was 4% Y/Y (3.2% in November on a harmonized basis) and near-double that in the Eurozone, 2.4% according to the flash estimate.

Furthermore, the UK story is not one of just energy and food. The chart below illustrates the diffusion of price inflation across the components of the harmonized HICP (data at Eurostat), and the legend lists the period average for each economy. Diffusion levels above 50 indicate that a larger share of component prices are growing at an annual rate above 2% that below 2%. The diffusion a measure of the breadth of price pressures…

…and is UK inflation broad-based! In contrast, inflation in the Eurozone is focused in the commodity and energy space. Now, I’m not suggesting that the BoE hike – in fact I would recommend the opposite, or at least stay on hold – but I’m sure that the BoE has its vision acutely focused on developments in the Middle East.

If I had to choose an economy that would be derailed by the price spikes in the commodity space, it would be the UK. But I choose (1).

Rebecca Wilder

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