May 14, 2008
Inflation here, there and everywhere
What is inflation?
Inflation is rising just about everywhere. Why is this and what can be done about it?
To get some basic concepts clear: inflation is a sustained rise in the general price level. Both the words ’sustained’ and ‘general price level’ are imprecise and in need of operationalisation. By general price level I mean a broad, representative index of consumer prices. That excludes the (headline) CPI in the UK because, like the other EU harmonised price indices, it excludes housing costs (that is, the rental cost of housing services or the imputed rental paid by owner occupiers). This makes the CPI/HICP indices unrepresentative, unless either the relative price of housing services and the goods and services included in the CPI/HICP remains constant or UK/EU citizens live in cardboard boxes provided free of charge by the Salvation Army. It may come to that, but not yet. The UK’s RPI and RPIX indices would be more representative.
I also exclude as unrepresentative various ‘core’ price indices, which exclude from the headline index such things as food, drink, energy and fuel. Among leading central banks, only the Fed has focused mainly on core inflation rather than on the headline index of consumer goods and services prices. Focusing on core inflation will be misleading unless either the relative price of core and non-core goods and services is expected to remain constant or Americans don’t eat , drink, drive cars and heat their houses or use air conditioning.
Until recently the Fed believed (a) that the best forecast of the future relative price of core and non-core goods and services was the current relative price of these sub-indices and (b) that the prices of non-core goods (mainly energy, fuel and agricultural commodities-based products) were more volatile than those of core goods and services. The volatility point was and remains empirically correct. The random walk or martingale hypothesis for the relative price of core and non-core goods was always a bad assumption empirically. In the most recent phase of globalisation, which has for much of this decade delivered a steady increase in the relative price of non-core goods to core goods and services, the assumption that it is OK to take this relative price as constant in the future is bad statistics and bad economics. Fortunately, the Fed is showing signs of kicking its core inflation habit, although painful withdrawal symptoms still are apparent from time to time. Admitting you have geen wrong is almost as difficult for central bankers as it is for politicians.
By ’sustained’ I mean,…uh, well, you know, something like ‘persistent’. And by ‘persistent’ I mean ’sustained’. Unsustained would be any one-off increase in the level of the price index that is not associated with expectations of further increases. I know this is vague and unsatisfactory, but welcome to the world of applied social science. For practical purposes, a representative price index that rises for more than two years would indicate inflation.
Who or what causes inflation?
This one is easy. In a fiat money world, central banks cause inflation, or, more precisely, only central banks are resposible for inflation. Other shocks, real and nominal, can influence the general price level if the central bank does not respond swiftly and determinedly, but these non-central bank-induced changes in the general price level can always be offset by the central bank, given enough time, freedom to act and courage.
But, in the medium and long term (at horizons of two years and over, say) central banks choose the average rate of inflation. Not globalisation; not indirect taxes; not bad harvests; not OPEC and the price of oil; not the Chinese and their exchange rate management. There is no oil inflation, food inflation or cost-push inflation. There is just inflation. Inflation may be accompanied by changes in key relative prices - in the real prices of oil, of food, of oil and of labour for instance - if other relative demand and supply shocks accompany the inflationary impulses created by the central bank. Large increases in the real price of food will be bad news to food importers (including most urban households) and good news to rural food producers and exporters. But don’t confuse it with inflation.
Sometimes the central bank is the political captive of the fiscal authority. This is most clearly the case in countries with underdeveloped financial systems where seigniorage (the revenues appropriated by the central bank through the issuance of fiat money) is a significant source of government revenue and the central bank is not operationally independent. Sometimes the revenue needs of the government force a non-independent central bank to monetise the governments deficits. Zimbabwe is an example today. This is not a relevant consideration in today’s advanced industrial countries, as the revenue from seigniorage is tiny (around 0.25%-0.5% of GDP or less).
