The One Number That Proves the Inflation Threat Is a Bogeyman

http://www.theatlantic.com/business/archive/2012/04/the-inflation-threat-is-a-bogeyman/256514/

by mattobrien • 14 years ago

25 31 14 years ago

rjsamson4• 14 years ago

Great article - mostly I'm amazed that there are folks out there who are supposed to be intelligent, who actually believe 10% inflation is a reality...

lalalalahaha2• 14 years ago

I believe it because my food bill has increased approximately 50% in 3 years and gas prices are at the same level as during the bubble in 2008 but with a much more subdued economy. I don't understand how an article with an NGDP chart and some fancy hand waving negates this.

mattobrien2• 14 years ago

Can you refute the point that we can't have positive job growth and negative real GDP? Then how is overall inflation more than 2-3%?

rjsamson4• 14 years ago

As I mentioned in another comment, food and fuel are not counted when calculating inflation - they are both commodities whose prices are determined by external market forces (ie speculation, weather, etc) and do not accurately reflect rising prices due to monetary inflation. Inflation of a few percentage points is healthy - and that's where we are now. Any less and you begin to risk slowing economic growth - currency that declines in value slightly over time gives one the incentive to spend their cash, rather than hoard it.

aaronblohowiak2• 14 years ago

Now is a terrible time to have food as a large portion of your budget (ie: are poor)

robatsu• 14 years ago

There is a little bit of misunderstanding sometimes when people discuss "inflation". To some, if not most people, inflation means increasing prices. To others, it means increase in the money supply, which eventually may cause rising prices after some latency, especially if the growth rate of the economy doesn't keep up with the increase in money supply.

I have no idea whether "rising price inflation" has been underreported, especially by design, by the government. I would concede that there are political and bottom line reasons (e.g, minimize increases in salaries/benefits tied to COLA), but again, if this is happening, IMO it is probably more just institutional slouch than a top-secret directive from the Federal Reserve bunker.

Overall, I don't have an informed opinion what the facts of the matter are wrt to underreported inflation - I only have anecdotal evidence.

OTOH, it is pretty clear that "money supply inflation" has increased dramatically in the past few years due to the various policies associated with the bailout.

Whether this will cause "rising price inflation" remains to be seen - there is always latency between money supply increase and rising prices. In the bailout policies case, the latency is pretty large, as the bulk of the money went to securing "toxic" assets and so forth rather than directly into the consumer economy.

The overhang of this increase in money supply/government debt naturally constitutes rising price pressure, but again, how much is anyone's guess, as there are deflationary pressures as well (falling asset prices, and such).

mattobrien2• 14 years ago

The Fed has tools like interest on reserves, reverse repos and term deposit facilities to make sure that all of the excess reserves on bank balance sheets don't turn into actual price increases.

Austrian economists conflate increases in the money supply and price inflation, but it's not necessarily true. In fact, mainstream New Keynesians (that includes conservatives like Greg Mankiw) have predicted for years that increasing the Fed's balance sheet wouldn't increase inflation. They have been right.

rjsamson4• 14 years ago

Yup - in theory the two can be related, but in the real world its a lot more complicated than that.

grandalf4• 14 years ago

But this is due to the larger forces of supply and demand for US treasury bills. So it's the US's role as an empire that makes its sovereign debt demanded by nations with less solid foundations.

The US enjoys this position largely b/c of its size but also b/c of the frequent policymaking folly that occurs in other nations.

The only thing that can impose true discipline on this process is the existence of competition.... it's the only thing that could decrease demand for US Treasury bills.

It's obvious that we're not currently experiencing hyper-inflation, but the configuration of the world that will allow the trend to continue becomes less certain the further things get extended.

Imagine someone issues you a credit card with a $1 per month minimum payment. As long as you can keep getting the limit increased you'll surely be able to make the payment each month, no matter what other spending you do. The US is able to keep borrowing and borrowing, and its creditors are very lenient b/c they lack a better option.

rjsamson4• 14 years ago

You're sort of correct, in that inflation and the money supply can often be related, but generally one would not use the term "inflation" to refer to an increase in the money supply.

