Thoughts From the Divide: Attribution

March 1, 2024

“A lack of consumer discipline”

In April of last year, Huw Pill caught flack for saying that Brits “need to accept that they’re worse off”. This was followed by John Authers coming to the defense of the pilloried BoE chief economist. As we wrote.

Authers noted that the comments were taken out of context and explained that the BoE’s Chief Economist was describing how “after a few external shocks, inflation becomes a collective action problem” where “ideally everyone would take a share of the hit, and then they can move on. Human nature isn’t like that, and as a result, economics isn’t like that”.

Now, roughly a year later, the BoE’s Catherine Mann has picked up Mr. Authers’ baton (alternative articlelink). It turns out that people who can maintain their standard of living will tend to do just that! Bemoaning the “challenge” of bringing inflation back to target, Mann said there was “a lack of consumer discipline” to rein in businesses’ pricing power,

“Consumers discipline what firms can price – they can’t pay for it… or they choose not to… There is not a lot of consumer discipline on a large enough fraction of categories of services to represent active deceleration in services price inflation”.

As an aside, services appear to also be on a tear stateside, with Core Services PCE printing an eye-watering 0.65% MoM increase, more than 8% annualized.

To our cynical eyes, Mann’s comments are an attempt to shift the blame (“It’s not us, it’s those people who still want a new kitchen!”), a view that is supported by Mann, who also blames the supply side for restricting the Bank’s ability to maneuver. (There’s an argument to be made that the restriction is mutual) However, we’d note that in her discussion of discipline, Mann implies that consumers have to be both willing AND able to pay higher prices. Moving past the willing part (Given the choice between Mardi Gras and a diet of water and bread, few seem to prefer the latter), we’d love to ask Mann her thoughts on the source of the remarkable resilience of UK consumers to “the pressures of higher interest rates”. (Paging Warren Mosler!) While we wouldn’t bet on the Fed starting to reference the “interest income channel” or even a 1984-esque rewriting of their position “We’ve always been at war with the Interest Income Channel”, there’s the chance that someone looking at government interest expenditures might wonder where all that money is going.

Of course, there are two sides to any market, and Bob Elliot has made a strong case that fiscal doesn’t explain all of the remarkable performance of US nominal GDP. In a thought-provoking series of tweets (xeets?) he highlights that the apparent fiscal boost appears to account for only 25% of the increase in nominal GDP. So, what’s driving the rest? Bob suggests it’s labor compensation. We’d note the importance of Bob’s argument without having yet reached a conclusion. He definitely raises an interesting point, but it would inevitably beg the question of what was the catalyst for what Bob describes as “endogenous income growth”?

https://www.gocomics.com/calvinandhobbes/1989/10/31

P.S. While there is a bit of a kerfuffle in Japan at the moment, with BoJ governor Takata discussing the move away from NIRP and QE, our in-house Japan expert warns that the political situation is too turbulent to expect a move any time soon.

P.P.S. Rich Miller quotes Rob Dugger (one of the standout speakers from our conference last fall) in a recent article explaining exactly what the drying up of “Ben Bernanke’s global savings glut” could mean for global macro and markets. An article by Dugger on the topic can be found here.

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