But with an operationally independent, sufficiently well capitalised central bank, the monetary authorities can, on average in the medium and long term, achieve the inflation rate they want. They are responsible, no-one else.
I assume, of course, that the exchange rate either floats or is set by the central bank. With a fixed exchange rate, or an exchange rate whose value is not set by the central bank, there is no substantive central bank independence. Given a floating exchange rate or a central-bank-set exchange rate, the central bank can make inflation in the medium and long term anything it wants it to be.
The central bank pursues its inflation objective by raising its policy rate (a short default-risk-free nominal interest rate) whenever inflation is expected to be above target over the horizon the central bank can influence it in a predictable way (starting between 6 and 12 months from the present), and by lowering the policy rate whenever inflation is expected to be below target. It’s simple, really. In financially repressed systems like India, the interest rate instrument (a) cannot be used freely because of political constraints and (b) has only a very small anvil to hit. So credit controls, including selective credit controls have so supplement the exchange rate as anti-inflationary instruments. It is clear that the Chinese authorities either don’t know the degree of monetary tightening (through credit controls, interest rate increases and yuan appreciation) that is required to bring inflation first under control and then down to a lower level, or that the economically necessary degree of monetary, credit and exchange rate tightening is noty yet politacally feasible.
Inflation is rising (almost) everywhere
The UK just got a nasty inflation shock. On the Bank of Englan’s official target, the CPI, year-on-year inflation in April came out at 3.0 percent, a full percent above the 2.0 percent target. Any higher and we would have had another Letter of St. Mervyn to the Tresorians. We are likely be see another couple of espistels again this year. The increase from 2.5 to3.0 percent was both large and larger than expected. It was preceded by a slew of data showing manufacturers costs and prices rising at alarming rates. The imminent interest rate cuts that had been anticipated by markets because the marked economic slowdown that is under way will reduce capacity utilisation and bring inflation down, are likely to be shelved for the time being. If the coming months confirm the pattern of higher than expected inflation, interest rate hikes must be on the cards for the UK, as even quite sharp increases in excess capacity may not be enough to bring inflation back to its target sufficiently quickly.
The reporting of the increase in UK inflation has been abominable, even in papers that still credit their readers with IQs in double digits. The Financial Times contained a deeply misleading article headed “Familiar culprits drive surprise jump in bills”, with above it “7.2% food, 8.3% household energy,…., 18.7% fuel for transport…” etc. This is major-league disinformation as regards the drivers of inflation. There is indeed a familiar culprit for the increase in the cost of living - the Bank of England’s Monetary Policy Committee. The fact that this rise in inflation is accompanied by shocks that cause major changes in relative prices, including a nasty adverse terms of trade shock for the British consumer, is neither here nor there as regards the overall rate of inflation. If fuel for transport, food and household energy had not gone up at all, other prices would have gone up by more to produce pretty much the same overall rate of inflation.
I am willing to grant the old-Keynesians and new-Keynesians among us, the empirical regularity that at very high frequencies, the fact that most nominal commodity prices (and prices of non-core goods in general) are flexible (both ways), while most nominal core goods and services are sticky in the short run. So relative demand or supply shocks that cause the relative price of non-core goods to go up will tend to do so in the first instance through an increase in the nominal price of non-core goods rather than through a reduction in the nominal price of core goods and services; likewise relative demand or supply shocks that cause the relative price of non-core goods to do down will tend to do so in the first instance through a decline in the nominal price of non-core goods rather than through an increase in the nominal price of core goods and services.
So for a given stance of past, current and future monetary policy (as measured by the sequence of past, present and contingent future policy rates), relative demand and supply shocks that cause an increase in the relative price of non-core goods (the kind of shocks we are seeing globally today), will temporarily raise inflation above the level at which it would have been without these relative demand and supply shocks but with aggregate demand and supply at the same level. Such general price level blips work their way through the system quite swiftly; much of it is gone within a year, virtually all of it within two years. The do not ’cause inflation’.
