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Once again with the reasoning from manipulated prices

Summary:
Prices are, of course, information. Information necessary to any decision about what to do next. However, as we’ve mentioned before, using a manipulated price doesn’t provide the information necessary. Because, of course, the price is false and so is the information by the amount of the manipulation:Looking forward, the signals are not of recovery, but relapse, and it is not clear that the same old central-bank magic will make much of a difference. Inflation is sinking like a stone as consumers rein in their spending again. Annual prices in the eurozone fell by 0.3% in September following a 0.2% decline in August, according to figures last week. Consumer price inflation in the UK dropped to 0.2% in August, meaning prices barely rose.Therefore, goes the logic used, we should have negative

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Prices are, of course, information. Information necessary to any decision about what to do next. However, as we’ve mentioned before, using a manipulated price doesn’t provide the information necessary. Because, of course, the price is false and so is the information by the amount of the manipulation:

Looking forward, the signals are not of recovery, but relapse, and it is not clear that the same old central-bank magic will make much of a difference. Inflation is sinking like a stone as consumers rein in their spending again. Annual prices in the eurozone fell by 0.3% in September following a 0.2% decline in August, according to figures last week. Consumer price inflation in the UK dropped to 0.2% in August, meaning prices barely rose.

Therefore, goes the logic used, we should have negative interest rates.

Our point here is not to argue either in favour of, nor against, negative interest rates - not here at least. Rather, the link to the UK CPI was this:

Falling prices in restaurants and cafes, arising from the Eat Out to Help Out Scheme, resulted in the largest downward contribution (0.44 percentage points) to the change in the CPIH 12-month inflation rate between July and August 2020.

We’ve had a specific and known manipulation of the inflation rate, one that lasted for one month at most. This is not a price from which we can gain useful information about what to do with the whole economy for the next few years.

Precisely because market prices are information we have to make sure that it is actually market prices, not manipulated ones, that we use as our inputs into the decision making process.

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Tim Worstall
Tim Worstall is a British-born writer and Senior Fellow of the Adam Smith Institute. Worstall is a regular contributor to Forbes and the Register. He has also written for the Guardian, the New York Times, PandoDaily, the Daily Telegraph blogs, the Times, and The Wall Street Journal. In 2010 his blog was listed as one of the top 100 UK political blogs by Total Politics.

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