4 ms·

We don't control inflation with interest rates; we do some economic theatre with interest rates that some people believe controls inflation in a predictable way

We don't control inflation with interest rates; we do some economic theatre with interest rates that some people believe controls inflation in a predictable way.

pjc50 2y ago
The evidence is very strong that we do actually control it, because in many countries you can see in the historical data when central bank targeting was introduced that the inflation rate drops fairly rapidly into the target band. It's not a perfect control system because the cost is "NAIRU": non accelerating rate of unemployment. That is, economic growth and wage growth are constrained to avoid a wage-price spiral. And sometimes you get a shock from outside the system.
- hgomersall 2y ago
  Please do show this very strong evidence that the effect is any more than the supply chains sorting themselves out. Even some within the CBs are doubting the causality. Japan had the lowest inflation of any major economy post COVID, and yet persisted with essentially a ZIRP. There's a good argument that in our high reserves world, interest is actually inflationary.
  - pjc50 2y ago
    UK historical investigation: https://www.elibrary.imf.org/display/book/9781557758897/ch07.xml https://www.elibrary.imf.org/display/book/9781557758897/ch07... - written in 2000, but you can see on this graph https://www.macrotrends.net/global-metrics/countries/gbr/united-kingdom/inflation-rate-cpi https://www.macrotrends.net/global-metrics/countries/gbr/uni... how flat it is from 1992 to 2020. That's a very good record for any piece of policy. Inflation control works for controlling business cycle inflation. However, it's not perfect and the COVID+war shock resulted in unavoidable inflation. It's a ""plant"" in the https://en.wikipedia.org/wiki/Control_theory https://en.wikipedia.org/wiki/Control_theory sense. (my original comment: "you can see in the historical data when central bank targeting was introduced that the inflation rate drops fairly rapidly into the target band". The US graph is similar https://www.macrotrends.net/global-metrics/countries/usa/united-states/inflation-rate-cpi https://www.macrotrends.net/global-metrics/countries/usa/uni... - although the adoption of inflation targeting wasn't fully formalized, it was definitely used in setting interest rates from the 90s.
    - hgomersall 2y ago
      Now show the UK plot for the 2010s. Also, show the one for Japan. It's easy to cherry pick data to show whatever you want. It doesn't constitute strong data for a casual and reliable link between interest rates and inflation.
      - fernmyth 2y ago
        Plot the days when your air conditioner is on with the temperature of your room. It will have many concrete examples and a long-term correlation showing that actually, the air conditioner is associated with the temperature going up. All feedback/control systems are like that.
        hgomersall 2y ago
        Your argument would have more weight if the inflation predictions were accurate. Here's the prediction report for the BoE in Aug 2014: https://www.bankofengland.co.uk/-/media/boe/files/inflation-report/2014/august-2014 https://www.bankofengland.co.uk/-/media/boe/files/inflation-... (It's worth noting that even with the assumption of the models used being useful, the spread on those inflation rates is wild). Here's what actually happened: https://www.ons.gov.uk/economy/inflationandpriceindices/timeseries/l55o/mm23 https://www.ons.gov.uk/economy/inflationandpriceindices/time... It very rapidly hit the bottom end of the prediction range before jumping up again pretty high. All that time interest rates were held constant and low. Given they claim feedback lags of two years or so, one wonders what the point of all this is... (one cannot run a control loop with control lags substantially longer than the time constant of the system; that's basically the recipe for an unstable control system, assuming of course the control system is doing anything). There's an argument that it's inflation expectations that matter, but there are dissenters within the temple that disagree: https://www.federalreserve.gov/econres/feds/files/2021062pap.pdf https://www.federalreserve.gov/econres/feds/files/2021062pap...
