Category Archive for: Inflation [Return to Main]

Friday, June 27, 2014

The Panic Over Inflation Is 'Perplexing'

Greg Ip echoes Tim Duy on 'Inflation Hysteria':

The spontaneous combustion theory of inflation: In the last few weeks, ominous warnings of inflation's imminent resurgence have multiplied... On factual, theoretical and strategic grounds, I find the panic over inflation perplexing.
First, factual. Yes, core CPI inflation has rebounded to 2% from 1.6% in February and today we learned that core PCE inflation has risen to 1.5% from 1.1%. What should we infer from this? Nothing. In the short run inflation oscillates...
Second, theoretical. ... The New Keynesian theory, to which the Fed subscribes, considers inflation a function of slack and expectations. The evidence is pretty persuasive that while slack has shrunk in the last five years..., it remains ample. Expectations, likewise, have oscillated but shown no trend up or down. ...
What if you consider inflation always and everywhere a monetary phenomenon? I consider the money supply pretty useless for forecasting anything, but even if were a monetarist, I wouldn't be worried..., M2 is up just 6.5% in the last year...
Third, strategic. ... Of course, the Fed might wait too long to tighten and inflation could eventually rise above the 2% target. But,... overshooting inflation is clearly a lesser evil than undershooting inflation. This, more than anything else, is why the panic over inflation is misplaced.

Tuesday, June 17, 2014

The Economy May Be improving, But Worker Pay Isn’t

This is a good follow-up to my column (linked in the post below this one):

The Economy May Be improving. Worker Pay Isn’t, by Neil Irwin, Washington Post: The latest economic data out Tuesday morning was generally good. Home building activity rebounded nicely in May after weak results in April. Consumer prices rose 0.4 percent in May, such that inflation over the last year is now 2.1 percent, about in line with what the Federal Reserve aims for.
But that inflation news carried with it a depressing side note. ... Average hourly earnings for private-sector American workers rose about 49 cents an hour over the last year... But that wasn’t enough to cover inflation over the year, so in “real” or inflation adjusted terms, hourly worker pay fell 0.1 percent over the last 12 months. Weekly pay shows the same story...
Pause for just a second to consider that. Five years after the economic recovery began, American workers have gone the last 12 months without any real increase in what they are paid. ...
There had been some hints here and there that worker pay was starting to rise in the last few months... But it wasn’t sustained. ...
The latest numbers should give pause to any Federal Reserve officials ... who see wage pressures as evidence that the economy is overheating..., the evidence points to more of what we’ve seen for most of the last six years: Employees have little negotiating power to demand higher pay.

The Latest Inflation Worry Is, As Usual, Overblown

I have a new column:

The Latest Inflation Worry Is, As Usual, Overblown, by Mark Thoma: Worries about inflation have been pervasive ever since the Fed began trying to lift the economy out of recession. If the Fed does not tighten policy very soon we have been told repeatedly, an outbreak of inflation is inevitable. But so far, those worries have been unfounded.
The latest round of worries is tied to the belief that labor markets are tighter than it appears from standard statistics such as the unemployment rate. ...

Saturday, June 14, 2014

'You Can’t Have A Wage-Price Spiral Without Wages'

Paul Krugman:

You Can’t Have A Wage-Price Spiral Without Wages: There was a fairly characteristic argument over dinner last night about when the Fed should tighten. I’m in the camp that says it should wait until we see wages rising at least at pre-crisis rates. The other side says that wages are a lagging indicator, and if it waits that long the Fed will be behind the curve.
My answer to this is that I’m much more worried about a slide into a Japan-style trap of low or negative inflation than I am of a return to 70s-style stagflation, and that the big risk is that the Fed will tighten much too soon.
One thing should be clear: there is no sign of wage pressure... — and also no hint that we’ve been closing the gap between actual and potential output.
So my plea to the Fed: hold your fire.

That's my pleas as well.

Friday, June 06, 2014

The Myth of Wage-Led Inflation

Josh Bivins at the WSJ:

... Much recent discussion about potential price inflation seems to take as a given that it would be sparked by a pickup of wage growth. But looking at data from the non-financial corporate sector–which accounts for well more than half of all private-sector economic activity and for which rich data are available–what’s really striking about price growth since the end of the Great Recession is how much of it has been driven by rising profits, not rising labor costs. In fact, labor costs have been essentially flat between the end of the Great Recession and the first quarter of 2014. Profits earned per unit sold, on the other hand, have been rising at an average annual growth rate of nearly 9% since the recovery’s beginning. To the degree that there is any inflationary pressure in the U.S. economy over that time, it is surely not coming from labor costs. ...

Wednesday, May 28, 2014

A Wedge in the Dual Mandate: Monetary Policy and Long-Term Unemployment

Glenn Rudebusch and John Williams:

A Wedge in the Dual Mandate: Monetary Policy and Long-Term Unemployment, by Glenn D. Rudebusch and John C. Williams, Federal Reserve Bank of San Francisco: Abstract In standard macroeconomic models, the two objectives in the Federal Reserve's dual mandate -- full employment and price stability -- are closely intertwined. We motivate and estimate an alternative model in which long-term unemployment varies endogenously over the business cycle but does not a ect price in ation. In this new model, an increase in long-term unemployment as a share of total unemployment creates short-term tradeoffs for optimal monetary policy and a wedge in the dual mandate. In particular, faced with high long-term unemployment following the Great Recession, optimal monetary policy would allow inflation to overshoot its target more than in standard models.

I'll believe the Fed will allow *intentional overshooting* of its inflation target when I see it.

Thursday, May 08, 2014

'Pretending To Do Something Like Science'???

Paul Krugman:

Predictions and Prejudice: The 2008 crisis and its aftermath have been a testing time for economists — and the tests have been moral as well as intellectual. After all, economists made very different predictions about the effects of the various policy responses to the crisis; inevitably, some of those predictions would prove deeply wrong. So how would those who were wrong react?
The results have not been encouraging.
Brad DeLong reads Allan Meltzer in the Wall Street Journal, issuing dire warnings about the inflation to come. Newcomers to this debate may not be fully aware of the history here, so let’s recap. Meltzer began banging the inflation drum five full years ago, predicting that the Fed’s expansion of its balance sheet would cause runaway price increases; meanwhile, some of us pointed both to the theory of the liquidity trap and Japan’s experience to say that this was not going to happen. ...
Tests in economics don’t get more decisive; this is where you’re supposed to say, “OK, I was wrong, and here’s why”.
Not a chance. And the thing is, Meltzer isn’t alone. Can you think of any prominent figure on that side of the debate who has been willing to modify his beliefs in the face of overwhelming evidence? ...
Were the freshwater guys always just pretending to do something like science, when it was always politics? Is there simply too much money and too much vested interest behind their point of view?

Even if we do get a bit of inflation at some point, the people who have been warning about it repeatedly for the last half decade won't be able to say they predicted it in any real sense. Warning that there will be, say, a tornado every day for five years until one finally comes is not much of a track record, or helpful in any way. And if it never comes...

Tuesday, April 08, 2014

Why is Deflation so Harmful?

I have a new "explainer" -- their term -- at Moneywatch:

Explainer: Why is deflation so harmful?, by Mark Thoma, CBS News: John Makin, writing for conservative-leaning think tank the American Enterprise Institute, warned on Monday that "Now is the time to preempt deflation." Conservatives are usually inflation hawks. So, why are some of them calling for "aggressive monetization" to avoid the deflation threat in the U.S. and Europe?
Deflation is an actual fall in prices, rather than just the inflation rate getting lower, which is call disinflation. Recall that the fear of deflation was the main reason the Federal Reserve instituted the first round of quantitative easing. What was the Fed so afraid of?
There are three main reasons to fear deflation. ...

Monday, April 07, 2014

Paul Krugman: Oligarchs and Money

Class interests stand in the way of raising the inflation target:

Oligarchs and Money, by Paul Krugman, Commentary, NY Times: Econonerds eagerly await each new edition of the International Monetary Fund’s World Economic Outlook. ... This latest report ... in effect makes a compelling case for raising inflation targets above 2 percent, the current norm in advanced countries. ...
First, let’s talk about the case for higher inflation. ... It’s good for debtors — and therefore good for the economy as a whole when an overhang of debt is holding back growth and job creation. It encourages people to spend rather than sit on cash — again, a good thing in a depressed economy. And it can serve as a kind of economic lubricant, making it easier to adjust wages and prices...
But ... would it be enough to get back to 2 percent, the official inflation target...? Almost certainly not.
You see, monetary experts ... thought that 2 percent was high enough to ... make liquidity traps ... very rare. But America has now been in a liquidity trap for more than five years. Clearly, the experts were wrong.
Furthermore,... there’s strong evidence that changes in the global economy are increasing the tendency of investors to hoard cash..., thereby increasing the risk of liquidity traps unless the inflation target is raised. But the report never dares to say this outright.
So why is the obvious unsayable? One answer is that serious people like to prove their seriousness by calling for tough choices and sacrifice (by other people, of course). They hate being told about answers that don’t involve more suffering.
And behind this attitude, one suspects, lies class bias. Doing what America did after World War II — using low interest rates and inflation to erode the debt burden — is often referred to as “financial repression,” which sounds bad. But who wouldn’t prefer modest inflation and a bit of asset erosion to mass unemployment? Well, you know who: the 0.1 percent... Modestly higher inflation, say 4 percent, would be good for the vast majority of people, but it would be bad for the superelite. And guess who gets to define conventional wisdom.
Now, I don’t think that class interest is all-powerful. Good arguments and good policies sometimes prevail even if they hurt the 0.1 percent — otherwise we would never have gotten health reform. But we do need to make clear what’s going on, and realize that in monetary policy as in so much else, what’s good for oligarchs isn’t good for America.

Sunday, March 30, 2014

The Two Percent *Ceiling* for Inflation

The Fed has consistently missed its inflation target:

Monetary Policy And Secular Stagnation, by Atif Mian and Amir Sufi: ...The Fed’s goal is to achieve the target of 2% inflation in the long-term, and its preferred price index is the core personal consumption expenditure price index that excludes the volatile food and energy sectors (or core PCE for short). So how has the Fed performed in achieving its target of 2% inflation in the past 15 years?


The chart above plots the implied core PCE index if inflation had met its 2% target (red line), and the actual core PCE index (blue line) starting from 1999. ... The divergence between target and actual inflation is all the more striking given the elevated rate of unemployment during the sample period. ...
It is hard to fault the Fed for not trying... The Fed’s difficulty in maintaining a 2% target is not just about the Great Recession. The divergence started in the 2000′s... In fact the only period when the blue line runs parallel to the red (implying a 2% rate of inflation for a while) is the 2004-2006 period when the economy witnessed an unprecedented growth in credit. ...
What we are witnessing is the limit of what monetary policy alone can do. Sometimes there is a tendency to assume that the Fed can “target” any inflation rate it wishes, or that it can target the overall price level – the so-called nominal GDP targeting. The evidence suggests that the Fed may not be so omnipotent. ...

Another interpretation is that, at least during normal times, the Fed does have quite a bit of control over the inflation rate, but it treats 2% inflation as a ceiling (i.e. inflation must never rise above 2%) rather than a central tendency (i.e. inflation is allowed to fluctuate both above and below the 2% target so that, on average, inflation is 2%).

Monday, March 03, 2014

'Trimmed Mean PCE Inflation Rate'

Following up on the post below this one, from the Dallas Fed today:

Trimmed Mean PCE Inflation Rate: The Trimmed Mean PCE inflation rate is an alternative measure of core inflation in the price index for personal consumption expenditures (PCE). It is calculated by staff at the Dallas Fed, using data from the Bureau of Economic Analysis (BEA).

January 2014

The Trimmed Mean PCE inflation rate for January was an annualized 0.6 percent. According to the BEA, the overall PCE inflation rate for January was 1.2 percent, annualized, while the inflation rate for PCE excluding food and energy was 1.1 percent.

The tables below present data on the Trimmed Mean PCE inflation rate and, for comparison, the overall PCE inflation and the inflation rate for PCE excluding food and energy. The tables give annualized one-month, six-month and 12-month inflation rates.