In simple terms though, as the money supply increases, the value of the currency decreases, causing prices to rise (inflation) - but there are too many other factors to count that affect prices and its not always as simple as supply goes up -> prices go up.

Where I think there may some disagreement is around how prices are recorded and tracked - the methodology behind the calculation of whichever price index is being referenced. The number used to determine real inflation excludes the prices of fuel (oil) and food since both numbers depend heavily on speculation and a number of other factors outside of "inflation".

Symmetry2• 14 years ago

I thought that the current mainstream economic view was that inflation, rather than lagging the quantity of money, actually reacted to people's expectation of how much the money supply would increase in the future. That was certainly the case a little while ago when the Swiss central bank announced they wouldn't allow any more appreciation in the Frank, and that they would print more Franks until they had reached the peg they wanted. The exchange rate hit their target within 15 minutes of the announcement.

EDIT: Wikipedia has a very good article on inflation, and I think that it would do most people a lot of good to read it and understand the various reasons people care about inflation, and where different schools of economics differ on it. http://en.wikipedia.org/wiki/Inflation

grandalf4• 14 years ago

While I respect the pragmatic nature of your argument, I think it's important to understand not just the limit of the system but the underlying mechanisms.

If increasing the money supply is "free", then why not just increase it a whole bunch this year and end poverty?

I think the view you express implicitly puts too much trust in policymakers and assumes the system under study to be more stable than we really have evidence to believe it is. Incidentally it is precisely those two characteristics that led to the crash a few years ago.

roc2• 14 years ago

> "I have no idea whether "rising price inflation" has been underreported, especially by design, by the government."

That shouldn't even be an open question anymore. Concern about the accuracy of government reporting of prices is what gave rise to the Billion Price Project.[1] So unless we posit that MIT is now 'in' on a government conspiracy to suppress price increases, we can put that one to bed.

[1] http://bpp.mit.edu/usa/

beagle32• 14 years ago

Do you know how the bpp selected their basket of goods? From what I can tell (reverse engineering from the result), they regressed their collected prices against the CPI -- which therefore makes it a not-independent estimator of price.

(If I'm right, this offers evidence neither for nor against accuracy of CPI reporting -- it just makes BPP mostly irrelevant for this discussion until 10 years or so have passed)

option_greek• 14 years ago

Inflation need not be just seen in the country with monitory supply. It can be felt around the world. The flood of money is being felt in developing countries and commodity markets where gold and oil seem to have just taken flying lessons.

dpatru3• 14 years ago

An essential premise of his argument is that real GDP can't decline if jobs are being added. So if jobs are being added, and they seem to be, then real GDP growth must be positive. Real GDP growth is nominal GDP growth (4%) minus inflation, so inflation must be no more than 4% to keep real GDP growth positive.

"Let's try a thought experiment. If inflation really is 10 percent, that implies that real GDP fell around 6 percent last year. How bad is that? That's roughly where the economy was in the first quarter of 2009. Basically, complete free-fall. And thanks to Okun's Law -- which relates real GDP and unemployment -- we can guesstimate what that would mean for jobs. A back-of-the-envelope estimate says that unemployment should have risen between 3 and 4 percent in that scenario. Instead, we added 1.899 million jobs in the last year."

But of course jobs and production (GDP) do not need to grow in lockstep. This assumes that productivity is constant. If productivity is falling, then production could be declining even as the number of jobs increases.

For example, if the star employee (say Steve Jobs) of your company (Apple) no longer works there, your company may still suffer a production loss even if several employees are hired to replace the star. This is a case where production can fall even as employment increases.

roc2• 14 years ago

> "If productivity is falling, then production could be declining even as the number of jobs increases."

Good catch. But where's productivity been going? (Hint: not down. [1])

So while this indicates an assumption that should be identified and recognized, the correction doesn't impact the conclusion in this case.

