Inflation remains very much alive and well at the producer level: producer prices rose fully 1.1% in December, and are up at a 7% annualized pace in the past six months. Not counting food & energy (a tough thing to do since energy prices are an unavoidable component of business costs), prices are up 1.4% over the past year, and have risen 11.3% in the past 5 years. I note also that the Producer Price Index reached a new all-time high in December, eclipsing its former energy-led high set in July '08.
However you slice and dice these numbers, there is no sign of, or even the threat of, deflation. On the contrary. As the second chart suggests, since early 2004 (about the time the Fed shifted into strong accommodative mode by pegging the funds rate at 1% for a full year) producer price inflation has been running at a 3.5% annual rate, about twice the pace of what we saw from 1983 through 2003 (years during which the Fed was actively fighting inflation). With oil prices now reaching new post-2008 highs, and no sign that other prices are declining, it's unlikely that overall inflation will slow, and more likely that it will accelerate from the levels of the past several years.
It's disturbing, to say the least, that the Fed remains so complacent about inflation risks in light of this evidence.
You point toward the time period 1983 - 2003. That is roughly the same time period John B. Taylor’s “Taylor Rule” was adhered to.
ReplyDeleteWEH: I'm glad you pointed that out. John Taylor recently gave a talk about how rules-based policymaking has resulted in stronger growth and lower inflation. I think it makes a lot of sense. The Fed needs to return to a rules-based strategy, and the sooner the better.
ReplyDeleteMy issue with the Taylor Rule is it confuses description with prescription. Just because interest rates behaved in such and such a way during a stable period, we cannot conclude that stability can be achieved by manipulating interest rates in imitation of their behavior during stable periods.
ReplyDeleteYes, a rule based monetary policy is superior to ad hoc fiddling and floundering. But it is possible to adopt destabilizing rules. Targeting the money supply was destabilizing. I believe targeting nominal gdp would be destabilizing in a similar fashion - especially given the long lags between policy actions and reported consequences. I do believe that the Taylor rule is superior to the alternatives.
Monetary policy is like a man driving at top speed down a mountain road. Yes, the steering wheel controls the car but we had better hope the white lines that define the road control what the driver does with the steering wheel.
In today's world monetary policy can destabilize the economy and that's about it. The goal of monetary policy should be to avoid driving off a cliff and/or spooking the passengers.
Bring on some inflation, I say.
ReplyDeleteI would rather go through the mild inflation of the 1990s, than the deflation Japan has.
Besides, remember, the Fed properly has a dual mandate--remember our labor participation rates are down 6 percentage points from pre-recession.
If you think the Fed should have a sole mandate, think about Japan,. The central bank there has whipped inflation good--and their economy.