One-month PCE inflation, annual rate
  Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14
PCE 1.2 1.3 0.6 0.8 2.0 1.2
PCE excluding food & energy 1.3 1.1 1.4 1.4 1.0 1.1
Trimmed Mean PCE 1.3 1.8 1.6 1.4 1.2 0.6


Six-month PCE inflation, annual rate
  Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14
PCE 0.6 1.0 1.6 1.6 1.2 1.2
PCE excluding food & energy 1.0 1.1 1.4 1.4 1.2 1.2
Trimmed Mean PCE 1.2 1.3 1.6 1.6 1.5 1.3


12-month PCE inflation
  Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14
PCE 1.1 0.9 0.8 1.0 1.1 1.2
PCE excluding food & energy 1.2 1.2 1.1 1.2 1.2 1.1
Trimmed Mean PCE 1.3 1.3 1.4 1.4 1.4 1.3
NOTE: These data are subject to revision

The following chart plots the evolution of the distribution of price increases in the monthly component data over the past year. The chart shows the percentage of components each month, weighted by their shares in total spending, for which prices grew between 0 and 2 percent (at an annual rate); between 2 and 3 percent; between 3 and 5 percent; between 5 and 10 percent; and more than 10 percent.

Evolution of the distribution of component price increases

Paul Krugman: The Inflation Obsession

Why has the Fed been so concerned about inflation?

The Inflation Obsession, by Paul Krugman, Commentary, NY Times: Recently the Federal Reserve released transcripts of its monetary policy meetings during the fateful year of 2008. And boy, are they discouraging reading. ... The economy was plunging, yet all many people at the Fed wanted to talk about was inflation. ...
Historians of the Great Depression have long marveled at the folly of policy discussion at the time. For example, the Bank of England, faced with a devastating deflationary spiral, kept obsessing over the imagined threat of inflation. ... But it turns out that modern monetary officials facing financial crisis were just as obsessed with the wrong thing as their predecessors three generations before.
And it wasn’t just a bad call in 2008..., inflation obsession has persisted, year after year, even as events have refuted its supposed justifications. And this tells us that something more than bad analysis is at work. At a fundamental level, it’s political.
This is fairly obvious... The overall picture is that most conservatives are inflation obsessives, and nearly all inflation obsessives are conservative.
Why...? In part it reflects the belief that the government should never seek to mitigate economic pain, because the private sector always knows best. ...
The flip side of this antigovernment attitude is the conviction that any attempt to boost the economy, whether fiscal or monetary, must produce disastrous results — Zimbabwe, here we come! And this conviction is so strong that it persists no matter how wrong it has been, year after year.
Finally, all this ties in with a predilection for acting tough and inflicting punishment whatever the economic conditions. ...William Keegan once described this as “sado-monetarism,” and it’s very much alive today.
Does any of this matter? It’s true that the Fed hasn’t surrendered to the sado-monetarists. Notably, it didn’t panic in 2011, when another blip in gasoline prices briefly raised the headline rate of inflation, and Republicans began inveighing against the “debasement” of the dollar.
But I’d argue that the clamor from inflation obsessives has intimidated the Fed, which might otherwise have done more. And it has also been part of a general climate of opposition to anything that might address our continuing jobs crisis.
As I suggested, we used to marvel at the wrongheadedness of policy makers during the Great Depression. But when the Great Recession struck, and we were given a chance to do better, we ended up repeating all the same mistakes.

Thursday, February 06, 2014

'Do Oil Prices Predict Inflation?'

Apparently not:

Do Oil Prices Predict Inflation?, by Mehmet Pasaogullari and Patricia Waiwood, FRB Cleveland: Some analysts pay particular attention to oil prices, thinking they might give an advance signal of changes in inflation. However, using a variety of statistical tests, we find that adding oil prices does little to improve forecasts of CPI inflation. Our results suggest that higher oil prices today do not necessarily signal higher CPI inflation next year, although they do help to explain short-term movements in the CPI. ...

Thursday, December 26, 2013

Money and Inflation

In the long-run, inflation is driven primarily by changes in money growth, but over shorter timeframes the connection is not as strong:

Prices from a Monetary Perspective, by Owen F. Humpage and Margaret Jacobson, FRB Cleveland: Economists like to remind people that inflation and deflation are monetary phenomena and that they ultimately stem from central banks’ monetary policies. Inflation results when a nation’s central bank creates more money than its public wants to hold, and deflation occurs when a central bank creates too little. The connection between central banks’ monetary policies and inflation, however, is imprecise and often drawn out over many years. This imprecision happens for two reasons: Not all price changes stem from inflation; some instead reflect an emerging scarcity or abundance of particular goods. And the public’s demand for money, the amount it wants to hold, often is not very stable. Economists can, however, employ a simple technique that helps us see more clearly the relationship between money and price movements.
To get at the monetary nature of inflation and deflation, economists can divide price changes into two components: excess-money growth and changes in the velocity of money. Excess-money growth is simply the difference between the growth of money and the growth in real output. The velocity of money, in theory, represents the average rate at which money changes hands in a given time period. In practice, economists calculate velocity as anything that affects aggregate prices besides excess-money growth. Velocity might, for example, respond to relative price changes, price controls, and factors that affect money demand besides real GDP, like interest rates or inflation expectations.
Applying this framework to the U.S. GDP deflator—a very broad price measure—provides an example. The GDP deflator rose 1.3 percent on average during the first three quarters of 2013. This average price change consisted of a 4.3 percent increase in excess-money growth and a 3 percent decline in velocity. As this method shows, the connection between aggregate price movements and U.S. money growth over the course of 2013 was so loose as to be unapparent.
This imprecision is not unusual. Over the short run—a year or two—excess-money growth explains very little of the changes in the GDP deflator. If excess-money growth explained all of the annual price changes, the dots in the scatter plot below would line up along the 45-degree line, and all price movements would be inflation—strictly a monetary phenomenon. Instead, the dots are spread about, showing almost no correspondence between the annual change in the GDP deflator and excess-money growth. The simple correlation coefficient is only 0.10. Moreover, the typical annual dispersion of price changes from excess-money growth is about 4 percentage points, but there are some enormous outliers. Many of the largest deviations occurred during the Great Depression and the Second World War, both highly disruptive and uncertain economic events. Likewise many dots associated with the recent Great Recession years also seem well off the mark. Clearly, central banks do not have much control over aggregate-price movements on a year-to-year basis.

As time passes, the effects of nonmonetary events (velocity) on the GDP deflator fade and the connection between excess-money growth and prices starts to predominate. Five-year averages of excess-money growth and price changes, for example, line up more closely along the 45 degree line. At this interval, the correlation between excess-money growth and price changes increases to 0.72, and the typical annual dispersion of price changes from excess-money growth falls by roughly half, to about 2 percentage points. Still, big outlying observations exist; particularly noticeable are again those associated with the Great Depression and the Second World War.

The velocity of money often falls during recessions or shortly thereafter, and its decline can persist for a long time after an economic recovery has taken hold. This is certainly true today. Since the onset of the Great Recession in 2007, the velocity of money in the United States has fallen sharply, at an annual average rate of 3.1 percent. This decline has offset average annual excess-money growth of 4.9 percent, resulting in an average annual increase in the GDP deflator of 1.8 percent.

While many factors affect prices that are beyond the Federal Reserve’s direct control, eventually monetary policy tends to re-emerge as the key driver of inflation. After abstracting from short-term movements caused by economic disruptions, recessions, and wars, inflation is ultimately a monetary phenomenon: since 1929, the average annual percentage increase in the GDP deflator has been 2.8 percent, and the average annual growth in excess money has been 2.9 percent.

Tuesday, December 24, 2013

'Robots and Economic Luddites'

Dean Baker:

Robots and Economic Luddites: They Aren't Taking Our Jobs Quickly Enough: Lydia DePillis warns us in the Post of 8 ways that robots will take our jobs. It is amazing how the media have managed to hype the fear of robots taking our jobs at the same time that they have built up fears over huge budget deficits bankrupting the country. You don't see the connection? Maybe you should be an economics reporter for a leading national news outlet.
Okay, let's get to basics. The robots taking our jobs story is a story of labor surplus, too many workers, too few jobs. Everything that needs to be done is being done by the robots. There is nothing for the rest of us to do but watch.
There can of course be issues of distribution. If the one percent are able to write laws that allow them to claim everything the robots produce then they can make most of us very poor. But this is still a story of society of plenty. We can have all the food, shelter, health care, clean energy, etc. that we need; the robots can do it for us.
Okay, now let's flip over to the budget crisis that has the folks at the Washington Post losing sleep. This is a story of scarcity. We are spending so much money on our parents' and grandparents' Social Security and Medicare that there is no money left to educate our kids.
Some confused souls may say that the problem may not be an economic one, but rather a fiscal problem. The government can't raise the tax revenue to pay for both the Social Security and Medicare for the elderly and the education of our kids. This is confused because if we are living in the world where the robots are doing all the work then the government really doesn't need to raise tax revenue, it can just print the money it needs to back its payments.
Okay, now everyone is completely appalled. The government is just going to print trillions of dollars? That will send inflation through the roof, right? Not in the world where robots are doing all the work it won't. If we print money it will create more demands for goods and services, which the robots will be happy to supply. As every intro econ graduate knows, inflation is a story of too much money chasing too few goods and services. But in the robots do everything story, the goods and services are quickly generated to meet the demand. Where's the inflation, robots demanding higher wages?
In short, you can craft a story where we have huge advances in robot technology so that the need for human labor is drastically reduced. You can also craft a story where an aging population leads to too few workers being left to support too many retirees. However, you can't believe both at the same time unless you write on economic issues for the Washington Post.
Just in case anyone cares about what the data says on these issues, the robots don't seem to be winning out too quickly. Productivity growth has slowed sharply over the last three years and it is well below the pace of 1947-73 golden age. (Robots are just another form of good old-fashioned productivity growth.)

labor productivity

On the other hand, the scarcity mongers don't have much of a case either. Even if productivity growth stays at just a 1.5 percent annual rate its impact on raising wages and living standards will swamp any conceivable tax increases associated with caring for a larger population of retirees.

Tuesday, December 17, 2013

What is the Best Way to Measure Inflation?

My latest "Explainer" At CBS MoneyWatch:

What is the best way to measure inflation?

Should CPI vor PCE be used, and should it be core or overall inflation? It depends...

Monday, December 09, 2013

'Republican Inflation Paranoia Is Political Suicide'

Ramesh Ponnuru is paranoid about Republican paranoia:

Republican Inflation Paranoia Is Political Suicide, by Ramesh Ponnuru: In the years since the financial crisis, Republican politicians have increasingly embraced a “hard money” critique of the Federal Reserve.
They’ve warned that its policies are too loose and dangerously inflationary, even as inflation has stayed well below historical levels. Now some conservatives are arguing that criticizing loose money should be a more prominent part of their case to voters. It’s a winning issue, they say, and Republicans should make the most of it.
They’re wrong on both counts. ...
Republicans do need to rethink their approach to economics. Intensifying their already excessive focus on inflation isn’t the way to do it.

Monday, November 11, 2013

'Greenspan’s Dilemma Revived'

Izabella Kaminska at FT Alphaville:

Greenspan’s dilemma revived, by Izabella Kaminska: Deficit continues to be a dirty word in the US..., whilst the idea that the US is an unsustainable deficit spender increasingly propagates in mainstream circles.

But, as Ethan Harris at Bank of America Merrill Lynch shows on Monday, nothing could be further from the truth. In reality the US deficit is contracting at a relatively speedy rate... And, bar the employment situation..., all of this comes in the context of an ever more quickly reviving economy...

Which leaves the following as the most notable point being made by Harris, in reference to the natural unemployment rate (NAIRU):

If inflation persists below 1.5%, we would expect the interest rate forecast to drop further. We also expect the FOMC to cut its unemployment rate guidepost for hiking rates from 6.5% to 5.5% or lower. Ultimately, the Fed may decide to “overshoot” the inflation-neutral NAIRU to force inflation back up to target.

This in itself could become ever more crucial in the months to come. In short, it echoes exactly the same sort of dilemma Alan Greenspan faced all the way back in 1996. Do you raise rates despite little obvious inflationary pressure and risk stagnating growth? Or do you give the notion of a “new economy” — the idea that technological change is fuelling a boom in productivity and alleviating inflationary pressures — the benefit of the doubt?

Janet Yellen, it must be said, is uniquely positioned to make that call if she is confirmed. Not only was she there the first time around, she may have had more input on Greenspan’s ultimate decision than many remember. Call it something akin to mea culpa dotcom crash hindsight. ...

Tuesday, November 05, 2013

'Free-Floating Inflation Hysteria'

Paul Krugman (the red line in the graph is the CPI):

Free-Floating Inflation Hysteria: Brad DeLong has some fun with Senator Pat Roberts, who has gone from praising Janet Yellen in August to denouncing her as a dangerous inflationist now. So the senator is willing to say whatever the Tea Party wants him to say; big surprise.