      - pjc50 2y ago
        The second link https://www.macrotrends.net/global-metrics/countries/gbr/united-kingdom/inflation-rate-cpi https://www.macrotrends.net/global-metrics/countries/gbr/uni... is from 1960 to 2023.
  - gruez 2y ago
    >There's a good argument that in our high reserves world, interest is actually inflationary. How's that working out with Turkey?
    - nostrebored 2y ago
      It will probably work out just fine as they become a key player in European LNG. Turkey couldn’t have serviced their debt with rising interest rates and continued government spending on expansion. Being inflation averse makes sense when you can’t reasonably make use of funds. It’s not clear how much of that is actually related to the business cycle and how much is related to MMT, regardless of what adherents would have you believe.
  - FuriouslyAdrift 2y ago
    This is the result of demographic crash and stagnation more than anything else...
    - hgomersall 2y ago
      You mean interest rates don't necessarily control inflation?
      - FuriouslyAdrift 2y ago
        Japan is the worlds first steady state economy and got that way due to a sudden stagnation in trade and then demographic crash over a generation. They've tried just about anything (except unrestrained foreign immigration or forced breeding) to jump start the economy but nothing has worked. Inflation is effectively zero...
        hgomersall 2y ago
        Exactly, but read many macro textbooks and they will tell you that interest rates control inflation. You've eloquently described a counter example and made the point I was trying to make.
        eru 2y ago
        They haven't tried just about anything. They haven't tried printing enough money. As a counterfactual: if you can print arbitrary amounts of money without raising inflation, you can just gradually buy up all the assets in the world with newly printed money. As far as I can tell, the Japanese central bank does not own the US stock market or all the gold in the world or all bitcoin etc, yet, so they haven't printed enough money. Btw, what makes you think Japan is a 'steady state economy'? https://fred.stlouisfed.org/series/NYGDPPCAPKDJPN https://fred.stlouisfed.org/series/NYGDPPCAPKDJPN says their real GDP per capita grew fairly steadily over the years. It's just the price level that has been relatively steady, but if that's your yardstick, than just about any economy that used to be on a gold standard would also fit that idiosyncratic definition.
  - wbl 2y ago
    How is that working for Argentina or Turkey?
dennis_jeeves2 2y ago
Correct, it's mostly theater , and people nerding out on the numbers. The true measure of inflation is this: For a single day one works (calculated over a lifetime), how many days can one survive without working which will pay off all of one's bills. The lower this figure, higher is the inflation.
- gruez 2y ago
  >The true measure of inflation is this: For a single day one works (calculated over a lifetime), how many days can one survive without working which will pay off all of one's bills. This rapidly falls apart when you try to actually calculate it. Whose income do you use? Is inflation lower for doctors than burger flippers? What do you use as the retirement age? Does inflation go down if the retirement age is raised? What counts as "survive"? Does that mean the price of smartphones don't count toward inflation because you can theoretically survive without them?
- eru 2y ago
  Huh? What does this have to do with inflation at all?
  - dllthomas 2y ago
    Unless I miss something, it's very much not a standard measure of inflation. That said, leaning on that "at all": If wages are stickier than expenses, then the gap between wages and expenses will represent recent inflation to some degree.
    - eru 2y ago
      If inflation is stable (and low-ish), then stickiness doesn't matter. Sticky prices are only important, when expectations are invalidated. So to fix your sentence: > If wages are stickier than expenses, then the gap between wages and expenses will represent recent unexpected inflation to some degree.
      - dllthomas 2y ago

