Class4

Global Economic Journalism
Class 4: Government Economic Policy - 1

Jeffrey Timmermans

Wednesday, 16 May, 12

Economic goals of governments

✤ Full employment

✤ or at least as full as possible...

✤ Steady annual growth in output

✤ without overheating

✤ Stable prices (low but steady rise in inﬂation)


Measuring economic performance

✤ Output of goods & services ✤ Productivity of workers

✤ Changes in prices for goods &
services over time

✤ Mood of consumers

✤ Employment

✤ Total supply of money

✤ Trade with other countries


Consumer Price Index

✤ Based on the prices of a “basket” of goods & services

✤ Typically, only focus on % change in index, rather than the absolute
index

✤ Baseline for index (index=100) is set at an arbitrary point in time


Problems with CPI

✤ Actual index base year is arbitrary (Oct. 2004-Sep. 2005 in HK)

✤ Different countries have different “baskets”

✤ “Baskets” change over time, even in the same country

✤ The quality of goods changes over time

✤ You get far more computer for the price now than 10 years ago

✤ Consumers will substitute pricey goods with cheaper ones


CPI: Core vs. non-core

Change in U.S. CPI 1958-2011

✤ Core CPI: excludes “volatile”
components such as food and
energy

✤ But deﬁnition of “core” can
vary from country to country

✤ Non-core CPI: includes all
index components
Source: Thumbcharts


Writing about CPI

✤ Focus on the percentage change, rather than the nominal index level

✤ Use CPI as a proxy for the inflation rate

✤ Using core on non-core depends on your audience

✤ Core inflation is used to determine economic policy responses

✤ Non-core is better to show effects of inflation on consumers


Japan Consumer Prices Fall 1%
By Tomoyuki Tachikawa
1 October 2010

TOKYO -- Japan's consumer prices fell in August for the 18th consecutive month, Change
government data showed Friday, suggesting no end in sight for a deflationary trend
that has been undermining the broader economy, and providing further impetus for
the Bank of Japan to take additional monetary easing measures soon.
The country's core consumer price index, which excludes volatile fresh food prices,
Cause
fell 1.0% from the same month a year earlier, the Ministry of Internal Affairs and
Communications said. The result was in line with the median forecast in a poll of
private economists. Expectations
The latest data show that the pace of decline in the core CPI is easing up, with the
figure having fallen 1.1% in July and 1.0% in June compared with a recent low of
1.5% in April. This suggests that a mild recovery in the economy is propping up Context
domestic demand and preventing prices from falling further.
But analysts warn that deflation may accelerate as the yen stays strong with the
outlook for the U.S. and European economies uncertain, dragging on Japan's export- Future
reliant economy and reducing the prices of oil, food, metals and other commodities
the country buys from overseas.
Persistent price declines usually eat into corporate profits, which could prompt firms
to scale down operations and cut payrolls, increasing the risk that worsening income
and employment conditions will make consumers reluctant to spend. That in turn
should raise the possibility of Japan's economy entering a lull in the near future.
"As long as deflation continues and the yen rises, falling corporate profits could keep
putting downward pressure on the economy," said Takeshi Minami, chief economist at Comment
Norinchukin Research Institute. "It's very likely for the Japanese economy to stall
down the road."
Tokyo policymakers have also become more concerned over the future course of Future
Japan's economy.


CPI in Hong Kong

✤ CPI (A): basket based on expenditure patterns of 50% of households,
namely those with low income (HK$4,400-$17,300 currently)

✤ CPI (B): based on the habits of the next 30% of households by income
(HK$17,300-$31,100)

✤ CPI (C): based on the next 10% (HK$31,100-$67,900)

✤ Composite CPI: includes all of the above, or 90% of HK households

✤ This is usually the headline number


DJ UPDATE: HK March CPI Up 4.6%; Inflationary Pressures Likely To Rise
583 words
22 April 2011
By Chester Yung and Fiona Law
HONG KONG (Dow Jones)--Hong Kong's consumer prices rose at their fastest pace in
two and a half years in March, and further increases are likely as inflationary
Change
pressures grow both at home and abroad, the government said Thursday.
Hong Kong's headline consumer price index rose 4.6% in March from a year earlier,
the Census and Statistics Department said Thursday, accelerating from February's Future
3.7% rise to the fastest pace since the CPI rose 4.6% in August 2008. March's
reading was also above the median 4.1% rise forecast by 11 economists surveyed
earlier by Dow Jones Newswires. Expectations
Underlying CPI, which excludes the effects of government relief measures, rose 4.4%
in March from a year earlier, the government said, also up from February's 3.6%
increase.
Context
A government spokesman said in a statement increases in private residential rents
and rising food prices will likely continue to add to inflationary pressure in the coming
months, while 'the hike in the tobacco duty and higher fuel costs also contributed
somewhat to the increase in inflation (in March).'
Private housing rental rates rose 4.9% in March, higher than February's 4.1% rise.
Property prices in the territory rose around 24% last year, following a 30% surge in
2009, but rents haven't kept pace because they are normally locked in by contracts
Cause
that cover a year or more. Public and private rents account for about one-third of
Hong Kong's CPI basket.
Food prices rose 6.3% on year in March, significantly higher than the 5.0% increase
in February.
Hang Seng Bank Senior Economist Irina Fan said the major drivers of inflation in
March--a surge in global food prices and strong domestic demand--are unlikely to
ease in the near term. Comment
'Imported inflation is weighing in, especially when other Asian currencies are rising
and the Hong Kong dollar is unchanged and pegged to the U.S. dollar,' she said,
adding she expects the city's CPI rise to reach 4.7% or even higher for the full year.
The government
Wednesday, 16 May, 12 has said it expects the CPI to rise 4.5% in 2011, above the 2.4%

