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Have we been thinking about inflation all wrong?

thewalrus.ca

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Re: Have we been thinking about inflation all wrong?

#171

Post by cool_dude85 »

jbay808 wrote: post #57

When it starts to get really burdensome to keep your promises, the idea of breaking them gets really attractive. But that doesn't come for free. It costs credibility. The cost of central banks breaking their inflation-control commitment when inflation starts running hot, is that the market starts pricing in their unwillingness to raise interest rates. This fuels a whole bunch of other inflation feedback loops, and th…

Why haven't I been reading this kind of hemming and hawing over the lack of full employment for, oh, the last 50 years or so? The fed has a mandate for that too, but somehow when they didn't manage to achieve it, I never heard about how society is going to collapse any minute now. Only when poor people are making income gains. Strange.

Re: Have we been thinking about inflation all wrong?

#172

Post by vorpalhex »

cool_dude85 wrote: post #171
jbay808 wrote: post #57

When it starts to get really burdensome to keep your promises, the idea of breaking them gets really attractive. But that doesn't come for free. It costs credibility. The cost of central banks breaking their inflation-control commitment when inflation starts running hot, is that the market starts pricing in their unwillingness to raise interest rates. This fuels a whole bunch of other inflation feedback loops, and th…

Why haven't I been reading this kind of hemming and hawing over the lack of full employment for, oh, the last 50 years or so? The fed has a mandate for that too, but somehow when they didn't manage to achieve it, I never heard about how society is going to collapse any minute now. Only when poor people are making income gains. Strange.

We are pretty close to full employment.

Rising groceries and fuel costs hurt everyone, but that hurt is more so on the poor who have less overall cash flow.

Re: Have we been thinking about inflation all wrong?

#173

Post by uses »

dnautics wrote: post #120

> If inflation were allowed to run a bit higher, it could deliver a long-overdue win for young people who have had to face a combination of stagnant wages and rising housing costs what the hell? Inflation exists as a policy to stiff wage-earners. This is arguably more likely to go exactly the other way than the author expects. Take it from a nobel laureate: https://krugman.blogs.nytimes.com/2010/02/13/the-case-for-hi…

Inflation doesn't exist as a policy to stiff wage earners. Inflation exists as a reality of a growing economy (more goods and services needs more money to cover them). The alternative is deflation, which would be extremely bad. So what we aim for, is low inflation. Which we've had for ~40 years. Low, controlled inflation is the vastly preferable alternative to any amount of deflation, so it's the side of the scale we target, giving a ~2% margin of error (~2% is the inflation level usually targeted by modern central banks).

What Krugman is talking about is that cutting wages is extremely hard for employers to do. Nobody wants to take a paycut. So what employers do instead, being put in the situation of needing to cut payroll, is eliminate entire positions. Which on the whole is worse than a paycut because of the destabilizing effect to the individual and society. So a positive side effect of inflation (not the main effect, a side effect), is that in the absence of pay raises, low inflation creates a constant mild paycut unless there is specifically a pay raise. It makes the economy more resilient.

Re: Have we been thinking about inflation all wrong?

#174

Post by dsjoerg »

cool_dude85 wrote: post #171
jbay808 wrote: post #57

When it starts to get really burdensome to keep your promises, the idea of breaking them gets really attractive. But that doesn't come for free. It costs credibility. The cost of central banks breaking their inflation-control commitment when inflation starts running hot, is that the market starts pricing in their unwillingness to raise interest rates. This fuels a whole bunch of other inflation feedback loops, and th…

Why haven't I been reading this kind of hemming and hawing over the lack of full employment for, oh, the last 50 years or so? The fed has a mandate for that too, but somehow when they didn't manage to achieve it, I never heard about how society is going to collapse any minute now. Only when poor people are making income gains. Strange.

Their mandate is not for "full employment" but for "maximum sustainable employment". https://www.chicagofed.org/research/dual-mandate/dual-mandat...

Re: Have we been thinking about inflation all wrong?

#175

Post by e4e78a06 »

cool_dude85 wrote: post #171
jbay808 wrote: post #57

When it starts to get really burdensome to keep your promises, the idea of breaking them gets really attractive. But that doesn't come for free. It costs credibility. The cost of central banks breaking their inflation-control commitment when inflation starts running hot, is that the market starts pricing in their unwillingness to raise interest rates. This fuels a whole bunch of other inflation feedback loops, and th…

Why haven't I been reading this kind of hemming and hawing over the lack of full employment for, oh, the last 50 years or so? The fed has a mandate for that too, but somehow when they didn't manage to achieve it, I never heard about how society is going to collapse any minute now. Only when poor people are making income gains. Strange.

Poor people are making _nominal_ income gains. Their real income is actually declining because wage gains aren't keeping up with inflation despite a red hot labor market.

It's almost like rents rise to match incomes unless you build more housing. Rent control just means that the costs get offloaded to other things like the security deposit, application fees, and deferred maintenance. You can't regulate the market out of existence.

