UK
Anyone notice the UK RICS housing report that just came out? At +34. That was the best reading since November 2006. In case you are not familiar w/ the RICS housing survey it oscillates between -100 and +100. Zero reflects a balance between house price upswings to downswings. From the end of 2007 to this past April it was averaging around -85 so why the optimism and what does this mean for the BOE?
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Well if history is any indication then the BOE should consider moving back towards tightening as when UK house prices are rising inflation usually follows. Of course the BOE is not going hike today, but see the charts below: The chart below left scales out the RICS data by 12 months and overlays it to the Avg. Earnings data. It appears that spending increases before employees earnings increase. The chart below right also scales forward the RICS data and shows that normally inflation follows when house prices are rising (studying the cycles will offer better analysis).
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CPI = Consumer price inflation. Inflation will rise when demand increases usually as a result of higher wages. The central bank then acts to cut demand and the cycle renews. So what happened in 2008? Earnings were falling but the 2% mandate by the BOE forced them to hike. As we've seen house prices were not rising last year and jobs were not being created. Average earnings were certainly falling and falling fast. The BOE stated in May of 2008 "higher energy and food price (have hit) inflation in particular." Hmmm, somehow that doesn't add up. If anything it gives credibility to the FOMC's mandate.
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What is that phrase, those that forget history are doomed to repeat it? Remember the days when there were professionals that were considered Fed watchers or the equivalent in Japan, Germany, Paris and the UK? Well dare I say that we are taking baby steps back in that direction again. If inflation is basically a non-factor going forward and Zero percent policies are here for much longer than any of us could expect then we'll continue to watch the money supply. Back to pre Greenspan, pre King or pre Eddie George days. Way back to when the Bundesbank was surprising the markets and watching M2 and M4 so closely. After all with 8% unemployment rates in the UK how can there be consumer inflation? The chart below shows that the BOE actually had policy too easy for to long letting the supply of money build up and create those asset bubbles. The same chart can be produced for the other central banks. What is even more worrisome is that a bank that has one mandate failed to follow that particular mandate. Now we have a G20 meeting suggesting that the central banks will be there for the economies (to repeat history and create another set of asset bubbles as we are in the early stages of with money supply growing again).
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