Some other measures of inflation

✤ Wholesale Price Index (WPI): measures prices on a wholesale level

✤ Sometimes considered a leading indicator for CPI, but only a
fraction of wholesale goods are inputs in final consumer goods

✤ GDP Deflator: used to remove the effects of inflation from GDP to get
“real” economic growth

✤ Basically, CPI with a much bigger basket: all final newly produced
goods & services


Unemployment Rate

✤ Tracks the number of people in the labor force who don’t have jobs

✤ How do you deﬁne “labor force”?

✤ Usually expressed in percentage terms rather than an absolute
number

✤ Full employment is a bad thing!


Problems with unemployment
data

✤ Based on a household survey

✤ Doesn’t include people who have given up looking for work

✤ Deﬁnitions of “unemployment” vary among countries

✤ Japan’s deﬁnition is more restrictive than the U.S.’s


Grim Milestone as Jobless Rate Tops 10%
By Sudeep Reddy
9 November 2009

The unemployment rate last month soared above 10% for the first time since the early 1980s, a milestone likely to weigh on
consumer confidence and stir new efforts in Washington to spur job creation.
Some 558,000 people joined the ranks of the jobless in October, sending the rate to 10.2% and the tally of officially
unemployed Americans to 15.7 million, the Labor Department said. The 10% figure could overshadow last week's news that
the economy began growing again this summer after a long contraction.
"Ten percent is a terribly important number," Democratic pollster Peter Hart said. "It is not only the 10.2% of the people who
are unemployed, it is the number of people who are reliant on that 10%. It's probably the other 20% who say, 'I'm worried,
I'm uncertain, I'm afraid about this, I worry about my job.'"
The report intensified pressure on the government to provide more unemployment relief and spur hiring. President Barack
Obama on Friday signed an extension of jobless benefits for up to 20 weeks. He said his administration was considering new
investment in infrastructure, as well as tax cuts for businesses, to stimulate employment.
"History tells us that job growth always lags behind economic growth," Mr. Obama said, "which is why we have to continue to
pursue measures that will create new jobs."
The unemployment news initially sent stocks lower. But the market ended up modestly on hopes that job growth would return
by early next year.
The payroll figures weren't entirely bleak. The survey of employers showed fewer jobs lost in October than in previous months;
figures for August and September were revised up. The temporary employment sector, seen as an indicator of future
employment, gained 34,000 jobs to mark the third straight month of increases. The rest of the business and professional-
services sector grew, as did education and health jobs. Factory overtime hours increased.
Still, October marked only the second time since recordkeeping began in 1948 that the jobless rate topped 10%. It stayed that
high for 10 months in the early 1980s, peaking at 10.8% in November and December of 1982. Economists expect the
unemployment rate to continue rising at least until spring, even as gross domestic product resumes growing.
The 10.2% rate "reinforces a view on Main Street that recovery is spelled j-o-b-s and not G-D-P," said Stuart Hoffman, chief
economist at PNC. "We're in a sort of economic purgatory where we see growth in productivity and growth in output, and even
some growth in consumer spending. But it hasn't been sustained long enough for businesses to create jobs."
Sectors slammed hardest in the recession continued to suffer. Manufacturing lost 61,000 jobs, more than in the prior three
months. Construction employment fell by 61,000, near the pace of prior months. Retail declined by 40,000 jobs. A measure of
unemployment that includes people who have stopped actively searching for work, or are working part-time because they can't
find full-time work, hit 17.5% in October -- up half a percentage point from September.
Tom O'Pray, 36 years old, of Rockville, Md., lost his job as a hotel waiter a year ago and spent six months looking for a full-
time position. Mr. O'Pray applied to as many as four openings a week as an executive assistant -- a prior occupation of his --
but stopped looking in April. "There are so many overqualified applicants that I never made it to the top of the stack to ever
get an interview," Mr. O'Pray said.
He went to the movies with a friend and -- "on a lark," he said -- asked the theater manager if he had jobs. There was a part-
time position, paying $7.85 an hour, that included concession sales and cleaning restrooms.
"I'd prefer another office job," he said. "I'm working harder, for less money, than I ever have in my whole life."
The economy's course in coming months will depend on how well it can transition from growth backed by government support
-- such as the $787 billion stimulus package -- to an expansion built on the private sector.


Consumer/Business Confidence
Index
✤ A leading indicator of short-term consumer spending or investment
by businesses

✤ Often presented as a diffusion index

✤ How many respondents are conﬁdent minus how many are
pessimistic

✤ A reading of above 50 indicates optimism

✤ Compare to previous month/quarter for changes in sentiment


Problems with confidence indices

✤ Can have relatively large margin of error

✤ How big is the survey?

✤ Can mask dramatic changes in consumer or business sub-groups

✤ In the case of the tankan, check the sub-index for smaller businesses


Some other indicators

✤ Balance of Payments, including Trade Balance

✤ Industrial Production

✤ Retail Sales

✤ Tourist Arrivals

✤ Home Sales/Land Sales


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