In an interview with the Yorkshire Post, Mark Carney, Governor of the Bank of England, said that under current circumstances he did not feel that further quantitative easing was justified. He said:
My personal view is, given the recovery has strengthened and broadened, I don’t see a case for quantitative easing and I have not supported it.
In response to his speech, the pound strengthened against the dollar. It appreciated by just over 1 cent, or 0.7%. But why should the likelihood of no further quantitative easing lead to a strengthening of the pound?
The answer lies with people’s anticipation of future interest rates. If there is no further increase in money supply through QE, interest rates are likely to rise as the economy recovers and thus the demand for money rises. 
A rise in interest rates, in turn, is likely to lead to an inflow of finance into the country, thereby boosting the financial account of the balance of payments. The increased demand for sterling will tend to drive up the exchange rate.
However, an increase in aggregate demand will result in an increase in imports and a likely increase in the balance of trade deficit. Indeed, in July (the latest figures available) the balance of trade deficit rose to £3.085bn from £1.256bn in June. As recovery continues, the balance of trade deficit is likely to deteriorate further. Other things being equal, this would lead to a depreciation of the pound.
So if the pound appreciates, this suggests that the effect on the financial account is bigger than the effect on the current account – or is anticipated to be so. In fact, given the huge volumes of short-term capital that move across the foreign exchanges each day, financial account effects of interest rate changes – actual or anticipated – generally outweigh current account effects.
Articles
Yorkshire can reap benefits from turnaround says Mark Carney Yorkshire Post (27/9/13)
Sterling Jumps as BOE Chief Signals No More Bond Buying Wall Street Journal, Nick Cawley and Jason Douglas (27/9/13)
Carney’s Northern Exposure Sends Sterling Soaring Wall Street Journal, David Cottle (27/9/13)
Pound Gains as Carney Sees No Case for QE, Confidence Improves Bloomberg, Anchalee Worrachate & David Goodman (28/9/13)
Exchange Rate Bounces as Strong UK Data Supports Sterling FCF (Future Currency Forecast), Laura Parsons (30/9/13)
Currency briefing: What if the pound sterling has been overbought? iNVEZZ, Tsvyata Petkova (30/9/13)
Pound rises after Carney rejects increasing QE BBC News (27/9/13)
Pound Rises for Fourth Day Versus Euro on Housing, Mortgage Data Bloomberg, Emma Charlton (30/9/13)
Data
$ per £ exchange rate (latest month) XE (You can access other periods and currencies)
Effective exchange rate indices (nominal and real) Bank for International Settlements
Balance of Payments, Q2 2013 Dataset ONS
Questions
- Explain how quantitative easing affects exchange rates.
- What is happening concerning quantitative easing in the USA? How is this likely to affect the exchange rate of the US dollar to sterling; other currencies to sterling?
- Why may an increase in the balance of trade deficit lead directly to an appreciation of the exchange rate?
- Why is an anticipation of a policy change likely to have more of an effect on exchange rates than the actual policy change itself? Why, indeed, may a policy change have the reverse effect once it is implemented?
- Under what circumstances may speculation against exchange rate changes be (a) stabilising; (b) destabilising?
- How is quantitative easing (or an anticipation of it) likely to affect each of the main components of the current and financial accounts of the balance of payments?
- For what reasons might sterling have been ‘overbought’ and hence be overvalued?
- What is meant by the real exchange rate (REER)? Why may reference to the REER suggest that sterling is not currently overvalued?
For all households, energy is considered an essential item. As electricity and gas prices rise and fall, many of us don’t think twice about turning on the lights, cooking a meal or turning on the heating. We may complain about the cost and want prices brought down, but we still pay the bills. But, is there anything that can be done about high energy prices? And if there is, should anything be done?
The worlds of politics and economics are closely linked and Ed Miliband’s announcement of his party’s plans to impose a 20-month freeze on energy prices if elected in 2015 showed this relationship to be as strong as ever. The price freeze would certainly help average households reduce their cost of living by around £120 and estimates suggest businesses would save £1800 over this 20 month period. The energy companies have come in for a lot of criticism, in particular relating to their control of the industry. The sector is dominated by six big companies – your typical oligopoly, and this makes it very difficult for new firms to enter. Thus competition is restricted. But is a price freeze a good policy?
