CMP Associates Regulation Blog: Valuation Risks, World Inflation Waves, Squeeze of Economic Activity by Carry Trades Induced by Zero Interest Rates, United States Industrial Production, Unresolved US Balance of Payments Deficits and Fiscal Imbalance Threatening Risk Premium on Treasury Securities, World Cyclical Slow Growth and Global Recession Risk: Part IV

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Valuation Risks, World Inflation Waves, Squeeze of Economic Activity by Carry Trades Induced by Zero Interest Rates, United States Industrial Production, Unresolved US Balance of Payments Deficits and Fiscal Imbalance Threatening Risk Premium on Treasury Securities, World Cyclical Slow Growth and Global Recession Risk

Carlos M. Pelaez

Executive Summary

I World Inflation Waves

IA Appendix: Transmission of Unconventional Monetary Policy

IB1 Theory

IB2 Policy

IB3 Evidence

IB4 Unwinding Strategy

IB United States Inflation

IC Long-term US Inflation

ID Current US Inflation

IE Theory and Reality of Economic History, Cyclical Slow Growth Not Secular Stagnation and Monetary Policy Based on Fear of Deflation

IIA Unresolved US Balance of Payments Deficits and Fiscal Imbalance Threatening Risk Premium on Treasury Securities

IIB United States Industrial Production

III World Financial Turbulence

IIIA Financial Risks

IIIE Appendix Euro Zone Survival Risk

IIIF Appendix on Sovereign Bond Valuation

IV Global Inflation

V World Economic Slowdown

VA United States

VB Japan

VC China

VD Euro Area

VE Germany

VF France

VG Italy

VH United Kingdom

VI Valuation of Risk Financial Assets

VII Economic Indicators

VIII Interest Rates

IX Conclusion

References

Appendixes

Appendix I The Great Inflation

IIIB Appendix on Safe Haven Currencies

IIIC Appendix on Fiscal Compact

IIID Appendix on European Central Bank Large Scale Lender of Last Resort

IIIG Appendix on Deficit Financing of Growth and the Debt Crisis

IIIGA Monetary Policy with Deficit Financing of Economic Growth

IIIGB Adjustment during the Debt Crisis of the 1980s

IV Global Inflation. There is inflation everywhere in the world economy, with slow growth and persistently high unemployment in advanced economies. Table IV-1, updated with every blog comment, provides the latest annual data for GDP, consumer price index (CPI) inflation, producer price index (PPI) inflation and unemployment (UNE) for the advanced economies, China and the highly indebted European countries with sovereign risk issues. The table now includes the Netherlands and Finland that with Germany make up the set of northern countries in the euro zone that hold key votes in the enhancement of the mechanism for solution of sovereign risk issues (Peter Spiegel and Quentin Peel, “Europe: Northern Exposures,” Financial Times, Mar 9, 2011 http://www.ft.com/intl/cms/s/0/55eaf350-4a8b-11e0-82ab-00144feab49a.html#axzz1gAlaswcW). Newly available data on inflation is considered below in this section. Data in Table IV-1 for the euro zone and its members are updated from information provided by Eurostat but individual country information is provided in this section as soon as available, following Table IV-1. Data for other countries in Table IV-1 are also updated with reports from their statistical agencies. Economic data for major regions and countries is considered in Section V World Economic Slowdown following with individual country and regional data tables.

Table IV-1, GDP Growth, Inflation and Unemployment in Selected Countries, Percentage Annual Rates

	GDP	CPI	PPI	UNE
US	2.0	2.0	2.4 FD 2.0	6.3
Japan	3.0	3.4	4.4	3.6
China	7.4	2.5	-1.4
UK	3.1	1.5* CPIH 1.4	0.5 output 1.0** input -5.0	6.6
Euro Zone	0.9	0.5	-1.2	11.7
Germany	2.3	0.6	-0.9	5.2
France	0.8	0.8	-0.9	10.4
Nether-lands	-0.5	0.1	-2.0	7.2
Finland	-0.8	1.0	-1.0	8.5
Belgium	1.2	0.8	-5.1	8.5
Portugal	1.2	-0.3	-0.6	14.6
Ireland	NA	0.4	-0.2	11.9
Italy	-0.5	0.4	-1.8	12.6
Greece	-1.1	-2.1	0.8	26.5
Spain	0.5	0.2	0.1	25.1

Notes: GDP: rate of growth of GDP; CPI: change in consumer price inflation; PPI: producer price inflation; UNE: rate of unemployment; all rates relative to year earlier

*Office for National Statistics http://www.ons.gov.uk/ons/rel/cpi/consumer-price-indices/may-2014/index.html **Core

PPI http://www.ons.gov.uk/ons/rel/ppi2/producer-price-index/may-2014/index.html Source: EUROSTAT http://epp.eurostat.ec.europa.eu/portal/page/portal/eurostat/home/; country statistical sources http://www.census.gov/aboutus/stat_int.html

In the effort to increase transparency, the Federal Open Market Committee (FOMC) provides both economic projections of its participants and views on future paths of the policy rate that in the US is the federal funds rate or interest on interbank lending of reserves deposited at Federal Reserve Banks. These policies and views are discussed initially followed with appropriate analysis.

Charles Evans, President of the Federal Reserve Bank of Chicago, proposed an “economic state-contingent policy” or “7/3” approach (Evans 2012 Aug 27):

“I think the best way to provide forward guidance is by tying our policy actions to explicit measures of economic performance. There are many ways of doing this, including setting a target for the level of nominal GDP. But recognizing the difficult nature of that policy approach, I have a more modest proposal: I think the Fed should make it clear that the federal funds rate will not be increased until the unemployment rate falls below 7 percent. Knowing that rates would stay low until significant progress is made in reducing unemployment would reassure markets and the public that the Fed would not prematurely reduce its accommodation.

Based on the work I have seen, I do not expect that such policy would lead to a major problem with inflation. But I recognize that there is a chance that the models and other analysis supporting this approach could be wrong. Accordingly, I believe that the commitment to low rates should be dropped if the outlook for inflation over the medium term rises above 3 percent.

The economic conditionality in this 7/3 threshold policy would clarify our forward policy intentions greatly and provide a more meaningful guide on how long the federal funds rate will remain low. In addition, I would indicate that clear and steady progress toward stronger growth is essential.”

Evans (2012Nov27) modified the “7/3” approach to a “6.5/2.5” approach:

“I have reassessed my previous 7/3 proposal. I now think a threshold of 6-1/2 percent for the unemployment rate and an inflation safeguard of 2-1/2 percent, measured in terms of the outlook for total PCE (Personal Consumption Expenditures Price Index) inflation over the next two to three years, would be appropriate.”

The Federal Open Market Committee (FOMC) decided at its meeting on Dec 12, 2012 to implement the “6.5/2.5” approach (http://www.federalreserve.gov/newsevents/press/monetary/20121212a.htm):

“To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored.”

Another rising risk is division within the Federal Open Market Committee (FOMC) on risks and benefits of current policies as expressed in the minutes of the meeting held on Jan 29-30, 2013 (http://www.federalreserve.gov/monetarypolicy/files/fomcminutes20130130.pdf 13):

“However, many participants also expressed some concerns about potential costs and risks arising from further asset purchases. Several participants discussed the possible complications that additional purchases could cause for the eventual withdrawal of policy accommodation, a few mentioned the prospect of inflationary risks, and some noted that further asset purchases could foster market behavior that could undermine financial stability. Several participants noted that a very large portfolio of long-duration assets would, under certain circumstances, expose the Federal Reserve to significant capital losses when these holdings were unwound, but others pointed to offsetting factors and one noted that losses would not impede the effective operation of monetary policy.”

Jon Hilsenrath, writing on “Fed maps exit from stimulus,” on May 11, 2013, published in the Wall Street Journal (http://online.wsj.com/article/SB10001424127887324744104578475273101471896.html?mod=WSJ_hp_LEFTWhatsNewsCollection), analyzes the development of strategy for unwinding quantitative easing and how it can create uncertainty in financial markets. Jon Hilsenrath and Victoria McGrane, writing on “Fed slip over how long to keep cash spigot open,” published on Feb 20, 2013 in the Wall street Journal (http://professional.wsj.com/article/SB10001424127887323511804578298121033876536.html), analyze the minutes of the Fed, comments by members of the FOMC and data showing increase in holdings of riskier debt by investors, record issuance of junk bonds, mortgage securities and corporate loans. Jon Hilsenrath, writing on “Jobs upturn isn’t enough to satisfy Fed,” on Mar 8, 2013, published in the Wall Street Journal (http://professional.wsj.com/article/SB10001424127887324582804578348293647760204.html), finds that much stronger labor market conditions are required for the Fed to end quantitative easing. Unconventional monetary policy with zero interest rates and quantitative easing is quite difficult to unwind because of the adverse effects of raising interest rates on valuations of risk financial assets and home prices, including the very own valuation of the securities held outright in the Fed balance sheet. Gradual unwinding of 1 percent fed funds rates from Jun 2003 to Jun 2004 by seventeen consecutive increases of 25 percentage points from Jun 2004 to Jun 2006 to reach 5.25 percent caused default of subprime mortgages and adjustable-rate mortgages linked to the overnight fed funds rate. The zero interest rate has penalized liquidity and increased risks by inducing carry trades from zero interest rates to speculative positions in risk financial assets. There is no exit from zero interest rates without provoking another financial crash.

Unconventional monetary policy will remain in perpetuity, or QE→∞, changing to a “growth mandate.” There are two reasons explaining unconventional monetary policy of QE→∞: insufficiency of job creation to reduce unemployment/underemployment at current rates of job creation; and growth of GDP at around 2.0 percent, which is well below 3.0 percent estimated by Lucas (2011May) from 1870 to 2010. Unconventional monetary policy interprets the dual mandate of low inflation and maximum employment as mainly a “growth mandate” of forcing economic growth in the US at a rate that generates full employment. A hurdle to this “growth mandate” is that US economic growth has been at only 2.2 percent on average in the cyclical expansion in the 19 quarters from IIIQ2009 to IQ2014. Boskin (2010Sep) measures that the US economy grew at 6.2 percent in the first four quarters and 4.5 percent in the first 12 quarters after the trough in the second quarter of 1975; and at 7.7 percent in the first four quarters and 5.8 percent in the first 12 quarters after the trough in the first quarter of 1983 (Professor Michael J. Boskin, Summer of Discontent, Wall Street Journal, Sep 2, 2010 http://professional.wsj.com/article/SB10001424052748703882304575465462926649950.html). There are new calculations using the revision of US GDP and personal income data since 1929 by the Bureau of Economic Analysis (BEA) (http://bea.gov/iTable/index_nipa.cfm) and the second estimate of GDP for IQ2014 (http://www.bea.gov/newsreleases/national/gdp/2014/pdf/gdp1q14_2nd.pdf). The average of 7.7 percent in the first four quarters of major cyclical expansions is in contrast with the rate of growth in the first four quarters of the expansion from IIIQ2009 to IIQ2010 of only 2.7 percent obtained by diving GDP of $14,738.0 billion in IIQ2010 by GDP of $14,356.9 billion in IIQ2009 {[$14,738.0/$14,356.9 -1]100 = 2.7%], or accumulating the quarter on quarter growth rates (http://cmpassocregulationblog.blogspot.com/2014/06/financial-instability-mediocre-cyclical.html and earlier http://cmpassocregulationblog.blogspot.com/2014/05/financial-volatility-mediocre-cyclical.html). The expansion from IQ1983 to IVQ1985 was at the average annual growth rate of 5.9 percent, 5.4 percent from IQ1983 to IIIQ1986, 5.2 percent from IQ1983 to IVQ1986, 5.0 percent from IQ1983 to IQ1987, 5.0 percent from IQ1983 to IIQ1987, 4.9 percent from IQ1983 to IIIQ1987 and at 7.8 percent from IQ1983 to IVQ1983 (http://cmpassocregulationblog.blogspot.com/2014/06/financial-instability-mediocre-cyclical.html and earlier http://cmpassocregulationblog.blogspot.com/2014/05/financial-volatility-mediocre-cyclical.html). The US maintained growth at 3.0 percent on average over entire cycles with expansions at higher rates compensating for contractions. Growth at trend in the entire cycle from IVQ2007 to IQ2014 would have accumulated to 21.2 percent. GDP in IQ2014 would be $18,172.7 billion (in constant dollars of 2009) if the US had grown at trend, which is higher by $2,269.8 billion than actual $15,902.9 billion. There are about two trillion dollars of GDP less than at trend, explaining the 26.6 million unemployed or underemployed equivalent to actual unemployment of 16.2 percent of the effective labor force (http://cmpassocregulationblog.blogspot.com/2014/06/financial-risks-rules-discretionary.html and earlier http://cmpassocregulationblog.blogspot.com/2014/05/financial-volatility-mediocre-cyclical.html). US GDP in IQ2014 is 12.5 percent below than at trend. US GDP grew from $14,996.1 billion in IVQ2007 in constant dollars to $15,902.9 billion in IQ2014 or 6.0 percent at the average annual equivalent rate of 0.9 percent. The US missed the opportunity to grow at higher rates during the expansion and it is difficult to catch up because growth rates in the final periods of expansions tend to decline. The US missed the opportunity for recovery of output and employment always afforded in the first four quarters of expansion from recessions. Zero interest rates and quantitative easing were not required or present in successful cyclical expansions and in secular economic growth at 3.0 percent per year and 2.0 percent per capita as measured by Lucas (2011May). There is cyclical uncommonly slow growth in the US instead of allegations of secular stagnation.

First, total nonfarm payroll employment seasonally adjusted (SA) increased 217,000 in May 2014 and private payroll employment rose 216,000. The average monthly number of nonfarm jobs created from May 2012 to May 2013 was 185,083 using seasonally adjusted data, while the average number of nonfarm jobs created from May 2013 to May 2014 was 198,250, or increase by 7.1 percent. The average number of private jobs created in the US from May 2012 to May 2013 was 189,917, using seasonally adjusted data, while the average from May 2013 to May 2014 was 196,833, or increase by 3.6 percent. This blog calculates the effective labor force of the US at 162.430 million in May 2013 and 163.926 million in May 2014 (Table I-4), for growth of 1.496 million at average 124,667 per month. The difference between the average increase of 196,833 new private nonfarm jobs per month in the US from May 2013 to May 2014 and the 124,667 average monthly increase in the labor force from May 2013 to May 2014 is 72,166 monthly new jobs net of absorption of new entrants in the labor force. There are 26.618 million in job stress in the US currently. Creation of 72,166 new jobs per month net of absorption of new entrants in the labor force would require 369 months to provide jobs for the unemployed and underemployed (26.618 million divided by 72,166) or 31 years (369 divided by 12). The civilian labor force of the US in May 2014 not seasonally adjusted stood at 155.841 million with 9.443 million unemployed or effectively 17.528 million unemployed in this blog’s calculation by inferring those who are not searching because they believe there is no job for them for effective labor force of 163.926 million. Reduction of one million unemployed at the current rate of job creation without adding more unemployment requires 1.2 years (1 million divided by product of 72,166 by 12, which is 865,992). Reduction of the rate of unemployment to 5 percent of the labor force would be equivalent to unemployment of only 7.792 million (0.05 times labor force of 155.841 million) for new net job creation of 1.651 million (9.443] million unemployed minus 7.792 million unemployed at rate of 5 percent) that at the current rate would take 1.9 years (1.651 million divided by 0.865992). Under the calculation in this blog, there are 17.528 million unemployed by including those who ceased searching because they believe there is no job for them and effective labor force of 163.926 million. Reduction of the rate of unemployment to 5 percent of the labor force would require creating 11.257 million jobs net of labor force growth that at the current rate would take 10.8 years (17.528 million minus 0.05(163.926 million) = 9.332 million divided by 0.865992, using LF PART 66.2% and Total UEM in Table I-4). These calculations assume that there are no more recessions, defying United States economic history with periodic contractions of economic activity when unemployment increases sharply. The number employed in May 2014 was 146.398 million (NSA) or 0.917 million fewer people with jobs relative to the peak of 147.315 million in Jul 2007 while the civilian noninstitutional population of ages 16 years and over increased from 231.958 million in Jul 2007 to 247.622 million in May 2014 or by 15.664 million. The number employed fell 0.6 percent from Jul 2007 to May 2014 while the noninstitutional civilian population of ages of 16 years and over, or those available for work, increased 6.8 percent. There is actually not sufficient job creation in merely absorbing new entrants in the labor force because of those dropping from job searches, worsening the stock of unemployed or underemployed in involuntary part-time jobs.

