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Fundamentals of
Business & Financial Journalism
Week 8: Covering Economic Events, part 2

Jeffrey Timmermans

Monday, 19 November, 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 prices over time)


Measuring economic performance

✤ Output of goods & services

✤ Changes in prices for goods & services over time

✤ Mood of consumers

✤ Employment

✤ Total supply of money

✤ Trade with other countries


Major economic indicators

✤ Gross Domestic Product

✤ Consumer Price Index

✤ Consumer Conﬁdence Index

✤ Unemployment rate

✤ Money Supply

✤ Trade Balance


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
Japan's economy. Future


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.
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
Monday, 19 November, 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


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


Economic policy tools

✤ Fiscal policy ✤ Monetary policy

✤ Taxation ✤ Interest rates

✤ Government spending ✤ Reserve ratio


Taxation

✤ Changes to tax policy can alter economic incentives

✤ Broad-based tax cuts can incentivize spending

✤ Targeted tax cuts/exemptions/credits can affect investment
decisions

✤ Mortgage tax exemption

✤ Capital gains taxes


Government spending

✤ To expand the economy, government spending must use borrowed
money (deﬁcit spending)

✤ The impact of government spending is multiplied, depending on how
much people spend and how much they save

✤ As the economy begins to grow, businesses and consumers tend to
invest and consume more


Monetary policy

✤ Now, typically the domain of central banks, independent from
government control

✤ Central banks can change an economy’s benchmark interest rate by
changing the supply of money via open-market operations

✤ Modern monetary policy focuses primarily on money supply


Roles of central banks

✤ Lender of last resort to domestic banks

✤ Regulator of domestic banking system

✤ Sets benchmark interest rate via open-market purchases of bonds

✤ Interest rates set to achieve steady economic growth with low
inﬂation (price stability)


Required reserve ratio

✤ Central banks are also typically responsible for overseeing the
country’s banking system

✤ Central banks tell commercial banks the percentage of deposits to
hold as reserves so they have enough cash on hand to pay depositors
who want to withdraw their money

✤ The higher the reserve ratio, the less banks can lend out

✤ Currently 10% in U.S., 20.5% in China from Feb. 24


Impact of reserve ratio
adjustments

Ratio UP borrowing DN Money supply DN

Ratio DN Borrowing UP Money supply UP


Interest rate changes

✤ By offering to purchase government bonds from commercial banks, or
offering to sell banks more bonds, a central bank can directly
inﬂuence the supply of money in an economy

✤ As interest rates are in effect the price of borrowing money, the supply
of money will have a direct impact on interest rates


Impact of open-market actions

Open Mkt purchases UP
Money supply UP

interest rates DN

Open Mkt Sales UP
Money supply DN

interest rates UP


Examples of key benchmark rates

✤ Fed Funds rate in U.S. (zero-0.25%)

✤ Overnight call rate in Japan (zero-0.10%)

✤ European Central Bank benchmark rate (1%)


UPDATE 2-Australia c.bank cuts rates, more seen likely
2 October 2012
04:46 GMT
Reuters News

By Wayne Cole
SYDNEY, Oct 2 (Reuters) - Australia's central bank cut interest rates by a quarter point to a three- Change
year trough of 3.25 percent on Tuesday as a slowdown in China, falling export prices and a high
currency all dimmed the economic outlook at home.
The Australian dollar fell half of a U.S. cent as the market had not been fully priced for a move, Cause
with many analysts favouring November as the more likely window for a cut.
"The Board judged that, on the back of international developments, the growth outlook for next
year looked a little weaker," Reserve Bank of Australia (RBA) Governor Glenn Stevens said after
the central bank's monthly policy meeting.
Comment
"The Board therefore decided that it was appropriate for the stance of monetary policy to be a little
more accommodative."
The latest move brings the cuts delivered since last November to 150 basis points. Investors had
priced in about a 60 percent probability on an easing this week, in part due to concerns about
China, Australia's biggest export market.
Most economists had thought the central bank would wait for third-quarter inflation figures due Expectations
later this month before pulling the trigger.
Still, with core inflation expected to remain near the floor of the RBA's long-term target band of 2
to 3 percent, markets had assumed further easing was inevitable.
"I think they have done the right thing," said Shane Oliver, head of investment strategy at AMP
Capital Investors. "The global economy is looking a bit shaky." Comment
"We are looking to another 0.25 percent cut in November, and then another one in February or
March next year, taking the cash rate to 2.75 percent." & Future


Evolution of monetary policy

✤ Until the 20th Century, most currencies were tied to gold or silver at a
fixed rate

✤ So governments fixed the price of their currency

✤ Now, most major currencies are allowed to float freely in value
against other currencies

✤ And, now, central banks fix the quantity of their currency


Evolution of central banks

✤ The U.S. Federal Reserve was founded only in 1913

✤ It became fully independent only in 1951

✤ The Bank of England was created in the 17th Century

✤ It only became operationally independent in 1997


Fed funds rate


U.S. inflation


Quantitative Easing

✤ First used by the Bank of Japan from 2001 after a long period of
near-zero short-term interest rates failed to kick-start the
economy

✤ A central bank “expands its balance sheet” by offering to buy
government or other bonds from commercial banks

✤ The central bank credits the account the commercial bank
maintains with the central bank and holds onto the bond


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