Friday, October 28, 2011

Inflation update

The September readings for the Personal Consumption Deflator were generally in line with expectations. As this chart shows, it's hard to get excited about either too much or too little inflation at this point, since the Fed's preferred measure, the core deflator, is well within its target range, and the headline measure is only a point above. Over the past six months, the core deflator has increased at a 2% annual rate, while the headline measure has increased at a 2.4% pace, so on balance we can say that inflation is somewhat on the high side, but not by enough to warrant any change in monetary policy; no changes, neither to ease nor to tighten, are called for based on these numbers. Since nominal GDP has increased 5% over the past year, deflation risks are essentially nonexistent. If there is another shoe to drop here, it is likely to be concern that inflation pressures are picking up, and that the Fed should pay more attention to exiting its quantitative easing strategies, rather than launching another one. That case is bolstered by the renewed weakness in the dollar and the nascent pickup in commodity prices, which are still quite high from an historical perspective.


Benjamin Cole said...

With GDP about 10-15 percent below where it should be, the Fed should be targeting accelerated growth, not miniscule inflation rates. Unemployment is at 9 percent.

Not only is that a human tragedy, it represents huge lost business opportunities.

A peevish fixation on inflation, and deep skepticism about the putative virtues of economic growth appear to be prerequisites for central bankers today.

Bill said...


Thoughts on Krugman's article than unless the ECB is willing to stand behind the Euro it's destined to collapse? He's made the argument that you've made before that the US would never default because the FED would print money to stop that from happening and unless the ECB is willing to do the same, markets will not have confidence that the Euro will survive.

John said...


While inflation is modest now, by historic standards, it is a big problem because of stagnant and falling wages. Unless "targeting accelerated growth" includes wage growth, more inflation could be devastating.

Benjamin Cole said...


I have worked for a living as an employee, more than two decades. I have also been self-employed and run a business.

One problem in modern economies is "sticky wages." As man is not only a rational creature but a social animal, we tend not to cut people's wages, and by law we cannot go below the minimum wage.

The result is that when there is weak demand (like now) it is difficult to recharge employment. Inflation offers a way to gently reduce wages, and get employment going again.

Nothing I has just said should be interpreted to mean I am "against' working people. I am fine with progressive taxation (especially progressive consumption taxes, per Milton Friedman). If we could go to Japan-style medical care at 4 percent of GDP--care for everyone---I would go for that. The private-sector has many ethical conflicts when providing medical care.

I detest the warmongering, homophobic, creationist, anti-immigrationist, pinko-rural right-wing. They are a continual menace to a better America.

All that said, it is the private sector that gives us wealth, innovation, creative opportunities. Large federal bureaucracies, especially the Pentagon and the USDA, are parasitic.

I wish I had a party for vote for.

BTW, try to learn about Market Monetarism. It is an apolitical way to stimulate the economy.

Benjamin Cole said...

Is this the GOP that will be our salvation? They are not Keynesians, except when they are?

"With just a under a month until the deficit Super Committee must recommend policies that cut the 10 year deficit by $1.2 trillion, members of the Republican party — the same party that’s been on the war path for deep spending cuts, and that decries President Obama’s “failed stimulus” — are making uncharacteristic arguments against slashing spending. Trim too much, too quickly, they warn, and people will lose their jobs....

“What’s more, cutting our military—either by eliminating programs or laying off soldiers—brings grave economic costs,” wrote Chairman Buck McKeon (R-CA) in a Wall Street Journal op-ed last week. “[I]f the super committee fails to reach an agreement, its automatic cuts would kill upwards of 800,000 active-duty, civilian and industrial American jobs. This would inflate our unemployment rate by a full percentage point, close shipyards and assembly lines, and damage the industrial base that our warfighters need to stay fully supplied and equipped.”

Sad, pathetic, weak, stupid, imbecilic, partisan idiocy. That is what the GOP is today. And the Dems are much the same.

John said...


I've been working & paying taxes for 40 years. Sounds to me you're on the horns of a dilemna, young man. Think about it, here's what you wrote:

"when there is weak demand (like now) it is difficult to recharge employment."

"Inflation offers a way to gently reduce wages, and get employment going again."

Won't weak demand get weaker if stuff costs more?

How will "gently" (or brutally) reducing wages create more demand? I don't know about other people, but when I have less dough I can't buy as much stuff as I used to.

Mark Gerber said...

I don't think you need to worry about getting more QE from the Fed. As soon as the next recession begins, most likely early to mid 2012, they will let the QE3 flow. Of course, it won't help the overall economy much and the dollar will achieve lower lows, but they will do it none the less.

Benjamin Cole said...

John--Thanks fro calling me young! When I wrote that I was an employee for 20 years, I meant I earned a paycheck for 20 years. I also have been self-employed (on-off) for about 20 years. I am bald, and eyeing retirement options.

Generally rising prices would reduce wages, I can't hide that. It also makes labor cheaper, and more employable.

At the same time, I would encourage the Fed to expand monetarily, so overall demand would pick up, and with that wages (after a few years).


QE alone is better than nothing, but it needs a transparent, rules-based plan by the Fed to target nominal GDP growth. Everyone should know that Fed will act aggressively until targets are reached.

A cheaper dollar? Bring it on. Japanese industry is complaining bitterly that a strong yen is destroying Japan and that may be right.