There is current interest in past theories of “secular stagnation.” Alvin H. Hansen (1939, 4, 7; see Hansen 1938, 1941; for an early critique see Simons 1942) argues:

“Not until the problem of full employment of our productive resources from the long-run, secular standpoint was upon us, were we compelled to give serious consideration to those factors and forces in our economy which tend to make business recoveries weak and anaemic (sic) and which tend to prolong and deepen the course of depressions. This is the essence of secular stagnation-sick recoveries which die in their infancy and depressions which feed on them-selves and leave a hard and seemingly immovable core of unemployment. Now the rate of population growth must necessarily play an important role in determining the character of the output; in other words, the com-position of the flow of final goods. Thus a rapidly growing population will demand a much larger per capita volume of new residential building construction than will a stationary population. A stationary population with its larger proportion of old people may perhaps demand more personal services; and the composition of consumer demand will have an important influence on the quantity of capital required. The demand for housing calls for large capital outlays, while the demand for personal services can be met without making large investment expenditures. It is therefore not unlikely that a shift from a rapidly growing population to a stationary or declining one may so alter the composition of the final flow of consumption goods that the ratio of capital to output as a whole will tend to decline.”

The argument that anemic population growth causes “secular stagnation” in the US (Hansen 1938, 1939, 1941) is as misplaced currently as in the late 1930s (for early dissent see Simons 1942). There is currently population growth in the ages of 16 to 24 years but not enough job creation and discouragement of job searches for all ages (http://cmpassocregulationblog.blogspot.com/2014/06/financialgeopolitical-risks-recovery.html and earlier http://cmpassocregulationblog.blogspot.com/2014/05/rules-discretionary-authorities-and.html).

Second, long-term economic performance in the United States consisted of trend growth of GDP at 3 percent per year and of per capita GDP at 2 percent per year as measured for 1870 to 2010 by Robert E Lucas (2011May). The economy returned to trend growth after adverse events such as wars and recessions. The key characteristic of adversities such as recessions was much higher rates of growth in expansion periods that permitted the economy to recover output, income and employment losses that occurred during the contractions. Over the business cycle, the economy compensated the losses of contractions with higher growth in expansions to maintain trend growth of GDP of 3 percent and of GDP per capita of 2 percent. The US maintained growth at 3.0 percent on average over entire cycles with expansions at higher rates compensating for contractions. US economic growth has been at only 2.2 percent on average in the cyclical expansion in the 19 quarters from IIIQ2009 to IQ2014. Boskin (2010Sep) measures that the US economy grew at 6.2 percent in the first four quarters and 4.5 percent in the first 12 quarters after the trough in the second quarter of 1975; and at 7.7 percent in the first four quarters and 5.8 percent in the first 12 quarters after the trough in the first quarter of 1983 (Professor Michael J. Boskin, Summer of Discontent, Wall Street Journal, Sep 2, 2010 http://professional.wsj.com/article/SB10001424052748703882304575465462926649950.html). There are new calculations using the revision of US GDP and personal income data since 1929 by the Bureau of Economic Analysis (BEA) (http://bea.gov/iTable/index_nipa.cfm) and the second estimate of GDP for IQ2014 (http://www.bea.gov/newsreleases/national/gdp/2014/pdf/gdp1q14_2nd.pdf). The average of 7.7 percent in the first four quarters of major cyclical expansions is in contrast with the rate of growth in the first four quarters of the expansion from IIIQ2009 to IIQ2010 of only 2.7 percent obtained by diving GDP of $14,738.0 billion in IIQ2010 by GDP of $14,356.9 billion in IIQ2009 {[$14,738.0/$14,356.9 -1]100 = 2.7%], or accumulating the quarter on quarter growth rates (http://cmpassocregulationblog.blogspot.com/2014/06/financial-instability-mediocre-cyclical.html and earlier http://cmpassocregulationblog.blogspot.com/2014/05/financial-volatility-mediocre-cyclical.html). The expansion from IQ1983 to IVQ1985 was at the average annual growth rate of 5.9 percent, 5.4 percent from IQ1983 to IIIQ1986, 5.2 percent from IQ1983 to IVQ1986, 5.0 percent from IQ1983 to IQ1987, 5.0 percent from IQ1983 to IIQ1987, 4.9 percent from IQ1983 to IIIQ1987 and at 7.8 percent from IQ1983 to IVQ1983 (http://cmpassocregulationblog.blogspot.com/2014/06/financial-instability-mediocre-cyclical.html and earlier http://cmpassocregulationblog.blogspot.com/2014/05/financial-volatility-mediocre-cyclical.html). The US maintained growth at 3.0 percent on average over entire cycles with expansions at higher rates compensating for contractions. Growth at trend in the entire cycle from IVQ2007 to IQ2014 would have accumulated to 21.2 percent. GDP in IQ2014 would be $18,172.7 billion (in constant dollars of 2009) if the US had grown at trend, which is higher by $2,269.8 billion than actual $15,902.9 billion. There are about two trillion dollars of GDP less than at trend, explaining the 26.6 million unemployed or underemployed equivalent to actual unemployment of 16.2 percent of the effective labor force (http://cmpassocregulationblog.blogspot.com/2014/06/financial-risks-rules-discretionary.html and earlier http://cmpassocregulationblog.blogspot.com/2014/05/financial-volatility-mediocre-cyclical.html). US GDP in IQ2014 is 12.5 percent below than at trend. US GDP grew from $14,996.1 billion in IVQ2007 in constant dollars to $15,902.9 billion in IQ2014 or 6.0 percent at the average annual equivalent rate of 0.9 percent. The US missed the opportunity to grow at higher rates during the expansion and it is difficult to catch up because growth rates in the final periods of expansions tend to decline. The US missed the opportunity for recovery of output and employment always afforded in the first four quarters of expansion from recessions. Zero interest rates and quantitative easing were not required or present in successful cyclical expansions and in secular economic growth at 3.0 percent per year and 2.0 percent per capita as measured by Lucas (2011May). There is cyclical uncommonly slow growth in the US instead of allegations of secular stagnation. The economy of the US can be summarized in growth of economic activity or GDP as decelerating from mediocre growth of 2.5 percent on an annual basis in 2010 to 1.8 percent in 2011, 2.8 percent in 2012 and 1.9 percent in 2013. The following calculations show that actual growth is around 1.9 to 2.2 percent per year. The rate of growth of 1.0 percent in the entire cycle from 2007 to 2013 is well below 3 percent per year in trend from 1870 to 2010, which the economy of the US always attained for entire cycles in expansions after events such as wars and recessions (Lucas 2011May). Revisions and enhancements of United States GDP and personal income accounts by the Bureau of Economic Analysis (BEA) (http://bea.gov/iTable/index_nipa.cfm) provide important information on long-term growth and cyclical behavior. Table Summary provides relevant data.

Long-term. US GDP grew at the average yearly rate of 3.3 percent from 1929 to 2013 and at 3.2 percent from 1947 to 2013. There were periodic contractions or recessions in this period but the economy grew at faster rates in the subsequent expansions, maintaining long-term economic growth at trend.
Whole Cycles. Long-term growth was around 3.0 percent per year during entire cycles including contractions and expansions. The average growth rate of GDP was 3.5 percent per year in the entire cycle from 1980 to 1989 but only 1.0 percent in the entire cycle from 2007 to 2013.
Cycles. The combined contraction of GDP in the two almost consecutive recessions in the early 1980s is 4.7 percent. The contraction of US GDP from IVQ2007 to IIQ2009 during the global recession was 4.3 percent. The critical difference in the expansion is growth at average 7.8 percent in annual equivalent in the first four quarters of recovery from IQ1983 to IVQ1983. The average rate of growth of GDP in four cyclical expansions in the postwar period is 7.7 percent. In contrast, the rate of growth in the first four quarters from IIIQ2009 to IIQ2010 was only 2.7 percent. Average annual equivalent growth in the expansion from IQ1983 to IVQ1985 was 5.9 percent and 4.9 percent from IQ1983 to IIIQ1987. In contrast, average annual equivalent growth in the expansion from IIIQ2009 to IQ2014 was only 2.2 percent. The US appears to have lost its dynamism of income growth and employment creation.

Table Summary, Long-term and Cyclical Growth of GDP, Real Disposable Income and Real Disposable Income per Capita

	GDP
Long-Term
1929-2013	3.3
1947-2013	3.2
Whole Cycles
1980-1989	3.5
2006-2013	1.1
2007-2013	1.0
Cyclical Contractions ∆%
IQ1980 to IIIQ1980, IIIQ1981 to IVQ1982	-4.7
IVQ2007 to IIQ2009	-4.3
Cyclical Expansions Average Annual Equivalent ∆%
IQ1983 to IVQ1985 IQ1983-IQ1986 IQ1983-IIIQ1986 IQ1983-IVQ1986 IQ1983-IQ1987 IQ1983-IIQ1987 IQ1983-IIIQ1987	5.9 5.7 5.4 5.2 5.0 5.0 4.9
First Four Quarters IQ1983 to IVQ1983	7.8
IIIQ2009 to IQ2014	2.2
First Four Quarters IIIQ2009 to IIQ2010	2.7
	Real Disposable Income	Real Disposable Income per Capita
Long-Term
1929-2013	3.2	2.0
1947-1999	3.7	2.3
Whole Cycles
1980-1989	3.5	2.6
2006-2013	1.3	0.5

Source: Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm

The revisions and enhancements of United States GDP and personal income accounts by the Bureau of Economic Analysis (BEA) (http://bea.gov/iTable/index_nipa.cfm) also provide critical information in assessing the current rhythm of US economic growth. The economy appears to be moving at a pace from 1.9 to 2.2 percent per year. Table Summary GDP provides the data.

Average Annual Growth in the Past Eight Quarters. GDP growth in the four quarters of 2012, the four quarters of 2013 and the first quarter of 2014 accumulated to 4.3 percent. This growth is equivalent to 1.9 percent per year, obtained by dividing GDP in IQ2014 of $15,902.9 billion by GDP in IVQ2011 of $15,242.1 billion and compounding by 4/9: {[($15,902.9/$15,242.1)^4/9 -1]100 = 1.9 percent.
Average Annual Growth in the Past Four Quarters. GDP growth in the four quarters of IQ2013 to IQ2014 accumulated to 2.3 percent that is equivalent to 2.3 percent in a year. This is obtained by dividing GDP in IQ2014 of $15,902.9 billion by GDP in IQQ2013 of $15,583.9 billion and compounding by 4/4: {[($15,902.9/$15,583.9)^4/4 -1]100 = 2.0%}. The US economy grew 2.0 percent in IQQ2014 relative to the same quarter a year earlier in IQ2013. Another important revelation of the revisions and enhancements is that GDP was flat in IVQ2012 and in IQ2014, which is just at the borderline of contraction. US GDP fell 0.2 percent in IQ2014. The rate of growth of GDP in the third estimate of IIIQ2013 is 4.1 percent in seasonally adjusted annual rate (SAAR). Inventory accumulation contributed 1.67 percentage points to this rate of growth. The actual rate without this impulse of unsold inventories would have been 2.43 percent, or 0.6 percent in IIIQ2013, such that annual equivalent growth in 2013 is closer to 2.2 percent {[(1.003)(1.006)(1.006)(1.007)^4/4-1]100 = 2.2%}, compounding the quarterly rates and converting into annual equivalent. Inventory divestment deducted 1.62 percentage points from GDP growth in IQ2014. Without this deduction of inventory divestment, GDP growth would have been 0.64 percent in IQ2014, such that the actual growth rates in the four quarters ending in IQ2014 is closer to 3.0 percent {[(1.006)(1.01)(1.007)(1.0064)]^4/4 -1]100 = 3.0%}.

Table Summary GDP, US, Real GDP and Percentage Change Relative to IVQ2007 and Prior Quarter, Billions Chained 2005 Dollars and ∆%

	Real GDP, Billions Chained 2009 Dollars	∆% Relative to IVQ2007	∆% Relative to Prior Quarter	∆% over Year Earlier
IVQ2007	14,996.1	NA	NA	1.9
IVQ2011	15,242.1	1.6	1.2	2.0
IQ2012	15,381.6	2.6	0.9	3.3
IIQ2012	15,427.7	2.9	0.3	2.8
IIIQ2012	15,534.0	3.6	0.7	3.1
IVQ2012	15,539.6	3.6	0.0	2.0
IQ2013	15,583.9	3.9	0.3	1.3
IIQ2013	15,679.7	4.6	0.6	1.6
IIIQ2013	15,839.3	5.6	1.0	2.0
IVQ2013	15,942.3	6.3	0.7	2.6
IQ2014	15,902.9	6.0	-0.2	2.0
Cumulative ∆% IQ2012 to IQ2014	4.3		4.4
Annual Equivalent ∆%	1.9		1.9

Source: US Bureau of Economic Analysis http://www.bea.gov/iTable/index_nipa.cfm

In fact, it is evident to the public that this policy will be abandoned if inflation costs rise. There is concern of the production and employment costs of controlling future inflation. Even if there is no inflation, QE→∞ cannot be abandoned because of the fear of rising interest rates. The economy would operate in an inferior allocation of resources and suboptimal growth path, or interior point of the production possibilities frontier where the optimum of productive efficiency and wellbeing is attained, because of the distortion of risk/return decisions caused by perpetual financial repression. Not even a second-best allocation is feasible with the shocks to efficiency of financial repression in perpetuity.