In the Euro Area inflation has come down a little to 3.3 % year-on-year (on the inadequate HICP index, admittedly), from last month’s peak at 3.6%. For a central bank that aims at inflation in the medium term of below but close to 2 percent, this is not a great or even an acceptable performance. Unless the Euro Area level of activity slows down sharply, higher interest rates from the ECB cannot be ruled out.
Inflation in the US is running at 4.0 percent on the headline CPI inflation (which does include housing costs). This is way above what should be the Fed’s comfort zone. The die-hard core inflationists there will point out that core inflation is only 2.4%, but the only appropriate answer to that is: so what? Core inflation is of interest only to the extent that it is a superior predictor of future headline inflation. If it ever was, it has ceased to be so this millennium. The Fed has let inflation get away from it even more than the ECB and the Bank of England.
Even in Japan, inflation is positive again and rising.
In the BRICS, inflation is high and rising. China’s inflation rate just went up to 8.5 percent; and no, it’s not rice, chickens, pigs or energy, it’s inflation made by lax monetary policy in the short and medium term and a positive output gap in the short term. In fact, if we allow for inflation suppressed by price controls, the equivalent open inflation rate in China is probably above 10 percent. In Russia, inflation is well into double digits and rising. In India inflation is above 5 percent and rising. Only Brazil appears to have inflation reasonably steady at 4.73%, close to its target value.
Inflation is rising in countries that are tied to a weak currency, like the Gulf Cooperation Council States. Inflation is rising in countries tied to a strong currency. Latvia’s inflation rate came in at 17.8 percent. Inflation is rising in countries that have a floating exchange rate, like Iceland.
Central banks across the world have had it too easy for too long. It is time to bring inflation down to tolerable levels through appropriate restrictive policy. Fiscal tightening cannot reduce the short-run paid, but it can bias the composition of the necessary contraction in favour of the protection of investment. Unfortunaltely, both in the UK and in the US, discretionary stimuli instaed primarily support a still excessively buoy level of consumer demand.
As as regards those analysts and repporters who consider the inflation rate and inform you that, provided you exclude the bundles of goods and services whose prices have increased the most, the inflation rate of the rest is quite modest, cast them out, because they are not your frieds.
Conclusion
The oil price shocks of 1973/74 and of 1979/80 did not cause inflation. They caused a massive favourable terms of trade shock for oil exporters and a massive adverse terms of trade shock for oil importers. They also caused an adverse supply shock for all producers that used oil and its close substitutes as inputs into the production of non-oil goods and services. Without central bank accommodation and expansionary fiscal policy to try to undo the negative effects of the oil price shock on non-oil production and employment, there would at most have been a one-off increase in the general price level. Because everything takes time, this one-off increase would have shown up as a minor and temporary (probably less than 2 years in duration) increase in the rate of inflation.
We got in addition a large fiscal boost in the oil importing countries (adding a further one-off increase in the general prices level) and monetary accommodation by every central bank in the known universe, bringing us actual sustained increases in inflation.
The current commodity price increases (including oil and food) are mainly drivven by global demand growth rather than by major unexpected contractions of supply. This global demand growth (concentrated in the Emerging Markets) has outstripped even the formidable growth in potential output in the world economy (again mainly in the Emerging Markets). The inflation we are seeing world wide is the result of excessively expansionary monetary policy and the excessive credit growth is has created almost everywhere. Its solution will be globally tighter monetary policy (to different degrees in different countries) leading to lower global credit growth, a global economic slowdown (locally even to recessions) and ultimately lower inflation. This has been seen and done a hundred times. Only the scale and some of the players, like China, are different.
First, is there not a growing, and valid, perception that “inflation” indices are utter nonsense as a measure of changes in Cost of Living?
Even, the head of the UK ONS was widely quoted to have said that everyone understands that CPI and RPI are not cost of living indices, not that it stops the government from using them as a bench-mark for everything from indexing pensions or flogging their inflation linked bonds!