As you know, a strong point in the US economy now is our manufacturing sector. A cheap dollar encourages exports, encourages foreigners to bring production here, encourages tourism here.

A "strong" dollar is one that makes America strong, and strong now is lower---better for us!

Mark and John--I enjoy your comments and lack of personal rancor.

John said...


I was first drawn to this site by Scott's relentless presentation of pretty good data. I dig the charts. But, the comment section is a little bit like the "Discussion" section of a professional paper, but much less formal and often more candid. Occassionally crass and disappointing, but Scott does a good job of maintenance.

Your comments about Japan have made me want to go there. Why do they do this to themselves? Do they have a different philosophy about money and consumption?

Public Library said...


Ben is confused about 'deflation' and standards of living. Japans real economy has grown mightily over the past 2 decades although GDP wasn't juiced by inflation so tends to look flat. The falling prices benefited the people, not the banks, so the Japanese are and continue to be on the up and up.

On the other hand, prices rise in the US despite employment, GDP prints at 5%, yet we get poorer. We should wish for flat to declining prices over time. Falling prices do not mean falling profits in a free-market economy.

The problem is we do not have free markets thus money printing and bailouts are required to keep the scheme floating.

Benjamin Cole said...

This is a chat of Japan per capita GDP expressed in current US dollars. Despite a rise in the value of the yen, per capita GDP in Japan is lower now than in 1995.

Living standards in Japan may be higher than the US. That may be in part as Japan spends about 4 percent of its GDP on health care (vs, 16 percent in the USA) and 0.8 percent on military outlays (vs, about 6 percent in the USA).

In short they accomplish with 5 percent of total output what use 22 percent to accomplish. They probably spends tons less on police etc., and they have much lower crime rates.

Why is the Bank of Japan ruining their economy. Central bankers often have a peevish fixation on inflation, and an unhealthy obsession with money and currency. The BoJ has consistently made inflation-fighting its "revealed preference."

The result has been ruin for Japan, and a huge loss of trade to China.

The example of Japan crushes any argument that deflation of absolute price stability is desirable. Calls for a "strong dollar" needs to explain the damage that a rising yen has inflicted on Japan.

Even Milton Friedman told the Japanese to print more money, and print enough to cause inflation, in 1998.

Friedman had a very consistent way of looking at the world, and I suspect he was right on Japan,

Scott Grannis said...

Benjamin: some important facts about Japan you are missing:

1) Your choice of 1995 as a reference year is biased to reduce the gains to the Japanese, since the yen was unusually, and only briefly, excessively strong vs. the dollar.

2) the per capita figure you cite only runs through 2009, when the yen was about equal to its 1995 value. Since then, the yen has appreciated about 25% vs. the dollar. That means that per capita GDP in yen through today is up 25% in dollar terms since 1995, or about 1.4% per year. And that is in real terms, since Japan has had zero inflation since 1995. If you choose any year other than 1995, then per capital GDP in Japan is up even more.

3) When looked at correctly, the facts show that Japan has experienced decent real per capita grow over the past 16 years. It is a myth that Japan's economy has been in a deep funk for decades.

Benjamin Cole said...


I am just going with charts I can scan down from the web. I am just a layman!

I don't see how you can say Japan has had a healthy economy in the last two decades. There was a definite and negative inflection point in 1990-5, and never seems to have recovered.

If I come across more charts I wll show them to you. The chart cited is in current US dollars, so that is somewhat persuasive that the japanese are following unsuccessful policies.

BTW, if you think Japan has thrived, they have done so while running chronic and huge federal fiscal deficits. Are you contending that this is the right policy?

Benjamin Cole said...


If you go to the not-bad Wikipedia entry:

You will see that PPP Per Capita As % of US peaked in 1990 at 81.27 and has fallen to 71.49 as of 2010.

They have had the earthquake-nuke-tidal wave since.

The PPP attempts to adjust for currency etc.

I see a nation where living standards have been falling, relative to the USA, for 20 years.

In fact, the Japanese probably have about the same day-to-day living standards as we do. They spend 4 percent of GDP on health care, and 0.8 percent on defense. We spend 16 percent and 6 percent, respectively.

The Japanese also enjoy very low crime rates---probably life in Japan is just fine. But their economy, once growing rapidly, has slowed markedly, and had chronic slow growth and recessions ever since the Bank of Japan targeted inflation. The yen has, of course, appreciated dramatically.

I see no case that very tight money, and huge federal deficits, work to boost economic output, based on Japan. I think they are courting long-term obscurity.

BTW, Friedman, John Taylor and Bernanke all told the Japanese to loosen up. That's quite a crew of macroeconomists.

in particular, see Milton Friedman here:

Was Milton Friedman ever wrong?

Benjamin Cole said...


Japan’s third round of yen sales this year may help equities extend their first monthly gain versus bonds since June as the currencies biggest drop in three years boosts exporters and curbs foreign demand for the nation’s debt.
The Topix Index of stocks snapped its three-month losing streak to rise 0.4 percent in October, Bloomberg data showed. Japanese government bonds lost 0.1 percent, their first decline since February, according to Bank of America Merrill Lynch indexes, while U.S. Treasuries fell 1.4 percent.


A couple more notes. Japan's real estate and stock markets are down about 75-80 percent in the last two decades. I just do not see how such a track record can be regarded as a "success." Is this what anybody wants for the USA (aside from some gold-nuts)?

And from the above, we see at least some japanese have reservations about the strong yen.