The other day I was looking at a graph of oil prices denominated in ounces of gold over the last four or five years. I recognize that consumer prices aren’t a particularly good way of measuring inflation but it suddenly occurred to me that when commodity prices rise, more or less in lock step, that’s a pretty fair measure of inflation. It certainly doesn’t look like the numbers coming out of the Fed.
Inflation is an increase in prices occurring due to aggregate demand exceeding an economy’s productive capacity. For example, most commodities are impacted by oil prices because we’re primarily dependent on it for transporation of those commodities.
Is that what you’re asking?
Mankiw posted a while back why he wasn’t worried about inflation. Key to the post was a chart showing rising nominal wages during the 70s. If wages aren’t spiraling up, price increases will be transitory (barring supply constraints).
Someone here keeps posting about rising prices (Icepick?) being a problem if the Fed induces inflation. This misses the part where wages rise/hours increase as a necessary component of demand based inflation.
@Sam, I think the problem of inflation has been brought up as a problem for retirees and people on fixed incomes that can’t benefit from wage increases.
Sam, why do you think that if prices rise wages will also rise? With high unemployment the pressure on wages is to decrease them over time, not increase them. (And unemployment isn’t getting better, despite that piece of shit report put out by those whores at the BLS today. Pretty much all the improvement is from dropping people out of the work-force at a staggering rate.)
Prices have been going up at the grocery store. My wife’s wage have been stagnant in recent years, following a big drop due to loss of overtime in 2008. (Of course, my wages have gone to zero over the same perod of time.) And don’t tell me she should look for another job – she has done that. There just aren’t enough jobs out there, period. Where’s the upward trend on wages? It just isn’t there. (Other things getting more expensive – healthcare, fuel, etc.) Inflation at this point will only benefit the government and the bankers. Everyone else gets fucked with a chainsaw. Not that that’s anything new.
Cullen has a post on this subject which I think is broadly correct:
http://pragcap.com/money-supply-update
“So where’ the inflation coming from? As I’ve been repeating for the last few years, it appears to be largely a China phenomenon. While most economists are busy griping about the “irresponsible†Fed and ECB, they seem to be missing the one central bank in the world that is beyond reckless – the People’s Bank of China. The PBOC has been cranking out money supply growth at double digit rates for a decade now. M2 (the broadest aggregate published in China) has been growing at an average pace of 17% per year over the last 15 years! As they build cities in the middle of nowhere and implement the greatest central planning scheme ever known to man the printing press has been red hot. And this endless printing has no doubt had an impact on commodity prices. After all, there are few people in the world who would question the commodity demand story in China.”
That is a very unorthodox view, IMO, limiting just to the notion of “demand pull”. By the way, your example of rising oil prices then leading to higher prices of other goods in the economy violates your claim, that is more a “cost push” example.
I know you don’t think changes in the quantity of money impact prices, but for the life of me I can’t see where you come up with that notion. You keep saying monetary policy is endogenous. So, changes to aggregate demand can also be endogenous.
I’d also point out that inflation, broadly speaking, due different sources (demand pull vs. cost push vs. increases in the money supply) have different implications for the economy. For example, if it is the case that aggregate demand is higher than what the economy can current produced then it will likely be the case that there will be a high level of growth. On the other hand cost push inflation on the other hand may retard growth. Using your example a sudden rise in oil prices may dampen economic activity rather than increase it.
Tell us Ben, are you a post-Keynesian, your views are quite heterodox.
“By the way, your example of rising oil prices then leading to higher prices of other goods in the economy violates your claim, that is more a “cost push†example.”
Yes, but unless intentionally limited, in the above case the ultimate source of the cost rise is demand exceeding the planetary economy’s productive capacity for oil, which has remained flat since 2004. No one is suggesting the effects of demand are always direct, which is of course the primary difference between demand-pull and cost-push.
“I know you don’t think changes in the quantity of money impact prices, but for the life of me I can’t see where you come up with that notion. You keep saying monetary policy is endogenous. So, changes to aggregate demand can also be endogenous.”
When I use the term endogenous (and this is my fault for getting lazy and assuming people know what I mean) I’m referring to transaction occurring within the banking system, QE for example. If printing money on its own produced inflation then we should be seeing it now after tripling the monetary base, but we don’t because all that’s happened is the Fed has added to bank reserves. Those reserves don’t contribute to lending and have no other channel to the real economy, hence these monetary operations are endogenous to the banking system. The Fed has been pumping up reserves in a fruitless effort to spark aggregate demand, fruitless because it requires the actions of the consolidated government (the Fed, Treasury and Congress) to add net financial assets to the private sector.
Also, the government has in reality been spending by printing money for forty years, (and during a nearly two decade period of unusually low inflation) it just doesn’t look like it because all other aspects of the gold-standard system remain unchanged. We continue to sell debt because law requires government to issue bonds in equal proportion to our deficits.