As for getting inflation under control, is the the first step down that road not an acknowledgement that money is too loose and, instead of the US and European Central Banks falling over themselves to squirt more money at the problem, maybe they should be reining in credit?
Might that not curtail the speculative froth in
the commodities market?
Of course, that would mean that the average punter in the US and Europe would have to pull in their belts, which is not quite as appealing as watching footage of food riots in far off exotic places!!
Posted by: Jim | May 14th, 2008 at 1:13 pm | Report this commentDear Professor Buiter:
Could be the case these bureaucrats at the central banks are actually reducing our wages by letting inflation rise? I remember Keynes said something about this matter. Salaries are never expected to fall, but inflation does this dirty job.
What can we do?
Posted by: Rafa Sanchez Olias | May 14th, 2008 at 1:31 pm | Report this commentThat was an excellent article. There simply isn’t enough of this information available in the Press. Its fraud and the population is powerless if they don’t understand the source of their wealth destruction.
What can we do? -I don’t know, there is no political interest to bring the Bank cartels to heal. They own the governments.
Posted by: Cameron | May 14th, 2008 at 1:56 pm | Report this commentAmong the many fields of knowledge there is a special one that distinguishes itself by being, and consciously chooses to remain, almost totally detached from reality: economics. In this whole article the rise in oil prices caused by the by now famous global oil peak is not mentioned once. Only energy is mentioned once and not as a cause of inflation. Economists have become worse than religious priests ignoring reality and facts.
Posted by: Odissefs Panopoulos | May 14th, 2008 at 1:58 pm | Report this commentDear Prof. Buiter,
I enjoyed reading your latest post, as always.
Nevertheless, I would like to point out that Brazilian inflation is currently neither “steady” nor “close to its target value”. It is now above 5% (April), hence not only higher than the 4,73% in march, but accelerating (steadily!). Domestic absorption is in overdrive, and although the central bank has recently started a tightening cycle, it will likely need to be more long-lasting and intense than many imagine. For this year, inflation above target is practically a done deal. Unless the monetary authority is sufficiently aggressive, that’s probably also the case for 2009. As you say, it all boils down to the central bank….
Posted by: Monica Baumgarten de Bolle | May 14th, 2008 at 2:05 pm | Report this commentAs long as we have the major economies (US, Asia, EU) growing at different rates and remain dependent on a singular finite and dwindling resource (oil), inflation will stay.
Divergence is what makes inflation really hard to manage.
Posted by: Vladimir Dzhuvinov | May 14th, 2008 at 2:11 pm | Report this comment@ Odysseus Panopoulos. Exete thikio!!
It’s time for a massive cull of economists. An over-supply also seems to have led to a fall in the quality too.
Posted by: J.J. | May 14th, 2008 at 2:14 pm | Report this commentI quite liked your article, however, am stunned by the overly simplistic argument you bring for the main cause of inflation being the central bank.
I would have thought that the main driver behind any price increase, hence also aggregate or general price increases, are buyers bidding up prices. Hence, in a macro-context, this means that at least one important sector of the economy is in demand of additional net credit. All the central bank can do, therefore, is to make the realisation of this additional demand for credit cheaper or costlier. However, by doing so, i.e. making the extra credit more expensive, it is likely to screw all the other sectors of the economy, where demand for new credit has been weak in the first place.
Therefore, whilst you are right that ultimately a central bank will always succeed in curbing inflation, in practice the question is “how big the collateral damage?”.
Besides, if it really were so straightforward for central banks to control inflation, then why was the BoJ unable lift CPI in Japan for several years, despite reducing rates to zero and pumping up the money supply as if there were no tomorrow? And why did Bernanke feel inclined to hold his famous “the US government has a printing press”-speech in 2002?
Thus, I really liked your analytical approach, but I am not sure that its policy implication for central banks are as straightforward as you seem to imply.