The statement of the FOMC at the conclusion of its meeting on Dec 12, 2012, revealed policy intentions (http://www.federalreserve.gov/newsevents/press/monetary/20121212a.htm) practically unchanged in the statement at its meeting on Jun 18, 2014 with symbolic reduction of purchases of securities for the Fed’s balance sheet (http://www.federalreserve.gov/newsevents/press/monetary/20140618a.htm):

“Press Release

Release Date: June 18, 2014

For immediate release

Information received since the Federal Open Market Committee met in April indicates that growth in economic activity has rebounded in recent months. Labor market indicators generally showed further improvement. The unemployment rate, though lower, remains elevated. Household spending appears to be rising moderately and business fixed investment resumed its advance, while the recovery in the housing sector remained slow. Fiscal policy is restraining economic growth, although the extent of restraint is diminishing. Inflation has been running below the Committee's longer-run objective, but longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace and labor market conditions will continue to improve gradually, moving toward those the Committee judges consistent with its dual mandate. The Committee sees the risks to the outlook for the economy and the labor market as nearly balanced. The Committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, and it is monitoring inflation developments carefully for evidence that inflation will move back toward its objective over the medium term.

The Committee currently judges that there is sufficient underlying strength in the broader economy to support ongoing improvement in labor market conditions. In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions since the inception of the current asset purchase program, the Committee decided to make a further measured reduction in the pace of its asset purchases. Beginning in July, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $15 billion per month rather than $20 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $20 billion per month rather than $25 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee's sizable and still-increasing holdings of longer-term securities should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative, which in turn should promote a stronger economic recovery and help to ensure that inflation, over time, is at the rate most consistent with the Committee's dual mandate.

The Committee will closely monitor incoming information on economic and financial developments in coming months and will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability. If incoming information broadly supports the Committee's expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective, the Committee will likely reduce the pace of asset purchases in further measured steps at future meetings. However, asset purchases are not on a preset course, and the Committee's decisions about their pace will remain contingent on the Committee's outlook for the labor market and inflation as well as its assessment of the likely efficacy and costs of such purchases.

To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy remains appropriate. In determining how long to maintain the current 0 to 1/4 percent target range for the federal funds rate, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. The Committee continues to anticipate, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends, especially if projected inflation continues to run below the Committee's 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored.

When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.

Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Stanley Fischer; Richard W. Fisher; Narayana Kocherlakota; Loretta J. Mester; Charles I. Plosser; Jerome H. Powell; and Daniel K. Tarullo.”

There are several important issues in this statement.

Mandate. The FOMC pursues a policy of attaining its “dual mandate” of (http://www.federalreserve.gov/aboutthefed/mission.htm):

“Conducting the nation's monetary policy by influencing the monetary and credit conditions in the economy in pursuit of maximum employment, stable prices, and moderate long-term interest rates”

Open-ended Quantitative Easing or QE_∞ with Symbolic Tapering. Earlier programs are continued with an additional lower open-ended $35 billion of bond purchases per month, increasing the stock of $4,103,522 million securities held outright and bank reserves deposited at the Fed of $2,637,585 million (http://www.federalreserve.gov/releases/h41/current/h41.htm#h41tab1): “The Committee currently judges that there is sufficient underlying strength in the broader economy to support ongoing improvement in labor market conditions. In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions since the inception of the current asset purchase program, the Committee decided to make a further measured reduction in the pace of its asset purchases. Beginning in July, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $15 billion per month rather than $20 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $20 billion per month rather than $25 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee's sizable and still-increasing holdings of longer-term securities should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative, which in turn should promote a stronger economic recovery and help to ensure that inflation, over time, is at the rate most consistent with the Committee's dual mandate.”
New Advance Guidance.” Policy will be accommodative even after the economy recovers satisfactorily: “To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy remains appropriate. In determining how long to maintain the current 0 to 1/4 percent target range for the federal funds rate, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. The Committee continues to anticipate, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends, especially if projected inflation continues to run below the Committee's 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored” (emphasis added).
Policy Commitment with Unemployment Rate. The emphasis of policy is in maintaining full employment: “When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.”

Current focus is on tapering quantitative easing by the Federal Open Market Committee (FOMC). There is sharp distinction between the two measures of unconventional monetary policy: (1) fixing of the overnight rate of fed funds at 0 to ¼ percent; and (2) outright purchase of Treasury and agency securities and mortgage-backed securities for the balance sheet of the Federal Reserve. Market are overreacting to the so-called “paring” of outright purchases to $35 billion of securities per month for the balance sheet of the Fed. What is truly important is the fixing of the overnight fed funds at 0 to ¼ percent for which there is no end in sight as evident in the FOMC statement for Jun 18, 2014 (http://www.federalreserve.gov/newsevents/press/monetary/20140618a.htm):

“To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy remains appropriate. In determining how long to maintain the current 0 to 1/4 percent target range for the federal funds rate, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. The Committee continues to anticipate, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends, especially if projected inflation continues to run below the Committee's 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored” (emphasis added).

How long is “considerable time”? At the press conference following the meeting on Mar 19, 2014, Chair Yellen answered a question of Jon Hilsenrath of the Wall Street Journal explaining “In particular, the Committee has endorsed the view that it anticipates that will be a considerable period after the asset purchase program ends before it will be appropriate to begin to raise rates. And of course on our present path, well, that's not utterly preset. We would be looking at next, next fall. So, I think that's important guidance” (http://www.federalreserve.gov/mediacenter/files/FOMCpresconf20140319.pdf). Many focused on “next fall,” ignoring that the path of increasing rates is not “utterly preset.”

At a speech on Mar 31, 2014, Chair Yellen analyzed labor market conditions as follows (http://www.federalreserve.gov/newsevents/speech/yellen20140331a.htm):

“And based on the evidence available, it is clear to me that the U.S. economy is still considerably short of the two goals assigned to the Federal Reserve by the Congress. The first of those goals is maximum sustainable employment, the highest level of employment that can be sustained while maintaining a stable inflation rate. Most of my colleagues on the Federal Open Market Committee and I estimate that the unemployment rate consistent with maximum sustainable employment is now between 5.2 percent and 5.6 percent, well below the 6.7 percent rate in February.

Let me explain what I mean by that word "slack" and why it is so important.

Slack means that there are significantly more people willing and capable of filling a job than there are jobs for them to fill. During a period of little or no slack, there still may be vacant jobs and people who want to work, but a large share of those willing to work lack the skills or are otherwise not well suited for the jobs that are available. With 6.7 percent unemployment, it might seem that there must be a lot of slack in the U.S. economy, but there are reasons why that may not be true.”

Chair Yellen analyzes the view of inflation (http://www.federalreserve.gov/newsevents/speech/yellen20140416a.htm):

“Inflation, as measured by the price index for personal consumption expenditures, has slowed from an annual rate of about 2-1/2 percent in early 2012 to less than 1 percent in February of this year. This rate is well below the Committee's 2 percent longer-run objective. Many advanced economies are observing a similar softness in inflation.

To some extent, the low rate of inflation seems due to influences that are likely to be temporary, including a deceleration in consumer energy prices and outright declines in core import prices in recent quarters. Longer-run inflation expectations have remained remarkably steady, however. We anticipate that, as the effects of transitory factors subside and as labor market gains continue, inflation will gradually move back toward 2 percent.”

There is a critical phrase in the statement of Sep 19, 2013 (http://www.federalreserve.gov/newsevents/press/monetary/20130918a.htm): “but mortgage rates have risen further.” Did the increase of mortgage rates influence the decision of the FOMC not to taper? Is FOMC “communication” and “guidance” successful? Will the FOMC increase purchases of mortgage-backed securities if mortgage rates increase?

Perhaps one of the most critical statements on policy is the answer to a question of Peter Barnes by Chair Janet Yellen at the press conference following the meeting on Jun 18, 2014 (page 19 at http://www.federalreserve.gov/mediacenter/files/FOMCpresconf20140618.pdf):

So I don't have a sense--the committee doesn't try to gauge what is the right level of equity prices. But we do certainly monitor a number of different metrics that give us a feeling for where valuations are relative to things like earnings or dividends, and look at where these metrics stand in comparison with previous history to get a sense of whether or not we're moving to valuation levels that are outside of historical norms, and I still don't see that. I still don't see that for equity prices broadly” (emphasis added).

Bernanke (2010WP) and Yellen (2011AS) reveal the emphasis of monetary policy on the impact of the rise of stock market valuations in stimulating consumption by wealth effects on household confidence. What is the success in evaluating deviations of valuations of risk financial assets from “historical norms”? What are the consequences on economic activity and employment of deviations of valuations of risk financial assets from those “historical norms”? What are the policy tools and their effectiveness in returning valuations of risk financial assets to their “historical norms”?

In testimony on the Semiannual Monetary Policy Report to the Congress before the Committee on Financial Services, US House of Representatives, on Feb 11, 2014, Chair Janet Yellen states (http://www.federalreserve.gov/newsevents/testimony/yellen20140211a.htm):

“Turning to monetary policy, let me emphasize that I expect a great deal of continuity in the FOMC's approach to monetary policy. I served on the Committee as we formulated our current policy strategy and I strongly support that strategy, which is designed to fulfill the Federal Reserve's statutory mandate of maximum employment and price stability. If incoming information broadly supports the Committee's expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective, the Committee will likely reduce the pace of asset purchases in further measured steps at future meetings. That said, purchases are not on a preset course, and the Committee's decisions about their pace will remain contingent on its outlook for the labor market and inflation as well as its assessment of the likely efficacy and costs of such purchases. In December of last year and again this January, the Committee said that its current expectation--based on its assessment of a broad range of measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments--is that it likely will be appropriate to maintain the current target range for the federal funds rate well past the time that the unemployment rate declines below 6-1/2 percent, especially if projected inflation continues to run below the 2 percent goal. I am committed to achieving both parts of our dual mandate: helping the economy return to full employment and returning inflation to 2 percent while ensuring that it does not run persistently above or below that level (emphasis added).”

At the confirmation hearing on nomination for Chair of the Board of Governors of the Federal Reserve System, Vice Chair Yellen (2013Nov14 http://www.federalreserve.gov/newsevents/testimony/yellen20131114a.htm), states needs and intentions of policy:

“We have made good progress, but we have farther to go to regain the ground lost in the crisis and the recession. Unemployment is down from a peak of 10 percent, but at 7.3 percent in October, it is still too high, reflecting a labor market and economy performing far short of their potential. At the same time, inflation has been running below the Federal Reserve's goal of 2 percent and is expected to continue to do so for some time.

For these reasons, the Federal Reserve is using its monetary policy tools to promote a more robust recovery. A strong recovery will ultimately enable the Fed to reduce its monetary accommodation and reliance on unconventional policy tools such as asset purchases. I believe that supporting the recovery today is the surest path to returning to a more normal approach to monetary policy.”

In testimony before the Committee on the Budget of the US Senate on May 8, 2004, Chair Yellen provides analysis of the current economic situation and outlook (http://www.federalreserve.gov/newsevents/testimony/yellen20140507a.htm):

“The economy has continued to recover from the steep recession of 2008 and 2009. Real gross domestic product (GDP) growth stepped up to an average annual rate of about 3-1/4 percent over the second half of last year, a faster pace than in the first half and during the preceding two years. Although real GDP growth is currently estimated to have paused in the first quarter of this year, I see that pause as mostly reflecting transitory factors, including the effects of the unusually cold and snowy winter weather. With the harsh winter behind us, many recent indicators suggest that a rebound in spending and production is already under way, putting the overall economy on track for solid growth in the current quarter. One cautionary note, though, is that readings on housing activity--a sector that has been recovering since 2011--have remained disappointing so far this year and will bear watching.

Conditions in the labor market have continued to improve. The unemployment rate was 6.3 percent in April, about 1-1/4 percentage points below where it was a year ago. Moreover, gains in payroll employment averaged nearly 200,000 jobs per month over the past year. During the economic recovery so far, payroll employment has increased by about 8-1/2 million jobs since its low point, and the unemployment rate has declined about 3-3/4 percentage points since its peak.

While conditions in the labor market have improved appreciably, they are still far from satisfactory. Even with recent declines in the unemployment rate, it continues to be elevated. Moreover, both the share of the labor force that has been unemployed for more than six months and the number of individuals who work part time but would prefer a full-time job are at historically high levels. In addition, most measures of labor compensation have been rising slowly--another signal that a substantial amount of slack remains in the labor market.

Inflation has been quite low even as the economy has continued to expand. Some of the factors contributing to the softness in inflation over the past year, such as the declines seen in non-oil import prices, will probably be transitory. Importantly, measures of longer-run inflation expectations have remained stable. That said, the Federal Open Market Committee (FOMC) recognizes that inflation persistently below 2 percent--the rate that the Committee judges to be most consistent with its dual mandate--could pose risks to economic performance, and we are monitoring inflation developments closely.

Looking ahead, I expect that economic activity will expand at a somewhat faster pace this year than it did last year, that the unemployment rate will continue to decline gradually, and that inflation will begin to move up toward 2 percent. A faster rate of economic growth this year should be supported by reduced restraint from changes in fiscal policy, gains in household net worth from increases in home prices and equity values, a firming in foreign economic growth, and further improvements in household and business confidence as the economy continues to strengthen. Moreover, U.S. financial conditions remain supportive of growth in economic activity and employment.”

In his classic restatement of the Keynesian demand function in terms of “liquidity preference as behavior toward risk,” James Tobin (http://www.nobelprize.org/nobel_prizes/economic-sciences/laureates/1981/tobin-bio.html) identifies the risks of low interest rates in terms of portfolio allocation (Tobin 1958, 86):

“The assumption that investors expect on balance no change in the rate of interest has been adopted for the theoretical reasons explained in section 2.6 rather than for reasons of realism. Clearly investors do form expectations of changes in interest rates and differ from each other in their expectations. For the purposes of dynamic theory and of analysis of specific market situations, the theories of sections 2 and 3 are complementary rather than competitive. The formal apparatus of section 3 will serve just as well for a non-zero expected capital gain or loss as for a zero expected value of g. Stickiness of interest rate expectations would mean that the expected value of g is a function of the rate of interest r, going down when r goes down and rising when r goes up. In addition to the rotation of the opportunity locus due to a change in r itself, there would be a further rotation in the same direction due to the accompanying change in the expected capital gain or loss. At low interest rates expectation of capital loss may push the opportunity locus into the negative quadrant, so that the optimal position is clearly no consols, all cash. At the other extreme, expectation of capital gain at high interest rates would increase sharply the slope of the opportunity locus and the frequency of no cash, all consols positions, like that of Figure 3.3. The stickier the investor's expectations, the more sensitive his demand for cash will be to changes in the rate of interest (emphasis added).”