Part of the prices we pay go towards investment in cleaner and more environmentally friendly sources of energy. Critics suggest that any price freeze would deprive the energy sector of much needed investment, meaning our energy bills will be higher in the future. Furthermore, some argue this price freeze suggests that Labour is abandoning its environmental policy. Energy shortages have been a concern, especially with the cold weather the UK experienced a few years ago. This issue may reappear with price freezes. As Angela Knight, from Energy UK, suggests:
Freezing the bill may be superficially attractive, but it will also freeze the money to build and renew power stations, freeze the jobs and livelihoods of the 600,000-plus people dependent on the energy industry and make the prospect of energy shortages a reality, pushing up the prices for everyone.
There is a further concern and that is that large energy companies will be driven from the UK. This thought was echoed by many companies, in particular the British Gas owner Centrica, commenting that:
If prices were to be controlled against a background of rising costs it would simply not be economically viable for Centrica to continue to operate and far less to meet the sizeable investment challenge that the industry is facing…The impact of such a policy would be damaging for the country’s long-term prosperity and for our customers.
Share prices naturally fluctuate with global events and a political announcement such as this was inevitably going to cause an effect. But, perhaps the effect was not expected to be as big as the one we saw. 
Share prices for Centrica and SSE fell following the announcement – perhaps no great shock – but then they continued to fall. The market value tumbled by 5% and share prices kept falling. This has led to Ed Miliband being accused of ‘economic vandalism’ by a major shareholder of Centrica, which is hardly surprising, given the estimated cost of such a price freeze would be £4.5 billion.
The economic implications of such a move are significant. The announcement itself has caused massive changes in the FTSE and if such a move were to go ahead if Labour were elected in 2015, there would be serious consequences. While families would benefit, at least in the short term, there would inevitably be serious implications for businesses, the environmental policy of the government, especially relating to investment and the overall state of the economy. The following articles consider the aftermath of Ed Miliband’s announcement.
Miliband stands firm in battle over fuel bills plan The Guardian, Patrick Wintour and Terry Macalister (25/9/13)
Michael Fallon calls Miliband’s energy prices pledge ‘dangerous’ Financial Times, Elizabeth Rigby and Jim Pickard (26/9/13)
Britain’s labour treads narrow path between populism and prudence Reuters (26/9/12)
Ed Miliband’s radical reforms will make the energy market work for the many Independent (26/9/13)
Has Labour fallen out of love with Business? BBC News (26/9/13)
Top Centrica shareholder Neil Woodford accuses Labour leader Ed Miliband of economic vandalism The Telegraph, Kamal Ahmed (25/9/13)
Centrica and SSE slide after Labour price freeze pledge The Guardian (26/9/13)
Ed Miliband’s energy price freeze pledge is a timely but risky move The Guardian, Rowena Mason (24/9/13)
Questions
- Why are energy prices such a controversial topic?
- How are energy prices currently determined? Use a diagram to illustrate your answer. By adapting this diagram, illustrate the effect of a price control being imposed. How could it create an energy shortage? What impact would this have after the 20-month price freeze
- Why would there be adverse effects on energy companies if prices were frozen and costs increased? Use a diagram to illustrate the problem and use your answer to explain why energy companies might leave the UK.
- How would frozen energy prices help households and businesses?
- Why were share prices in Centrica and SSE adversely affected?
- Is there an argument for regulating other markets with price controls?
- Why is there such little competition in the energy sector?
Coffee prices have been falling on international commodity markets. In August, the International Coffee Organization’s ‘composite indicator price’ fell to its lowest level since September 2009 (see). This reflects changes in demand and supply. According to the ICO’s monthly Coffee Market Report for August 2013 (see):
“Total exports in July 2013 reached 9.1 million bags, 6.6% less than July 2012, but total exports for the first ten months of the coffee year are still up 3.6% at 94.5 million bags. In terms of coffee consumption, an increase of 2.1% is estimated in calendar year 2012 to around 142 million bags, compared to 139.1 million bags in 2011.”