What remains notable, however, is just what all Republicans are obliged to say: Ron Paul monetary theory has become obligatory:

Vice Chair Yellen will continue the destructive and inflationary policy of pouring billions of newly printed money every month into our economy, and artificially holding interest rates to near zero. This policy has been in place far too long.

So, the Fed began rapidly expanding its balance sheet when Lehman fell — more than five years ago. Here’s the result of that “destructive and inflationary” policy so far:

It’s not often that you see an economic theory fail so utterly and completely. Yet that theory’s grip on the GOP has only strengthened as its failure becomes ever more undeniable. ...

Friday, October 25, 2013

Paul Krugman: Addicted to the Apocalypse

Why is Chicken Little so popular?:

Addicted to the Apocalypse, by Paul Krugman, Commentary, NY Times: Once upon a time, walking around shouting “The end is nigh” got you labeled a kook... These days, however,... you more or less have to subscribe to fantasies of fiscal apocalypse to be considered respectable.
And I do mean fantasies. Washington has spent the past three-plus years in terror of a debt crisis that keeps not happening, and, in fact, can’t happen to a country like the United States, which has its own currency and borrows in that currency. Yet the scaremongers can’t bring themselves to let go.
Consider, for example, Stanley Druckenmiller... Or consider the deficit-scold organization Fix the Debt, led by the omnipresent Alan Simpson and Erskine Bowles. ... [gives examples of doomsaying] ...
As I’ve already suggested, there are two remarkable things about this kind of doomsaying. ... On the Chicken Little aspect: It’s actually awesome, in a way, to realize how long cries of looming disaster have filled our airwaves and op-ed pages. For example, I just reread an op-ed article by Alan Greenspan ... warning that our budget deficit will lead to soaring inflation and interest rates ... published in June 2010... — and both inflation and interest rates remain low. So has the ex-Maestro reconsidered his views after having been so wrong for so long? Not a bit. ...
Meanwhile, about that oft-prophesied, never-arriving debt crisis:... two and half years ago, Mr. Bowles warned that we were likely to face a fiscal crisis within around two years... They just assume that it would cause soaring interest rates and economic collapse, when both theory and evidence suggest otherwise. ...
Look at Japan, a country that, like America, has its own currency and borrows in that currency, and has much higher debt relative to G.D.P. than we do. Since taking office, Prime Minister Shinzo Abe has, in effect,... persuaded investors that deflation is over and inflation lies ahead, which reduces the attractiveness of Japanese bonds. And the effects on the Japanese economy have been entirely positive! ...
Why, then, should we fear a debt apocalypse here? Surely, you may think, someone in the debt-apocalypse community has offered a clear explanation. But nobody has.
So the next time you see some serious-looking man in a suit declaring that we’re teetering on the precipice of fiscal doom, don’t be afraid. He and his friends have been wrong about everything so far, and they literally have no idea what they’re talking about.

Tuesday, September 17, 2013

'Low Inflation in August'

Calculated Risk notes that inflation is still running below the Fed's target:

Key Measures Show Low Inflation in August: The Cleveland Fed released the median CPI and the trimmed-mean CPI this morning...

Inflation Measures
Click on graph for larger image.

This graph shows the year-over-year change for ... four key measures of inflation. On a year-over-year basis, the median CPI rose 2.1%, the trimmed-mean CPI rose 1.7%, the CPI rose 1.5%, and the CPI less food and energy rose 1.8%. Core PCE is for July and increased just 1.2% year-over-year.
On a monthly basis, median CPI was at 2.1% annualized, trimmed-mean CPI was at 1.5% annualized, and core CPI increased 1.5% annualized. Also core PCE for July increased 0.9% annualized.
These measures indicate inflation is below the Fed's target.

Unemployment is too high and inflation is too low (and inflation expectations are stable). Why are we talking about tapering?

Tuesday, September 03, 2013

'U.S. Price-Level Dynamics'

David Andolfatto wants you to explain why he's wrong about NGDP targeting (this is part of a much longer post):

...let's take a look at the (log) PCE from 1990 onward, together with linear trend:
The PCE inflation rate since 1990 averaged 2.09% per annum.
What's interesting about this diagram is that even though the Fed does not officially target the PCE price level, the data above suggests that the Fed is behaving as if it does.
As a price-level (PL) target is equivalent to a nominal GDP (NGDP) target in a wide class of macroeconomic models (especially under the assumption of constant productivity growth), then what more does the NGDP crowd expect from an official NGDP target? Seems to me that they are just asking for more price inflation and wishfully hoping that some of the subsequent rise in NGDP will take the form of real income.
Tell me I'm wrong (and why).

Thursday, August 22, 2013

Teaching about Inflation is Fun (but Dangerous)

One more -- Antonio Fatas is reevaluating how he teaches about inflation:

Teaching about inflation is fun (but dangerous): Teaching about inflation is fun. Most people who have never been exposed to macroeconomics before are surprised when you show the correlation between inflation and money growth in a large sample of countries. You then produce some data about some hyperinflation countries that include a picture of some bank note with lots of zeros (thank you Zimbabwe) and the students love it. ...
The notion that inflation is (mainly) a monetary phenomenon is new to many students and going through the history of inflation and monetary policy regimes is a very rewarding exercise for a teacher.
But there is a problem with the way we teach inflation: in many countries inflation has been under control for decades now. And this control does not come from the fact that monetary policy was anchored to a physical commodity such as gold but from the actions and credibility of the central bank. ...
In this environment, inflation is almost constant and the correlation between money supply and inflation is inexistent. But we leave this fact for the last five minutes of the class given how much fun it was to talk about Germany in 1923, Hungary in 1946 and Zimbabwe in 2008.
So given the way we have been teaching about inflation it is not that surprising that for the last five years some have been worrying so much about inflation or even hyperinflation as central banks balance sheets have grown very fast. [There is, of course, the mistake that many do of not understanding the difference between the monetary base and the money supply but I will leave that for another post.]
Next time I teach my macroeconomics course I will spend less time talking about inflation and if I talk about it, I will not show the picture of the one hundred trillion dollars note from Zimbabwe, instead I will spend more time about the incredible stability of inflation in many countries. ...

The point about the difference between the monetary base and the money supply is important. Money piling up in banks is not inflationary, it has to be spent to create the demand needed to force prices up. Having the money stockpiled and available makes people and businesses feel safer in bad economic times, but once things improve there's a danger that quite a bit of the pent up demand could hit the marketplace all at once creating large upward pressure on prices. So long as the Fed can vacuum up the money through open market operations, or hold it in place with mechanisms such as paying higher interest on reserves as conditions improve there won't be an inflation problem. I am confident the Fed can do this, my fear is that they will get antsy and start the process too soon which could harm economic growth.

Tuesday, August 20, 2013

Learn to Stop Worrying and Love (Moderate) Inflation

Noah Smith says moderate inflation would be a good thing (each point is explained in detail in his post):

Learn to stop worrying and love (moderate) inflation, by Noah Smith: The Federal Reserve's unprecedented programs of Quantitative Easing have not, as many predicted, resulted in substantially increased inflation. But I view this as a failure of the policy, not a success.
Inflation is grossly underappreciated. Economists consistently fail to educate the public about what they mean by the term "inflation". People think it just means "a rise in the price of something" (though that's not really what it means). And people don't like prices rising, because it seems like it should make stuff more expensive - and who wants that?
We're told that inflation is a necessary cost of improving the economy. And in fact, that's exactly what monetarist macroeconomists (think of Mike Woodford, Miles Kimball, etc.) tell us that it is. We must accept higher inflation, they tell us, in order to also get better GDP growth. But given our 'druthers, they tell us, we'd rather have very low inflation. No one wants to become like Zimbabwe, or the Weimar Republic, right??
I'm not so sure this is true, and I'll explain why later. But first, let me dispel a couple of popular myths about inflation.
Popular Inflation Myth 1: "Inflation means I can't buy as much stuff." ...
Popular Inflation Myth 2: "Inflation punishes savers." ...
Inflation Benefit 1: Your debt goes away. ...
Inflation Benefit 2: The federal government debt goes away. ...
Inflation Benefit 3 (?): "Balance sheet recession" might go away! ...
Now, I have to be fair, so I should mention that of course inflation has its costs as well. One of these is the pure nuisance cost - constantly changing prices is a nuisance, and that nuisance can become extremely economically damaging in a hyperinflation. Second, high inflation leads to variable inflation, increasing uncertainty and depressing investment. And finally there might even be government moral hazard; if the government decides it can simply inflate away its debt, it might engage in more irresponsible spending. These costs are all especially severe for higher levels of inflation.
But anyway I hope, after reading this, that you will be a little more wary of all those warnings about the evils of inflation. stop listening to poorly informed politicians, "Austrian" forum trolls, and your uncle who thinks he's still in the 70s. Inflation does not rob the poor man of his hard-earned wages; in fact, it is more likely to unburden the poor man from his crippling debt. And inflation helps get rid of all that debt, both public and private, that many people believe is clogging up our economic system. 
We don't want to let inflation get out of hand. But a higher Fed inflation target for the next decade - say, 4% or 5%, instead of our current 2% - would probably be a good thing for most Americans.

I'm not so sure about raising the target that high for an entire decade, but overshooting the 2% target (o raising the target) during the recovery could have helped to speed the return to normal.

Thursday, August 15, 2013

'Hawks, Doves, and Ostriches'

One of the big lessons of the recession for me is that inflation isn't so easy to create as the textbooks imply when the economy is mired in a severe recession. It's not a matter of just increasing bank reserves -- if the reserves sit idle in banks, even at extraordinarily low interest rates, then there increase in aggregate demand and no upward pressure on prices. Somehow, the idle reserves must get into the hands of people who will use them for consumption or investment (and government can fulfill this role as well), but we haven't been willing to pursue those polices.

Anyway, here's Paul Krugman arguing that if I'd just internalized the message in his 1998 paper, I wouldn't have been surprised at all!:

Hawks, Doves, and Ostriches, by Paul Krugman: More than four years ago Allan Meltzer issued a dire prediction: the Fed’s policy of expanding its balance sheet will lead to high inflation. We’re still waiting for that to happen. So it might behoove Meltzer to admit that he was wrong and ask where his analysis went wrong.

OK, you can stop laughing now. What Meltzer does, instead, is complain that the Fed has undermined his perfectly fine analysis. You see, those dastardly officials are paying interest on reserves – a hefty 0.25 percent – and this has led to something totally unexpected:

The US Federal Reserve Board has pumped out trillions of dollars of reserves, but never have so many reserves produced so little monetary growth. Neither the hawks nor the doves (nor anyone else) expected that.

So the money supply broadly defined hasn’t taken off – a complete surprise! – and hence no inflation.

Except that this isn’t at all a surprise; it’s exactly what those of us who had analyzed the liquidity trap predicted would happen when you expand the monetary base in an economy at the zero lower bound. ...

Nor was it just theory. Meltzer claims support from the lessons of history; but the relevant history is of other liquidity-trap episodes. Consider, in particular, the case of Japan’s quantitative easing in the early 2000s...

Unlike the Fed, the Bank of Japan didn’t pay interest on reserves. Nonetheless, a huge increase in the monetary base just sat there, mostly in the form of increased bank reserves – the same as what happened in America later.

We might add further that if the Fed can neutralize the supposedly awesome inflationary effect of quantitative easing by paying ¼ percent interest on reserves, it should be very easy to contain the inflationary threat in future.

Anyway, I do get kind of annoyed here. Some of us came into the global crisis with a well-worked-out theory of monetary and fiscal policy in a liquidity trap; the predictions of that theory have been completely consistent with actual experience. People like Meltzer chose to disregard all of that, insisting that terrible inflation (and high interest rates) were just around the corner. You almost never get that clear a test of rival economic views, and the results should be considered decisive.

Instead, the usual suspects stick their heads in the sand and pretend that they have been right all along. ...