Tobin (1969) provides more elegant, complete analysis of portfolio allocation in a general equilibrium model. The major point is equally clear in a portfolio consisting of only cash balances and a perpetuity or consol. Let g be the capital gain, r the rate of interest on the consol and r^e the expected rate of interest. The rates are expressed as proportions. The price of the consol is the inverse of the interest rate, (1+r^e). Thus, g = [(r/r^e) – 1]. The critical analysis of Tobin is that at extremely low interest rates there is only expectation of interest rate increases, that is, dr^e>0, such that there is expectation of capital losses on the consol, dg<0. Investors move into positions combining only cash and no consols. Valuations of risk financial assets would collapse in reversal of long positions in carry trades with short exposures in a flight to cash. There is no exit from a central bank created liquidity trap without risks of financial crash and another global recession. The net worth of the economy depends on interest rates. In theory, “income is generally defined as the amount a consumer unit could consume (or believe that it could) while maintaining its wealth intact” (Friedman 1957, 10). Income, Y, is a flow that is obtained by applying a rate of return, r, to a stock of wealth, W, or Y = rW (Ibid). According to a subsequent statement: “The basic idea is simply that individuals live for many years and that therefore the appropriate constraint for consumption is the long-run expected yield from wealth r*W. This yield was named permanent income: Y* = r*W” (Darby 1974, 229), where * denotes permanent. The simplified relation of income and wealth can be restated as:

W = Y/r (10

Equation (1) shows that as r goes to zero, r→0, W grows without bound, W→∞. Unconventional monetary policy lowers interest rates to increase the present value of cash flows derived from projects of firms, creating the impression of long-term increase in net worth. An attempt to reverse unconventional monetary policy necessarily causes increases in interest rates, creating the opposite perception of declining net worth. As r→∞, W = Y/r →0. There is no exit from unconventional monetary policy without increasing interest rates with resulting pain of financial crisis and adverse effects on production, investment and employment.

In delivering the biannual report on monetary policy (Board of Governors 2013Jul17), Chairman Bernanke (2013Jul17) advised Congress that:

“Instead, we are providing additional policy accommodation through two distinct yet complementary policy tools. The first tool is expanding the Federal Reserve's portfolio of longer-term Treasury securities and agency mortgage-backed securities (MBS); we are currently purchasing $40 billion per month in agency MBS and $45 billion per month in Treasuries. We are using asset purchases and the resulting expansion of the Federal Reserve's balance sheet primarily to increase the near-term momentum of the economy, with the specific goal of achieving a substantial improvement in the outlook for the labor market in a context of price stability. We have made some progress toward this goal, and, with inflation subdued, we intend to continue our purchases until a substantial improvement in the labor market outlook has been realized. We are relying on near-zero short-term interest rates, together with our forward guidance that rates will continue to be exceptionally low--our second tool--to help maintain a high degree of monetary accommodation for an extended period after asset purchases end, even as the economic recovery strengthens and unemployment declines toward more-normal levels. In appropriate combination, these two tools can provide the high level of policy accommodation needed to promote a stronger economic recovery with price stability.

The Committee's decisions regarding the asset purchase program (and the overall stance of monetary policy) depend on our assessment of the economic outlook and of the cumulative progress toward our objectives. Of course, economic forecasts must be revised when new information arrives and are thus necessarily provisional.”

Friedman (1953) argues there are three lags in effects of monetary policy: (1) between the need for action and recognition of the need; (2) the recognition of the need and taking of actions; and (3) taking of action and actual effects. Friedman (1953) finds that the combination of these lags with insufficient knowledge of the current and future behavior of the economy causes discretionary economic policy to increase instability of the economy or standard deviations of real income σ_y and prices σ_p. Policy attempts to circumvent the lags by policy impulses based on forecasts. We are all naïve about forecasting. Data are available with lags and revised to maintain high standards of estimation. Policy simulation models estimate economic relations with structures prevailing before simulations of policy impulses such that parameters change as discovered by Lucas (1977). Economic agents adjust their behavior in ways that cause opposite results from those intended by optimal control policy as discovered by Kydland and Prescott (1977). Advance guidance attempts to circumvent expectations by economic agents that could reverse policy impulses but is of dubious effectiveness. There is strong case for using rules instead of discretionary authorities in monetary policy (http://cmpassocregulationblog.blogspot.com/search?q=rules+versus+authorities).

The key policy is maintaining fed funds rate between 0 and ¼ percent. An increase in fed funds rates could cause flight out of risk financial markets worldwide. There is no exit from this policy without major financial market repercussions. Indefinite financial repression induces carry trades with high leverage, risks and illiquidity.

Unconventional monetary policy drives wide swings in allocations of positions into risk financial assets that generate instability instead of intended pursuit of prosperity without inflation. There is insufficient knowledge and imperfect tools to maintain the gap of actual relative to potential output constantly at zero while restraining inflation in an open interval of (1.99, 2.0). Symmetric targets appear to have been abandoned in favor of a self-imposed single jobs mandate of easing monetary policy even with the economy growing at or close to potential output that is actually a target of growth forecast. The impact on the overall economy and the financial system of errors of policy are magnified by large-scale policy doses of trillions of dollars of quantitative easing and zero interest rates. The US economy has been experiencing financial repression as a result of negative real rates of interest during nearly a decade and programmed in monetary policy statements until 2015 or, for practical purposes, forever. The essential calculus of risk/return in capital budgeting and financial allocations has been distorted. If economic perspectives are doomed until 2015 such as to warrant zero interest rates and open-ended bond-buying by “printing” digital bank reserves (http://cmpassocregulationblog.blogspot.com/2010/12/is-fed-printing-money-what-are.html; see Shultz et al 2012), rational investors and consumers will not invest and consume until just before interest rates are likely to increase. Monetary policy statements on intentions of zero interest rates for another three years or now virtually forever discourage investment and consumption or aggregate demand that can increase economic growth and generate more hiring and opportunities to increase wages and salaries. The doom scenario used to justify monetary policy accentuates adverse expectations on discounted future cash flows of potential economic projects that can revive the economy and create jobs. If it were possible to project the future with the central tendency of the monetary policy scenario and monetary policy tools do exist to reverse this adversity, why the tools have not worked before and even prevented the financial crisis? If there is such thing as “monetary policy science”, why it has such poor record and current inability to reverse production and employment adversity? There is no excuse of arguing that additional fiscal measures are needed because they were deployed simultaneously with similar ineffectiveness. Jon Hilsenrath, writing on “New view into Fed’s response to crisis,” on Feb 21, 2014, published in the Wall Street Journal (http://online.wsj.com/news/articles/SB10001424052702303775504579396803024281322?mod=WSJ_hp_LEFTWhatsNewsCollection), analyzes 1865 pages of transcripts of eight formal and six emergency policy meetings at the Fed in 2008 (http://www.federalreserve.gov/monetarypolicy/fomchistorical2008.htm). If there were an infallible science of central banking, models and forecasts would provide accurate information to policymakers on the future course of the economy in advance. Such forewarning is essential to central bank science because of the long lag between the actual impulse of monetary policy and the actual full effects on income and prices many months and even years ahead (Romer and Romer 2004, Friedman 1961, 1953, Culbertson 1960, 1961, Batini and Nelson 2002). The transcripts of the Fed meetings in 2008 (http://www.federalreserve.gov/monetarypolicy/fomchistorical2008.htm) analyzed by Jon Hilsenrath demonstrate that Fed policymakers frequently did not understand the current state of the US economy in 2008 and much less the direction of income and prices. The conclusion of Friedman (1953) is that monetary impulses increase financial and economic instability because of lags in anticipating needs of policy, taking policy decisions and effects of decisions. This is a fortiori true when untested unconventional monetary policy in gargantuan doses shocks the economy and financial markets.

In remarkable anticipation in 2005, Professor Raghuram G. Rajan (2005) warned of low liquidity and high risks of central bank policy rates approaching the zero bound (Pelaez and Pelaez, Regulation of Banks and Finance (2009b), 218-9). Professor Rajan excelled in a distinguished career as an academic economist in finance and was chief economist of the International Monetary Fund (IMF). Shefali Anand and Jon Hilsenrath, writing on Oct 13, 2013, on “India’s central banker lobbies Fed,” published in the Wall Street Journal (http://online.wsj.com/news/articles/SB10001424052702304330904579133530766149484?KEYWORDS=Rajan), interviewed Raghuram G Rajan, who is the current Governor of the Reserve Bank of India, which is India’s central bank (http://www.rbi.org.in/scripts/AboutusDisplay.aspx). In this interview, Rajan argues that central banks should avoid unintended consequences on emerging market economies of inflows and outflows of capital triggered by monetary policy. Portfolio reallocations induced by combination of zero interest rates and risk events stimulate carry trades that generate wide swings in world capital flows. Professor Rajan, in an interview with Kartik Goyal of Bloomberg (http://www.bloomberg.com/news/2014-01-30/rajan-warns-of-global-policy-breakdown-as-emerging-markets-slide.html), warns of breakdown of global policy coordination.

Professor Ronald I. McKinnon (2013Oct27), writing on “Tapering without tears—how to end QE3,” on Oct 27, 2013, published in the Wall Street Journal (http://online.wsj.com/news/articles/SB10001424052702304799404579153693500945608?KEYWORDS=Ronald+I+McKinnon), finds that the major central banks of the world have fallen into a “near-zero-interest-rate trap.” World economic conditions are weak such that exit from the zero interest rate trap could have adverse effects on production, investment and employment. The maintenance of interest rates near zero creates long-term near stagnation. The proposal of Professor McKinnon is credible, coordinated increase of policy interest rates toward 2 percent. Professor John B. Taylor at Stanford University, writing on “Economic failures cause political polarization,” on Oct 28, 2013, published in the Wall Street Journal (http://online.wsj.com/news/articles/SB10001424052702303442004579121010753999086?KEYWORDS=John+B+Taylor), analyzes that excessive risks induced by near zero interest rates in 2003-2004 caused the financial crash. Monetary policy continued in similar paths during and after the global recession with resulting political polarization worldwide.

Table IV-2 provides economic projections of governors of the Board of Governors of the Federal Reserve and regional presidents of Federal Reserve Banks released at the meeting of Jun 18, 2014. The Fed releases the data with careful explanations (http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20131218.pdf). Columns “∆% GDP,” “∆% PCE Inflation” and “∆% Core PCE Inflation” are changes “from the fourth quarter of the previous year to the fourth quarter of the year indicated.” The GDP report for IQ2014 is analyzed in Section I (http://cmpassocregulationblog.blogspot.com/2014/06/financial-instability-mediocre-cyclical.html

It is instructive to focus on 2014 and 2015 because 2016 and longer term are too far away, and there is not much information even on what will happen in 2014-2015 and beyond. The central tendency should provide reasonable approximation of the view of the majority of members of the FOMC but the second block of numbers provides the range of projections by FOMC participants. The first row for each year shows the projection introduced after the meeting of Jun 18, 2014 and the second row “PR” the projection of the Mar 19, 2014 meeting. There are three changes in the view.

1. Growth “∆% GDP.” The FOMC has changed the forecast of GDP growth in 2014. The FOMC decreased GDP growth in 2014 from 2.8 to 3.0 percent at the meeting in Mar 2014 to 2.1 to 2.3 percent at the meeting in Jun 2014.

2. Rate of Unemployment “UNEM%.” The FOMC reduced the forecast of the rate of unemployment for 2014 from 6.1 to 6.3 percent at the meeting on Mar 19, 2014 to 6.0 to 6.1 percent at the meeting on Jun 18, 2014. The projection for 2015 decreased to the range of 5.4 to 5.7 in Jun 2014 from 5.6 to 5.9 in Mar 2014. Projections of the rate of unemployment are moving closer to the desire 6.5 percent or lower with 5.1 to 5.5 percent in 2016 after the meeting on Jun 18, 2014.

3. Inflation “∆% PCE Inflation.” The FOMC changed the forecast of personal consumption expenditures (PCE) inflation for 2014 from 1.5 to 1.6 percent at the meeting on Mar 19, 2014 to 1.5 to 1.7 percent at the meeting on Jun 18, 2014. There are no projections exceeding 2.0 percent in the central tendency but some in the range reach 2.4 percent in 2015. The longer run projection is at 2.0 percent.

4. Core Inflation “∆% Core PCE Inflation.” Core inflation is PCE inflation excluding food and energy. There is again not much of a difference of the projection for 2014, not changing significantly from 1.4 to 1.6 percent at the meeting on Mar 19, 20134 to 1.5 to 1.6 percent at the meeting Jun 18, 2014. In 2015, there is minor change in the projection from 1.7 to 2.0 percent at the meeting on Mar 19, 2014 to 1.6 to 2.0 percent on Jun 18, 2014. The rate of change of the core PCE is below 2.0 percent in the central tendency with 2.4 percent at the top of the range in 2015.

Table IV-2, US, Economic Projections of Federal Reserve Board Members and Federal Reserve Bank Presidents in FOMC, Mar 19, 2013 and Jun 18, 2014

∆% GDP

UNEM %

∆% PCE Inflation

∆% Core PCE Inflation

Central
Tendency

2014
Mar PR

2.1 to 2.3
2.8 to 3.0

6.0 to 6.1
6.1 to 6.3

1.5 to 1.7
1.5 to 1.6

1.5 to 1.6
1.4 to 1.6

2015

Mar PR

3.0 to 3.2

5.4 to 5.7

5.6 to 5.9

1.5 to 2.0

1.6 to 2.0

1.7 to 2.0

2016

Mar PR

2.5 to 3.0

5.1 to 5.5

5.2 to 5.6

1.6 to 2.0

1.7 to 2.0

1.8 to 2.0

Longer Run

Mar PR

2.1 to 2.3

2.2 to 2.3

5.2 to 5.5

5.2 to 5.6

2.0

Range

2014
Mar PR

1.9 to 2.4
2.1 to 3.0

5.8 to 6.2
6.0 to 6.5

1.4 to 2.0
1.3 to 1.8

1.4 to 1.8
1.3 to 1.8

2015

Mar PR

2.2 to 3.6

2.2 to 3.5

5.2 to 5.9

5.4 to 5.9

1.4 to 2.4

1.5 to 2.4

2016

Mar PR

2.2 to 3.2

2.2 to 3.4

5.0 to 5.6

5.1 to 5.8

1.5 to 2.0

1.6 to 2.0

1.6 to 2.2

Longer Run

Mar PR

1.8 to 2.5

1.8 to 2.4

5.0 to 6.0

5.2 to 6.0

2.0

Notes: UEM: unemployment; PR: Projection

Source: Board of Governors of the Federal Reserve System, FOMC

http://www.federalreserve.gov/newsevents/press/monetary/20140618b.htm

http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20140618.pdf

Another important decision at the FOMC meeting on Jan 25, 2012, is formal specification of the goal of inflation of 2 percent per year but without specific goal for unemployment (http://www.federalreserve.gov/newsevents/press/monetary/20120125c.htm):

“Following careful deliberations at its recent meetings, the Federal Open Market Committee (FOMC) has reached broad agreement on the following principles regarding its longer-run goals and monetary policy strategy. The Committee intends to reaffirm these principles and to make adjustments as appropriate at its annual organizational meeting each January.

The FOMC is firmly committed to fulfilling its statutory mandate from the Congress of promoting maximum employment, stable prices, and moderate long-term interest rates. The Committee seeks to explain its monetary policy decisions to the public as clearly as possible. Such clarity facilitates well-informed decision making by households and businesses, reduces economic and financial uncertainty, increases the effectiveness of monetary policy, and enhances transparency and accountability, which are essential in a democratic society.

Inflation, employment, and long-term interest rates fluctuate over time in response to economic and financial disturbances. Moreover, monetary policy actions tend to influence economic activity and prices with a lag. Therefore, the Committee's policy decisions reflect its longer-run goals, its medium-term outlook, and its assessments of the balance of risks, including risks to the financial system that could impede the attainment of the Committee's goals.

