Monday, October 12, 2009
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:
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.