Wednesday, August 14, 2013

'Never Channel the Ghosts of Dead Economists as a Substitute for Analysis'

 Nick Rowe checks in with David Laidler:

David Laidler goes meta on "What would Milton have said?": I tried to persuade David Laidler to join us in the econoblogosphere, especially given recent arguments about Milton Friedman. I have not yet succeeded, but David did say I could use these two paragraphs from his email:

However - re. the "what Milton would have said" debate  - When I was just getting started in the UK, I got thoroughly fed up with being told "what Maynard [Keynes] would have said" -- always apparently that the arguments of people like me were nonsense and therefore didn't have to be addressed in substance. I took a vow then never to channel the ghosts of dead economists as a substitute for analysis, and still regard it as binding!
MF was a big supporter of QE for Japan at the end of the '90s. I know that, because one of his clearest expressions of the view was in response to a question I put to him on a video link at a BofC conference. But so was Allan Meltzer at that time, and he is now  (a) virulently opposed to QE for the US and (b) on the record (New York Times, Nov. 4th 2010 "Milton Friedman vs. the Fed.")  as being sure that Milton would have agreed with him. In my personal view (a) demonstrates that even as wise an economist as Meltzer can sometimes give dangerous policy advice, and (b) shows that he knows how to deploy pure speculation to make a rhetorical splash when he does so. Who could possibly know what Milton would have said?  He isn't here.

David Laidler is probably the person best qualified to answer the question "What would Milton have said?", and that's his answer.

Speaking of Meltzer and substitutes for analysis, his last op-ed warns yet again about inflation. Mike Konczal responds:

Denialism and Bad Faith in Policy Arguments, by Mike Konczal: Here’s the thing about Allan Meltzer: he knows. Or at least he should know. It’s tough to remember that he knows when he writes editorials like his latest, "When Inflation Doves Cry." This is a mess of an editorial, a confused argument about why huge inflation is around the corner. “Instead of continuing along this futile path, the Fed should end its open-ended QE3 now... Those who believe that inflation will remain low should look more thoroughly and think more clearly. ”
But he knows. Because here’s Meltzer in 1999 with "A Policy for Japanese Recovery": “Monetary expansion and devaluation is a much better solution. An announcement by the Bank of Japan and the government that the aim of policy is to prevent deflation and restore growth by providing enough money to raise asset prices would change beliefs and anticipations.”
He knows that there’s an actual debate, with people who are “thinking clearly,” about monetary policy at the zero lower bound as a result of Japan. He participated in it. So he must have been aware of Ben Bernanke, Paul Krugman, Milton Friedman, Michael Woodford, and Lars Svensson all also debating it at the same time. But now he’s forgotten it. In fact, his arguments for Japan are the exact opposite of what they are now for the United States. ...
The problem here isn’t that Meltzer may have changed his mind on his advice for Japan. If that’s the case, I’d love to read about what led to that change. The problem is one of denialism, where the person refuses to acknowledge the actually existing debate, and instead pantomimes a debate with a shadow. It involves the idea of a straw man, but sometimes it’s simply not engaging at all. For Meltzer, the extensive debate about monetary policy at the zero lower bound is simply excised from the conversation, and people who only read him will have no clue that it was ever there.
There’s also another dimension that I think is even more important, which is whether or not the argument, conclusions, or suggestions are in good faith. ...

Tuesday, July 23, 2013

Never Having to Say You're Sorry

On the "inflationphobes":
This Time Was Predictable, by Paul Krugman: Bruce Bartlett continues his interesting series on inflation panic, this time focusing on the economists and politicians who keep predicting runaway inflation year after year after year, and never seem to acknowledge having been wrong. ...
And that ... gets at the true sin of the inflationphobes. They were wrong; well, that happens to everyone now and then. But the question is what you do when events prove your doctrine wrong — especially when they unfold almost exactly the way people with a different doctrine predicted. Do you admit that maybe your premises were misguided? Do you admit that maybe those other guys were on to something? Or do you just keep predicting the same thing, never admitting your past mistakes?

Guess what the answer turned out to be.

Tuesday, July 16, 2013

'Both are Below the Fed's Target'

From Calculated Risk:

CPI increases 0.5% in June, Core CPI 0.2%: From the Bureau of Labor Statistics (BLS): Consumer Price Index - June 2013

The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.5 percent in June on a seasonally adjusted basis, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 1.8 percent before seasonal adjustment. The gasoline index rose sharply in June and accounted for about two thirds of the seasonally adjusted all items change. ... The index for all items less food and energy increased 0.2 percent in June, the same increase as in May. ...

On a year-over-year basis, CPI is up 1.8 percent, and core CPI is up also up 1.6 percent. Both are below the Fed's target. ...

Thursday, June 27, 2013

Inflation is Too Low

Inflation is too low (and unemployment is too high):

Yes, We Have No Inflation, by Binyamin Appelbaum, NY Times: Inflation remained sluggish in May. Prices continued to rise at the slowest pace in at least half a century, up just 1.1 percent over the previous year, the Bureau of Economic Analysis said Thursday. ...

As he goes on to explain:

Slow inflation may sound like a good thing, but it’s not. Particularly not now.


Ben S. Bernanke ... and other Fed officials have shown relatively few signs of concern lately. The Fed’s most recent policy statement, and its economic projections, both released last week, show that Fed officials expect the pace of inflation to increase gradually. ...
“There are a number of transitory factors that may be contributing to the very low inflation rate,” Mr. Bernanke said last week. “For example, the effects of the sequester on medical payments, the fact that nonmarket prices are extraordinarily low right now. So these are some things that we expect to reverse and we expect to see inflation come up a bit. If that doesn’t happen, we will obviously have to take some measures to address that. And we are certainly determined to keep inflation not only — we want to keep inflation near its objective, not only avoiding inflation that’s too high, but we also want to avoid inflation that’s too low.”

If they "want to avoid inflation that’s too low," they should be doing more about it now instead of coming up with reasons, yet again, to wait and see. Why not say, for example, we'll do more now, and if it turns out we overshoot our target a bit due to medical prices going up, "we will obviously have to take some measures to address that."

Saturday, June 22, 2013

'Debased Economics'

I need a quick post today, so I'll turn to the most natural blogger I can think of, Paul Krugman:

Debased Economics: John Boehner’s remarks on recent financial events have attracted a lot of unfavorable comment, and they should. ... I mean, he’s the Speaker of the House at a time when economic issues are paramount; shouldn’t he have basic familiarity with simple economic terms?
But the main thing is that he’s clinging to a story about monetary policy that has been refuted by experience about as thoroughly as any economic doctrine of the past century. Ever since the Fed began trying to respond to the financial crisis, we’ve had dire warnings about looming inflationary disaster. When the GOP took the House, it promptly called Bernanke in to lecture him about debasing the dollar. Yet inflation has stayed low, and the dollar has remained strong — just as Keynesians said would happen.
Yet there hasn’t been a hint of rethinking from leading Republicans; as far as anyone can tell, they still get their monetary ideas from Atlas Shrugged.
Oh, and this is another reminder to the “market monetarists”, who think that they can be good conservatives while advocating aggressive monetary expansion to fight a depressed economy: sorry, but you have no political home. In fact, not only aren’t you making any headway with the politicians, even mainstream conservative economists like Taylor and Feldstein are finding ways to advocate tighter money despite low inflation and high unemployment. And if reality hasn’t dented this dingbat orthodoxy yet, it never will.

I'll be offline the rest of today ...

Tuesday, June 11, 2013

Fed Watch: Bullard Holds His Ground

Tim Duy:

Bullard Holds His Ground, by Tim Duy: St. Louis Federal Reserve President James Bullard reaffirmed his commitment to the current policy stance. From his press release:

“Labor market conditions have improved since last summer, suggesting the Committee could slow the pace of purchases, but surprisingly low inflation readings may mean the Committee can maintain its aggressive program over a longer time frame,” Bullard concluded.

This is not surprising. Bullard has long been more focused on the implications of inflation for policy, believing that employment is largely out of the Fed's hands at this point. More from Reuters:

"What's not encouraging in this picture is that it's (inflation) just going down and so far it hasn't moved back at all. So I would have expected our very aggressive purchase program to turn that process, inflation expectations would go up and actual inflation would follow behind, which is what happened in the QE2 period," said St. Louis Fed President James Bullard.

I think that Bullard is something of an outlier at this point. Ongoing declines in inflation would eventually cause his worries to spread further through the Fed, and could very well delay any effort to cut back on asset purchases. That, however, is not the baseline case. As a general rule, policymakers are more focused on the path of unemployment, which leads them to expect tapering to begin as early as in a few months. See Robin Harding here.

On the subject of tapering, Jon Hilsenrath had this to say over the weekend:

The hangup for Fed officials is the word “tapering” suggests a slow, steady and predictable reduction from the current level of $85 billion a month at a succession of Fed meetings, say to $65 billion per month, then to $45 billion and so on. And that’s not necessarily what Fed officials envision.

Because Fed officials are uncertain about the economic outlook and the pros and cons of their own program, they might reduce their bond purchases once and then do nothing for a while. Or they might cut their bond buying once and then later increase it if the economy falters. Or they might indeed reduce their purchases in a series of steps if warranted by economic developments — but they don’t want the markets to think that’s a set plan. It is, as Fed officials like to say, “data dependent.”

Which is interesting given that Bullard had this to say regarding inflation and policy:

"Maybe this is noise in the data, maybe this will turn around, but I'd like to see some reassurance that this is going to turn around before we start to taper our asset purchase program," he said.

If the Fed wants us to stop using the word "taper," they will need to take the lead. Or is Bullard just being honest - any reasonable forecast matched against their past behavior suggests the Fed tapers. On financial stability, Bullard adds this:

He noted that the Fed remains vigilant about the potential for financial market excess in the U.S. “An important concern for the FOMC is that low interest rates can be associated with excessive risk-taking in financial markets,” Bullard said. “So far, it appears that this type of activity has been limited since the end of the recession in 2009.” While the Dodd-Frank Act is meant to help contain some dimensions of this activity, “Still, this issue bears careful watching: Both the 1990s and the 2000s were characterized by very large asset bubbles,” he added.

The Fed is keeping an eye out for bubbles, but the bulk of policymakers aren't finding them. Consequently, the issue of financial stability is not a primary driver of policy. At best it is a distant third, far behind unemployment first and inflation second.

Bottom Line: Bullard remains focused on inflation. If his colleagues were to join him, they would stop pointing us toward cutting asset purchases in the next few months. As a general rule, however, for now low inflation is seen as an aberration, not the forecast.

Monday, June 10, 2013

Paul Krugman: The Big Shrug

Why don't politicians care about the unemployed?:

The Big Shrug, by Paul Krugman, Commentary, NY Times: ...For more than three years some of us have fought the policy elite’s damaging obsession with budget deficits ... that led governments to cut investment when they should have been raising it, to destroy jobs when job creation should have been their priority. That fight seems largely won —... I don’t think I’ve ever seen anything quite like the sudden intellectual collapse of austerity economics as a policy doctrine.
But while insiders no longer seem determined to worry about the wrong things, that’s not enough; they also need to start worrying about the right things — namely, the plight of the jobless and the immense continuing waste from a depressed economy. And that’s not happening. Instead, policy makers both here and in Europe seem gripped by a combination of complacency and fatalism, a sense that nothing need be done and nothing can be done. Call it the big shrug.
Even the people I consider the good guys ... aren’t showing much sense of urgency these days. For example,... the Federal Reserve’s ... talk of “tapering,” of letting up on its efforts, even though inflation is below target, the employment situation is still terrible and the pace of improvement is glacial at best. ...
Why isn’t reducing unemployment a major policy priority? One answer may be that inertia is a powerful force... As long as we’re adding jobs, not losing them, and unemployment is basically stable or falling ... policy makers don’t feel any urgent need to act.
Another answer is that the unemployed don’t have much of a political voice. ... A third answer is that while we aren’t hearing so much these days from the self-styled deficit hawks, the monetary hawks ... have, if anything, gotten even more vociferous. It doesn’t seem to matter that the monetary hawks, like the fiscal hawks, have an impressive record of being wrong about everything (where’s that runaway inflation they promised?). ...
The tragedy is that it’s all unnecessary. Yes, you hear talk about a “new normal”..., but all the reasons given for this ... fall apart when subjected to careful scrutiny. If Washington would reverse its destructive budget cuts, if the Fed would show the “Rooseveltian resolve” that Ben Bernanke demanded of Japanese officials back when he was an independent economist, we would quickly discover that there’s nothing normal or necessary about mass long-term unemployment.
So here’s my message to policy makers: Where we are is not O.K. Stop shrugging, and do your jobs.

Saturday, June 01, 2013

'Little Cause for Inflation Worries'

Remember those predictions that we'd have runaway inflation by now?:

Little Cause for Inflation Worries, by Catherine Rampell, NYT: Periodically I am asked whether we should worry about inflation, given how much money the Federal Reserve has pumped into the economy. Based on the Bureau of Economic Analysis data released Friday morning, this answer is still emphatically no.
The personal consumption expenditures, or P.C.E., price index, which the Fed has said it prefers to other measures of inflation, fell from March to April by 0.25 percent. On a year-over-year basis, it was up by just 0.74 percent. Those figures are quite low by historical standards...
When looking at price changes, a lot of economists like to strip out food and energy, since costs in those spending categories can be volatile. Instead they focus on so-called “core inflation.” On a monthly basis, core inflation was flat. But year over year, this core index grew just 1.05 percent, which is the lowest pace since the government started keeping track more than five decades ago. ...