Posted by: weissgarnix.de | May 14th, 2008 at 2:25 pm | Report this commentNATURAL inflation is a direct function of land’s scarce nature. Because land is scarce, the rent or cost for it rises; and labor costs rise proportionately to pay for rising rent costs (including all commodities such as oil).
UNNATURAL inflation is caused by the central bank as they “play” with interest rates or “print” money, unnaturally attempting to add supply of resources to the economy. We all know you can’t print more land, so their short-term fix creates long-term UNNATURAL inflation.
Today we are experiencing NATURAL inflation as supply of natural resources decreases (i.e. rice or oil) as well as UNNATURAL inflation as the central banks print more and more money, devaluing their respective currency long-term visa vie scarce natural resources.
The only “true” or “perfect” solution to inflation is to naturally find a Stabilized Rent Level through pure competition. Such a stabilized or fixed rent level can also be achieved by the growth of Renewable Resources or Renewable Energy as such resources are not scarce but infinite in utility value. As renewable resources grow, a natural fixed rent/cost is stabilized or final equilibrium is achieved. Such fixed/rent cost is consistent with Walrus’ solution for a “Desired Cash Balance”.
Posted by: Doug Wolkon - Author of The New Game | May 14th, 2008 at 10:48 pm | Report this commentTo: Monica Baumgarten de Bolle. I reasoned from the data available today on the website of the Central Bank of Brazil (http://www.bcb.gov.br/?english ), which gave the twelve-month inflation rate to March 2008 as 4.73 percent (compared to a target of 4.75 percent plus or minus a band of 2.0 percent).
As a country specialist you are undoubtedly better informed, and I accept your statement that Brazil’s April inflation rate is 5 percent and rising.
During a recent (March 2008) visit to Brazil, I was struck bothby the real progress made by the country since the dark days of the 1980s and 1990s, and by the overconfidence of the policy makers, the central bank and some of the key private financial sector players. Many of them gloated about the nasty pickle the US and Western Europe found themselves in and believed none of this would have any adverse impact on them. It is however, clear, that Brazil’s success reflects in addition to better monetary and fiscal policy, the beneficial impact of a massive favourable terms of trade shock, which will not be repeated on the same scale in the future, and a benign external financial environment for EM financial instruments, which is also unlikely to last.
Even more worryingly, policy makers and central bankers talked as if they had discovered the new Jerusalem of sustained rising groth and low and stable inflation. There was a distinct whiff of hybris in the air, and sufficient hubris can put paid to even the strongest fundamentals.
Posted by: Willem Buiter | May 14th, 2008 at 11:19 pm | Report this commentSir
I can’t see why it is so difficult to connect the dots.
The US authorities have sought to contain the effects of the banking crisis by implementing recklessly loose monetary policy. Interest rates have been slashed and money has been squirted around with gay abandon, perversely, because the Fed thinks that the banking crisis is going to precipitate a US recession, which will contain inflation.
The markets voted otherwise. Commodities, particularly soft commodities and energy, took off in the last quarter of 2007 on the back of expectations that the response to the banking crisis of the US authorities and, to a lesser extent, the European banks, would be inflationary. So far, this this perception is correct and market worries about recession are ignored.
But global inflation is now back with a vengeance, not that our American friends are inclined to recognise this. They would rather tinker with statistics and have us believe that their inflation is contained, notwithstanding that they are running a huge trade deficit with a weak currency. This, quite simply, is impossible, unless we accept that Americans don’t eat or consume energy. I might add that I can’t fathom how the UK can have a lower “inflation” index than Europe, for exactly the same reason.
That aside, this morning the European press is full of stories suggesting that the European Central Banks are acutely concerned about broad based inflation pressures, but particularly food and energy inflation.
There is a lot of hand wringing about what needs to be done. A good deal of the comment going no further than suggesting that nothing can be done because this is a permanent, imported, external price adjustment.
At the risk of being simplistic, is the policy response not obviously to follow the money??
