"Inflation: Both Sides Have a Point"

What comes to your mind when you read the Business Daily's Friday 3, 2017 splash about how poor households are skipping meals in order to beat inflation? What was the essence of seeking the views of the Chris Kirubi and Donald Kipkorir?

This is what the duo had to say.

Kirubi: "It's the small people that the government needs to step in and cushion from rising costs".

Kipkorir: "I even don't know the price of fuel, food and such. I am never bothered by these price changes as they don't affect me".

When I saw the quotes attributed to the duo, I couldn't help but recall a column written by Economist Paul Krugman nearly 17 years ago in the New York Times where he said thus:

"If a presidential candidate were to declare that the earth is flat, you would be sure to see a news analysis under the headline "Shape of the Planet: Both Sides Have a point".

In other words, the story above was looking for balance in giving  the duo a chance to gloat about why the inflation thing is not about them - I naively used to imagine that business people need a stable operating environment as assured by low and stable inflation!

Crazy!

The Trageddy of a One Day News Cycle

On January 31, 2017, I published a Research Note that made some policy makers unhappy. In the Note, I observed thus:

"We therefore observe that the decision by the MPC to hold the CBR at 10.0 percent as justified
by the Committee’s argument that inflation is within the target range and previous decisions
need time to work through the economy was anticipated. While on that account the MPCs
decision seems justified, its assessment of the immediate term risks on price stability and other
macro  parameters  are  of  less  candour.  Consequently,  this  reflects  the  MPC’s  inability,  or
unwillingness, to provide forward guidance in its monetary policy signalling".

At that point in time, everybody who has an opinion on such matters - especially the pretentious business media - was fixated on the cost of credit, terming the MPC decision a reprieve to borrowers.

To many,  it didn't matter then that the capping of interest rates had dampened credit expansion as many of us had forewarned and that the main worry was macroeconomic stability.

It equally didn't matter that the MPC - in its wisdom or lack thereof - decided to hold its meeting a few hours before the release of  inflation numbers - the core policy target; this meant that the Committee chose to make a decision without the benefit of one crucial piece of information.

Fast forward to February and as I had anticipated Inflation hit the roof, busting the official target. Now everybody is wise. The editorials are roaring: "Inflation rise a wake-up call for policy makers".

The next MPC meeting is scheduled for March 27, 2017 - curiously three days before inflation numbers are published.

If the MPC does the right thing and adopts a tightening stance, the same wise people will predictable start talking about the cost of credit - as if that is all that matters!

While this is a tragedy of the one day news cycle syndrome - that coincides with the editorials' short  memory - is vindicates my argument on the folly of the CBK's choice of the Central Bank Rate (CBR) as the benchmark rate for capping  lending rates.

For those curious, the CBR is a policy signalling rate meant to balance the inflation gap (actual vis-a-vis the target) on the one hand and the output gap (actual output vis-a-vis potential output).

The CBR therefore has no business being linked to credit pricing. It is role is to signal policy intentions, and then be operationalized by a market rate (be it the interbank rate, repo rate, or even the Kenya Banks Reference Rate (KBRR) - which the MPC chose to suspend).

That is funny stuff right there!