Friday, May 10, 2013

Fed Watch: When Will The Divergence Between PCE and CPI Matter?

Tim Duy:

When Will The Divergence Between PCE and CPI Matter?, by Tim Duy: The divergence between PCE and CPI measures of inflation remains in the headlines. Pedro da Costa at Reuters sees a test of the Fed's credibility at hand:

With the inflation rate about half of the Federal Reserve's 2.0 percent target, the central bank is facing a major test and some experts wonder whether it will eventually need to ramp up its already aggressive bond buying program.

The challenge for policymakers is that they are clearly falling short of their dual mandate and that should open the door for additional asset purchases. But, but, but...I think that additional asset purchases is just about the last thing they want to do right now. We will see if their thinking evolved much at the last FOMC meeting, but the minutes of the March meeting clearly indicate that a large contingent of FOMC members are looking to end the asset purchase program by the end of this year. Take ongoing improvements in labor markets, add in concerns about financial stability, mix in some cost-benefit analysis about the efficacy of additional QE, and top-off with a dash of improving housing markets, bake at 350 for 40 minutes, and you get monetary policymakers hesitant to push the QE lever any further.

My sense is that policymakers will thus try to find reasons to dismiss falling PCE inflation as a non-issue. From an email exchange last week, today da Costa quotes me as saying:

"The Fed may view the divergence between the two measures as indicating that worries about deflation are premature," said Tim Duy, a professor of economics at the University of Oregon. "If core CPI was trending down as well, the Fed would be more likely to conclude that their inflation forecasts should be guided lower."

And also last week, Greg Ip at the Economist had this observation:

If CPI inflation were to converge to PCE inflation, that would be a concern. Goldman expects CPI inflation to drop to 1.8% in coming years and PCE inflation to rise to 1.5%. It would be preferable for both to converge to 2%; but so long as inflation expectations remain where they are, it is of little consequence for monetary policy – and a tangible plus for incomes and spending.

Yesterday, Philadelphia Federal Reserve President Charles Plosser had this to add, via the Wall Street Journal:

As of right now, “I’m not concerned” about inflation drifting too far under the central bank’s price target of 2%, Federal Reserve Bank of Philadelphia President Charles Plosser said in response to reporter’s questions at a conference here.

Inflation expectations “look pretty well anchored,” and it’s likely that price pressures as measured by the personal consumption expenditures price index will drift back up to 2% over time and reconverge with the consumer price index, he said.

Today, Chicago Federal Reserve President Charles Evans seemed resigned to low inflation. Again, from the Wall Street Journal:

“Inflation is low, and it’s lower than our long-run objective,” Mr. Evens said in an interview on Bloomberg Television, adding that he would like to see inflation closer to 2% but expects it to stay below 2% for several more years. Inflation, he said, “can be too low” when the central bank’s objective is 2%.

Asked if low inflation should prompt a policy response from the Fed, Mr. Evans said “I think it’s way too early to think like that.” In the debate over how the Fed might exit from the asset purchase program, Mr. Evans, a voting member of the policy-setting Federal Open Market Committee, said he remains “open minded [and] I’m listening to my colleagues.”

The general story seems to be that as long as inflation expectations remain anchored, and CPI inflation does not drift much below 2%, then the Fed will resist accelerating the pace of asset purchases.

Also note that the downward inflation drift is an underlying trend, or so concludes the Federal Reserve Bank of Atlanta's macroblog. The authors use a principle component model to estimate a common trend in the price data, and get these results:


The author's note that by this measure, the decline in PCE is not as ominous as it first seems, but it is clear that inflation by either measure is missing the Fed's target and currently trending away from that target. They conclude:

Does that mean we should ignore the recent disinflation being exhibited in the core PCE inflation measure? Well, let’s put it this way: If you’re a glass-half-full sort, we’d say that the recent disinflation trend exhibited by the PCE price index doesn’t seem to be “woven” into the detailed price data, and it certainly doesn’t look like what we saw in 2010. But to you glass-half-empty types, we’d also point out that getting the inflation trend up to 2 percent is proving to be a curiously difficult task.

Indeed, very curious given that we tend to think that at a minimum the monetary authority should be able to raise inflation rates. You are left with thinking that either the Federal Reserve still had more work to do or that monetary policy can do little more at this point than put a floor under the economy. If the latter, and if you want something more, you need to turn to fiscal policy.

Bottom Line: I suspect that at this point the Fed tends to think the costs of additional action still outweigh the benefits, and thus below-target inflation only induces pressure to maintain the current pace of QE longer than they currently anticipate rather than increase the pace of purchases.

Wednesday, May 08, 2013

About Those Inflation Fears

Via Cardiff Garcia at FT Alphaville, Inflation is falling everywhere:

(Charts via Capital Economics.)

... It’s probably worth noting that the wild fluctuations in the headline rate have had only a muted impact on core inflation in the past decade. Just something to keep in mind when you start hearing calls for policy action at the first hint of commodity price gyrations.
Capital Economics writes that there is divergence among some of the bigger emerging economies, with India and Brazil headed in opposite directions, but across the developed world the story is similar (though Japanese inflation expectations are heading higher, and are now above the eurozone’s, by one popular market measure):

Friday, May 03, 2013

Paul Krugman: Not Enough Inflation

Inflation is the wrong thing to worry about:

Not Enough Inflation, by Paul Krugman, Commentary, NY Times: Ever since the financial crisis struck, and the Federal Reserve began “printing money” in an attempt to contain the damage, there have been dire warnings about inflation...
And now, sure enough, the Fed really is worried about inflation. You see, it’s getting too low. ...
It’s not hard to see where inflation fears were coming from. In its efforts to prop up the economy, the Fed has bought more than $2 trillion of stuff — private debts, housing agency debts, government bonds. It has paid for these purchases by crediting funds to the reserves of private banks, which isn’t exactly printing money, but is close enough for government work. Here comes hyperinflation!
Or, actually, not. From the beginning, it ... should have been obvious that the financial crisis had plunged us into a “liquidity trap”... Economists who had studied such traps ... knew that some of the usual rules of economics are in abeyance as long as the trap lasts. Budget deficits, for example, don’t drive up interest rates; printing money isn’t inflationary; slashing government spending has really destructive effects on incomes and employment.
The usual suspects dismissed all this analysis; it was “liquidity claptrap,” declared Alan Reynolds of the Cato Institute. But ... the liquidity trappers seem to have been right, after all. ...
So all those inflation fears were wrong..., at this point, inflation — at barely above 1 percent by the Fed’s favored measure — is dangerously low. ...
So why is inflation falling? The answer is the economy’s persistent weakness, which keeps workers from bargaining for higher wages and forces many businesses to cut prices. And if you think about it,,,, you realize that this is a vicious circle, in which a weak economy leads to too-low inflation, which perpetuates the economy’s weakness.
And this brings us to a broader point: the utter folly of not acting to boost the economy, now.
Whenever anyone talks about the need for more stimulus, monetary and fiscal, to reduce unemployment, the response from people who imagine themselves wise is always that we should focus on the long run, not on short-run fixes. The truth, however, is that ... by letting short-run economic problems fester we’re setting ourselves up for a long-run, perhaps permanent, pattern of economic failure.
The point is that we are failing miserably in responding to our economic challenge — and we will be paying for that failure for many years to come.

Wednesday, May 01, 2013

Fed Watch: What About Inflation?

Tim Duy:

What About Inflation?, by Tim Duy: I find Binyamin Applelbaum's Fed preview to be rather depressing and distressing. Appelbaum begins with a solid insight - reducing the unemployment rate is not the same as maximizing employment:

The Federal Reserve is making modest progress in its push to reduce the unemployment rate. But that is not the jobs goal Congress actually established for the Fed. The central bank is supposed to be maximizing employment. And on that front, it is not making progress.

Applelbaum points to the employment to population ratio as evidence that the Fed is falling short of the mandate. But are Fed officials ready to do more? No:

There is little sign, however, that Fed officials are considering an expansion of their four-year-old stimulus campaign as the Fed’s policy-making committee prepares to convene Tuesday and Wednesday in Washington.

Applelbaum notes that the recent flow of data has forced monetary policymakers to back away from talk of ending large scale assets purchases. But among the reasons to avoid expansion of the program we find this:

Another reason the Fed is not embracing new measures is that it already has tied the duration of low interest rates to the unemployment rate. The Fed said in December that it intended to hold interest rates near zero at least as long as the unemployment rate remained above 6.5 percent, provided that inflation remained under control. The theory is that the economy will get as much stimulus as it needs.

But what if the inflation rate is persistently below the target? Or, worse, trending lower? Clearly then the economy is not getting the stimulus it needs. If we are missing on both targets, then the economy needs more stimulus. And while we can debate the efficacy of monetary policy in influencing the pace of employment growth, surely monetary policy can influence the inflation rate. Correct?

The distressing part of this article is that it reads as if the Fed has given up not only on its ability to influence the pace of employment growth, but also on its ability to influence the inflation rate. Or, possibly worse, that the Fed is simply no longer concerned with the inflation rate now that the obvious threat of deflation has passed. This again feeds suspicion that the Fed's 2 percent target is really an upper bound.

Bottom Line: The Fed is supposed to have a dual mandate. Dual, as in two. Maximum employment and price stability. One would think that failing at the latter would be at least as important as failing at the former. Perhaps we are learning that the Evan's rule is flawed - it should not be about only conditions before which the Fed considers removing stimulus, but also conditions by which the Fed deliberately considers adding additional stimulus. A two-side Evan's rule is needed.

Tuesday, April 30, 2013

Why Do We Use Core Inflation?

Paul Krugman:

Blogging is a bit like teaching the same class year after year; inevitably there are moments when you feel exasperated at the class’s failure to grasp some point you know you explained at length — then you realize that this was last year or the year before, and it was to a different group of people.
So, I gather that the old core inflation bugaboo is rearing its head again — the complaint that it’s somehow stupid, dishonest, or worse to measure inflation without food and energy prices, often coupled with the claim that the statistics are being manipulated anyway. So, time for a refresher. ...

Hs refresher is here. Let me offer one of my own (from 2008):

Why Do We Use Core Inflation?: There is a lot of confusion over the Fed's use of core inflation as part of its policy making process. One reason for confusion is that we using a single measure to summarize three different definitions of the term "core inflation" based upon how it is used.

First, core inflation is used to forecast future inflation. For example, this recent paper uses a "bivariate integrated moving average ... model ... that fits the data on inflation very well," and finds that the long-run trend rate of inflation "is best gauged by focusing solely on prices excluding food and energy prices." That is, this paper finds that predictions of future inflation based upon core measures are more accurate than predictions based upon total inflation.

Second, we also use the core inflation rate to measure the current trend inflation rate. Because the inflation rate we observe contains both permanent and transitory components, the precise long-run inflation rate that consumers face going forward is not observed directly, it must be estimated. When food and energy are removed to obtain a core measure, the idea is to strip away the short-run movements thereby giving a better picture of the core or long-run inflation rate faced by households. I should note, however that this is not the only nor the best way to extract the trend and the Fed also looks at other measures of the trend inflation rate that have better statistical properties. Thus while the first use of core inflation was for forecasting future inflation rates, this use of core inflation attempts to find today's trend inflation rate [There is a way to combine the first and second uses into a single conceptual framework that encompasses both, but it seemed more intuitive to keep them separate. In both cases, the idea is to find the inflation rate that consumers are likely to face in the future.]

Let me emphasize one thing. If the question is "what is today's inflation rate," the total inflation rate is the best measure. It's intended to measure the cost of living and there's no reason at all to strip anything out. It's only when we ask different questions that different measures are used.

Third, and this is the function that is ignored most often in discussions of core inflation, but to me it is the most important of the three. The inflation target that best stabilizes the economy (i.e. best reduces the variation in output and employment) is a version of core inflation.

In theoretical models used to study monetary policy, the procedure for setting the policy rule is to find the monetary policy rule that maximizes household welfare (by minimizing variation in variables such as output, consumption, and employment). The rule will vary by model, but it usually involves a measure of output and a measure of prices, and those measures can be in levels, rates of change, or both depending upon the particular model being examined.