The inflation rate over the longer run is primarily determined by monetary policy, and hence the Committee has the ability to specify a longer-run goal for inflation. The Committee judges that inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures, is most consistent over the longer run with the Federal Reserve's statutory mandate. Communicating this inflation goal clearly to the public helps keep longer-term inflation expectations firmly anchored, thereby fostering price stability and moderate long-term interest rates and enhancing the Committee's ability to promote maximum employment in the face of significant economic disturbances.

The maximum level of employment is largely determined by nonmonetary factors that affect the structure and dynamics of the labor market. These factors may change over time and may not be directly measurable. Consequently, it would not be appropriate to specify a fixed goal for employment; rather, the Committee's policy decisions must be informed by assessments of the maximum level of employment, recognizing that such assessments are necessarily uncertain and subject to revision. The Committee considers a wide range of indicators in making these assessments. Information about Committee participants' estimates of the longer-run normal rates of output growth and unemployment is published four times per year in the FOMC's Summary of Economic Projections. For example, in the most recent projections, FOMC participants' estimates of the longer-run normal rate of unemployment had a central tendency of 5.2 percent to 6.0 percent, roughly unchanged from last January but substantially higher than the corresponding interval several years earlier.

In setting monetary policy, the Committee seeks to mitigate deviations of inflation from its longer-run goal and deviations of employment from the Committee's assessments of its maximum level. These objectives are generally complementary. However, under circumstances in which the Committee judges that the objectives are not complementary, it follows a balanced approach in promoting them, taking into account the magnitude of the deviations and the potentially different time horizons over which employment and inflation are projected to return to levels judged consistent with its mandate. ”

The probable intention of this specific inflation goal is to “anchor” inflationary expectations. Massive doses of monetary policy of promoting growth to reduce unemployment could conflict with inflation control. Economic agents could incorporate inflationary expectations in their decisions. As a result, the rate of unemployment could remain the same but with much higher rate of inflation (see Kydland and Prescott 1977 and Barro and Gordon 1983; http://cmpassocregulationblog.blogspot.com/2011/05/slowing-growth-global-inflation-great.html http://cmpassocregulationblog.blogspot.com/2011/04/new-economics-of-rose-garden-turned.html http://cmpassocregulationblog.blogspot.com/2011/03/is-there-second-act-of-us-great.html See Pelaez and Pelaez, Regulation of Banks and Finance (2009b), 99-116). Strong commitment to maintaining inflation at 2 percent could control expectations of inflation.

The FOMC continues its efforts of increasing transparency that can improve the credibility of its firmness in implementing its dual mandate. Table IV-3 provides the views by participants of the FOMC of the levels at which they expect the fed funds rate in 2014, 2015, 2016 and the in the longer term. Table IV-3 is inferred from a chart provided by the FOMC with the number of participants expecting the target of fed funds rate (http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20140618.pdf). The rate would still remain at 0 to ¼ percent in 2014 for 15 participants with one expecting the rate to be in the range of 0.5 to 1.0. This table is consistent with the guidance statement of the FOMC that rates will remain at low levels. For 2015, 8 participants expect the rate to remain between 0.5 and 1.0 percent, 6 to be between 1.0 and 1.5 percent, 9 between 1 and 2 percent and 3 between 2 and 3 percent. For 2016, 2 participant expects the rate between 0.5 and 1 percent, 2 between 1 and 2 percent, 9 between 2 and 3 percent and 6 between 3 and 4.5 percent. In the long term, all 16 participants expect the fed funds rate in the range of 3.0 to 4.5 percent.

Table IV-3, US, Views of Target Federal Funds Rate at Year-End of Federal Reserve Board

Members and Federal Reserve Bank Presidents Participating in FOMC, Jun 18, 2014

Source: Board of Governors of the Federal Reserve System, FOMC

http://www.federalreserve.gov/newsevents/press/monetary/20140618b.htm

http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20140618.pdf

Additional information is provided in Table IV-4 with the number of participants expecting increasing interest rates in the years from 2014 to 2016. It is evident from Table IV-4 that the prevailing view of the FOMC is for interest rates to continue at low levels until 2015. This view is consistent with the economic projections of low economic growth, relatively high unemployment and subdued inflation provided in Table IV-2. The FOMC states that rates will continue to be low even after return of the economy to potential growth.

Table IV-4, US, Views of Appropriate Year of Increasing Target Federal Funds Rate of Federal Reserve Board Members and Federal Reserve Bank Presidents Participating in FOMC, Mar 19, 2014

Appropriate Year of Increasing Target Fed Funds Rate	Number of Participants
2014	1
2015	12
2016	3

Source: Board of Governors of the Federal Reserve System, FOMC

http://www.federalreserve.gov/newsevents/press/monetary/20140618b.htm

http://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20140618.pdf

There are two categories of responses in the Empire State Manufacturing Survey of the Federal Reserve Bank of New York (http://www.newyorkfed.org/survey/empire/empiresurvey_overview.html): current conditions and expectations for the next six months. There are responses in the survey for two types of prices: prices received or inputs of production and prices paid or sales prices of products. Table IV-5 provides indexes for the two categories and within them for the two types of prices from Jan 2011 to Jun 2014. The index of current prices paid or costs of inputs increased from 16.13 in Dec 2012 to 17.2 in Jun 2014 while the index of current prices received or sales prices increased from 1.08 in Dec 2012 to 4.3 in Jun 2014. The farther the index is from the area of no change at zero, the faster the rate of change. Prices paid or of inputs at 17.2 in Jun 2014 are expanding at faster pace than prices received or of sales of products at 4.3. The index of future prices paid or expectations of costs of inputs in the next six months fell from 51.61 in Dec 2012 to 36.56 in Jun 2014 while the index of future prices received or expectation of sales prices in the next six months decreased from 25.81 in Dec 2012 to 16.31 in Jun 2014. Priced paid or of inputs are expected to increase at a faster pace in the next six months than prices received or prices of sales products. Prices of sales of finished products are less dynamic than prices of costs of inputs during waves of increases. Prices of costs of costs of inputs fall less rapidly than prices of sales of finished products during waves of price decreases. As a result, margins of prices of sales less costs of inputs oscillate with typical deterioration against producers, forcing companies to manage tightly costs and labor inputs. Instability of sales/costs margins discourages investment and hiring.

Table IV-5, US, FRBNY Empire State Manufacturing Survey, Diffusion Indexes, Prices Paid and Prices Received, SA

	Current Prices Paid	Current Prices Received	Six Months Prices Paid	Six Months Prices Received
Jun 2014	17.2	4.3	36.56	16.13
May	19.78	6.59	31.87	14.29
Apr	22.45	10.20	33.67	14.29
Mar	21.18	2.35	43.53	25.88
Feb	25.00	15.00	40.00	23.75
Jan	36.59	13.41	45.12	23.17
Dec 2013	15.66	3.61	48.19	27.71
Nov	17.11	-3.95	42.11	17.11
Oct	21.69	2.41	45.78	25.30
Sep	21.51	8.60	39.78	24.73
Aug	20.48	3.61	40.96	19.28
Jul	17.39	1.09	28.26	11.96
Jun	20.97	11.29	45.16	17.74
May	20.45	4.55	29.55	14.77
Apr	28.41	5.68	44.32	14.77
Mar	25.81	2.15	50.54	23.66
Feb	26.26	8.08	44.44	13.13
Jan	22.58	10.75	38.71	21.51
Dec 2012	16.13	1.08	51.61	25.81
Nov	14.61	5.62	39.33	15.73
Oct	17.20	4.30	44.09	24.73
Sep	19.15	5.32	40.43	23.40
Aug	16.47	2.35	31.76	14.12
Jul	7.41	3.70	35.80	16.05
Jun	19.59	1.03	34.02	17.53
May	37.35	12.05	57.83	22.89
Apr	45.78	19.28	50.60	22.89
Mar	50.62	13.58	66.67	32.10
Feb	25.88	15.29	62.35	34.12
Jan	26.37	23.08	53.85	30.77
Dec 2011	24.42	3.49	56.98	36.05
Nov	18.29	6.10	36.59	25.61
Oct	22.47	4.49	40.45	17.98
Sep	32.61	8.70	53.26	22.83
Aug	28.26	2.17	42.39	15.22
Jul	43.33	5.56	51.11	30.00
Jun	56.12	11.22	55.10	19.39
May	69.89	27.96	68.82	35.48
Apr	57.69	26.92	56.41	38.46
Mar	53.25	20.78	71.43	36.36
Feb	45.78	16.87	55.42	27.71
Jan 2011	35.79	15.79	60.00	42.11

Source: http://www.newyorkfed.org/survey/empire/empiresurvey_overview.html

Price indexes of the Federal Reserve Bank of Philadelphia Outlook Survey are in Table IV-6. As inflation waves throughout the world (Section I and earlier http://cmpassocregulationblog.blogspot.com/2014/05/world-inflation-waves-squeeze-of.html), indexes of both current and expectations of future prices paid and received were quite high until May 2011. Prices paid, or inputs, were more dynamic, reflecting carry trades from zero interest rates to commodity futures. All indexes softened after May 2011 with even decline of prices received in Aug 2011 during the first round of risk aversion. Current and future price indexes have increased again but not back to the intensity in the beginning of 2011 because of risk aversion frustrating carry trades even induced by zero interest rates. The index of prices paid or prices of inputs increased from 20.6 in Dec 2012 to 35.0 in Jun 2014. The index of current prices received was minus 7.2 in Apr 2013, indicating decrease of prices received. The index of current prices received decreased from 10.9 in Dec 2012 to 14.1 in Jun 2014. The farther the index is from the area of no change at zero, the faster the rate of change. The index of current prices paid or costs of inputs at 35.0 in Jun 2014 indicates faster increase than the index of current prices received or sales prices of production at 14.1. The index of future prices paid decreased to 44.5 in Jun 2014 from 41.9 in Dec 2012 while the index of future prices received increased from 27.3 in Dec 2012 to 30.0 in Jun 2014. Expectations are incorporating faster increases in prices of inputs or costs of production, 44.5 in Jun 2014, than of sales prices of produced goods, 30.0 in Jun 2014, forcing companies to manage tightly costs and labor inputs. Volatility of margins of sales/costs discourages investment and hiring.

Table IV-6, US, Federal Reserve Bank of Philadelphia Business Outlook Survey, Current and Future Prices Paid and Prices Received, SA

	Current Prices Paid	Current Prices Received	Future Prices Paid	Future Prices Received
10-Dec	42.6	6.0	56.8	25.7
11-Jan	47.9	12.1	58.7	34.1
11-Feb	61.1	13.2	62.6	30.7
11-Mar	57.6	17	62.1	32.4
11-Apr	50.9	20.8	55.3	33.7
11-May	49.3	20.5	54.6	28.5
11-Jun	38.9	7.7	41.6	6.8
11-Jul	35.6	6.3	48.3	16.7
11-Aug	24.6	-4	45.2	23.4
11-Sep	32	7.1	40.9	22.2
11-Oct	24.3	2.8	42.9	27.8
11-Nov	22.8	6.3	35.4	28.3
11-Dec	25	7	43.1	24.7
12-Jan	25.3	8	47.5	20.8
12-Feb	31.9	9.4	43.4	24.8
12-Mar	14.1	5.3	37.8	22.6
12-Apr	18.1	6.2	35.2	20.2
12-May	7.7	0.7	39.5	9.7
12-Jun	5.5	-3.7	34.8	16.9
12-Jul	10.8	4.9	27.9	20.3
12-Aug	18	5.6	39.5	25
12-Sep	15.8	3.5	42.2	27.5
12-Oct	19.9	7.1	45.8	15.3
12-Nov	23.6	6.5	47.6	12.8
12-Dec	20.6	10.9	41.9	27.3
13-Jan	11.8	-1.6	33.9	20
13-Feb	10.6	-1.3	25.4	20.6
13-Mar	7.6	-1.3	32.4	16.8
13-Apr	5	-7.2	28.9	9.9
13-May	9.7	0.2	33.5	19.9
13-Jun	23.7	14.6	33.3	24.3
13-Jul	22.7	8	41	25.6
13-Aug	20.4	11.1	40.7	24.5
13-Sep	25.9	12.5	43	31.6
13-Oct	21	12.8	43.1	34.6
13-Nov	25.4	9	43.5	38.1
13-Dec	16.4	10.8	39.1	34.8
14-Jan	18.7	5.1	35.3	11.8
14-Feb	14.2	7.6	18.2	16.3
14-Mar	13.9	4.3	29.4	15.9
14-Apr	11.3	4.3	35.1	13
14-May	23	17	36.1	29.5
14-Jun	35	14.1	44.5	30

Source: Federal Reserve Bank of Philadelphia

http://www.phil.frb.org/index.cfm

Chart IV-1 of the Business Outlook Survey of the Federal Reserve Bank of Philadelphia Outlook Survey provides the diffusion index of current prices paid or prices of inputs from 2006 to 2014. Recession dates are in shaded areas. In the middle of deep global contraction after IVQ2007, input prices continued to increase in speculative carry trades from central bank policy rates falling toward zero into commodities futures. The index peaked above 70 in the second half of 2008. Inflation of inputs moderated significantly during the shock of risk aversion in late 2008, even falling briefly into contraction territory below zero during several months in 2009 in the flight away from risk financial assets into US government securities (Cochrane and Zingales 2009) that unwound carry trades. Return of risk appetite induced carry trade with significant increase until return of risk aversion in the first round of the European sovereign debt crisis in Apr 2010. Carry trades returned during risk appetite in expectation that the European sovereign debt crisis was resolved. The various inflation waves originating in carry trades induced by zero interest rates with alternating episodes of risk aversion are mirrored in the prices of inputs after 2011, in particular after Aug 2012 with the announcement of the Outright Monetary Transactions Program of the European Central Bank (http://www.ecb.int/press/pr/date/2012/html/pr120906_1.en.html). Subsequent risk aversion and flows of capital away from commodities into stocks and high-yield bonds caused sharp decline in the index of prices paid followed by another recent rebound with marginal decline and new increase. The index falls and then rebounds in the final segment but there are no episodes of contraction after 2009.

Chart IV-1, Federal Reserve Bank of Philadelphia Business Outlook Survey Current Prices Paid Diffusion Index SA

Source: Federal Reserve Bank of Philadelphia

http://www.philadelphiafed.org/index.cfm

Chart IV-2 of the Federal Reserve Bank of Philadelphia Outlook Survey provides the diffusion index of current prices received from 2006 to 2014. The significant difference between the index of current prices paid in Chart IV-1 and the index of current prices received in Chart IV-2 is that increases in prices paid are significantly sharper than increases in prices received. There were several periods of negative readings of prices received from 2010 to 2014 but none of prices paid. Prices paid relative to prices received deteriorate most of the time largely because of the carry trades from zero interest rates to commodity futures. Profit margins of business are compressed intermittently by fluctuations of commodity prices induced by unconventional monetary policy of zero interest rates, frustrating production, investment and hiring decisions of business, which is precisely the opposite outcome pursued by unconventional monetary policy.

