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The Case for Supercore Inflation

3 points by throw0101a 6y ago

throw0101a 6y ago
Mirror in case of paywall: * https://archive.is/Agb9M https://archive.is/Agb9M
throw0101a 6y ago
One way inflation can start becoming persistent: > That is, each time [the seller] resets the price it will mark it up both to make up for past inflation and to get ahead of expected future inflation. If it changes prices once a year, it will raise the price 10 percent on each reset. > And if there are lots of price-setters acting this way, it means that overall prices will rise at 10 percent a year, even if there’s no new inflationary pressure — that is, even if supply and demand are balanced and the economy isn’t overheating. This is pretty much what we mean when we talk about “embedded” inflation. > Now suppose that policymakers want to bring inflation down. They have a problem: inflation has a lot of inertia. To get it down they need to give sellers a reason not to raise prices as much as they have been in the recent past. They can do this by pushing the economy into a recession. And if the recession is deep and long enough, the economy can be purged of inflation: not only will sellers stop raising prices as quickly, but they’ll begin expecting lower inflation in the future, which means smaller price increases, and so on. Eventually the economy can be reflated, at a permanently lower rate of inflation. > That is, however, a hugely expensive process, as we saw in the 1980s. So you really don’t want to let inflation get embedded in the first place. But how do you know if that’s happening? And what may happen when the post-pandemic 'recovery' starts: > So I expect to see a lot of price blips outside food and energy — some resulting from “base effects,” that is, recovery of prices that were depressed during the worst of the pandemic, some resulting from those bottlenecks. You can already see some of that in the latest consumer price report. For example, ordinary rents rose only 0.1 percent in March, but lodging away from home rose 6.6 percent. > What this suggests is that in the months ahead the numbers won’t speak for themselves. Headline inflation will surely be a poor guide to what’s really happening, even worse than it was in 2011-12. Even core inflation as usually measured may be misleading. > This doesn’t mean that we should discount inflation risks entirely. It does mean that we’ll need to kick the tires on whatever inflation readings we get, and try, as objectively as possible, to figure out whether or not they’re actually reason for concern.

3 points by throw0101a 6y ago

Mirror in case of paywall: * https://archive.is/Agb9M https://archive.is/Agb9M

One way inflation can start becoming persistent: > That is, each time [the seller] resets the price it will mark it up both to make up for past inflation and to get ahead of expected future inflation. If it changes prices once a year, it will raise the price 10 percent on each reset. > And if there are lots of price-setters acting this way, it means that overall prices will rise at 10 percent a year, even if there’s no new inflationary pressure — that is, even if supply and demand are balanced and the economy isn’t overheating. This is pretty much what we mean when we talk about “embedded” inflation. > Now suppose that policymakers want to bring inflation down. They have a problem: inflation has a lot of inertia. To get it down they need to give sellers a reason not to raise prices as much as they have been in the recent past. They can do this by pushing the economy into a recession. And if the recession is deep and long enough, the economy can be purged of inflation: not only will sellers stop raising prices as quickly, but they’ll begin expecting lower inflation in the future, which means smaller price increases, and so on. Eventually the economy can be reflated, at a permanently lower rate of inflation. > That is, however, a hugely expensive process, as we saw in the 1980s. So you really don’t want to let inflation get embedded in the first place. But how do you know if that’s happening? And what may happen when the post-pandemic 'recovery' starts: > So I expect to see a lot of price blips outside food and energy — some resulting from “base effects,” that is, recovery of prices that were depressed during the worst of the pandemic, some resulting from those bottlenecks. You can already see some of that in the latest consumer price report. For example, ordinary rents rose only 0.1 percent in March, but lodging away from home rose 6.6 percent. > What this suggests is that in the months ahead the numbers won’t speak for themselves. Headline inflation will surely be a poor guide to what’s really happening, even worse than it was in 2011-12. Even core inflation as usually measured may be misleading. > This doesn’t mean that we should discount inflation risks entirely. It does mean that we’ll need to kick the tires on whatever inflation readings we get, and try, as objectively as possible, to figure out whether or not they’re actually reason for concern.