But despite the fall in wholesale coffee prices, the price of a coffee in your local coffee shop, or of a jar of coffee in the supermarket, has not been falling. Is this what you would expect, given the structure of the industry? Is it simply a blatant case of the abuse of market power of individual companies, such as Starbucks, or even of oligopolistic collusion? Or are more subtle things going on?
The following articles look at recent trends in coffee prices at both the wholesale and retail level.
Articles
Coffee Prices Continue Decline Equities.com, Joel Anderson (17/9/13)
Arabica coffee falls Business Recorder (19/9/13)
Brazil Launches Measures to Boost Coffee Prices N. J. Douek, Jeffrey Lewis (7/9/13)
Coffee Prices Destroyed Bloomberg (4/9/13)
The surprising reality behind your daily coffee: The CUP costs twice as much as the beans that are flown in from South America Mail Online, Mario Ledwith (23/9/13)
Coffeenomics: Four Reasons Why You Can’t Get a Discount Latte Bloomberg Businessweek, Kyle Stock (19/9/13)
Here’s who benefits from falling coffee costs CNBC, Alex Rosenberg (9/9/13)
The great coffee rip-off is no myth Sydney Morning Herald, BusnessDay, Michael Pascoe (23/9/13)
Monthly Coffee Market Report International Coffee Organization (August 2013)
Data
Coffee Prices ICO
ICO Indicator Prices – Annual and Monthly Averages: 1998 to 2013 ICO
Coffee, Other Mild Arabicas Monthly Price – US cents per Pound Index Mundi
Coffee, Robusta Monthly Price – US cents per Pound Index Mundi
Questions
- Why have wholesale coffee prices fallen so much since 2011? Are the reasons on the demand side, the supply side or both? Illustrate your answer with a supply and demand diagram.
- What determines the price elasticity of demand for coffee (a) on international coffee markets; (b) in supermarkets; (c) in coffee shops?
- Why has the gap between Arabica and Robusta coffee prices narrowed in recent months?
- Identify the reasons why coffee prices have not fallen in coffee shops.
- The cost of the coffee beans accounts for around 4% of the cost of a cup of coffee in a coffee shop. If coffee beans were to double in price and other costs and profits were to remain constant, by what percentage would a cup of coffee rise?
- How would you set about establishing whether oligopolistic collusion was taking place between coffee shops?
- What is meant by ‘hedging’ in coffee markets? How does hedging affect wholesale coffee prices?
- Explain the statement “If they have hedged correctly, Starbucks and such competitors as Green Mountain Coffee Roasters (GMCR) are likely paying far more for beans right now than current market rates.”
- What are “buffer stocks”. How can governments use buffer stocks (e.g. of coffee beans) to stabilise prices? What is the limitation on their power to do so? Can buffer stocks support higher prices over the long term?
- What are “coffee futures”? What determines their price? What effect will coffee future prices have on (a) the current price of coffee; (b) the actual price of coffee in the future?
As we saw in the news item The difficult exit from cheap money, central banks around the world have been operating an extremely loose monetary policy since the beginning of 2009. Their interest rates have been close to zero and trillions of dollars of extra money has been injected into the world economy through various programmes of quantitative easing.
For the past few months the Federal Reserve has been purchasing bonds under its most recent programme dubbed QE3, and thereby increasing narrow money, by $85 billion per month. Since the start of its QE programme in 2009, it has pumped around $2.8 trillion of extra money into the US and world economies. This huge increase in money supply has boosted the demand for assets worldwide and world stock markets have risen. Much of the money has flowed into developing countries, such as India, and has acted as a boost to their economies.
Once the US economy is growing strongly again, the aim is to taper off, and ultimately end or even reverse, the QE programme. It was expected that the Fed would decide to start this tapering off process at its meeting on 18 September – perhaps reducing bond purchases initially by some $10 billion. (Note that this would still be an increase in money supply, just a slightly smaller one.) Over the past few days, US bond prices have been falling (and yields increasing) in anticipation of such a move.
As it turned out, the Fed decided to delay tapering off. It will continue with its assets purchase programme of $85 billion per month for the time being. The reason given was that the US economy was still too fragile and needed the monthly injections of money to stay at the current level.