In general, a Taylor rule type framework comes out of this process ( i.e. a rule that links the federal funds rate to measures of output and prices). However, in the policy rule, the best measure of prices is usually something that looks like a core measure of inflation. Essentially, when prices are sticky, which is the most common assumption driving the interaction between policy and movements in real variables in these models, it's best to target an index that gives most of the weight to the stickiest prices (here's an explanation as to why from a post that echoes the themes here).  That is, volatile prices such as food and energy are essentially tossed out of the index used in the policy rule.

The indexes that come out of this type of theoretical exercise often includes both output and input prices, and occasionally asset prices as well. That is, a core measure of inflation composed of just output prices isn't the best thing for policymakers to target, a more general core inflation rate combining both input and output prices works better. ...

Finally, there is also a question of what we mean by inflation conceptually. Does a change in relative prices, e.g. from a large increase in energy costs, that raises the cost of living substantially count as inflation, or do we require the changes to be common across all prices as would occur when the money supply is increased? Which is better for measuring the cost of living? Which is a better target for stabilizing the economy? The answers may not be the same. For a nice discussion of this topic, see this speech given yesterday by Dennis Lockhart, President of the Atlanta Fed:

Inflation Beyond the Headlines, by Dennis P. Lockhart, President, Federal Reserve Bank of Atlanta: ...Let me begin by posing the simple question: What do we mean by "inflation"? The answer to that simple question isn't as simple as it may seem.

The popular treatment of inflation in our sound bite society risks confusing inflation with relative price movements and the cost of living. By cost of living, I'm referring to the costs you and I incur to maintain our level of consumption of various goods and services including essential items such as food, gasoline, and lodging. 

Relative price movements occur continuously in an economy as individual prices react to market forces affecting that good or service. Neither relative price movements nor sustained high living costs constitute inflation as economists commonly use the term....

And I think I'll end with this part of his remarks:

Attempts to measure the aggregate rate of price change—no matter how sophisticated—remain imperfect. As a result, when it comes to measuring inflation, judgment is needed to distinguish persistent price movements that underlie overall inflation from the relative price adjustments. Separating the inflation signal from noise involves much uncertainty—especially when making decisions in real time. Discerning accurately the underlying trend is difficult. It is essential for those of us who have responsibility for responding to these trends to use a wide variety of core measures and inflation projections to make the most informed judgment we can.

Monday, April 15, 2013

Paul Krugman: The Antisocial Network

The two huge misconceptions surrounding goldbugism and bitbugism:

The Antisocial Network, by Paul Krugman, Commentary, NY Times: Bitcoin’s wild ride may not have been the biggest business story of the past few weeks, but it was surely the most entertaining. Over the course of less than two weeks the price of the “digital currency” more than tripled. Then it fell more than 50 percent in a few hours. ...
The biggest declared investors in bitcoins are the Winklevoss brothers ... and they make claims for the digital product similar to those made by goldbugs... “We have elected,” declared Tyler Winklevoss recently, “to put our money and faith in a mathematical framework that is free of politics and human error.”
The similarity to goldbug rhetoric isn’t a coincidence, since goldbugs and bitcoin enthusiasts — bitbugs? — tend to share both libertarian politics and the belief that governments are vastly abusing their power to print money. ...
However,... let’s focus on the two huge misconceptions — one practical, one philosophical — that underlie both goldbugism and bitbugism.
The practical misconception here — and it’s a big one — is ... that we live in an era of wildly irresponsible money printing, with runaway inflation just around the corner... The truth is that Ben Bernanke’s promises that his actions wouldn’t be inflationary have been vindicated..., while goldbugs’ dire warnings of inflation keep not coming true.
The philosophical misconception, however, seems to me to be even bigger. Goldbugs and bitbugs alike seem to long for a pristine monetary standard, untouched by human frailty. But that’s an impossible dream. Money is, as Paul Samuelson once declared, a “social contrivance,” not something that stands outside society. Even when people relied on gold and silver coins, what made those coins useful wasn’t the precious metals they contained, it was the expectation that other people would accept them as payment.
Actually, you’d expect the Winklevosses, of all people, to get this, because in a way money is like a social network, which is useful only to the extent that other people use it. But I guess some people are just bothered by the notion that money is a human thing, and want the benefits of the monetary network without the social part. Sorry, it can’t be done.
So do we need a new form of money? I guess you could make that case if the money we actually have were misbehaving. But it isn’t. We have huge economic problems, but green pieces of paper are doing fine — and we should let them alone.

Friday, April 12, 2013

Paul Krugman: Lust for Gold

What explains "goldbuggism"?:

Lust for Gold, by Paul Krugman, Commentary, NY Times: News flash: Recent declines in the price of gold, which is off about 17 percent from its peak, show that this price can go down as well as up. You may consider this an obvious point, but ... it has come as a rude shock to many small gold investors, who imagined that they were buying the safest of all assets.
And thereby hangs a tale. One of the central facts about modern America is that everything is political; on the right, in particular, people choose their views about everything, from environmental science to gun safety, to suit their political prejudices. And the remarkable recent rise of “goldbuggism,” in the teeth of all the evidence, shows that this politicization can influence investments as well as voting.
What do I mean by goldbuggism? Not the notion that buying gold sometimes makes sense..., gold is like a very long-term bond that’s protected from inflation...
No, being a goldbug means asserting that gold offers unique security in troubled times; it also means asserting that all would be well if we abolished the Federal Reserve and returned to the good old gold standard... And both forms of goldbuggism soared after ... the financial crisis of 2008... (although that surge has abated a bit since 2011). But why..., how can we rationalize the modern goldbug position? Basically, it depends on the claim that runaway inflation is just around the corner. ...

Conservative-minded people tend to support a gold standard — and to buy gold — because they’re very easily persuaded that “fiat money” ... created ... to stabilize the economy is really just part of the larger plot to take away their hard-earned wealth and give it to you-know-who.
But the runaway inflation that was supposed to follow reckless money-printing — inflation that the usual suspects have been declaring imminent for four years and more — keeps not happening. For a while, rising gold prices helped create some credibility for the goldbugs even as their predictions about everything else proved wrong, but now gold as an investment has turned sour, too. So will we be seeing prominent goldbugs change their views, or at least lose a lot of their followers?
I wouldn’t bet on it. In modern America, as I suggested at the beginning, everything is political; and goldbuggism, which fits so perfectly with common political prejudices, will probably continue to flourish no matter how wrong it proves.

Thursday, March 14, 2013

Inflation is *Not* What We Should Be Worried About

Dave Henderson responds to an article called "If There's No Inflation, Why are Prices Up So Much?":

...the main thing he does in the ... article is look selectively at relative prices that have increased a lot...

I had started a response to the same article a couple of days ago, and then decided to let it go. But I may as well resurrect it. As noted, the article looks selectively at a few prices that have gone up a lot, and then asks "why haven’t these more rapid increases shown up in the Consumer Price Index?" They have, but they are offset by falling prices elsewhere. This is easy to see in the underlying data.

This is the PCE rather than the CPI, but the story is the same (this is what the Fed monitors, and it's a better measure to look at anyway -- I used month-to-month data because it seems like the article used a similar measure -- year over year is less volatile, but again the story is basically the same). Shown below is a list of the inflation rates for the individual components that make up the PCE (the changes are from December to January, the latest data available). Notice how many prices of the goods and services consumed by a typical household fell on a month-to-month basis. You rarely hear people talking about how well they made out due to falling prices, but you hear a lot --- see the article -- about prices that are going up (the overall month-to-month figure, where prices are weighted by their share of a typical consumption basket, was 0.2 percent, i.e. less than one percent -- that means price increases and price decreases nearly canceled each other out).

Despite scare stories in the media about all the hidden inflation, it's just not there. Thus, there's no reason for the Fed to start raising interest rates to combat this phantom threat. If inflation (or the threat of inflation) does kick-up, we'll have to balance the costs of higher than expected inflation with the costs of fighting it and prolonging the recovery of output and employment -- even then, relative to a moderate outbreak of inflation I think unemployment is the more important problem to address -- but presently it's not a close call at all. Alleviating unemployment and all the struggles that come with it ought to be our top priority.

[Note: The entries marked in yellow are the trim points for the Dallas Fed's trimmed mean estimate of the inflation rate (which is similar to excluding food and energy). Inflation was 1.3 percent from December to January according to the trimmed-mean measure (excluding food and energy gives an estimate of 1.8 percent). People usually complain that trimming volatile prices from the inflation measure hides inflation that hits households, e.g. it hides increases in the price of gas. But in this case excluding volatile prices such as food and energy increases the measured inflation rate from .2 percent to either 1.3 percent or 1.8 percent depending on which prices are excluded. The very first entry in the table helps to explain why.]