Were the US and European central banks to start tightening monetary policy and increasing interest rates, commodity, equity and bond prices would fall - global aggregate demand would be pinched and aggregate savings would trend higher.
Of course, one has to believe that a global recession is a required, healthy adjustment that can be managed without a melt-down of the American and European banking system.
A cursory look at the commodity indices, particularly oil and soft grains shows these prices going exponential in the third quarter of last year. If I remember correctly, when the commodity prices took off, the widespread rationale was that inflation was going to be stoked by the US Fed pursuing inflationary policies to try and avoid a recession arising from the banking crisis.
Posted by: Jim | May 15th, 2008 at 8:03 am | Report this commentSir,
The seignioriage revenue is not the only, nor the main, one for the government. Inflation is a magnificent tax booster : In most developped countries, income from assets is taxed. For the same real rate of return before tax, an asset will have to generate more nominal revenue in an inflationary environment (think 15% T-Bill when inflation is at 12%).If one estimates assets to amount to 500% of GDP and tax rate circa 15%, every single inflation point brings 0.75% of GDP in additional revenues for the state, not negligible when inflation level creeps to 4% and more.
Posted by: Charles Monneron | May 15th, 2008 at 11:05 am | Report this commentAn analogy may help support Willem Buiter’s argument.
My foot on the gas pedal is only one of the many causes of my car’s speed; but if I am caught doing 120 in a 100 zone, the officer will be unimpressed by my arguing that the cause of my excessive speed was the strong tailwind or downhill slope. I can and should take such other causes into account when deciding how hard to press the gas pedal, and any reasonably competent driver can keep his speed roughly constant despite those other things changing.
Similarly, monetary policy (understood either as the time path of the money supply or of interest rates) is only one of several possible causes of inflation; but central banks can and should take such other causes into account when setting monetary policy, and any reasonably competent central bank can keep inflation roughly constant despite those other things changing.
The key questions are: how long does it take for inflation (the car’s speed) to adjust to changes in monetary policy (the gas pedal); and how easy is it for the central bank (the driver) to anticipate changes in those other things? A short (less than two years) deviation of inflation from target in response to unforeseeable shocks is forgiveable; a longer deviation is not.
Posted by: Nick Rowe | May 15th, 2008 at 4:11 pm | Report this commentWillem’s definition of inflation might be what the public would like their central bank to contain, but I fear that strictly consumer price inflation is difficult for the central bank to control in practice. Common sense would suggest that monetary policy affects the price of everything you can spend money on, including assets. The point that Willem makes about core and headline CPIs also applies to overall prices and consumer prices – there is a link, albeit elastic, between them (ie the value of an asset reflects the discounted value of the future consumption it provides for). The central bank can target consumer price inflation only, and take the view that asset prices are beyond their mandate but will be controlled to some extent by the link. In practice, however, it is politically difficult for a central bank to hold consumer price inflation on track when asset prices are falling, as we are seeing now. The conclusion I draw is that the inflation target should include assets to some degree, although I would admit that exactly how much weight various types of assets should be given is debateable.
Posted by: Tim Young | May 15th, 2008 at 6:49 pm | Report this commentIndeed the inflation rate posted on the english version of the Central Bank´s website is for March. The April numbers were released last week, and showed inflation at 5,04% in the last 12 months, significantly higher than the 4,5% target.