Normally it might be expected that the announcement of a more fragile recovery would cause the US stock market, and others worldwide, to fall. In fact the opposite occurred, with investors relieved that the extra money, which allows extra asset purchases, would continue at the same rate.
But this then raises the question of just what will be the effect when tapering off does actually occur. Will stock markets then go into a tailspin? Or will they merely stop rising so fast. That depends very much on the role of speculation.
Webcasts
Bernanke’s Own Words on Asset Purchases, Economy Bloomberg (18/9/13)
Bernanke: Fed to delay bond tapering PBS Newshour on YouTube (full speech plus questions) (18/9/13)
No tapering announced by Fed CNBC on Yahoo Finance (18/9/113)
The impact of US stimulus moves at home and abroad BBC News, Stephanie Flanders (18/9/13)
Is the upturn reaching Americans? BBC World, Stephanie Flanders (17/9/13)
Shares hit high as Federal Reserve maintains stimulus BBC News, Stephanie Flanders (18/9/13)
US Fed decision to delay tapering was a relief ET Now (India), Bimal Jalan (19/9/13)
Articles
Federal Reserve surprises markets by delaying QE tapering The Telegraph, Katherine Rushton (18/9/13)
Federal Reserve delays QE tapering: the full statement The Telegraph (18/9/13)
Q&A: What is tapering? BBC News (18/9/13)
Fed delay is no reason to celebrate The Guardian, Larry Elliott (19/9/13)
Federal Reserve tapering decision has baffled the markets The Guardian, Larry Elliott (19/9/13)
Taper tiger The Economist (21/9/13)
Everything You Need to Know About the Fed’s Decision Not to Taper QE3 The Atlantic, Matthew O’Brien (18/9/13)
Fed’s dovish turn leaves Wall Street economists mulling taper timing: poll Reuters, Chris Reese (18/9/13)
Good news and bad news from the Fed BBC News, Stephanie Flanders (19/9/13)
Is the Fed frightened of its shadow? BBC News, Robert Peston (19/9/13)
The Federal Reserve and Janet Yellen face a tough task with insufficient tools The Guardian, Mohamed A. El-Erian (14/10/13)
Questions
- Why might a slowing down in the increase in US money supply cause asset prices to fall, rather than merely to rise less quickly?
- Why has the US QE programme led to a rise in asset prices overseas?
- Distinguish between stabilising and destabilising speculation. Which type of speculation has been occurring as a result of the US QE programme?
- How has QE affected unemployment in the UK and USA? How is the participation rate and the flexibility of labour markets relevant to the answer?
- Explain the following two statements by Stephanie Flanders and Robert Peston respectively. “The market conditions argument has a circularity to it: talk of tapering leads to higher market rates, which in turn puts the taper itself on hold.” “The Fed simply hinting that less money would be created, means that there will be no reduction in the amount of money created (for now at least).”
- Why have US long-term interest rates, including mortgage rates, risen since May of this year?
- What impact have higher US long-term interest rates had on economies in the developing world? Explain.
The BBC has recently published the results of its third report on average ticket prices for football for the top ten divisions in the UK. These include all four professional leagues in England (The Premier League, The Championship, League 1 and League 2), the top division in English non-league football (Conference Premier), the 4 professional leagues in Scotland (The Scottish Premier, The Scottish Championship, Scottish League One, Scottish League Two) and the top league in women’s football (Women’s Super League). Most of the headlines have focused on evidence of falling ticket prices in the 4 professional leagues in England.
The BBC study focuses on four different categories of ticket.
– The most expensive adult season tickets
– The cheapest adult season tickets
– The most expensive adult match-day tickets
– The cheapest adult match-day tickets
The average price in each category is simply calculated as the price charged by each club in that category divided by the number of clubs. For example, the most expensive season ticket offered by Arsenal last year was £1955, whereas at Swansea it was £499. The average price was lower in all four categories for the three leagues in the English Football League (The Championship, League 1, League 2). For example, the price of the cheapest adult season tickets fell by 8.4% in the Championship, 1.6% in League 1 and 7.6% in League 2. Prices were also lower in three out of the four categories in the English Premier League (EPL). The only exception was the price of the cheapest adult season tickets which actually increased by 4.3%.