[1] http://www.bls.gov/news.release/prod2.nr0.htm

dpatru3• 14 years ago

The productivity of some workers may be rising, but not all. For example, with all the investment in government we've had, government should be very efficient. Government services such as roads, transportation, education, care for the poor, wars on brown people, business regulations, prisons, etc should be very cheap right? Or could it be that as the private sector increases its productivity, the public sector correspondingly consumes/wastes more?

grandalf4• 14 years ago

It's important to note that the main reason the graphs do not show inflation is b/c of the massive housing crash.

We have a situation where we have significant inflation in some sectors of the economy, but we also have enough deflation to offset it. I'm not talking about bad deflation, I'm talking about new advances in microchips, etc., that make computers cheaper and more powerful every year.

Inflation and deflation are natural aspects of a dynamic economy. The thing to watch for is when they signal structural problems. If microchips increased in performance so quickly that vendors refused to order inventory and store shelves were empty, then it would be a structural concern. Policymakers find it useful to wave the very imprecise notion "deflation" in front of the public without bothering to mention that it's all due to technological advancement, automation, outsourcing, etc.

Similarly, inflation isn't always bad -- developer salaries are "inflating" now, which sends a signal for more people to learn to write code. This will be self-correcting. The thing to be concerned about is when government action causes inflation sufficient to undermine peoples' willingness to accept the currency.

Policymakers try to get away with doing as much micro-tweaking as they can with the economy. Tax breaks for one select group of people, subsidies for another, etc. These sorts of policies can, over time, create inflation that is not self-correcting, since the policies are rarely ended once they have been created. Consider the massive over-investment in real-estate fueled by tax breaks. This led to an unstable real-estate market that crashed hard a few years ago.

crazy1van• 14 years ago

Forget the word inflation -- it is too politically charged and people think it means all kinds of different things.

However, in the long run there is little doubt that an expansion of the money supply will cause a rise in the price of goods and services.

Forget fancy metrics like NGDP and consider this thought experiment: if all of a sudden magically everyone's bank account balance had the decimal point moved to the right one place, what would happen to prices? After a very short transient period, they would increase by about a factor of 10. This is exactly what is happening right now (on a smaller scale and the magic occurs in the treasury department). The difference is that the extra money has been created, but is not really in circulation. Once banks and companies feel they no longer need the money in their accounts and can begin to put it into the general economy, prices will rise. Sure, the fed could take action to take money out of circulation as companies release it into circulation, but that is too politically unpopular and won't happen.

Retric• 14 years ago

A lot of Money was destroyed when all those housing loans died. On net the Fed may have created more money, but it's not as big a deal as you might assume.

beagle32• 14 years ago

FTA:

> The things people buy the most often -- gas and groceries -- have gone up the most the past few years. The things people buy the least often -- gadgets and other goods -- have not. It's an understandable mistake. But still a mistake.

Can someone explain the math behind this? The important thing is not "how often", but "what percentage of the overall expense", but I would guess that (as percentage of overall expense), gas and groceries are larger than gadgets for everyone?

As an example, in my household, we're about a thousand/month on food & transportation (rising much faster than 2%/year), thousands a month for rent (rising much faster than 2%/year). And while gadgets are getting cheaper (nothing else seems to), they account for ... say, 2% of our overall expenses.

davvid• 14 years ago

All numbers are cooked, especially unemployment. The whole argument of this article is based on leaky correlations. GDP is gamed in many ways. I'm a bit of a skeptic.

Head squid Goldman just slashed their April NFP employment estimates to 125,000, just barely higher than the disastrous March 120,000 NFP print which launched a thousand new QE rumors.

What is the point of this article? Is it to get everyone to nod their heads while they prepare to launch another round of QE? The NFP numbers prove that unemployment is not really doing that great.

I think this article is short-sighted. The prices of things like gas matter because the cost of energy impacts everything. The central planners' only tool is injection of more liquidity, which has a direct impact on the cost of commodities, oil, etc.

We've already been pumping the market with liquidity. Where did it all go? To euro banks, it seems. The employment numbers are not reflecting it, that much we know. Is this article suggesting we keep course?

The One Number That Proves the Inflation Threat Is a Bogeyman

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