Floodgates of Inflation

[cthulu2016]

Floodgates

Once again, we’re hearing warnings — including from some people who should know better — that the “floodgates” of inflation may be about to open. It’s funny how repeated total failures of prediction don’t seem to diminish the confidence of inflationistas in their insights.

So this may be a waste of time. Still, here’s the Fed’s preferred measure of inflation, the personal consumption expenditures deflator, measured on a 6- month basis (short enough to catch relatively short-term trends, long enough to smooth out the noise):



You may recall that early last year there was a huge fuss over a temporary rise in inflation, which was widely portrayed as the harbinger of terrible things to come. Bernanke and others tried to point out that it was mainly about gasoline, with nothing much going on in measures of domestically generated inflation; for this they (and I) were attacked fiercely. But sure enough, inflation came down.

Taking a longer view, we’ve had dire warnings about runaway inflation for more than three years at this point. When do people start to consider that maybe they have the wrong model?

http://krugman.blogs.nytimes.com/2012/03/31/floodgates/

[ananda]

1. Opening more than they are now?

Inflation is already here, if gas, grocery, utility, rent, phone, tv and other prices
are anything to go by.

[orwell]

3. True price inflation has been masked for years...

...with the advent of hedonic pricing.

The argument is that the increase of the quality of goods over time needs to be factored into nominal price increases. This effectively lowers overall inflation computations in the CPI calculations.

Sure your TV costs about the same or slightly more, but the quality of the TV - energy efficient flat panel with high definition picture - more than makes up for the cost increase or in many cases makes the new set effectively lower in price than its predecessor.

Sure a new car now costs more than a new car of 5 years ago, but by economist's calculations with hedonic pricing it gets better mileage, offers more creature comforts, and is safer. Thus the more expensive car is actually cheaper than a car of 5 years ago.

I'm not saying I buy it, but that is the prevailing reasoning.

[Egalitarian Thug]

5. I could even buy this if it were not for the fact that this rise in quality

were something new. It is not. It has always been so and I believe it can be argued that the "new" system of pseudo-monopoly we labor under has caused (purposely) slowed over the last 30 - 40 years.

Collusion is always more profitable than competition.

[golfguru]

4. You are right on, and add health services to that list n/t

[orwell]

2. The proponents of the current inflationary argument...

...have been wrong since Friedman popularized the notion that money creation equals inflationary pressure.

I used to believe this in the early 80's just like most involved in the financial industry. We would wait with baited breath for the Fed's weekly statistics, which would often cause a short-lived spike in prices on the exchanges upon release.

There were also the pronouncements from on high from bond gurus like Henry Kaufman who would frequently move markets with their latest (mostly wrong) predictions.

The reason why both were usually wrong is that money creation has little to do with either bond prices or inflationary expectations in the age of fiat currency and powerful central banking. In other words, we were all wrong. The important thing is that I can admit it when confronted with empirical contra-evidence while others can not. The difference is that some of us prefer to rely on data driven analysis, rather than cherry pick data to support a thesis that many times is grounded in religious or political worldviews.

Just as there is little connection between taxation levels and economic growth, a trope often cited by Cons of all stripes, there is also scant evidence for Friedman's and Kaufman's central thesis.

[dawg]

6. You can't have a wage - price spiral without increasing wages.

Some items will become scarce and rise in price (gasoline) while others will be less scarce and decline in price (our labor). The overall price level remains stable, even if many of us face declining living standards.

[longship]

7. Everybody should be listening to Krugman

R&