We don't control inflation with interest rates; we do some economic theatre with interest rates that some people believe controls inflation in a predictable way.

pjc50 2y ago

The evidence is very strong that we do actually control it, because in many countries you can see in the historical data when central bank targeting was introduced that the inflation rate drops fairly rapidly into the target band. It's not a perfect control system because the cost is "NAIRU": non accelerating rate of unemployment. That is, economic growth and wage growth are constrained to avoid a wage-price spiral. And sometimes you get a shock from outside the system.

hgomersall 2y ago
Please do show this very strong evidence that the effect is any more than the supply chains sorting themselves out. Even some within the CBs are doubting the causality. Japan had the lowest inflation of any major economy post COVID, and yet persisted with essentially a ZIRP. There's a good argument that in our high reserves world, interest is actually inflationary.
- pjc50 2y ago
  UK historical investigation: https://www.elibrary.imf.org/display/book/9781557758897/ch07.xml https://www.elibrary.imf.org/display/book/9781557758897/ch07... - written in 2000, but you can see on this graph https://www.macrotrends.net/global-metrics/countries/gbr/united-kingdom/inflation-rate-cpi https://www.macrotrends.net/global-metrics/countries/gbr/uni... how flat it is from 1992 to 2020. That's a very good record for any piece of policy. Inflation control works for controlling business cycle inflation. However, it's not perfect and the COVID+war shock resulted in unavoidable inflation. It's a ""plant"" in the https://en.wikipedia.org/wiki/Control_theory https://en.wikipedia.org/wiki/Control_theory sense. (my original comment: "you can see in the historical data when central bank targeting was introduced that the inflation rate drops fairly rapidly into the target band". The US graph is similar https://www.macrotrends.net/global-metrics/countries/usa/united-states/inflation-rate-cpi https://www.macrotrends.net/global-metrics/countries/usa/uni... - although the adoption of inflation targeting wasn't fully formalized, it was definitely used in setting interest rates from the 90s.
  - hgomersall 2y ago
    Now show the UK plot for the 2010s. Also, show the one for Japan. It's easy to cherry pick data to show whatever you want. It doesn't constitute strong data for a casual and reliable link between interest rates and inflation.
    - fernmyth 2y ago
      Plot the days when your air conditioner is on with the temperature of your room. It will have many concrete examples and a long-term correlation showing that actually, the air conditioner is associated with the temperature going up. All feedback/control systems are like that.
      - hgomersall 2y ago
        Your argument would have more weight if the inflation predictions were accurate. Here's the prediction report for the BoE in Aug 2014: https://www.bankofengland.co.uk/-/media/boe/files/inflation-report/2014/august-2014 https://www.bankofengland.co.uk/-/media/boe/files/inflation-... (It's worth noting that even with the assumption of the models used being useful, the spread on those inflation rates is wild). Here's what actually happened: https://www.ons.gov.uk/economy/inflationandpriceindices/timeseries/l55o/mm23 https://www.ons.gov.uk/economy/inflationandpriceindices/time... It very rapidly hit the bottom end of the prediction range before jumping up again pretty high. All that time interest rates were held constant and low. Given they claim feedback lags of two years or so, one wonders what the point of all this is... (one cannot run a control loop with control lags substantially longer than the time constant of the system; that's basically the recipe for an unstable control system, assuming of course the control system is doing anything). There's an argument that it's inflation expectations that matter, but there are dissenters within the temple that disagree: https://www.federalreserve.gov/econres/feds/files/2021062pap.pdf https://www.federalreserve.gov/econres/feds/files/2021062pap...
    - pjc50 2y ago
      The second link https://www.macrotrends.net/global-metrics/countries/gbr/united-kingdom/inflation-rate-cpi https://www.macrotrends.net/global-metrics/countries/gbr/uni... is from 1960 to 2023.
- gruez 2y ago
  >There's a good argument that in our high reserves world, interest is actually inflationary. How's that working out with Turkey?
  - nostrebored 2y ago
    It will probably work out just fine as they become a key player in European LNG. Turkey couldn’t have serviced their debt with rising interest rates and continued government spending on expansion. Being inflation averse makes sense when you can’t reasonably make use of funds. It’s not clear how much of that is actually related to the business cycle and how much is related to MMT, regardless of what adherents would have you believe.
- FuriouslyAdrift 2y ago
  This is the result of demographic crash and stagnation more than anything else...
  - hgomersall 2y ago
    You mean interest rates don't necessarily control inflation?
    - FuriouslyAdrift 2y ago
      Japan is the worlds first steady state economy and got that way due to a sudden stagnation in trade and then demographic crash over a generation. They've tried just about anything (except unrestrained foreign immigration or forced breeding) to jump start the economy but nothing has worked. Inflation is effectively zero...
      - hgomersall 2y ago
        Exactly, but read many macro textbooks and they will tell you that interest rates control inflation. You've eloquently described a counter example and made the point I was trying to make.
      - eru 2y ago
        They haven't tried just about anything. They haven't tried printing enough money. As a counterfactual: if you can print arbitrary amounts of money without raising inflation, you can just gradually buy up all the assets in the world with newly printed money. As far as I can tell, the Japanese central bank does not own the US stock market or all the gold in the world or all bitcoin etc, yet, so they haven't printed enough money. Btw, what makes you think Japan is a 'steady state economy'? https://fred.stlouisfed.org/series/NYGDPPCAPKDJPN https://fred.stlouisfed.org/series/NYGDPPCAPKDJPN says their real GDP per capita grew fairly steadily over the years. It's just the price level that has been relatively steady, but if that's your yardstick, than just about any economy that used to be on a gold standard would also fit that idiosyncratic definition.
- wbl 2y ago
  How is that working for Argentina or Turkey?

dennis_jeeves2 2y ago

Correct, it's mostly theater , and people nerding out on the numbers. The true measure of inflation is this: For a single day one works (calculated over a lifetime), how many days can one survive without working which will pay off all of one's bills. The lower this figure, higher is the inflation.

gruez 2y ago
>The true measure of inflation is this: For a single day one works (calculated over a lifetime), how many days can one survive without working which will pay off all of one's bills. This rapidly falls apart when you try to actually calculate it. Whose income do you use? Is inflation lower for doctors than burger flippers? What do you use as the retirement age? Does inflation go down if the retirement age is raised? What counts as "survive"? Does that mean the price of smartphones don't count toward inflation because you can theoretically survive without them?
eru 2y ago
Huh? What does this have to do with inflation at all?
- dllthomas 2y ago
  Unless I miss something, it's very much not a standard measure of inflation. That said, leaning on that "at all": If wages are stickier than expenses, then the gap between wages and expenses will represent recent inflation to some degree.
  - eru 2y ago
    If inflation is stable (and low-ish), then stickiness doesn't matter. Sticky prices are only important, when expectations are invalidated. So to fix your sentence: > If wages are stickier than expenses, then the gap between wages and expenses will represent recent unexpected inflation to some degree.
    - dllthomas 2y ago