Chart IV-2, Federal Reserve Bank of Philadelphia Business Outlook Survey Current Prices Received Diffusion Index SA

Source: Federal Reserve Bank of Philadelphia

http://www.philadelphiafed.org/index.cfm

The harmonized index of consumer prices of the euro area in Table IV-7 has similar inflation waves as in most countries (Section I and earlier http://cmpassocregulationblog.blogspot.com/2014/05/world-inflation-waves-squeeze-of.html). In the first wave, consumer prices in the euro area increased at the annual equivalent rate of 5.2 percent in Jan-Apr 2011. In the second wave, risk aversion caused unwinding of commodity carry trades with inflation decreasing at the annual equivalent rate of minus 2.4 percent in May-Jul 2011. In the third wave, improved risk appetite resulted in annual equivalent inflation in Aug-Nov 2011 at 4.3 percent. In the fourth wave, return of risk aversion caused decline of consumer prices at the annual equivalent rate of minus 3.0 percent in Dec 2011 to Jan 2012. In the fifth wave, improved attitudes toward risk aversion resulted in higher consumer price inflation at the high annual equivalent rate of 9.6 percent in Feb-Apr 2012. In the sixth wave, annual equivalent inflation fell to minus 2.8 percent in May-Jul 2012. In the seventh wave, increasing risk appetite caused new carry trade exposures that resulted in annual equivalent inflation of 6.8 percent in Aug-Sep 2012 and 5.3 percent in Aug-Oct 2012. In the eighth wave, annual-equivalent inflation was minus 2.4 percent in Nov 2012. In the ninth wave, annual equivalent inflation was 4.9 percent in Dec 2012. In the tenth wave, annual equivalent inflation was minus 11.4 percent in Jan 2013. In the eleventh wave, annual equivalent inflation was 10.0 percent in Feb-Mar 2013. In the twelfth wave, annual equivalent inflation was minus 1.2 percent in Apr 2013. In the thirteenth wave, annual equivalent inflation rose to 1.2 percent in May-Jun 2013. In the fourteenth wave, annual equivalent inflation was minus 5.8 percent in Jul 2013. In the fifteenth wave, annual equivalent inflation was 3.7 percent in Aug-Sep 2013. In the sixteenth wave, annual equivalent inflation was minus 2.4 percent in Oct-Nov 2013. In the eighteenth wave, annual inflation returned at 4.9 percent in Dec 2013. In the nineteenth wave, inflation fell at annual equivalent 12.4 percent in Jan 2014. In the twentieth wave, annual equivalent inflation was at annual equivalent 5.7 percent in Feb-Apr 2014. In the twenty first wave, annual equivalent inflation was minus 1.2 percent in May 2014. Inflation volatility around the world is confusing the information required in investment and consumption decisions. The bottom part of Table IV-7 provides annual inflation in the euro area from 1999 to 2013. HICP inflation was 3.3 percent in 2008 mostly because of carry trades from interest rates falling to zero into commodity futures. Exposures in commodity futures were reversed in the flight to US government obligations with resulting inflation of 0.3 percent in 2009. Reallocations of portfolios of financial investors according to risk aversion caused high volatility of inflation in 2011, 2012, 2013 and 2014.

Table IV-7, Euro Area Harmonized Index of Consumer Prices Month and 12 Months ∆%

	Month ∆%	12 Months ∆%
May 2014	-0.1	0.5
AE ∆% Feb	-1.2
Apr	0.2	0.7
Mar	0.9	0.5
Feb	0.3	0.7
AE ∆% Feb-Apr	5.7
Jan	-1.1	0.8
AE ∆% Jan	-12.4
Dec 2013	0.4	0.8
AE ∆% Dec	4.9
Nov	-0.1	0.8
Oct	-0.1	0.7
AE ∆% Oct-Nov	-2.4
Sep	0.5	1.1
Aug	0.1	1.3
AE ∆% Aug- Sep	3.7
Jul 2013	-0.5	1.6
AE ∆% Jul	-5.8
Jun	0.1	1.6
May	0.1	1.4
AE ∆% May-Jun	1.2
Apr	-0.1	1.2
AE ∆% Apr	-1.2
Mar	1.2	1.7
Feb	0.4	1.8
AE ∆% Feb-Mar	10.0
Jan	-1.0	2.0
AE ∆% Jan	-11.4
Dec 2012	0.4	2.2
AE ∆% Dec	4.9
Nov	-0.2	2.2
AE ∆% Nov	-2.4
Oct	0.2	2.5
Sep	0.7	2.6
Aug	0.4	2.6
AE ∆% Aug-Oct	5.3
Jul 2012	-0.5	2.4
Jun	-0.1	2.4
May	-0.1	2.4
AE ∆% May-Jul	-2.8
Apr	0.5	2.6
Mar	1.3	2.7
Feb	0.5	2.7
AE ∆% Feb-Apr	9.6
Jan	-0.8	2.6
Dec 2011	0.3	2.8
AE ∆% Dec-Jan	-3.0
Nov	0.1	3.0
Oct	0.4	3.0
Sep	0.7	3.0
Aug	0.2	2.6
AE ∆% Aug-Nov	4.3
Jul	-0.6	2.6
Jun	0.0	2.7
May	0.0	2.7
AE ∆% May-Jul	-2.4
Apr	0.6	2.8
Mar	1.4	2.7
Feb	0.4	2.4
Jan	-0.7	2.3
AE ∆% Jan-Apr	5.2
Dec 2010	0.6	2.2
Annual ∆%
2013		1.3
2012		2.5
2011		2.7
2010		1.6
2009		0.3
2008		3.3
2007		2.2
2006		2.2
2005		2.2
2004		2.2
2003		2.1
2002		2.3
2001		2.4
2000		2.2
1999		1.2

AE: annual equivalent Source: EUROSTAT

http://epp.eurostat.ec.europa.eu/portal/page/portal/eurostat/home/

http://epp.eurostat.ec.europa.eu/portal/page/portal/statistics/search_database

Table IV-8 provides weights and inflation of selected components of the HICP of the euro area. Inflation of all items excluding energy increased 0.6 percent in May 2014 relative to May 2013 and decreased 0.1 percent in May 2014 relative to Apr 2014. Prices of non-energy industrial goods changed 0.0 percent in May 2014 relative to a year earlier and decreased 0.1 percent in May 2014. Inflation of services was 1.1 percent in May 2014 relative to a year earlier and decreased 0.2 percent in May 2014.

Table IV-8, Euro Area, HICP Inflation and Selected Components, ∆%

	Weight % 2014	May 2014/ May 2013	12-month Average Rate May 2014-2013/ May 2013-2012	∆% May 2014/Apr 2014
All Items	1000.0	0.5	0.9	-0.1
All Items ex Energy	891.9	0.6	1.1	-0.1
All Items ex Energy, Food, Alcohol & Tobacco	694.4	0.7	0.9	-0.1
All Items ex Energy & Unprocessed Food	817.1	0.8	1.1	-0.1
All Items ex Energy & Seasonal Food	853.5	0.8	1.1	-0.1
All Items ex Tobacco	976.1	0.4	0.9	-0.1
Energy	108.1	0.0	-0.7	-0.1
Food, Alcohol & Tobacco	197.6	0.1	1.9	-0.1
Non-energy Industrial Goods	266.6	0.0	0.3	-0.1
Services	427.8	1.1	1.3	-0.2

AE: annual equivalent

Source: EUROSTAT

http://epp.eurostat.ec.europa.eu/portal/page/portal/eurostat/home/

http://epp.eurostat.ec.europa.eu/portal/page/portal/statistics/search_database

The index of producer prices for industrial products of Germany fell 0.2 percent in Apr 2014, not seasonally adjusted (NSA), changeded 0.0 percent calendar and seasonally adjusted (CSA) in May 2014 and decreased 0.8 percent not seasonally adjusted (NSA) in the 12 months ending in May 2014, as shown in Table IV-9. The producer price index of Germany has similar waves of inflation as in many other countries (Section I and earlier http://cmpassocregulationblog.blogspot.com/2014/05/world-inflation-waves-squeeze-of.html). In the first wave from Jan to Apr 2011, the annual equivalent rate of producer price inflation was 10.4 percent NSA and 6.2 percent CSA, propelled by carry trades from zero interest rates to exposures in commodity futures in a mood of risk appetite. In the second wave in May and Jun 2011, the annual equivalent rate of producer price inflation was only 0.6 percent NSA because of the collapse of the carry trade in fear of risks of European sovereign debt but 3.7 percent CSA. In the third wave from Jul to Sep 2011, annual-equivalent producer price inflation in Germany was 2.4 percent NSA and 3.2 percent CSA with fluctuations in commodity prices resulting from perceptions of the sovereign risk crisis in Europe. In the fourth wave from Oct to Nov 2011, annual equivalent inflation was 0.6 percent NSA and 1.8 percent CSA. In the fifth wave from Dec 2011 to Jan 2012, annual equivalent inflation was at 0.0 percent NSA and minus 0.6 percent CSA in return of risk aversion. In the sixth wave, annual equivalent inflation increased to 6.2 percent in Feb-Mar 2012 NSA and 4.9 percent in Feb-Apr and 2.0 percent CSA. In the seventh wave, annual equivalent inflation was minus 2.8 percent in May-Jul 2012 NSA and 0.0 percent CSA. In the eighth wave, annual equivalent inflation was 4.3 percent in Aug-Sep 2012 NSA and 2.4 percent CSA. In the ninth wave, renewed risk aversion resulted in annual equivalent inflation NSA of minus 0.8 percent in Oct-Dec 2012 and 0.8 percent CSA. In the tenth wave, annual equivalent inflation was 7.4 percent NSA and 2.4 percent CSA in Jan 2013. In the eleventh wave, annual equivalent inflation NSA was minus 2.4 percent in Feb-Apr 2013 and minus 2.4 percent CSA. In the twelfth wave, annual equivalent inflation was minus 1.8 percent in May-Aug 2013 and minus 0.6 percent CSA. In the thirteenth wave, annual equivalent inflation was 3.7 percent NSA and 0.0 CSA in Sep 2013. In the fourteenth wave, annual equivalent inflation was minus 1.8 percent in Oct-Nov 2013 NSA and minus 1.8 percent CSA. In the fifteenth wave, annual equivalent inflation was 1.2 NSA in Dec 2013 and 2.4 percent SA. In the sixteenth wave, annual equivalent was minus 1.7 percent in Jan-
May 2014 NSA and minus 1.4 percent SA.

Table IV-9, Germany, Index of Producer Prices for Industrial Products ∆%

	12 Months ∆% NSA	Month ∆% NSA	Month ∆% Calendar and SA
May 2014	-0.8	-0.2	0.0
Apr	-0.9	-0.1	-0.1
Mar	-0.9	-0.3	-0.1
Feb	-0.9	0.0	0.0
Jan	-1.1	-0.1	-0.4
AE ∆% Jan-May		-1.7	-1.4
Dec 2013	-0.5	0.1	0.2
AE ∆% Dec		1.2	2.4
Nov	-0.8	-0.1	-0.1
Oct	-0.7	-0.2	-0.2
AE ∆% Oct-Nov		-1.8	-1.8
Sep	-0.5	0.3	0.0
AE ∆% Sep		3.7	0.0
Aug	-0.5	-0.1	-0.2
Jul	0.0	-0.1	-0.1
Jun	0.1	-0.1	0.1
May	-0.2	-0.3	0.0
AE ∆% May-Aug		-1.8	-0.6
Apr	-0.2	-0.1	-0.1
Mar	0.1	-0.3	-0.3
Feb	0.9	-0.2	-0.2
AE ∆% Feb-Apr		-2.4	-2.4
Jan	1.5	0.6	0.2
AE ∆% Jan		7.4	2.4
Dec 2012	1.4	-0.3	0.0
Nov	1.2	0.0	0.1
Oct	1.1	0.1	0.1
AE ∆% Oct-Dec		-0.8	0.8
Sep	1.2	0.3	0.1
Aug	1.1	0.4	0.3
AE ∆% Aug-Sep		4.3	2.4
Jul	0.6	0.0	0.0
Jun	1.1	-0.4	-0.1
May	1.6	-0.3	0.1
AE ∆% May-Jul		-2.8	0.0
Apr	1.9	0.2	0.0
Mar	2.6	0.6	0.3
Feb	2.6	0.4	0.2
AE ∆% Feb-Apr		4.9	2.0
Jan	2.9	0.5	0.0
Dec 2011	3.5	-0.5	-0.1
AE ∆% Dec-Jan		0.0	-0.6
Nov	4.6	-0.1	0.1
Oct	4.9	0.2	0.2
AE ∆% Oct-Nov		0.6	1.8
Sep	5.1	0.2	0.2
Aug	5.2	-0.2	0.1
Jul	5.3	0.6	0.5
AE ∆% Jul-Sep		2.4	3.2
Jun	5.1	0.1	0.3
May	5.6	0.0	0.3
AE ∆% May-Jun		0.6	3.7
Apr	6.1	0.9	0.5
Mar	6.2	0.6	0.3
Feb	6.1	0.7	0.6
Jan	5.3	1.1	0.6
AE ∆% Jan-Apr		10.4	6.2

Source:

Federal Statistical Agency of Germany (Statistiche Bundesamt Deutschland)

https://www.destatis.de/EN/FactsFigures/Indicators/ShortTermIndicators/ShortTermIndicators.html

Chart IV-3 of the Federal Statistical Agency of Germany Statistiche Bundesamt Deutschland provides the producer price index of Germany from 2008 to 2014. Producer price inflation peaked in 2008 with the rise of commodity prices induced by the carry trade from zero interest rates to commodity futures during a global contraction. Prices then declined with the flight away from risk financial assets to government obligations after the financial panic in Sep 2008. With zero interest rates and no risk aversion, the carry trade pushed commodity futures prices upwardly resulting in new rising trend of the producer price index. The right-hand side of the chart shows moderation and even decline in prices because of risk aversion and portfolio reallocations across financial risk assets frustrating carry trades from zero interest rates to commodity futures.

Chart IV-3, Germany, Index of Producer Prices for Industrial Products, 2010=100

Source: Statistisches Bundesamt Deutschland

https://www.destatis.de/EN/FactsFigures/Indicators/ShortTermIndicators/ShortTermIndicators.html

Chart IV-4 provides the index of producer finished goods in the US from 2006 to 2014. Chart IV-4 of the US mirrors behavior in Chart IV-3 of Germany. Carry trades from zero interest rates to exposures in commodity futures and risk financial assets have synchronized worldwide inflation during periods of risk appetite and disinflation during periods of risk aversion and portfolio reallocations.

Chart IV-4, US, Producer Price Index, Finished Goods, NSA, 2006-2014

Source: US Bureau of Labor Statistics

http://www.bls.gov/ppi/

Chart IV-5 of the Federal Statistical Agency of Germany Statistiche Bundesamt Deutschland provides the unadjusted producer price index, trend and trend ends. There is a clear upward trend of prices after the end of risk aversion with zero interest rates in 2009. Oscillations of the actual curve relative to trend originate in carry trades from zero interest rates to commodity futures. The final segment shows declining trend in reallocation of carry trades toward stocks and high-yield bonds and away from commodities.

