Caroline Baum: 'Imported' Inflation?

Caroline Baum on the source of inflation:

'Imported' Inflation? Try 'Made in the U.S.A.', by Caroline Baum, Bloomberg.com: For years globalization was touted ... in terms of the low prices it delivered to consumers. It was unqualified bad news only if you happened to be the fellow who made the goods now being produced in China.

Now the tide has turned. After more than a decade of ''exporting'' deflation, ... the ... price of Chinese imports to the U.S. has risen in the last few months, triggering predictable reactions based on faulty assumptions.

Specifically the question is, can one country import inflation from another? In the case of China and the U.S., it depends on whether one is flying from east to west or west to east. China pegs its currency to the U.S. dollar. ... If the U.S. inflates, China inflates, not the other way around. ...

The broader issue is whether a sovereign nation with an independent central bank can import inflation -- or deflation -- from overseas. ...

Forget about borders and exchange rates for a moment and think about individual prices in the domestic economy. Let's say the price of oil goes up because demand increases. Is that inflationary?

Former Federal Reserve Chairman Alan Greenspan used to explain to Congress that relative price changes are not inflationary per se. ... For a given stock of money, a rise in the price of oil may translate into a one-time rise in the price level. With time, the price of something else will fall as consumers cut back on non-oil purchases.

The same is true for the price of imports. If consumers have to pay more for items made in China, they will have less money to spend on domestic goods and services and other foreign imports --unless the central bank accommodates those higher prices by allowing the money supply to increase.

So it is always and everywhere the province of the central bank to determine its domestic inflation rate. ... As long as globalization doesn't mean one world central bank -- Trilateral Commission and Bilderberg Group conspiracy theorists, restrain yourselves -- ''flexible exchange rates give countries the independence to set their own inflation goals,'' Glassman says. ''That insulates everyone else from what you choose to do.''

And as for price shocks, the central bank has the ability to offset them, whether they occur at home or abroad. Inflation isn't transmitted via spores in the air. It's a monetary phenomenon, and as such, starts and ends on native shores. Globalization hasn't made central banks impotent. ...

Let me add a bit to the last paragraph. Inflation is caused by money growth and in the long-run inflation and money growth move together, but there can also be episodes of inflation in the short-run as relative prices adjust to oil price or other shocks. However, whether or not the movement of prices from one level to another in response to shocks should be called inflation is a matter of definition, some monetary economists reserve the term inflation for a continual run-up in the price level, not a one-time change to a new level, but whatever such movements in prices are called there's still a role for central banks to play in response to shocks that cause short-run movements in the price level.

Comments

[op]

contro; what???

price level change
real interest rate
real exchange rate

all three require attention
not just two or worse one

and neddless to add
these three
target variables
interact

monetary and fiscal policy look easy

and macro markets "rational"
if any one
of these big three
or either of
the regular guy big two
( job growth
and wage rate change )
are neglected

can any of you
independent thinkers reading this
guess which ones are neglected today
in uncledom ????

got any idea why ???

ps
hayekians gold bugs
and other memebot
commercial freedonians
need not spew their
scritptual answers
in the words of arnold the first
"message received "

[kharris]

Not all that impressed, once again, with Baum. She is channeling monetarist doctrine, and leaving out a lot. China is a big place, and rapid growth in its output and trade mean that it is having an increasing impact on the rest of the world. Chinese productivity is low, but rising rapidly, which in combination with its growing place in the global economy is likely to mean a boost to global productivity. Same with India, Brazil, Viet Nam and a number of other up-and-comers. Productivity gains have an disinflationary influence. Chinese wages are low, though rising. Rising exports means that Chinese wages restrain wage growth elsewhere, holding down unit labor costs. Slow growth in unit labor costs have a disinflationary influence. Monetary policy is made in the context of these factors, not in isolation. Yes, central banks can ultimately control inflation, but "ultimate" can be along the lines of Keynes' "long-run". Policy makers would be arrogant to attend only to ultimate results. The policy needed to control inflation is determined by other factors in the economy. The cost of controlling inflation is determined by other factors in the economy.

Baum likes to lecture as if she is the font of all economics wisdom, but strikes me as mostly a combination of simplistic thought and dogmatic style.

[typekey pseudonym]

Inflation is caused by money growth and in the long-run inflation and money growth move together,

So ... is it that velocity never changes in the LR, or that LR inflation is not dependent in any way on LR changes in velocity?

[op]

"move together"
may only mean
one in the lr
won't move
in the opposite direction
from the other
or only a little when
the other moves a lot

which means
it don't mean much eh ??

velocity is a mystical dynamic
much like tech change
in bald 50's
neoclassic
productivity theory

in its proper place
--- along with the other
three silly abstractions in mv=pq -----
velocity covers
the "level of our ignorance"
in both senses of the phrase

[Bruce Wilder]

I always find the back-and-forth on the topic of distinguishing inflation from some-other-change-in-price-and-costs-which-bother-people somewhat less than enlightening

I have no problem with defining inflation in purely monetary terms, and sticking strictly to that definition. Inflation is always and everywhere a monetary phenomenon. By definition. I get it.

Central banks have the power, now that everyone understands that inflation is all about expectations and committment (and Prez. Fisher foaming at the mouth for the entertainment and edification of the Dallas Chamber of Commerce Ladies Luncheon). Got that.

But, somehow, I think exchange rates and China as workshop of the world, and the export of vast quantities of dollars to pay for oil, might have something to do with something.

[Gerard MacDonell]

I am with Bruce. When China turns from positive to negative supply-side influence, the rate of domestic demand growth consistent with price stability falls. That is not irrelevant. And to monitor the evolution of this story with a monetary aggregate would be stupid. C. Baum often says silly things.

[real person from the real world]

I know I am not the brightest bulb in the string, but when the price of Chinese goods rises based on a rise in labor costs due to a rise in standard of living in China, where do we in the US buy the stuff we quit making when China started to undercut the price on our stuff?????????????? We cannot expect 3rd world countries to remain in limbo, so that globalization gains keep comming for whoever is getting them (sure ain't me).