Posted by: Monica Baumgarten de Bolle | May 15th, 2008 at 10:08 pm | Report this commentYou are right about the exuberant optimism displayed by some of our authorities (though the Central Bank, at least, seems to have both feet on the ground…). Although I fully agree with your assessment, pessimism is quite expensive these days…This said, though some of the fundamentals appear strong, they´re not robust. The fiscal is on a clear deteriorating path, with expenditures on the rise and revenues supported, so far, by very favorable cyclical conditions. Reflecting the overheating in domestic demand, the current account has turned negative and is deteriorating rapidly. Perhaps the day of reckoning will come sooner than many think…
[…] Capitalism notes a post by Willem Buiter, who burnishes his monetarist credentials: In a fiat money world, central banks cause inflation, […]
Posted by: PrefBlog » Blog Archive » May 15, 2008 | May 16th, 2008 at 2:50 am | Report this commentWillem, your arguments are brilliantly thought-provoking, as always. But I would like to clarify something: Are you suggesting that current headline inflation in the United States is a better forecast of US headline inflation in two years time than current core inflation? Eric
Posted by: Eric Lonergan | May 16th, 2008 at 12:06 pm | Report this commentTo Eric: I would never try to predict a variable, be it inflation or tomorrow’s rainfall, only from the past behaviour of one variable.
Why would anyone in their right mind handicap themselves in predicting future headline inflation by restricting the information set used for forecasting future headline inflation either to just current headline inflation or to just current core inflation. There will no doubt be circumstances under which in a race between these two one-legged horses, the core inflation horse might do better than the headline inflation horse. I would prefer to study the drivers of inflation (output gap, inflation expectations, terms of trade shocks etc.) and make the best forecast using that richer information set.
With the US economy slowing down, core inflation will be subject to downward pressure in the next couple of years. While inflation expectations have not drifted up (yet) as much as one might have feared, given the record of headline CPI inflation for the past three or four years, they will if anything put upward pressure on headline inflation. The US dollar could easily weaken further. Unless the US economy slumps much more severely than I am anticipating, I believe that headline inflation in 2 years time will be closer to today’s rate of headline inflation (3.9 percent for the CPI) than to today’s core inflation level.
Posted by: Willem Buiter | May 16th, 2008 at 7:47 pm | Report this commentAs WB suggests,in times of rising inflation(by whatever it is being caused)one would expect monetary policy to be tightened.And yet,in Mauritius,where we have a floating exchange rate regime and seemingly no inflation targetting,the supposedly independent Central Bank MPC has recently cut its repo rate by 0.50% to 8% whilst the official inflation rate stands at 8.7% !What would WB respond to that apparently “schizoprenic” stance?
Posted by: tingsing | May 17th, 2008 at 7:38 am | Report this comment[…] Buiter: Inflation is rising just about everywhere. Why is this and what can be done about […]
Posted by: Naked Capitalism » Blog Archive » "Inflation here, there and everywhere" | May 17th, 2008 at 8:47 am | Report this commentMilton Friedman famously remarked that inflation is a monetary phenomenon. That is misleading. It is neither a monetary nor a real phenomenon: it is about the interface between the two.
Posted by: Ron Cohen-Seban | May 18th, 2008 at 11:43 pm | Report this comment[…] Inflation is rising just about everywhere. […]
Posted by: the new shelton wet/dry | May 27th, 2008 at 10:24 pm | Report this commentIt is time for M/s Obstfeld and Rogoff to write a sequel to their piece, “Mirage of fixed exchange rates” published in 1995. This sequel should be titled, “Mirage of Inflation targeting”.
In truth, modern central banks were not unaccommodative of inflation, perhaps not since Paul Volcker. In the absence of supporting cast, their monetary policy accommodation fed into asset prices.
Now that the supporting cast of “commodity price boom” has arrived, the heroes have delivered on their story line which is debasement of their fiat money as it creates an illusion of prosperity.
Generations do not realise that such prosperity is robbed from future generations. Men’s follies (I cannot recall women central bank chairpersons/presidents in recent times) eventually catch up with them.
It appears that the time for such a ‘catch-up’ is here.
Hence, unsurprisingly, there is an attempt to blame speculators for the boom in the price of oil.
(p.s: towards the end of your post, there is an inflation of spelling errors. Is it the case that spelling errors are almost always and everywhere a phenomena attributable to lengthy expositions?)
Posted by: V. Anantha Nageswaran | May 30th, 2008 at 3:10 pm | Report this comment