There is no such thing as ‘Swift-flation’
Plus, reviewing the RBA review papers; and the ever-shrinking Big Aussie short
Beyonce’s ‘decision to start her world tour in Stockholm in May led to a surge in local hotel prices that in turn meant Swedish inflation exceeded expectations…Danske’s chief economist in Sweden…estimated the singer caused 0.2 percentage points of the rise. Sweden Statistics said restaurants and hotels added 0.3 percentage points to the May figure, while recreation and culture contributed 0.2 percentage points.’ So reported the FT on 14 June, the main source for a rash of ‘Swift-flation stories,’ not least locally given the upcoming tour.
The AFR’s Chanticleer column maintained that ‘Because [Taylor] Swift is not just a cultural phenomenon, but an economic one, too – the history of this tour suggests that where Swift goes, a burst of inflation typically follows.’
These claims are a teachable moment in relation to the inflation process. Swift-flation is in fact a relative price shift in response to a changed pattern of demand, not an increase in the general price level (the definition of inflation).
For any given inflation print, there will be individual components that add to or subtract from the headline inflation rate. A common frame in reporting on inflation is to say that ‘but for the contribution from x, the inflation rate would have been y.’ If there is an economic motivation for excluding x, this framing might make sense. The various core or statistical measures that seek to remove volatile components to better focus on the persistent component of inflation that is of most concern to policymakers is one example. But in the absence of a specific economic motivation, it makes little sense to attribute overall inflation outcomes to changes in the relative prices that make up the overall price index. It is what the individual components have in common that matters for the inflation process, not what sets them apart.
It could be that the spending associated with a major event contributes positively to aggregate demand, but more likely represents a shift in the pattern of demand, hence the relative price shift. Large sporting and other events often displace or are substitutes for other economic activity. The venues taken up by Swifties and Swift herself have alternative uses. While we can’t rule out a boost to aggregate demand from events of this type, the implications for overall demand are often smaller than conventionally assumed given these displacement effects.
Even if Taylor Swift’s local tour were to register on measures of inflation and aggregate demand, these temporary influences would not have implications for monetary policy (a point the Chanticleer column ultimately acknowledges).
Rather than a positive demand shock, a better lens for the Taylor Swift tour might be a temporary negative productivity shock, given the effort apparently required to obtain tickets. That is more unambiguously inflationary, although also not something requiring a monetary policy response.
Governor Lowe has plenty of reasons to lose sleep, but Taylor Swift should not be one of them.
For the record, next week’s RBA Board meeting has cash rate futures pricing a 28% chance of a 25 basis point tightening, down from a more than 50% chance earlier in the month. The cash rate is still seen peaking at around 4.5% compared to 4.1% currently:
Source: ASX via Matt Cowgill’s cash rate scraper.
Reviewing the RBA Review papers
The RBA Review commissioned papers on a number of topics to inform its work. These papers were somewhat overshadowed by the Review’s recommendations, but are worth considering separately, particularly to the extent that the recommendations of those papers were not reflected in the final report. We will start this week with Prasanna Gai’s paper on The Governance of Monetary Policy (I should disclose that Prasanna and I were undergraduate contemporaries at ANU).
Monetary policy committees have been constituted as institutional solutions to the problem of policymaker ignorance about the shocks affecting the economy. Gai reviews international experience with monetary policy decision-making bodies, taking a micro-institutional approach to understanding the various trade-offs made in their design and how they have worked in practice.