Re: Have we been thinking about inflation all wrong?

#176

Post by AmericanBlarney »

cool_dude85 wrote: post #171
jbay808 wrote: post #57

When it starts to get really burdensome to keep your promises, the idea of breaking them gets really attractive. But that doesn't come for free. It costs credibility. The cost of central banks breaking their inflation-control commitment when inflation starts running hot, is that the market starts pricing in their unwillingness to raise interest rates. This fuels a whole bunch of other inflation feedback loops, and th…

Why haven't I been reading this kind of hemming and hawing over the lack of full employment for, oh, the last 50 years or so? The fed has a mandate for that too, but somehow when they didn't manage to achieve it, I never heard about how society is going to collapse any minute now. Only when poor people are making income gains. Strange.

Because we've been at or near full employment most of the time.

Also, the exact definition of full employment is fuzzy, whereas grocery bills rising is quite tangible.

Re: Have we been thinking about inflation all wrong?

#177

Post by nostrademons »

bryanlarsen wrote: post #94
sleepingadmin wrote: post #66

The walrus being a far-left MMT proposing place wrote this when inflation was at 3.5% or so. It's now much higher and very evidently out of control. The article quotes Mark Carney, as if he were on their side. BoE under Carney have raised interest rates twice: https://tradingeconomics.com/united-kingdom/interest-rate and that hasn't even dented inflation. https://tradingeconomics.com/united-kingdom/inflation-cpi I be…

> It's now much higher and very evidently out of control. Monthly inflation is slowing, and is at an annualized 4.8%. We had a big spike in the summer/fall that's still showing up in our annual figures, but inflation itself is coming under control. https://news.ycombinator.com/item?id=30289147

0.6% monthly inflation annualized isn't 4.8%. Not really sure how you got 4.8%, but the computation you want is 1.006^12 = 1.0744, about 7.4% (which also happens to match the annualized figures).

Re: Have we been thinking about inflation all wrong?

#178

Post by e4e78a06 »

bryanlarsen wrote: post #94
sleepingadmin wrote: post #66

The walrus being a far-left MMT proposing place wrote this when inflation was at 3.5% or so. It's now much higher and very evidently out of control. The article quotes Mark Carney, as if he were on their side. BoE under Carney have raised interest rates twice: https://tradingeconomics.com/united-kingdom/interest-rate and that hasn't even dented inflation. https://tradingeconomics.com/united-kingdom/inflation-cpi I be…

> It's now much higher and very evidently out of control. Monthly inflation is slowing, and is at an annualized 4.8%. We had a big spike in the summer/fall that's still showing up in our annual figures, but inflation itself is coming under control. https://news.ycombinator.com/item?id=30289147

Coincidentally government transfer payments funded by deficit spending reached a new low for the year [1]. I'd also add CPI underestimates true inflation because it uses hedonic adjustments, but in real life consumers don't keep buying crappier and crappier products. If you use 1980 methodology for computing CPI it's around 15% annualized now [2].

[1]: https://www.wsj.com/articles/u-s-government-recorded-119-bil...

[2]: http://www.shadowstats.com/alternate_data/inflation-charts

Re: Have we been thinking about inflation all wrong?

#179

Post by wolpoli »

zozbot234 wrote: post #129
jbay808 wrote: post #57

When it starts to get really burdensome to keep your promises, the idea of breaking them gets really attractive. But that doesn't come for free. It costs credibility. The cost of central banks breaking their inflation-control commitment when inflation starts running hot, is that the market starts pricing in their unwillingness to raise interest rates. This fuels a whole bunch of other inflation feedback loops, and th…

Yup. The kernel of truth behind Austrian theories of macroeconomics/the business cycle is that interest-rate based policy setting is inherently an unstable system. If the central bank makes policy errors that fail to stabilize the underlying target (whether inflation, nominal income, exchange rates, whatever) the whole system starts spiraling away from that unstable equilibrium point, and the subsequently needed corr…

> It's important that errors be promptly corrected, and expectations about future policy remain properly "anchored" to the right target.

It would be interesting to know if inflation expectation has become unanchored in the mind of the general public, because, ultimately, inflation expectation causes inflation.

Re: Have we been thinking about inflation all wrong?

#180

Post by lumost »

jbay808 wrote: post #57

When it starts to get really burdensome to keep your promises, the idea of breaking them gets really attractive. But that doesn't come for free. It costs credibility. The cost of central banks breaking their inflation-control commitment when inflation starts running hot, is that the market starts pricing in their unwillingness to raise interest rates. This fuels a whole bunch of other inflation feedback loops, and th…

Counterpoint:

Stability is a critical optimization criteria, but should be balanced with the need to maintain "dynamism". New ideas can't win if any time the entrenched hit problems they are bailed out. Maintaining employment is necessary for long-term societal stability, maintaining Goldman Sachs is not.

In recent years our definition of stability shifted to one where market winners remain winners indefinitely.

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