Matt Nolan

Has inflation fallen below the Bank’s target?

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I’ve heard people suggesting that the RBNZ has failed its mandate on the downside, eg this tweet by Vernon Small.

If inflation is 0.6 excluding excise on fags and the RBNZ looks thru Govt charges then hasn’t it just breached 1-3% band on the downside?

Now, I don’t mean to come out to defend the Bank as they can do it fine on their own – but there are a couple of clear issues with this claim I can comment on.

Firstly, as Eric Crampton suggests, the Bank is supposed to aim for inflation outcomes that settle in this range “in the medium term” – moving outside of this range for a single quarter doesn’t imply that they’ve failed anything.

The logic here is that the relative price of goods and services may change, and “unexpected” things may happen that the Bank did not foresee.  If these things happen, then the RBNZ does not want to look backwards – it wants to tell firms and households clearly that they can expect average price growth in this range in the future.

Now, there are a number of indicators of what is expected for inflation – my favourite is the adjusted Labour Cost Index, as it comes from actual behaviour rather than arbitrary reporting by individual firms and households … so what has that been doing?

So in this sense, things look pretty good – in least in so far as the inflation mandate is being met given the current credibility and policy of the RBNZ.

But even in terms of our measures of what “has happened” with inflation, did inflation actually slip temporarily out of the Banks target band?  As I have mentioned before annual growth in the CPI is a poor measure of what “inflation” really is – we want something like the RBNZ’s dynamic factor model (here).  So what is the sectoral factor model telling us?

Now, there is some end-point bias in this (the nearer periods will change as we get more data), but it doesn’t seem to suggest that inflation feel out the bottom of the band – even with the domestic economy, labour market, and global growth all disappointing heavily.

As a result, this type of criticism of the RBNZ doesn’t seem to be warranted.

jamesz

People don’t understand government support

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It’s very fashionable in some circles to call for reductions in government intervention these days. Let people stand on their own two feet, we are told. An interesting article in the NYT suggests that people don’t fully understand the role of the government in providing benefits. Krugman cites US research showing that:

…44 percent of Social Security recipients, 43 percent of those receiving unemployment benefits, and 40 percent of those on Medicare say that they “have not used a government program.”

I don’t know if the results would be similar for NZ: perhaps it depends on how the benefits are delivered and whether a private firm provides them. However, it seems pertinent at a time when the government is focused on reducing the costs of long-term unemployment, even as our healthcare and superannuation expenses are the major fiscal risks for the government. Do voters really understand the fiscal transfers that are occurring and where the government puts the money?

If you’re interested in who receives what benefit from the government then it’s worth having a look at the latest Treasury work on fiscal incidence.

Matt Nolan

Why stop at mini-apartments … what about public bedrooms?

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Over at Marginal Revolution there is talk of mini-apartments to solve the shortage of accommodation in New York City.

This is all well and good, specifically because it reminds me of this time I was standing outside a public toilet.  It was a very flash public toilet with a person sitting in a little glass office keeping an eye on everything, and I was in one of my “stare deeply and inappropriately at things” moods.  At that moment I thought “if we have public toilets, why don’t we have public beds”.

Is it inconceivable that one day we could have a world with public beds?  One where we work eight hours, do activities for another eight hours, and then wander over to a public bed facility to sleep for another eight hours.  Its a relatively dystopian view of the world, but surely its not inconceivable in areas with high population density.

If the price of housing and transportation climb significantly, and government wants to create equality of opportunity for people within large cities, wouldn’t a movement towards public beds/bedrooms make some sense?

jamesz

A test of statistical intuition

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Another dot is going to be added to this chart, in line with the distribution you see here. You get to choose what the X value of the dot is — and your aim is to get a Y value of greater than zero. So here’s the question: at what value of X are you going to have a 95% chance of getting a dot above the axis, in positive territory on the Y axis?

Find out how good your statistical intuition is.

jamesz

There is no such thing as an economic historian

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Economists often get criticised for trying to emulate physicists by arriving at a set of equations that describe human behaviour. There have been innumerable critiques of that approach and the predictive power of economic models is notoriously poor. This article was written in 1986 but feels as if it could have been written yesterday.

…economics, in view of what it is rather than what it claims to be, is a proper subset of history. …[Economists] are trying to do the same thing as historians, namely, to tell plausible stories about the past. …When done well it has the air of good history written by someone who has taken Differential Equations 152.

Which isn’t to say that we can’t learn from the past. In fact, when you read Matt’s posts about the role of economic forecasters he characterises them as story-tellers rather than oracles. The numbers are inevitably wrong but that is not the economist’s forte and shouldn’t be seen as the useful output of the profession. It is to the detriment of all economists that some members of the profession promulgate the view that we are fortune tellers. As McCloskey says, “if economists go on indulging the misapprehensions of their customers, issuing predictions about next month’s exchange rate of next spring’s interest rate, the loss of reputation when the customers catch on will be large, and richly deserved.”

Matt Nolan

Explaining the food headlines

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Yesterday we were told two things in media headlines:

Dairy weighs on food

Food prices up 1.4% in June, biggest monthly rise in a year

So what is it, did food prices go up lots or did they fall?  Who was right, Stuff or NBR?

Well, they were both right – although Stuff was a bit more right 😉

I remember this time last year, people were saying that we had massive inflation on the way – as shown by the price of tomatoes.  This was a load of bullocks, and in the same way the idea that the 1.4% lift in food prices we saw in June is inflationary is bullockey … as food prices tend to rise sharply in June.  Adjusting for the normal seasonal bit, prices were only up 0.2%.

Now Statistics New Zealand doesn’t like to seasonally adjust these figures for a reason – the actual seasonal pattern can be a bit weak and variable.  As a result, we should treat any adjustment with care, and also compare prices now to where they were a year ago – in this way we can note that food prices were down 0.2% from last June.

Falling dairy prices have been a big part of the weakness – as has the fact that we haven’t had a repeat of the Queensland floods from last year, which had pushed up prices for fruit and vegetables significantly!  All in all, the only thing we can take out of the data is that food price growth is really pretty weak.

As a result, if I had to pick which organisation was more accurate with their headline – it was stuff.co.nz.  But neither organisation was completely wrong.