Component Annualized 1-month % change
PCE: Gasoline & Other Motor Fuel Price Index   -32.7
Personal Consumption Expenditures: Clothing Materials Price Index   -30.9
Personal Consumption Expenditures: Sewing Items Price Index   -30.9
Personal Consumption Expenditures: Commercial Banks Price Index   -26.1
Sales Receipts: Foundatns/Grant Making/Giving Svcs to HH Price Idx  -25.8
Personal Consumption Expenditures: Eggs  Price Index   -21.0
Personal Consumption Expenditures: Photographic Equip Price Index   -20.4
Personal Consumption Expenditures: Natural Gas  Price Index   -18.7
Personal Consumption Expenditures: Fresh Fruit  Price Index   -18.6
PCE: Film & Photographic Supplies Price Index   -15.7
PCE: Othr Depository Instns & Regulated Invest Companies Price Idx  -12.8
PCE: Sporting Equip, Supplies, Guns & Ammunition Price Index   -12.0
PCE: Employment Agcy Services Price Index   -10.3
PCE: Computer Software & Acc Price Index   -10.0
PCE: Net Health Insurance Price Index   -9.5
Personal Consumption Expenditures: Tires Price Index   -9.2
PCE: Personal Computers & Peripheral Equip Price Index   -8.2
Personal Consumption Expenditures: Other Meats  Price Index   -8.1
Personal Consumption Expenditures: Furniture Price Index   -7.5
PCE: Household Cleaning Products Price Index   -7.3
Personal Consumption Expenditures: Fats and Oils Price Index   -7.2
PCE: Coffee, Tea & Other Beverage Mtls Price Index   -7.1
PCE: Children's & Infants' Clothing Price Index   -7.0
Personal Consumption Expenditures: Nursing Homes  Price Index   -6.8
PCE: Mineral Waters, Soft Drinks & Vegetable Juices Price Index   -6.7
PCE: Moving, Storage & Freight Services Price Index   -6.5
PCE: Hair/Dental/Shave/Misc Pers Care Prods ex Elec Prod Price Idx  -6.0
PCE: Elec Appliances for Personal Care Price Index   -6.0
PCE: Motor Vehicle Leasing Price Index   -6.0
Personal Consumption Expenditures: Cereals Price Index   -5.9
PCE: Flowers, Seeds & Potted Plants Price Index   -5.8
Personal Consumption Expenditures: Fresh Milk  Price Index   -5.4
PCE: Food Products, Not Elsewhere Classified Price Index   -5.2
Personal Consumption Expenditures: Window Coverings  Price Index   -5.1
Personal Consumption Expenditures: Wine Price Index   -5.0
Personal Consumption Expenditures: Lubricants & Fluids Price Index  -4.7
Personal Consumption Expenditures: Air Transportation Price Index   -4.6
PCE: Nonprescription Drugs Price Index   -4.0
Personal Consumption Expenditures: Social Assistance Price Index   -4.0
PCE: Stationery & Misc Printed Mtls Price Index   -3.9
Personal Consumption Expenditures: Televisions Price Index   -3.1
PCE: Maintenance & Repair of Rec Vehicles & Sports Eqpt Price Idx  -2.6
PCE: Processed Dairy Products Price Index   -2.5
PCE: Cosmetic/Perfumes/Bath/Nail Preparatns & Implements Price Idx  -2.3
Personal Consumption Expenditures: Fuel Oil  Price Index   -2.0
Personal Consumption Expenditures: Beef and Veal  Price Index   -2.0
PCE: Tax Preparation & Other Related Services Price Index   -1.8
PCE: Misc Household Products Price Index   -1.7
Personal Consumption Expenditures: Other Video Equip Price Index   -1.6
Personal Consumption Expenditures: Physician Services Price Index   -1.0
PCE: Veterinary & Other Services for Pets Price Index   -1.0
PCE: Household Paper Products Price Index   -0.7
PCE: Tools, Hardware & Supplies Price Index   -0.6
Personal Consumption Expenditures: Jewelry  Price Index   -0.6
PCE: Major Household Appliances Price Index   -0.2
Personal Consumption Expenditures: Accessories & Parts Price Index  0.0
Personal Consumption Expenditures: Prescription Drugs Price Index   0.1
PCE: Other Medical Products Price Index   0.3
PCE: Therapeutic Medical Equip Price Index   0.3
Personal Consumption Expenditures: Casino Gambling Price Index   0.3
Personal Consumption Expenditures: Lotteries  Price Index   0.3
PCE: Pari-Mutuel Net Receipts Price Index   0.3
Personal Consumption Expenditures: Legal Services Price Index   0.6
Personal Consumption Expenditures: Prof Assn Dues Price Index   0.6
PCE: Net Motor Vehicle & Other Transportation Insur Price Index   0.6
Personal Consumption Expenditures: New Light Trucks Price Index   0.9
PCE: Motion Picture Theaters Price Index   0.9
Personal Consumption Expenditures: Used Autos Price Index   0.9
Personal Consumption Expenditures: Museums & Libraries Price Index  0.9
PCE: Live Entertainment, ex Sports Price Index   0.9
PCE: Nonprofit Hospitals' Services to Households Price Index   1.0
PCE: Proprietary Hospitals Price Index   1.0
Personal Consumption Expenditures: Spirits  Price Index   1.0
Personal Consumption Expenditures: Govt Hospitals Price Index   1.0
Personal Consumption Expenditures: Taxicabs  Price Index   1.0
PCE: Intercity Mass Transit Price Index   1.0
PCE: Financial Service Charges, Fees & Commissions Price Index   1.1
Personal Consumption Expenditures: Used Light Trucks Price Index   1.3
PCE: Paramedical Services Price Index   1.4
Personal Consumption Expenditures: Motorcycles  Price Index   1.4
PCE: Other Purchased Meals Price Index   1.5
PCE: Video Cassettes & Discs, Blank & Prerecorded Price Index   1.5
Personal Consumption Expenditures: Beer  Price Index   1.5
Personal Consumption Expenditures: Pleasure Aircraft Price Index   1.6
Personal Consumption Expenditures: Pleasure Boats Price Index   1.6
PCE: Other Recreational Vehicles Price Index   1.6
Personal Consumption Expenditures: Bicycles & Acc Price Index   1.6
PCE: Pets & Related Products Price Index   1.8
Personal Consumption Expenditures: Watches Price Index   2.0
Final Consumptn Exps of Nonprofit Instns Serving HH Price Idx  2.0
PCE: Alcohol in Purchased Meals Price Index   2.1
PCE: Amusement Parks, Campgrounds & Related Recral Svcs Price Idx   2.1
PCE: Garbage & Trash Collection Price Index   2.1
Personal Consumption Expenditures: Package Tours  Price Index   2.1
PCE: Owner-Occupied Mobile Homes Price Index   2.2
PCE: Rental Value of Farm Dwellings Price Index   2.2
PCE: Owner-Occupied Stationary Homes Price Index   2.2
Personal Consumption Expenditures: Recreational Books Price Index   2.2
Personal Consumption Expenditures: Spectator Sports  Price Index   2.3
PCE: Other Household Services Price Index   2.3
PCE: Standard Clothing Issued to Military Personnel Price Index   2.6
PCE: Tenant-Occupied Stationary Homes Price Index   2.7
PCE: Tenant-Occupied Mobile Homes Price Index   2.7
Personal Consumption Expenditures: Group Housing   Price Index   2.7
PCE: Other Personal Business Services Price Index   2.8
PCE: Hairdressing Salons & Personal Grooming Estab Price Idx  3.0
PCE: Membership Clubs & Participant Sports Centers Price Index   3.1
PCE: Luggage & Similar Personal Items Price Index   3.2
Personal Consumption Expenditures: Communication Price Index   3.5
PCE: Shoes & Other Footwear Price Index   3.5
Personal Consumption Expenditures: Domestic Services Price Index   3.7
PCE: Food Supplied to Military Price Index   3.7
PCE: Elementary & Secondary School Lunches Price Index   3.7
PCE: Food Supplied to Civilians Price Index   3.7
PCE: Higher Education School Lunches Price Index   3.7
PCE: Elementary & Secondary Schools Price Index   3.8
PCE: Outdoor Equip & Supplies Price Index   4.0
Personal Consumption Expenditures: Fish and Seafood  Price Index   4.1
PCE: Motor Vehicle Maintenance & Repair Price Index   4.3
Personal Consumption Expenditures: New Domestic Autos Price Index   4.3
Personal Consumption Expenditures: New Foreign Autos Price Index   4.3
PCE: Parking Fees & Tolls Price Index   4.3
PCE: Net Household Insurance Price Index   4.5
Personal Consumption Expenditures: Pork Price Index   4.7
Personal Consumption Expenditures: Child Care  Price Index   4.8
PCE: Day Care & Nursery Schools Price Index   4.8
PCE: Corrective Eyeglasses & Contact Lenses Price Index   4.9
PCE: Water Supply & Sewage Maintenance Price Index   5.2
Personal Consumption Expenditures: Housing at Schools Price Index   5.3
Personal Consumption Expenditures: Dental Services  Price Index   5.3
PCE: Audio-Video, Photographic & Info Processing Svcs Price Index   5.5
Personal Consumption Expenditures: Life Insurance  Price Index   5.7
PCE: Water Transportation Price Index   5.7
PCE: Prerec/Blank Audio Disc/Tape/Digital Files/Download Price Idx  6.1
Personal Consumption Expenditures: Bakery Products  Price Index   6.4
PCE: Telephone & Facsimile Equip Price Index   6.5
PCE: Calculators/Typewriters/Othr Info Processing Eqpt Price Idx  6.5
Personal Consumption Expenditures: Musical Instruments Price Index  6.5
Personal Consumption Expenditures: Tobacco  Price Index   6.7
PCE: Funeral & Burial Services Price Index   7.0
PCE: Processed Fruits & Vegetables Price Index   7.0
PCE: Social Advocacy & Civic & Social Organizations Price Index   7.9
PCE: Religious Organizations' Services to Households Price Index   8.2
PCE: Laundry & Dry Cleaning Services Price Index   8.2
PCE: Tenant Landlord Durables Price Index   8.3
Personal Consumption Expenditures: Sugar and Sweets  Price Index   8.5
Personal Consumption Expenditures: Educational Books Price Index   8.7
Personal Consumption Expenditures: Poultry Price Index   9.1
PCE: Carpets & Other Floor Coverings Price Index   9.3
PCE: Proprietary & Public Higher Education Price Index   9.8
PCE: Nonprofit Pvt Higher Education Svcs to Households Price Index  9.8
PCE: Nonelectric Cookware & Tableware Price Index   10.3
PCE: Labor Organization Dues Price Index   11.2
Personal Consumption Expenditures: Other Fuels Price Index   11.4
PCE: Railway Transportation Price Index   11.5
PCE: Clock/Lamp/Lighting Fixture/Othr HH Decorative Item Price Idx  11.7
PCE: Men's & Boys' Clothing Price Index   12.2
Personal Consumption Expenditures: Household Linens  Price Index   13.0
PCE: Repair of Household Appliances Price Index   13.8
PCE: Repair of Furn, Furnishings & Floor Coverings Price Index   13.8
Personal Consumption Expenditures: Electricity   Price Index   14.0
PCE: Commercial & Vocational Schools Price Index   15.1
Personal Consumption Expenditures: Audio Equipment Price Index   16.8
PCE: Women's & Girls' Clothing Price Index   17.4
Personal Consumption Expenditures: Intercity Buses Price Index   18.0
PCE: Other Road Transportation Service Price Index   18.0
Personal Consumption Expenditures: Hotels and Motels Price Index   18.0
PCE: Clothing Repair, Rental & Alterations Price Index   18.4
PCE: Repair & Hire of Footwear Price Index   18.4
PCE: Misc Personal Care Services Price Index   18.4
Personal Consumption Expenditures: Pension Funds Price Index   20.5
PCE: Small Elec Household Appliances Price Index   21.6
PCE: Games, Toys & Hobbies Price Index   21.8
Personal Consumption Expenditures: Fresh Vegetables Price Index   32.2
PCE: Newspapers & Periodicals Price Index   37.6
Personal Consumption Expenditures: Dishes and Flatware Price Index  66.2
PCE: Motor Vehicle Rental Price Index   78.6
PCE: Food Produced & Consumed on Farms Price Index   124.4

Wednesday, March 06, 2013

How Much Should We Worry About Debt, Inflation, and Unemployment?

Here are the slides from a talk I gave last night:

How Much Should We Worry About Debt, Inflation, and Unemployment? (ppt ) (pdf)

The last slide concludes with:

We face a tradeoff. Attempts to lower unemployment can increase the risk of inflation and increase the debt . The reverse is true as well. Attempts to lower the debt and reduce the risk of inflation can increase unemployment.

In my view, presently we are too worried about inflation and debt, and not worried enough about unemployment.

Thursday, January 31, 2013

There Is An Inflation Problem: It's Falling Below Target

Inf[data source]

Annualized 6 and 12 Month Trimmed Mean
PCE Inflation Rates from 1/12 - 12/12

6-month 12-month
Jan-12 2.02 2.08
Feb-12 1.86 2.02
Mar-12 1.97 2.02
Apr-12 1.96 1.94
May-12 1.85 1.89
Jun-12 1.75 1.87
Jul-12 1.62 1.82
Aug-12 1.62 1.74
Sep-12 1.54 1.75
Oct-12 1.44 1.70
Nov-12 1.45 1.65
Dec-12 1.34 1.55

Tuesday, January 29, 2013

'Trillion Dollar Deficits are Sustainable for Now – Unfortunately'

John Makin and Daniel Hanson of the conservative American Economic Institute talk sense on the deficit. Now if we could just get them over their inflation fears -- the source of the "unfortunately" part of the title -- we might be able to get somewhere in addressing our biggest problem right now, high and persistent unemployment, and enhance our long-tern growth prospects at the same time:

Trillion dollar deficits are sustainable for now – unfortunately, by John H. Makin and Daniel Hanson, Commentary, FT: An abrupt spending sequester at a rate of about $110bn per year ($1.1tn over 10 years) scheduled to begin March 1 could cause a US recession, coming as it does on top of tax increases worth about 1.5 per cent of GDP enacted in January. The April deadline for a continuing resolution to fund federal spending could lead to a fight that shuts down the government, placing a further drag on growth.
These ad hoc measures, aimed at creation of an artificial crisis, will fail to produce prompt, sustainable progress towards reduction of “unsustainable” deficits because deficits have been, and will continue to be for some time, eminently sustainable. The Chicken Little “sky is falling” approach to frightening Congress into significant deficit reduction has failed because the sky has not fallen. Interest rates have not soared as promised... Trillion-dollar federal budget deficits have continued to be sustainable because the federal government is able to finance them at interest rates of half a per cent or less. Two per cent inflation means that the real inflation-adjusted cost of deficit finance averages −1.5 per cent...
The real danger facing American policy makers is ... the current sustainability of trillion-dollar deficits, thanks to very low borrowing costs relative to GDP growth. Eventually, the Federal Reserve’s QE programme of large government debt purchases at a current rate of $800bn per year, largely aimed at sustaining the growth of outlays on entitlements that do not support economic growth, will cause inflation to rise. The Fed’s latest move to target the unemployment rate with more quantitative easing only adds to the threat of inflation because the only way monetary policy can affect growth or employment is by engineering a higher-than-expected rate of inflation.
Despite the current absence of rising inflation, Washington is flirting with a debt trap, where abrupt austerity forced by the sequester and/or a government shut down would actually boost the ratio of debt to GDP by depressing growth too rapidly. That outcome will be far more costly in terms of forgone income and unemployment than moving preemptively to reduce American primary deficits to about 3 per cent of GDP over a half decade. ...
By 2018, once the debt-to-GDP ratio has stabilised under such a programme, reducing the primary deficit to 2 percent a year (given a growth rate of 3 percent above borrowing costs) will reduce the debt-to-GDP ratio gradually by 1 per cent a year. That is the meaning of sustainable long-run reduction of government debt relative to income, which will ensure moderate deficit financing costs for decades to come.

I can't let this pass:

the Federal Reserve’s QE programme of large government debt purchases at a current rate of $800bn per year, largely aimed at sustaining the growth of outlays on entitlements that do not support economic growth...

That's NOT what Fed policy is aimed at. There is no third part of its mandate that says it needs to sustain the growth of entitlements. (And the casual, but empirically unsupported claim that entitlement spending is anti-growth is troublesome as well.)

