Definitely worth a read.
Definitely worth a read.
Who writes this stuff?!
The headline makes it sound like widespread and out of control inflation is our biggest problem, but buries that consumer prices are rising barely over 2% a year. That’s well within bounds of acceptable inflation.
Furthermore, over the last 35 years, I’ll bet (I haven’t checked so you might want to take me up on it), there aren’t more than a half dozen months without rising consumer prices, allbeit at perhaps at a slow rate.
Bad headline with no proper context, I grumble.
The University of Michigan survey of consumers shows that expected inflation has moved up noticeably over the past few months, raising concerns that we may be in for a period of rising inflation. However, the increase in expected inflation likely reflects the excess sensitivity of consumers to food and energy prices. Consistent with this hypothesis, household surveys have not forecast inflation well in recent years, a period of volatile food and energy prices.
Household Inflation Expectations and the Price of Oil: It’s Deja Vu All Over Again
Mon, 23 May 2011 07:00:00 GMT
Inflation is negative for the economy. So far the evidence that more is coming is spotty. Some headline prices are rising,but most aren’t. I’f inclined to be watchful and wary. Inflation has to be chocked off before inflation expectation become heavily embeded as they did in the 1970’s.
I know I’m supposed to hang my head in shame at how some of us have been Chicken Littles on price inflation, but I’m still not sure it’s time to throw in the towel. (For the record: Yes I have definitely been wrong in the specific timeframes I gave for when we’d see certain things happening with CPI.)
Consumer goods except food and energy: +1.3%
Consumer goods: +3.2%
Finished goods: +6.8%
Intermediate goods: +9.4%
Crude goods: 23.7%
And in light of all this, I’m supposed to just roll over and say, “Yep there is clearly no sign of price inflation in the system.” ? I don’t mind people saying, “I think this is a one-time blip in commodities that will work its way through the headline numbers,” like so.
But Krugman et al. are going much farther than that, acting as if only Newt Gingrich could be so stupid as to think there is any sign of inflation. Steven Chapman (HT2 David R. Henderson) goes so far as to say, “The last epidemic of inflation, in the 1970s and early ’80s, was a searing experience, from which the Federal Reserve learned lessons it has no desire to repeat. Is inflation coming back? Sure. Right after the Ford Pinto.”
Really? That’s how confident we all are in this guy?
Update on (Price) Inflation
Fri, 13 May 2011 22:00:22 GMT
I agree with Paul Krugman
Sat, 07 May 2011 14:27:00 GMT
As my regular blog readers know, Paul Krugman and I often do not see eye to eye. So, once in a while, it might be useful to point out those times when we actually agree.
In a recent post on commodity prices, Paul says, "Volatile prices are volatile, which is why they shouldn’t be used to determine monetary policy." I agree, and I suspect many other macroeconomists would as well.
I once wrote a paper on this topic with Ricardo Reis, called "What Measure of Inflation Should a Central Bank Target?" (published link) Here is the abstract:
This paper assumes that a central bank commits itself to maintaining an inflation target and then asks what measure of the inflation rate the central bank should use if it wants to maximize economic stability. The paper first formalizes this problem and examines its microeconomic foundations. It then shows how the weight of a sector in the stability price index depends on the sector’s characteristics, including size, cyclical sensitivity, sluggishness of price adjustment, and magnitude of sectoral shocks. When a numerical illustration of the problem is calibrated to U.S. data, one tentative conclusion is that a central bank that wants to achieve maximum stability of economic activity should use a price index that gives substantial weight to the level of nominal wages.
As the graph below illustrates, the price of labor does not show any significant inflationary pressures right now:
Click on graphic to enlarge.
For more on this topic, see a recent post by MIT grad student Matt Rognlie.
Be sure to read the update. An oil price shock will cause a one time increase in the price level, but not a sustained rate of change.
Caroline Baum goes after the confused thinking on oil prices and inflation:
It must be the noxious fumes or the stratospheric prices because crude oil crossing the $100 threshold makes normally thoughtful individuals funny in the head.
The early symptoms of high oil price syndrome, or HOPS, can easily be masked or confused with a more generalized form of lazy economic thinking.
For example, those afflicted with HOPS start making assertions that higher oil prices are inflationary, as if relative price changes can morph into an economy-wide rise in prices without help from the central bank.
One implication of this is that the Fed should not tighten monetary policy since the higher oil prices are just a relative price change. The Fed should also not loosen monetary policy to ease the pain of such relative price shocks. As Baum notes, that is what the Fed did in the 1970s and look what it got us. The Fed should only respond to aggregate demand shocks. This piece dovetails nicely with Mark Thoma’s post where he considers whether the Fed should respond to commodity prices in general.
Update: I should have been more clear: a relative price shock can lead to a higher price level, but not higher trend inflation. There might be a one-time increase in the inflation rate, but not a permanent one from such shocks. The post title has been adjusted accordingly.
Higher Oil Prices Do Not Equal Higher Trend Inflation
firstname.lastname@example.org (David Beckworth)
Fri, 11 Mar 2011 15:29:00 GMT