Monday, October 12, 2009
Level of Disagreement Among Economists About Inflation Highest in a Decade
As the Federal Reserve Bank of San Francisco notes in a letter published October 5, the disagreement among economists about the possibility of inflation in the long-term is higher than it has been in the past decade:
Figure 1
Disagreement about the long-term inflation outlook
Note: The vertical axis represents the standard deviation of the SPF forecasts for the average CPI inflation rate over the next ten years...
The level of disagreement about the inflation forecast has risen recently, and the nature of this disagreement varies over the forecast horizon. Concerns about disinflation are increasing the forecast dispersion over the next year or so, while over the long run the rise in disagreement reflects fears that inflation will take off.
The SF Fed explained that part of the divergence was due to disagreement about the validity of the Philips Curve (the relationship between unemployment and inflation), and economists also disagreed about whether the Fed would monetize the debt, and whether the Fed would be able to mop up excess liquidity.
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"It all depends on what you means by 'inflation'." There is no standard or commonly accepted definition of "inflation." While Milton Friedman held that inflation is always and everywhere a monetary phenomenon, others hold that is a price phenomenon, and othesr hold that it is a wage (price of labor) phenomenon.
ReplyDeleteMost importantly, however, "inflation" is also a normative term with a pejorative meaning. "Inflation (and anything that leads to it) is bad."
Most neoclassical economists a politically libertarian and they follow Friedman and Hayek is condemning government economic intervention, which, they hold from the economic point of view, is inexorably inflationary.
Interestingly, they did not complain about Greenspan's accommodative monetary policy and the huge deficits of the Bush administration in boom years.
Therefore, it seems somewhat disingenuous — and also ideological — to see inflation everywhere when the US is stuck in a liquidity trap where interest rates are at the zero bound, prices are not rising generally, deleveraging is rampant, defaults abound, many asset classes have not bottomed, and wages do not look to recover anytime soon.
If these guys are so good with numbers, where are the numbers here, other than the "big" deficits that are dwarfed by credit contraction and financial insolvency.
This is politics, not economics.