Chart IV-5, Germany, Index of Producer Prices for Industrial Products, Non-adjusted Value and Trend, 2010=100

Source: Statistiche Bundesamt Deutschland

https://www.destatis.de/EN/FactsFigures/Indicators/ShortTermIndicators/ShortTermIndicators.html

Inflation in the UK is somewhat higher than in many advanced economies, deserving more detailed analysis. Table IV-10 provides 12-month percentage changes of UK output prices for all manufactured products, excluding food, beverage and petroleum and excluding duty. The UK Office for National Statistics introduced rebasing for 2010=100 of the producer price index with important revisions (http://www.ons.gov.uk/ons/rel/ppi2/producer-price-index/producer-price-index-rebasing--2010-100-/index.html). The 12-month rates rose significantly in 2011 in all three categories, reaching 5.3 percent for all manufactured products in Sep 2011 but declining to 4.9 percent in Oct 2011, 4.6 percent in Nov 2011 and down to 1.3 percent in Jul 2012. Inflation of all manufactured products increased marginally to 1.7 percent in Aug 2012, 1.8 percent in Sep, 1.9 percent in Oct, 1.7 percent in Feb 2013, 1.5 percent in Mar 2013 and 1.0 percent in Apr 2013. Output prices increased 1.2 percent in the 12 months ending in May 2013, 1.7 percent in Jun 2013 and 1.8 percent in Jul 2013. Output price inflation was 1.5 percent in the 12 months ending in Aug 2013 and 1.2 percent in the 12 months ending in Sep 2013. Output price inflation was 0.8 percent in the 12 months ending in Oct 2013 and 0.8 percent in the 12 months ending in Nov 2013. Prices of output increased 1.0 percent in the 12 months ending in Dec 2013 and 0.9 percent in the 12 months ending in Jan 2014. Output prices increased 0.6 percent in the 12 months ending in Feb 2014 and 0.4 percent in the 12 months ending in Mar 2014. Output prices increased 0.6 percent in the 12 months ending in Apr 2014 and 0.5 percent in the 12 months ending in May 2014. Output price inflation is highly sensitive to commodity prices as shown by the increase by 6.7 percent in 2008 when oil prices rose over $140/barrel even in the midst of a global recession driven by the carry trade from zero interest rates to oil futures. The mirage episode of false deflation in 2001 and 2002 is also captured by output prices for the UK, which originated in decline of commodity prices (see Barsky and Killian 2004) but was used as an argument for unconventional monetary policy of zero interest rates and quantitative easing during the past decade. Arguments for symmetric up and down inflation targets are based on fear of deflation (Pelaez and Pelaez, International Financial Architecture (2005), 18-28, Pelaez and Pelaez, The Global Recession Risk (2007), 83-95).

Table IV-10, UK Output Prices 12 Months ∆% NSA

	All Manufactured Products	Excluding Food, Beverage, Tobacco and Petroleum	All Excluding Duty
May 2014	0.5	1.0	0.6
Apr	0.6	1.0	0.6
Mar	0.4	1.1	0.6
Feb	0.6	1.1	0.6
Jan	0.9	1.2	1.0
Dec 2013	1.0	1.0	1.1
Nov	0.8	0.7	1.0
Oct	0.8	0.8	1.1
Sep	1.2	0.8	1.4
Aug	1.5	0.9	1.7
Jul	1.8	0.9	2.0
Jun	1.7	0.9	2.0
May	1.2	0.8	1.5
Apr	1.0	0.8	1.4
Mar	1.5	0.9	1.5
Feb	1.7	0.7	1.7
Jan	1.6	0.8	1.6
Dec 2012	1.4	0.4	1.4
Nov	1.5	0.7	1.6
Oct	1.9	0.6	1.7
Sep	1.8	0.5	1.5
Aug	1.7	0.5	1.5
Jul	1.3	0.8	1.1
Jun	1.4	1.0	1.2
May	2.0	1.3	1.9
Apr	2.3	1.4	2.1
Mar	2.9	2.0	2.9
Feb	3.4	2.3	3.3
Jan	3.5	2.2	3.4
Dec 2011	4.0	2.6	3.9
Nov	4.6	2.6	4.4
Oct	4.9	2.9	4.7
Sep	5.3	3.1	5.2
Aug	5.2	3.2	5.0
Jul	5.2	2.8	5.0
Jun	5.0	2.8	4.9
May	4.8	3.0	4.6
Apr	4.9	3.0	4.8
Mar	4.7	2.5	4.4
Feb	4.4	2.5	4.2
Jan	4.0	2.4	3.7
Dec 2010	3.4	2.0	2.9
Year ∆%
2013	1.3	0.9	1.5
2012	2.1	1.1	1.9
2011	4.8	2.8	4.6
2010	2.7	1.5	2.1
2009	0.5	1.4	-0.1
2008	6.7	3.6	6.8
2007	2.3	1.4	2.0
2006	2.1	1.5	2.0
2005	1.9	0.9	1.8
2004	1.1	-0.1	0.7
2003	0.6	0.0	0.6
2002	-0.1	-0.3	-0.1
2001	-0.2	-0.7	-0.3
2000	1.4	-0.4	0.8
1999	0.5	-1.1	-0.2
1998	0.1	-0.9	-1.0
1997	1.0	0.3	0.2

Source: UK Office for National Statistics

http://www.ons.gov.uk/ons/rel/ppi2/producer-price-index/may-2014/index.html

Monthly and annual equivalent rates of change of output prices are shown in Table IV-11. There are waves of inflation similar to those in other countries (Section I and earlier http://cmpassocregulationblog.blogspot.com/2014/05/world-inflation-waves-squeeze-of.html). In the first wave, annual equivalent inflation was 10.0 percent in Jan-Apr 2011 with relaxed risk aversion in commodity markets. In the second wave, intermittent risk aversion resulted in annual equivalent inflation of 1.6 percent in May-Oct 2011. In the third wave, alternation of risk aversion resulted in annual equivalent inflation of 1.2 percent in Nov 2011 to Jan 2012. In the fourth wave, the energy commodity shock processed through carry trades caused the jump of annual equivalent inflation to 5.3 percent in Feb-Apr 2012. A fifth wave occurred in May-Jun 2012 with decline of output inflation at 3.5 percent annual equivalent in an environment of risk aversion that caused decline of commodity prices. A sixth wave under commodity shocks induced by carry trades from zero interest rates resulted in annual equivalent inflation of 3.7 percent in Jul-Sep 2012 and 3.0 percent in Jul-Oct 2012. In the seventh wave, annual equivalent inflation in Nov-Dec 2012 fell to minus 2.4 percent. In the eighth wave, annual equivalent inflation returned at 4.9 percent in Jan-Mar 2013. In the ninth wave, risk aversion returned with annual equivalent inflation of minus 0.6 percent in Apr-May 2013. In the tenth wave, annual equivalent inflation was 2.0 percent in Jun-Aug 2013. In the eleventh wave, annual equivalent inflation was -1.5 percent in Sep-Dec 2013. In the twelfth wave, annual equivalent inflation returned at 2.0 percent in Jan-Mar 2014. In the thirteenth wave, annual equivalent inflation was 0.0 percent in Apr-May 2014.

Table IV-11, UK Output Prices Month ∆% NSA

	All Manufactured Products	Excluding Food, Beverage and Petroleum	All Excluding Duty
May 2014	-0.1	0.0	-0.1
Apr	0.1	0.0	0.0
∆% AE Apr-May	0.0	0.0	-0.6
Mar	0.1	0.2	0.3
Feb	0.1	0.2	0.1
Jan	0.3	0.5	0.3
∆% AE Jan-Mar	2.0	3.7	2.8
Dec 2013	0.0	0.1	-0.1
Nov	-0.2	-0.1	-0.1
Oct	-0.3	0.0	-0.2
Sep	0.0	0.0	0.0
∆% AE Sep-Dec	-1.5	0.0	-1.2
Aug	0.1	0.0	0.1
Jul	0.3	0.1	0.2
Jun	0.1	0.0	0.1
∆% AE Jun-Aug	2.0	0.4	1.6
May	0.0	0.0	0.0
Apr	-0.1	0.1	0.0
∆% AE Apr-May	-0.6	0.6	0.0
Mar	0.3	0.3	0.3
Feb	0.5	0.2	0.5
Jan	0.4	0.3	0.4
∆% AE Jan-Mar	4.9	3.2	4.9
Dec 2012	-0.2	-0.2	-0.2
Nov	-0.2	0.0	0.0
∆% AE Nov-Dec	-2.4	-1.2	-1.2
Oct	0.1	0.0	0.1
Sep	0.3	0.1	0.3
Aug	0.4	0.0	0.4
Jul	0.2	0.1	0.2
∆% AE Jul-Oct	3.0	0.6	3.0
Jun	-0.4	-0.1	-0.4
May	-0.2	0.0	-0.1
∆% AE May-Jun	-3.5	-0.6	-3.0
Apr	0.4	0.2	0.1
Mar	0.5	0.1	0.5
Feb	0.4	0.3	0.4
∆% AE Feb-Apr	5.3	2.4	4.1
Jan	0.2	-0.1	0.2
Dec 2011	-0.1	0.1	0.0
Nov	0.2	-0.1	0.1
∆% AE Nov-Jan	1.2	-0.4	1.2
Oct	0.0	-0.1	-0.1
Sep	0.2	0.1	0.3
Aug	0.0	0.3	0.0
Jul	0.3	0.3	0.3
Jun	0.2	0.2	0.3
May	0.1	0.1	0.1
∆% AE May-Oct	1.6	1.8	1.8
Apr	1.0	0.8	0.9
Mar	1.0	0.4	0.9
Feb	0.5	0.2	0.5
Jan	0.7	0.3	0.7
Jan-Apr ∆% AE	10.0	5.2	9.4
Dec 2010	0.5	0.1	0.4

Source: UK Office for National Statistics

http://www.ons.gov.uk/ons/rel/ppi2/producer-price-index/may-2014/index.html

Input prices in the UK have been more dynamic than output prices until the current event of risk aversion, as shown by Table IV-12, but with sharp oscillations because of the commodity and raw material content. The UK Office for National Statistics introduced rebasing for 2010=100 of the producer price index with important revisions (http://www.ons.gov.uk/ons/rel/ppi2/producer-price-index/producer-price-index-rebasing--2010-100-/index.html). The 12-month rates of increase of input prices, even excluding food, tobacco, beverages and petroleum, are very high, reaching 16.9 percent in Sep 2011 for materials and fuels purchased and 10.6 percent excluding food, beverages and petroleum. Inflation in 12 months of materials and fuels purchased moderated to 5.7 percent in Mar 2012 and 3.2 percent excluding food, tobacco, beverages and petroleum with the rates falling further in Apr 2012 to 1.5 percent for materials and fuels purchased and 1.1 percent excluding food, tobacco, beverages and petroleum. Input-price inflation collapsed in the 12 months ending in Jul 2012 to minus 2.5 percent for materials and fuels purchased and minus 2.5 percent excluding food, beverages and tobacco. Inflation returned at 0.7 percent in the 12 months ending in Aug 2012 but minus 2.6 percent excluding food, tobacco, beverages and petroleum. Inflation of input prices in Sep 2012 was minus 1.2 percent and minus 3.1 percent excluding food, beverages and petroleum. In Nov 2012, inflation of input prices of all manufacturing and materials purchased was minus 0.2 percent in 12 months and minus 1.6 percent in 12 months excluding food, tobacco, beverages and petroleum. Inflation of materials and fuels purchased in 12 months was 0.4 percent in Dec 2012 and minus 1.2 percent excluding tobacco, beverages and petroleum. Inflation of inputs returned with 1.6 percent in the 12 months ending in Jan 2013 and minus 0.2 percent excluding various items, increasing to 2.0 percent in Feb 2013 and 1.0 percent excluding various items. In Mar 2013, inflation of all manufacturing materials and fuels increased 0.9 percent in 12 months and 1.6 percent excluding various items. Prices of all manufacturing materials and fuels increased 0.3 percent in the 12 months ending in Apr 2013 and increased 0.9 percent excluding food and other items. Prices of all manufacturing increased 1.4 percent in the 12 months ending in May 2013 and 0.4 percent excluding various items. In Jul 2013, prices of manufactured products increased 4.7 percent in 12 months and 2.1 percent excluding food, tobacco, beverages and petroleum. In Aug 2013, prices of manufactured products increased 1.8 percent in 12 months and 1.4 percent excluding items. Inflation of input prices in the 12 months ending in Sep 2013 was 1.0 percent and 0.4 percent excluding items. Inflation collapsed in Oct 2013, with 0.0 percent for all manufacturing materials and fuels and minus 0.2 percent excluding various items. In Nov 2013, inflation of all manufacturing materials and fuels purchased fell 0.9 percent in 12 months and excluding items 1.0 percent. In Dec 2013, input prices for all manufacturing fell 0.9 percent in 12 months and fell 1.4 percent with exclusions. Inflation of all manufacturing fell 2.9 percent in the 12 months ending in Jan 2014 and 2.8 percent with exclusions. Inflation of input prices fell 5.8 percent in the 12 months ending in Feb 2014 and 5.1 percent with exclusions. Inflation of input prices fell 6.3 percent in the 12 months ending in Mar 2014 and 5.4 percent excluding items. In Apr 2014, inflation of input prices fell 5.3 percent in 12 months and 5.0 with exclusions. Inflation of input prices fell 5.0 percent in the 12 months ending in May 2014 and fell 4.3 percent with exclusions. There is comparable experience with 22.1 percent inflation of materials and fuels purchased in 2008 and 16.9 percent excluding food, beverages and petroleum followed in 2009 by decline of 5.7 percent for materials and fuels purchased and decrease of 1.3 percent for the index excluding items. UK input and output inflation is sensitive to commodity price increases driven by carry trades from zero interest rates. The mirage of false deflation is also observed in input prices in 1997-9 and then again from 2001 to 2003.

