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A Deflation Alert Hidden in the Latest Consumer Price Indicators
- ianai 4y agoI’m not entirely in agreement with the analysis here but they do make some good points and provide useful context. If influencing the economy through interest rates (as the Fed does) is a long latency process then they can move the interest rates too quickly. If it takes a year (as widely believed) for interest rate changes to be reflected then reacting too harshly in time intervals shorter than that confuses the outcome and signal. It’s also easy to overshoot a destination. (Edit-and deflation is a much bigger problem than inflation so it needs to be avoided.) I also wish we had some price insensitivity metrics. Just how will the demand side respond to price increases? This was probably impossible to measure in the past and might still be expensive or difficult. But an institution like the Fed ought to at least look for some metrics. We now have more data than ever before on personal characteristics. Plus a lot more computational ability than ever in the past. One such measure might be simply aggregating statistics from parts of industries which react the fastest. New housing construction, for instance, was down something like 40% already by the end of last year. That’s a quick moving sector as the inputs involved are relatively quick to ramp up or down (compared to the rest of the RE industry). They may even have such metrics but they don’t mention them in their discussions much/at all.