What inflation?
Day of the old men, part 2.
from Peter Radford
I’d be remiss if I didn’t pass along today’s news on inflation. There isn’t any. Nada.
Well that’s the story at the wholesale level where prices rose at an annual rate of 1.1% in September on the backs of volatile gasoline prices. As we all know energy and food contribute a lot of noise to any index of prices because they tend to bounce around a lot. This has real consequences for businesses and consumers in that no matter how volatile those prices are they still represent a drain on expenditure. But as an indicator of the pressures within an economy they are very bad measures. So we strip them out and look at ‘core’ prices. The advantage of this adjustment is that it allows us to see how the underlying and more dangerous long term effects of capacity constraints are either waxing or waning.
When September’s numbers are thus adjusted the rate of underlying inflation turns out to be zero. Literally. The core September rate was 0.0%.
The significance of this enormous.
It means that, despite protestations from hawks of all kinds, the Fed’s activities to support the economy have had no impact on inflation whatsoever. Those of us subscribing to a more Keynesian view of the world are not surprised at all. Indeed we expected it. Those who subscribe to market magic are presumably stunned that their theory is breaking apart so easily. They will have to resort, yet again, to the old ‘just you wait’ argument. They will no doubt warn us in serious tones about the impending explosion of inflation and the implied debasement of our currency. They lack all credibility. They have been issuing warnings about impending problems for what seems like a lifetime. You would have thought that something so imminent would have turned up by now. But no. It remains impending.
The rest of us can relax and focus our attention on solving real rather than imaginary problems.
The specter of inflation is a ghost. We ought not be afraid of ghosts. We have other more urgent issues to address. As today’s report confirms.
You would expect price inflation in an environment of economic expansion.
The figures confirm that we are in an environment of economic stagnation.
There have also been periods of staglflation – inflation combined with stgnation – in the past. Although I agree that we are in a period of stagnation, this should not be inferred from either core or non-core inflation alone.
The FED created “Fed money”, credits for legal tender held in accounts at the Fed. The banks were thus able to restore their balance sheets with these new legal tender credits without these credits ever entering general circulation as “money”. In fact, unless spent or borrowed into the economy, it would have zero effect on inflation as defined above.
Correctly , Keynesians would expect this.
BUT… these credits were largely created from new federal taxpayer debt that now requires huge cutbacks.
So, if prices stay the same but millions are thrown out of work, homes are foreclosed, the real estate market sheds value, and essential services have to be cut… are we to be happy that we can’t afford this year what we could easily afford last year, because, from the limited viewpoint expressed in the article above, there is “no inflation”?
If earnings went down faster than prices went down, an economist would call probably call that deflation. But faced with your paycheck in one hand and your bills in the other, it would be exactly the the same “user experience” as inflation wouldn’t it?
Peter, You are extraordinarily intelligent and well read but obviously don’t do the shopping or pay the bills for your family.
The spectre of inflation has been a dead and buried ghost for twenty years whilst policy employed economists hav eturned their backs to the real problems of unemployment and inequality whilst yabbering on about inflation threats.,.
Its easy for career economists to fight imaginary problems isnt it? (especially when they arent there).
So much harder to address real problems.