Table IV-12, UK, Input Prices 12-Month ∆% NSA

	All Manufacturing Materials and Fuels Purchased	Excluding Food, Tobacco, Beverages and Petroleum
May 2014	-5.0	-4.3
Apr	-5.3	-5.0
Mar	-6.3	-5.4
Feb	-5.8	-5.1
Jan	-2.9	-2.8
Dec 2013	-0.9	-1.4
Nov	-0.9	-1.0
Oct	0.0	-0.2
Sep	1.0	0.4
Aug	1.8	1.4
Jul	4.7	2.1
Jun	3.0	0.0
May	1.4	0.4
Apr	0.3	0.9
Mar	0.9	1.6
Feb	2.0	1.0
Jan	1.6	-0.2
Dec 2012	0.4	-1.2
Nov	-0.2	-1.6
Oct	-0.2	-2.1
Sep	-1.2	-3.1
Aug	0.7	-2.6
Jul	-2.5	-2.5
Jun	-1.7	-1.0
May	0.3	-0.5
Apr	1.5	1.1
Mar	5.7	3.2
Feb	7.5	4.4
Jan	6.4	3.9
Dec 2011	8.6	5.0
Nov	12.8	7.6
Oct	13.4	8.1
Sep	16.9	10.6
Aug	15.6	10.9
Jul	17.6	10.7
Jun	16.4	10.3
May	15.3	9.3
Apr	16.9	10.2
Mar	13.5	7.8
Feb	13.9	9.2
Jan	13.2	9.6
Dec 2010	12.1	8.9
Year ∆%
2013	1.2	0.4
2012	1.3	-0.2
2011	14.5	9.1
2010	8.0	4.7
2009	-5.7	-1.3
2008	22.1	16.9
2007	2.9	2.5
2006	9.8	7.2
2005	10.9	6.9
2004	3.4	1.7
2003	1.1	-0.7
2002	-4.5	-4.9
2001	-1.1	-1.2
2000	7.3	3.8
1999	-1.3	-3.6
1998	-8.9	-4.6
1997	-8.3	-6.4

Source: UK Office for National Statistics

http://www.ons.gov.uk/ons/rel/ppi2/producer-price-index/may-2014/index.html

Table IV-13 provides monthly percentage changes of UK input prices for materials and fuels purchased and excluding food, tobacco, beverages and petroleum. There are strong waves of inflation of input prices in the UK similar to those worldwide (Section I and earlier http://cmpassocregulationblog.blogspot.com/2014/05/world-inflation-waves-squeeze-of.html). In the first wave, input prices rose at the high annual equivalent rate of 30.6 percent in Jan-Apr 2011, driven by carry trades from unconventional monetary policy into commodity exposures. Inflation of input prices was at 31.8 percent annual equivalent in Oct-Dec 2010. In the second wave, alternating risk aversion caused annual equivalent inflation of minus 1.3 percent in May-Oct 2011. In the third wave, renewed risk aversion resulted in annual equivalent inflation of 0.0 percent in Nov-Dec 2011. In the fourth wave, annual equivalent inflation of input prices in the UK surged at 14.9 percent in Jan-Mar 2012 under relaxed risk aversion. In the fifth wave, annual equivalent inflation was minus 16.1 percent in Apr-Jul 2012 because of collapse of commodity prices during increasing risk aversion. In the sixth wave, annual equivalent inflation of materials and fuels purchased jumped to 23.9 percent in Aug 2012. In the seventh wave, annual equivalent inflation moderated to 3.0 percent in Sep-Dec 2012. In the eighth wave, annual equivalent inflation in Jan-Feb 2013 jumped to 24.6 percent. In the eighth wave, annual equivalent inflation of materials and fuels purchased was minus 9.5 percent in Mar-Jun 2013. In the ninth wave, annual equivalent inflation returned at 18.2 percent in annual equivalent in Jul 2013. In the tenth wave, annual equivalent inflation was minus 8.4 percent in Aug-Nov 2013. In the eleventh wave, annual equivalent inflation of manufacturing materials and fuels was 3.7 percent in Dec 2013. In the twelfth wave, annual equivalent inflation was minus 8.3 percent in Jan-May 2014.

Table IV-13, UK Input Prices Month ∆%

	All Manufacturing Materials and Fuels Purchased NSA	Excluding Food, Tobacco, Beverages and Petroleum SA
May 2014	-0.9	-0.2
Apr	-0.9	-0.3
Mar	-0.4	-0.3
Feb	-0.5	-1.0
Jan	-0.9	-0.7
∆% Jan-May	-8.3	-5.8
Dec 2013	0.3	-0.5
∆% Dec	3.7	-5.8
Nov	-0.6	-0.5
Oct	-0.4	-0.3
Sep	-0.9	-0.8
Aug	-1.0	-0.5
∆% Aug-Nov	-8.4	-6.1
Jul	1.4	1.1
∆% Jul	18.2	14.0
Jun	-0.3	-0.4
May	-1.3	-1.1
Apr	-1.9	-0.8
Mar	0.2	0.1
∆% Mar-Jun	-9.5	-6.4
Feb	2.5	1.5
Jan	1.2	0.6
∆% Jan-Feb	24.6	13.3
Dec 2012	0.3	0.0
Nov	0.3	0.3
Oct	0.5	0.4
Sep	-0.1	0.2
∆% Sep-Dec	3.0	2.7
Aug	1.8	0.0
∆% Aug	23.9	0.0
Jul	-0.3	-0.7
Jun	-1.8	0.2
May	-2.4	-0.6
Apr	-1.3	-0.1
∆% Apr-Jul	-16.1	-3.5
Mar	1.3	-0.5
Feb	2.2	0.4
Jan	0.0	-0.4
∆% AE Jan-Mar	14.9	-2.0
Dec 2011	-0.3	-0.7
Nov	0.3	-0.1
∆% AE Nov-Dec	0.0	-4.7
Oct	-0.5	-0.6
Sep	1.8	0.5
Aug	-1.5	0.3
Jul	0.5	0.7
Jun	0.2	0.8
May	-1.1	0.6
∆% AE May-Oct	-1.3	4.7
Apr	2.8	2.1
Mar	3.0	0.6
Feb	1.1	0.1
Jan	2.1	0.7
∆% AE Jan-Apr	30.6	11.0
Dec 2010	3.5	1.7
Nov	0.9	0.4
Oct	2.5	1.7
∆% AE Oct-Dec	31.8	16.3

Source: UK Office for National Statistics

http://www.ons.gov.uk/ons/rel/ppi2/producer-price-index/may-2014/index.html

The UK Office for National Statistics also provides contributions in percentage points to the monthly and 12-month rates of inflation of manufactured products, shown in Table IV-14. There are contributions to 12-month percentage changes of 0.03 percentage points by food products, 0.29 percentage points by tobacco and alcohol, 0.04 percentage points by computer, electrical and optical and 0.12 percentage points by other manufactured products. There are diversified sources of contributions to 12 months output price inflation such as 0.23 percentage points by clothing, textile and leather and 0.07 percentage points by transport equipment. Petroleum deducted 0.33 percentage points. In general, contributions by products rich in commodities are the drivers of price changes. There were diversified contributions in percentage points to monthly inflation: deduction of 0.03 percentage points deducted by petroleum and contribution of 0.05 percentage points added by food products.

Table IV-14, UK, Contributions to Month and 12-Month Change in Prices of All Manufactured Products, Percentage Points, NSA

May 2014	12 Months % Points	12 Months ∆%	Month % Points	Month ∆%
Total %		0.5		-0.1
Food Products	0.03	0.1	0.05	0.3
Tobacco & Alcohol	0.29	2.7	0.01	0.1
Clothing, Textile & Leather	0.23	1.9	-0.02	-0.1
Paper and Printing	0.04	0.9	-0.01	-0.2
Petroleum	-0.33	-3.2	-0.03	-0.3
Chemicals & Pharmaceutical	-0.05	-0.7	-0.02	-0.3
Metal, Machinery & Equipment	0.04	0.5	0.00	0.0
Computer, Electrical & Optical	0.04	0.3	0.01	0.1
Transport Equipment	0.07	0.5	0.01	0.1
Other Manufactured Products	0.12	0.7	-0.12	-0.8

Source: UK Office for National Statistics

http://www.ons.gov.uk/ons/rel/ppi2/producer-price-index/may-2014/index.html

The UK Office for National Statistics also provides contributions in percentage points to the monthly and 12-month rates of inflation of input prices in May 2014, shown in Table IV-15. Crude oil is a large factor with deduction of 1.31 percentage points to the 12-month rate and deduction of 0.21 percentage points to the monthly rate in May 2014. Price changes also transfer to the domestic economy through the prices of imported inputs: imported metals deducted 0.64 percentage points from the 12-month rate and deducted 0.01 percentage points from the May rate. Domestic food materials deducted 1.13 percentage points from the 12-month rate and deducted 0.02 percentage points from the May rate. Exposures and reversals of commodity exposures in carry trades during risk aversion are a major source of price and financial instability.

Table IV-15, UK, Contributions to Month and 12-Month Change in Prices of Inputs, Percentage Points NSA

May 2014	12 Months % Points	12 Months ∆%	Month % Points	Month ∆%
Total		-5.0		-0.9
Fuel	-0.32	-3.0	-0.45	-4.1
Crude Oil	-1.31	-5.7	-0.21	-0.9
Domestic Food Materials	-1.13	-8.0	-0.02	-0.2
Imported Food Materials	-0.20	-3.0	-0.08	-1.2
Other Domestic Produced Materials	0.20	7.6	0.05	1.9
Imported Metals	-0.64	-8.9	-0.01	0.0
Imported Chemicals	-0.54	-4.2	-0.10	-0.7
Imported Parts and Equipment	-0.63	-4.1	-0.06	-0.4
Other Imported Materials	-0.43	-5.3	-0.04	-0.5

Source: UK Office for National Statistics

http://www.ons.gov.uk/ons/rel/ppi2/producer-price-index/may-2014/index.html

Consumer price inflation in the UK is shown in Table IV-16. The CPI index increased 0.2 percent in Mar 2014 and increased 1.6 percent in 12 months. The same inflation waves (Section I and earlier http://cmpassocregulationblog.blogspot.com/2014/05/world-inflation-waves-squeeze-of.html) are present in UK CPI inflation. In the first wave in Jan-Apr 2011, annual equivalent inflation was at a high 6.5 percent. In the second wave in May-Jul 2011, annual equivalent inflation fell to only 0.4 percent. In the third wave in Aug-Nov 2011, annual equivalent inflation returned at 4.6 percent. In the fourth wave in Dec 2011 to Jan 2012, annual equivalent inflation was minus 0.6 percent because of decline of 0.5 percent in Jan 2012. In the fifth wave, annual equivalent inflation increased to 6.2 percent in Feb-Apr 2012. In the seventh wave, annual equivalent inflation was minus 3.0 percent in May-Jun 2012. In the eighth wave, annual equivalent inflation in Jul-Dec 2012 was 4.5 percent and 6.2 percent in Oct 2012 with the rate in Oct caused mostly by increases in university tuition payments. In the ninth wave, annual equivalent inflation was minus 5.8 percent in Jan 2013. In the tenth wave, annual equivalent inflation jumped to 4.3 percent in Feb-May 2013. In the eleventh wave, annual equivalent inflation was minus 1.2 percent in Jun-Jul 2013. In the twelfth wave, annual equivalent inflation was 3.4 percent in Aug-Dec 2013. In the thirteenth wave, annual equivalent inflation was minus 7.0 percent in Jan 2014. In the fourteenth wave, annual equivalent inflation returned at 4.5 percent in Feb-Apr 2014. In the fifteenth wave, annual equivalent inflation was minus 0.1 percent in May 2014.

Table IV-16, UK, Consumer Price Index All Items, Month and 12-Month ∆%

	Month ∆%	12 Months ∆%
May 2014	-0.1	1.5
AE ∆% May	-1.2
Apr	0.4	1.8
Mar	0.2	1.6
Feb	0.5	1.7
AE ∆% Feb-Apr	4.5
Jan	-0.6	1.9
AE ∆% Jan	-7.0
Dec 2013	0.4	2.0
Nov	0.1	2.1
Oct	0.1	2.2
Sep	0.4	2.7
Aug	0.4	2.7
AE ∆% Aug-Dec	3.4
Jul	0.0	2.8
Jun	-0.2	2.9
AE ∆% Jun-Jul	-1.2
May	0.2	2.7
Apr	0.2	2.4
Mar	0.3	2.8
Feb	0.7	2.8
AE ∆% Feb-May	4.3
Jan 2013	-0.5	2.7
AE ∆% Jan	-5.8
Dec 2012	0.5	2.7
Nov	0.2	2.7
Oct	0.5	2.7
Sep	0.4	2.2
Aug	0.5	2.5
Jul	0.1	2.6
AE ∆% Jul-Dec	4.5
Jun	-0.4	2.4
May	-0.1	2.8
AE ∆% May-Jun	-3.0
Apr	0.6	3.0
Mar	0.3	3.5
Feb	0.6	3.4
AE ∆% Feb-Apr	6.2
Jan	-0.5	3.6
Dec 2011	0.4	4.2
AE ∆% Dec-Jan	-0.6
Nov	0.2	4.8
Oct	0.1	5.0
Sep	0.6	5.2
Aug	0.6	4.5
AE ∆% Aug-Nov	4.6
Jul	0.0	4.4
Jun	-0.1	4.2
May	0.2	4.5
May-Jul	0.4
Apr	1.0	4.5
Mar	0.3	4.0
Feb	0.7	4.4
Jan	0.1	4.0
AE ∆% Jan-Apr	6.5
Dec 2010	1.0	3.7
Nov	0.4	3.3
Oct	0.3	3.2
Sep	0.0	3.1
Aug	0.5	3.1
Jul	-0.2	3.1
Jun	0.1	3.2
May	0.2	3.4
Apr	0.6	3.7
Mar	0.6	3.4
Feb	0.4	3.0
Jan	-0.2	3.5

Source: UK Office for National Statistics

http://www.ons.gov.uk/ons/rel/cpi/consumer-price-indices/may-2014/index.html

Inflation has been unusually high in the UK since 2006, as shown in Table IV-17. There were no rates of inflation close to 2.0 percent in the period from 1997 to 2004. Inflation has exceeded 2 percent since 2005, reaching 3.6 percent in 2008, 3.3 percent in 2010, 4.5 percent in 2011 and 2.8 percent in 2012. Annual inflation in 2013 was 2.6 percent.

Table IV-17, UK, Consumer Price Index, Annual ∆%

2005=100	Annual
	change ∆%
1998	1.6
1999	1.3
2000	0.8
2001	1.2
2002	1.3
2003	1.4
2004	1.3
2005	2.1
2006	2.3
2007	2.3
2008	3.6
2009	2.2
2010	3.3
2011	4.5
2012	2.8
2013	2.6

Source: UK Office for National Statistics

http://www.ons.gov.uk/ons/rel/cpi/consumer-price-indices/may-2014/index.html

Table IV-18 provides the analysis of inflation in May 2013 by the UK Office for National Statistics. In the rate of minus 0.1 percent for May 2014, clothing and footwear added 0.07 percentage points, furniture and household goods added 0.03 percentage points and transport deducted 0.11 percentage points. Contributions of percentage points to the 12-month rate of consumer price inflation of 1.5 percent are in the second column in Table IV-18. Food and nonalcoholic beverages deducted 0.08 percentage points, alcohol and tobacco added 0.21 percentage points, housing and household services added 0.44 percentage points and transport added 0.07 percentage points.

Table IV-18, UK, Consumer Price Index Month and Twelve-month Percentage Point Contributions to Change by Components

May 2014	Percentage Point Contribution 12 Months May	Percentage Point Contribution May
CPI All Items ∆%	1.5	-0.1
Food & Non-Alcoholic Beverages	-0.08	-0.13
Alcohol & Tobacco	0.21	0.07
Clothing & Footwear	0.01	-0.01
Housing & Household Services	0.44	0.01
Furniture & Household Goods	0.06	0.03
Health	0.07	0.00
Transport	0.07	-0.11
Communication	0.03	-0.02
Recreation & Culture	0.17	0.06
Education	0.21	0.00
Restaurants & Hotels	0.27	0.04
Miscellaneous Goods & Services	0.03	-0.01
Rounding Effects	0.01	-0.03

Note: there are rounding effects in contributions

Source: UK Office for National Statistics

http://www.ons.gov.uk/ons/rel/cpi/consumer-price-indices/may-2014/index.html

Longer Run