Who Cares About Inflation? The Fed Cares

I have to disagree with the spirit of this editorial and its claim that inflation is coming.  I hear nothing but increased focus on inflation targeting and transparency from the Fed.  The markets certainly do not appear to be expecting inflation in the future.  In addition, please distinguish real shocks (e.g. productivity shocks, real shocks to oil supply and demand) from nominal shocks (e.g. changes in money growth) when talking about underlying inflationary trends. "Inflation is always and everywhere a monetary phenomenon" (see point 8 just before the conclusion, see also this 2003 JME paper by E. Nelson; free version here).  Finally, I have to object a bit to the opening sentences.  Politicians do not set monetary policy.  The Fed is independent for good reason:

Who Cares About Inflation?, Floyd Norris, New York Times: Inflation is coming.  Politicians, while they may not actually want it, prefer it to the alternatives in both Europe and the United States.  It was a quarter-century ago that inflation was widely viewed as a threat that needed to be vanquished, even if it brought recession and pain. … But with inflation having been quiet for years, political attention has shifted. Now other things, like growth and employment, seem far more important. … One economist who thinks inflation is on its way back is Larry Kantor, the head of research at Barclays Capital in New York. He ticks off the reasons that inflation fell in the 1980's and 1990's. For one, there was widespread acceptance of the Bundesbank religion … that ordered the European Central Bank to aim at inflation, not growth.  There was also the declining price of oil, the productivity boom that came from improved information technology, and the emergence of cheap exports from China and India. By the mid-1980's, American fiscal policy was even getting tighter.  Now oil prices are rising and fiscal discipline has vanished. The productivity boom is fading … The Fed began to back away from the old-time religion for central banks in the late 1990's, when Alan Greenspan chose not to worry about what would previously have been viewed as excessive growth. … So why is there not a general belief that inflation is coming back? In part it is because a lot of attention is put on the so-called core rate of inflation, which excludes changes in volatile food and energy prices. Ignoring energy prices now is a bit ridiculous. … "Inflation will continue to creep up," Mr. Kantor forecasts, "and the Fed will have to do more than it has." …

It looks like Mr. Norris would like to see Jim Hamilton's son on the San Diego freeways learning to drive very fast.

Comments

[anne]

If ever I understand Floyd Norris I will tell you. Generally I do not bother to try. By the way, what "productivity boom is fading?"

[kharris]

Aggregate hours worked rose at a 2.8% annual pace in Q2. GDP estimates are running toward 3.3%. That works out to a roughly 0.5% productivity gain, vs 2%+ over the prior 2 quarters and 4%ish in the prior year. So that is why you'd see a productivity slowdown.

As to inflation, well the ISM prices paid indices have both turned notably soft lately, the ECRI and FIBER monthly inflation forecasting indices have both gone negative, and the pop in consumer prices seen in Q1 seems to be dissipating in Q2. Mr Norris is thinking of politics as a strong determinant of inflation. He may have firmer ground to stand on over the long haul, but over the course of a single cycle, I'd expect the cycle itself, along with the lagged impact of monetary policy, to be much more important.

[anne]

KHarris

As always I pay close attention to you, but I have set aside the recent productivity numbers and will now take them seriously. The near term figures bounce about a lot, so I chose to assume they will not change the trend of the last 5 years or 10 in any event. OK, be wary before I become arrogant.

I am not pleased with job creation, and still find no reason to think inflation is about to climb though we always know what is happening with energy costs. Well, I am not pleased in general.

[anne]

http://www.calvorn.com/gallery/photo.php?photo=5560&exhibition=7&pass=public&size=default&lang=eng

Recently Fledged House Wren
New York City--Central Park, Maintenance Field.

[anne]

http://www.calvorn.com/gallery/photo.php?photo=5556&u=4|2|...

Cedar Waxwing Taking a Bath
New York City--Central Park, The Ramble.

[tmcgee]

barclays capital is always forecasting more growth/inflation than there ever will be. why? because they are one of the biggest, if not the biggest, market maker for TIPS -- inflation-protected bonds. all the easier to sell when you're forecasting higher inflation!

[Assetman]

While politicians do not control monetary policy, they clearly influence it. Please don't be so naive as to believe we have a totally independent Fed... we don't, although the degree of independence relative to other countries is significant.

I'm still not sold on believing the source and interpretation productivity numbers, or the way our goverment has settled into how it measures inflation. But hey, that's a personal thing...

That being all said, I think you are right about the tone of the article. At least in my reality, inflationary and deflationary forces are pretty well in balance. It's other imbalances unwinding that may tip the inflationary scale one way or another. Global trade and wage creep will be the things to watch...

[Mark Thoma]

Assetman - agreed:

"The Implications for an Open Economy Model of Partisan Political Business Cycles," in European Journal of Political Economy, Mark Thoma and Chris Ellis, 635-651, 1995.

"Credibility and Political Business Cycles," Journal of Macroeconomics, Winter 1993, 69-89, Mark Thoma and Chris Ellis.

"Partisan Effects in Economies with Variable Election Terms," Journal of Money, Credit, and Banking, November 1991, 728-741 Mark Thoma and Chris Ellis.

says...

Larry Kantor is a GENIUS

-Bobby from Greenwich, CT