The ECB acting as lender of last resort to the banking system would not ultimately add net financial assets to the real economy, because banks don’t actually loan money at all. They simply agree to clear a large payment via transference of reserves in exchange for a series of smaller payment over time. The loan and liability together net to zero meaning no net creation of euros. This is referred to as a horizontal transaction in MMT speak. However were the ECB to “fund” EMU members via buying bonds it would be effecting a vertical transaction and adding assets to the private sector. If it funded too much spending it would at some point push demand beyond the member states’ productive capacity and create inflation.
“For example, if it is the case that aggregate demand is higher than what the economy can current produced then it will likely be the case that there will be a high level of growth. On the other hand cost push inflation on the other hand may retard growth. Using your example a sudden rise in oil prices may dampen economic activity rather than increase it.”
I completely agree that not all forms of demand are productive and beneficial. I tend not to use terms like demand-pull and cost-push because I think they have a tendency to stop thought before reaching root causation.
“Tell us Ben, are you a post-Keynesian, your views are quite heterodox.”
This may not be a satisfactory answer, but I try not to identify as anything other than an MMTer, because I believe that doing so with any other school of economic thought means implicitly adopting political ideals which interfere with the attempt to understand the operational realities of our current system. There are aspects of Chartalism, Keynesianism, Austrianism, Monetarism and others which I think have real applicability but to say, “I am X” pushes one to adopt positions in support of the tribe to which one has declared allegiance. Actually, that’s probably sufficient to label me heterodox, but then MMT is heterodox.
If no one’s wages are going up, something’s got to give. In this case housing prices. If the price of imported goods goes up, but the price of housing goes down, it’s not inflation.
If no one’s wages are going up, something’s got to give. In this case housing prices. If the price of imported goods goes up, but the price of housing goes down, it’s not inflation.
That’s true – IF YOU ARE BUYING A HOUSE. Most people aren’t, they’re either renting (and rent continues to go up here locally) or they’re underwater on their mortgages. But everyone is buying food.
Shorter: I can’t eat an iPad.
You are describing rising prices for some stuff, not inflation, and I agree it can be painful. The point I’m making is that if the Fed were to induce demand driven inflation, wages must necessarily go up. Otherwise there is a hard limit of how high prices can go. If food and gas just got more expensive, it would just drive prices down elsewhere and be recessionary – not inflation.
The question remains if the Fed CAN create demand side inflation. Scott Sumner and other new monetarists believe it can – and that it NOT just rising prices of food and gas. Whether you believe in fiscal policy or monetary policy, demand driven inflation is inevitable and probably necessary if a recovery is going to last because we are starting from a state of depressed demand.
@Sam
The Fed works entirely through the banking system, which means if monetary policy were able to spark increased demand it would require the private sector to releverage. In fact this is exactly what the Fed has been attempting for three years without success by pumping up bank reserves and paying IOR. Helicopter Ben doesn’t seem to realize banks don’t loan their reserves outside the banking system and are limited by the number of credit-worthy customers who walk in the front door. There won’t be more good customers to make loans to until the private sector deleverages, and that requires fiscal policy.
I think I see the process a little differently. Money is a commodity like any another, subject to supply and demand. If the cost of borrowing is high enough, it reduces the number of prospective borrowers. Keeping interest rates on loans high and defining “good customers” in a highly restrictive manner (as is presently the case) is largely another way of saying that banks don’t need to make loans to make money.
@Dave Schuler
When a bank “lends” it isn’t actually loaning money and doesn’t check its deposits and decide whether it can afford to extend credit. When the bank finds what it judges a creditworthy customer it simply makes the loan and finds the reserves to cover the transaction later; in other words the loan is literally creating the deposit rather than the other way around as we’re incorrectly taught.
Basically there’s no limit to banks’ ability to extend loans, the only reason they are being so selective right now is they judge the common man/woman as too overextended and therefore too great a default risk. Had they exercised that sort of caution over the last decade we wouldn’t be in the situation we are now.
There’s enormous private sector demand for dollars but that can’t be sustainably provided by banks making loans. We just went through that and the experience has been less than pleasant. Only fiscal action can provide more currency to the private sector without forcing it to relverage because when government spends it isn’t creating debt. It credits the recipients’ accounts via keystrokes and adds financial assets with no requirement to pay it back.
By convention only. I don’t think that there’s nothing stopping it from buying any asset, like MBSes in 2007, and long treasuries in QEs. Sumner’s point is all the Fed has to do is set the expectation that the Fed will buy whatever it takes to raise NGDP (which implies raising incomes) by 5%.
Sam,
The Fed can’t just go out and buy whatever it wants. It works through asset swaps within the banking system because that’s what its mandate limits it to. When it bought bad assets from the banks it increased the selling banks’ reserves in exchange for the assets. So the banks received what is effectively inert money. They can’t make loans with reserves or speculate with them because reserves are used only for meeting ratio requirements and clearing transactions. Normally banks compete to rid themselves of excess reserves; the reason those banks kept the reserves is because the Fed started paying interest on them back in 2008.
Don’t you have an implicit assumption here of everything else being equal?
What is MMT? Modern Monetary Theory?
Sorry I’m picking these things so singularly, I’m trying to understand the view point you are coming from.