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Monday, January 5, 2015

Where's This Inflation, Professor?

So about a year ago the chair of the econ department said he would not remove a question from the common final that I viewed to be wrong  (because it is - about the Fed controlling money supply and causing inflation) and gave the example of now where the Fed has expanded its balance sheet beyond reason, but lending did not get out of hand (because in reality lending happens first) and we've seen no rise in inflation even as the economy has improved dramatically... to which he responded essentially that "it's just a matter of time."

Anyway, it's been a year.  I'm waiting for all this inflation.    Inflation, where are you!

Sorry to any student of Intro Macro that missed that question.  Chances are you missed it because you are grounded in reality and not some made up textbook fantasy land.

PS I'm going to kickstart this blog again I think.  I took a long hiatus.


Tel said...

If you read people commenting about their household budgets, yes there has been inflation in most of the things households buy and care about: rent, electricity, meat, medical care, education, etc.

The Economist magazine using their "Big Mac index" concluded that inflation has been about 5.2% per year from 2009 to 2013.

This is offset by a number of factors:
[1] debt deflation -- people who default on debt, or else who are determined to pay back debt are deflating the available money available for consumer spending.
[2] poor jobs market -- not only are companies laying off workers, but many people have dropped to part time, and overall participation has been falling since 2000; less earning means less spending.
[3] technology -- computers, phones and gadgets are cheap to produce now, and if you add these to your "basket of goods" the headline inflation rate comes down.
[4] fashion and entertainment -- these are sensitive to economic hardship because they are the first things to be cut when household budgets are tight, so by including these in your "basket of goods" you can also offset the others.
[5] exported inflation away from the USA -- for some reason Asian countries have deliberately kept their currencies down against the US dollar, causing the inflation to shift offshore, how long they want to keep doing this is an open question.

The problem of course it that measuring inflation is subjective, just like all valuation is subjective.

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Yaneer Bar-Yam said...

Interested to hear your comments on the following analysis of monetary and fiscal policy. It is relevant to the question of whether Fed policy is linked to inflation