Wednesday, January 23, 2013

'King Stands by Inflation Targeting'

I don't get this argument from Bank of England governor Mervyn King:

The governor of the Bank of England... Sir Mervyn King ... dismissed suggestions made by his designated successor, Mark Carney, now governor of the Bank of Canada, for the Bank to ease monetary policy further by abandoning its inflation target if meaningful growth continues to elude the UK. Mr Carney succeeds him at the start of July. ...
With the UK government pursuing fiscal consolidation, monetary policy has been the mainstay of policy makers’ strategy to boost economic output... But the governor, speaking in Belfast, warned against over-reliance on monetary easing. “In many countries, including the UK, fiscal policy is constrained by the size of government indebtedness, and monetary policy has come to be seen as the only game in town,” Sir Mervyn said. “Relying on monetary policy alone, however, is not a panacea.”

That says nothing at all about whether monetary policy should be easier, tighter, or is currently just right. Actually, he does offer this:

The governor suggested the government should introduce supply-side reforms to support the UK’s shift towards higher exports and lower imports.
“It cannot be for a central bank to design a programme of such supply initiatives, but in economic terms there has never been a better time for supply-side reform,” he said.

He is suggesting that the UK's problems are entirely on the supply-side, and that further demand side measures cannot help (e.g. through further monetary easing). Bluntly, I think that's wrong. I have my doubts about nominal GDP targeting as the solution to our economic problems, but that doesn't imply that the current policy approach is optimal, or that deviating from a strict inflation target in the short-run (or the path to the target) cannot help.

Monday, January 21, 2013

Fed Watch: Is There a Big Inflation Mystery in Greece?

Tim Duy:

Is There a Big Inflation Mystery in Greece?, by Tim Duy: Tyler Cowen confuses me:

The rates of price inflation in Greece have been running in the range of 0.8% to 2%...It’s funny how many people pretend to understand what is going on here. If Greece were seeing a stronger bout of price deflation, the situation would be much clearer.

This seems to me to be a case of trying to find a problem where none exists. Greece consumer prices excluding energy:


What part of the deflation is not clear? Seems like any inflation is being driven by energy costs:


So what going on in the energy sector? Stories like this:

Greeks cutting back on household expenses are turning from oil to wood to heat their homes, but in turn are filling the night air with potentially hazardous pollutants, health care officials have warned.

The coalition government, under pressure from the EU-IMF-ECB Troika to impose more austerity measures, has pushed the price of heating oil to about 1.50 euros per litre by raising the tax on heating oil by 40 percent. Besides being a revenue-raiser, the government said the tax was meant to deter people from putting the oil in their cars instead of more expensive diesel.


Greece raised electricity prices for households by up to 15 percent this year to help state-controlled power company PPC cover costs for transmission rights, the government said on Sunday...

...They come after a 9.2 percent average increase in prices last year.

PPC is the dominant player in the Greek energy market, and the country's EU and IMF lenders are pressing the government to make room for private companies. The company's tariffs are regulated by the state.

The Troika is remaking the energy sector, with the consequence of rising prices in a way that looks like a sectoral supply shock that is very obviously distinct from the demand side disturbance. What exactly is the big mystery here?

Saturday, January 19, 2013

Sumner's Reply to Altig

Scott Sumner replies to David Altig :

David Altig on NGDPLT

[See here for David's post.]

Tuesday, January 08, 2013

'Inflation versus Price-Level Targeting in Practice'

David Altig and Mike Bryan argue that if the Fed had adopted a price-level target instead of an inflation target, it wouldn't have made much practical difference for policy:

Inflation versus Price-Level Targeting in Practice, by David Altig and Mike Bryan: In last Wednesday's Financial Times, Scott Sumner issued a familiar indictment of "modern central banking practice" for failing to adopt nominal gross domestic product (GDP) targets, for which he has been a major proponent. I have expressed my doubts about nominal GDP targeting on several occasions—most recently a few posts back—so there is no need to rehash them. But this passage from Professor Sumner's article provoked my interest:

Inflation targeting also failed because it targeted the growth rate of prices, not the level. When prices fell in the U.S. in 2009, the Federal Reserve did not try to make up for that shortfall with above target inflation. Instead it followed a "let bygones be bygones" approach.

In principle, there is no reason why a central bank consistently pursuing an inflation target can't deliver the same outcomes as one that specifically and explicitly operates with a price-level target. Misses with respect to targeted inflation need not be biased in one direction or another if the central bank is truly delivering on an average inflation rate consistent with its stated objective.

So how does the Federal Reserve—with a stated 2-percent inflation objective—measure up against a price-level targeting standard? The answer to that question is not so straightforward because, by definition, a price-level target has to be measured relative to some starting point. To illustrate this concept, and to provide some sense of how the Fed would measure up relative to a hypothetical price-level objective, I constructed the following chart.


Consider the first point on the graph, corresponding to the year 1993. (I somewhat arbitrarily chose 1993 as roughly the beginning of an era in which the Fed, intentionally or not, began operating as if it had an implicit long-run inflation target of about 2 percent.) This point on the graph answers the following question:

By what percent would the actual level of the personal consumption expenditure price index differ from a price-level target that grew by 2 percent per year beginning in 1993?

The succeeding points in the chart answer that same question for the years 1994 through 2009.

Here's the story as I see it:

  1. If you accept that the Fed, for all practical purposes, adopted a 2 percent inflation objective sometime in the early to mid-1990s, there arguably really isn't much material distinction between its inflation-targeting practices and what would have likely happened under a regime that targeted price-level growth at 2 percent per annum. The actual price level today differs by only about 1/2 to 1 1/2 percentage points from what would be implied by such a price-level target.

    Hitting a single numerical target for the price level at any particular time is of course not realistic, so an operational price-level targeting regime would have to include a description of the bounds around the target that defines success with respect to the objective. Different people may have different views on that, but I would count being within 1 1/2 percentage points of the targeted value over a 20-year period as a clear victory.

  2. If you date the hypothetical beginning of price-level targeting sometime in the first half of the 2000s, then the price level would have deviated above that implied by a price-level target by somewhat more. There certainly would be no case for easing to get back to the presumed price-level objective.

  3. A price-level target would start to give a signal that easing is in order only if you choose the reference date for the target during the Great Recession—2008 or 2009.

I'm generally sympathetic to the idea of price-level targeting, and I believe that an effective inflation-targeting regime would not "let bygones be bygones" in the long run. I also believe that the Federal Open Market Committee (FOMC) has effectively implemented the equivalent price-level target outcomes via its flexible inflation-targeting approach over the past 15 to 20 years (as suggested in point number 1 above).

In fact, the FOMC has found ample scope for stimulus in the context of that flexible inflation targeting approach (which honors the requirements of the Fed's dual mandate of price stability and maximum employment). I just don't think it is necessary or helpful to recalibrate an existing implicit price-level target by restarting history yesterday.

Wednesday, December 19, 2012

Inflation is Caused by Monopoly Power?

Why would a reputable economist endorse nonsense like this from Mickey Kaus (you know who you are):

If increased concentration lets ”corporations use their growing monopoly power to raise prices” couldn’t that be, you know, inflationary? But Krugman’s spent another trillion pixels lecturing us about how inflation is not a threat. Discuss.

One possible answer, Krugman Derangement Syndrome. [There's more nonsense where that came from, and not just in this article, but I just can't link the Daily Caller in good conscience.]

Monday, December 17, 2012

Is the Fed Risking "Dangerous Side Effects"?

Robert Samuelson:

The Fed rolls the dice, by Robert J. Samuelson, Commentary, Washington Post: It was big news last week when the Federal Reserve announced that it wants to maintain its current low-interest rate policy until unemployment, now 7.7 percent, drops to at least 6.5 percent. The Fed was correctly portrayed as favoring job creation over fighting inflation, though it also set an inflation target of 2.5 percent. What was missing from commentary was caution based on history: the Fed has tried this before and failed — with disastrous consequences.
By “this,” I mean a twin targeting of unemployment and inflation. In the 1970s, that’s what the Fed did. Targets weren’t announced but were implicit. The Fed pursed the then-popular goal of “full employment,” defined as a 4 percent unemployment rate; annual inflation of 3 percent to 4 percent was deemed acceptable. The result was economic schizophrenia. Episodes of easy credit to cut unemployment spurred inflation... By 1980, inflation was 13 percent and unemployment, 7 percent. ...
Today’s problem is similar. Although the Fed has learned much since the 1970s ... its economic understanding and powers are still limited. It can’t predictably hit a given mix of unemployment and inflation. Striving to do so risks dangerous side effects, including a future financial crisis. ...
It’s seductive to think the Fed can engineer the desired mix of unemployment and inflation. And the motivation is powerful. About 5 million Americans have been jobless for six months or more. The present job market represents, as Bernanke said, “an enormous waste of human and economic potential.” But the Fed is bumping against the limits of its powers. Are potential short-term benefits worth the long-term risks? It’s a close call.

What does he think a dual mandate means if not the "twin targeting of unemployment and inflation"? That's not unique to the 1970s, it's essentially the Taylor rule (the Taylor principle comes into play as well, but I want to focus on something else). Anyway, he is trying to tell the story about shifting Phillips curve due to rising inflationary expectations, but he misses a key part of the story. A popular explanation for problems in the 1970s, one I think has a lot of veracity, is that the Fed was shooting at the wrong unemployment target (you can find this story in most textbooks, e.g. see Mishkin's text on demand-pull inflation). The Fed was shooting at a 4 percent unemployment target, but because of a large influx of new workers from the baby boom and women entering the workforce, the natural rate of unemployment was actually much higher than 4 percent (new workers tend to have high frictional unemployment rates, and there were also structural changes going on within the economy that led to a higher natural rate of unemployment as well). All told, it's not unreasonable to think of the natural rate had drifted as high as 7 percent, maybe even higher. It eventually came down to closer to 4 percent as the surge of new workers ended and structural change abated somewhat, but for awhile it was elevated above the Fed's 4 percent target. Unfortunately, the Fed didn't not realize this.

Here's how the story goes. The Fed, seeing unemployment drifting toward its natural rate of, say, 7 percent responded to its full employment mandate by using more aggressive policy to create inflation. In the short-run, the policy worked, unemployment did fall due to the inflationary surprise, but as soon as people adjusted their inflationary expectations (and demanded higher wages, etc.), the Phillips curve shifted and we ended up with the inflation we wanted, but the employment gains were lost as the unemployment rate moved toward its natural rate of 7 percent. At that point the Fed says to itself, we must not have been aggressive enough, we need a second round of stimulus and it pumps up the inflation rate even further. Again, this works so long as the inflation is a surprise, unemployment falls in the short-run, but as soon as inflationary expectations adjust once again the employment gains are eliminated, but the inflation remains. As this continues, inflation continues to drift upward until eventually we end up with double-digit inflation and nothing whatsoever to show for it in terms of employment gains.

The fundamental problem here is a miscalculation of the natural rate of the natural rate of unemployment. So the question is, has the Fed made this mistake again? Is the natural rate of unemployment a lot higher than 6.5 percent so that shooting for this target is likely to end up with double-digit, 1970s type inflation?

No for several reasons. First, the Fed is fully aware of this past mistake, and many opposed more stimulus for precisely this reason (e.g. Narayana Kockerlakoata would not support more stimulus until Bernanke convinced him in a series of phone calls that the employment problem was largely cyclical, not structural). If they are shooting at the wrong target, then the policy will not work and they will not continue doing so as they did in the 1970s. They are much more aware of the signs to look for that indicate they've made this mistake. Second, there has been considerable effort to measure the structural/cyclical/frictional unemployment mix for precisely this reason, and the estimates, for the most part, point to a mostly cyclical problem. We didn't have this type of information in the 1970s, in fact we weren't even asking this question. We simply assumed that full employment meant 4 percent and set policy accordingly. Finally, there is an inflation threshold of 2.5 percent, a relatively low level of tolerance for mistakes of this type. If the Fed is wrong about the structural rate, we'll see inflation, and if it the projected inflation rate drifts above 2.5 percent, the program will be reversed. I have no doubt that the Fed is serious abut pulling the plug if inflation rises above 2.5 percent. That's true even if unemployment is still above 6.5 percent.

Samuelson can worry all he wants, he's good at playing the Very Serious Person role (inflation is coming!, the debt will cause interest rates to spike!, there could even be "dangerous side effects, including a future financial crisis"!), but the Fed is not risking a repeat of the 1970s, not even close.

Update: Dean Baker comments on the Samuelson article.