The overall trend in falling prices is in marked contrast to the previous year’s report that had found evidence of rising prices. For example the 2012 survey found that the average price of the cheapest adult match-day ticket increased by 11% on average across the EPL and EFL.
One factor that may be driving the apparent fall in prices in the English Football League is the falling attendances at games. Average attendance in 2012-13 was down 5% on the previous year – the second consecutive fall. It was 9% lower than in 2009-10 season. In complete contrast, attendance at EPL games were slightly up on the previous year and there were also record season ticket sales.
The increase in the average price of the cheapest adult season tickets in the EPL has received criticism from supporters groups. For example, The Football Supporters’ Federation called for far larger cuts in ticket prices, which they argued could have been funded by the big increase in the revenue from the latest TV deal. BskyB and BT paid a combined total of £3.018bn for the rights to show live games from the 2013-14 season to the 2015-16 season. This was an increase of £1.773bn on the previous deal. Malcolm Clarke, chair of the Football Supporters’ Federation, said
The Premier League has had an eye-watering increase in its media income. For example, they could knock £50 off the price of every single ticket of every single game for every single spectator in the Premier League this season and still have the same amount of money as they previously had.
Some have argued that it may also be in the commercial interests of the clubs to reduce prices. Professor Simon Chadwick from Coventry University commented that:
Lower prices and more fans can mean an increase in overall revenue, and there is also the secondary spend to consider: club merchandise, food and drink and so on.
However, care must be taken when interpreting this data because the report does not state how many fans actually pay the most expensive or cheapest price in each of the four categories. For example, the report found that Arsenal charged the highest price of £126 in the most expensive match-day ticket category. The club responded to this finding by stating that less than 100 people would actually pay this price at any given game!
Burton Albion was also reported as having the highest match-day ticket price of £30 for both League 1 and League 2. Once again the club responded by stating that only one or two of these tickets would be sold and car-parking, food and a programme were included in the price. Perhaps it would be more accurate to title the report “The average ticket price of the most expensive and cheapest seats for a football match”.
Some weighting system, such as that used to calculate the retail price index, would need to be used in order to obtain a more accurate picture of what is happening to average prices. It is possible that the price of tickets covered in the BBC report could be falling whilst the average price of all tickets could still be rising.
Articles
BBC Price of Football 2013: Average ticket prices fall BBC News (12/9/13)
Price of Football: The Premier League – then everybody else BBC News Matt Slater (12/9/13)
Price of Football: The Premier see some rises in cost BBC News Andy Cryer (12/9/13)
Price of Football: The Premier see some rises in cost BBC News (13/5/12)
Average ticket prices fall reveals Price of Football survey but Premier League continues to live in a world of its own The Independent (12/9/13)
Ben Robinson questions accuracy of BBC “Price of Football” survey BurtonMail David Broome (12/9/13)
Survey finds average prices of football match tickets have fallen The Independent (12/9/13)
Arsenal top BBC’s Price of Football table The Football Supporters Federation (12/9/13)
Questions
- Consider a number of factors that might determine the price of tickets for a particular football match.
- Draw a demand and supply diagram to illustrate what has happened in the market for tickets for matches in both the EPL and the EFL over the last couple of years.
- What non-price factors might have lead to the fall in demand for tickets for games in the English Football League?
- What does the evidence suggest about the income elasticity of demand for tickets at English Premier League games?
- In the article Professor Chadwick is quoted as saying that “Lower prices and more fans can mean an increase in overall revenue”. Using the concept of price elasticity of demand explain how this could be the case.
- Using a simple numerical example explain why the average price of tickets may be rising even though the price of tickets in the 4 categories in the BBC study are falling.
In an interview with the Yorkshire Post, Mark Carney, Governor of the Bank of England, said that under current circumstances he did not feel that further quantitative easing was justified. He said:
A rise in interest rates, in turn, is likely to lead to an inflow of finance into the country, thereby boosting the financial account of the balance of payments. The increased demand for sterling will tend to drive up the exchange rate.
