Archive for the ‘Inflation’ Category
The Fed and the White House wrestle with price indices
May 11th 2013 | WASHINGTON, DC |From the print edition
[Greg Ip] IN RECENT years inflation has been one of the few economic indices that has not caused much trouble to Americans. Contrary to repeated warnings, it has neither rocketed higher nor turned into deflation. But policymakers now face a different sort of inflation problem: determining which of many competing indices is giving the best picture of prices in America.
The most popular measure, the consumer price index (CPI), is a representative basket of goods and services drawn from a survey of the spending habits of 12,200 households. The index assumes that consumers buy the same quantity of each commodity from one period to the next until the basket is updated, every two years. The change in the cost of that basket is the inflation rate. But this almost certainly overstates the cost of living, because consumers continually adjust their spending patterns to buy more of what is cheap and less of what is dear.
America’s statisticians have known about this substitution bias since at least 1961, when a commission urged the development of a better index. In 1996 the Bureau of Economic Analysis (BEA) adopted “chain-weighted” indices—ones that are continuously updated to reflect changing spending patterns—to calculate real GDP. And in 2002 the Bureau of Labour Statistics (BLS) began calculating a chain-weighted version of the CPI. Read the rest of this entry »
Jun 18th 2012, 16:35 by G.I. | WASHINGTON
When Federal Reserve officials meet this week, they will despondently confront an economy yet again falling short. Employment growth has flagged. GDP probably grew less than 2% (annualized) in the first half of this year; clouds from Europe, Asia and America’s own “fiscal cliff” darken the second half. The Federal Open Market Committee’s full year forecast of 2.4% to 2.9% looks out of reach.
So what will they do? Much of the street expects some kind of action, a view I share. It would probably come as an extension of “Operation Twist,” the purchase of longer-term bonds in exchange for short or medium bonds already in the Fed’s portfolio. It could stretch this out over a few months or a full year.
This, however, will be fiddling at the edges. What critics say the Fed needs is a wholesale makeover of its goals and methods. Some want the Fed to raise its inflation target. Others would have it adopt a nominal GDP target. Both approaches are intended to induce easier monetary policy that would foster faster growth in employment. At the opposite end of the spectrum, more conservative economists and Republican legislators want to take away the Fed’s responsibility for full employment and have it focus solely on inflation.
Lost in this blizzard of outside advice is the fact that the Fed actually has a new framework of its own. In January it declared that henceforth its long-run target for inflation was 2%. Previously Fed members only stated their long-run preference, which ranged from 1.5% to 2%. It also said it considered its two statutory goals, low inflation and full employment, equally important. Previously, employment was, de facto, subordinate to inflation.
If you haven’t heard more about this, it’s because the Fed has treated the target like an unwanted Christmas gift, still unopened months after the tree has been taken down. The initial announcement was devoid of any hint of radicalism; it didn’t even use the word “target” or spell out the implications of its “balanced” approach to inflation and employment. It felt like the FOMC couldn’t agree on whether it was, or ought to be, a genuine departure. Indeed, the Fed acts as if nothing has changed. Its “appropriate” monetary policy in April yielded forecast inflation of 2% or lower over the next few years. This vindicates critics who say the Fed acts as if 2% is a ceiling, not a target.
If the Fed were conducting policy based on this new framework, inflation would be centered around 2%. Indeed, if the Fed treated employment and inflation equally, it would likely tolerate inflation above 2% given that it is missing its full employment mandate more than its low inflation mandate. Read the rest of this entry »
Mar 15th 2012, 21:08 by G.I. | WASHINGTON
Nov 1st 2011, 10:28 by G.I. | WASHINGTON
A complex chain of cause and effect links the Arab world’s turmoil to the health of the world economy
Mar 3rd 2011 | BREGA, LONDON AND WASHINGTON, DC | from the print edition
[Greg Ip and colleagues] TWO factors determine the price of a barrel of oil: the fundamental laws of supply and demand, and naked fear. Both are being tested by the violence that is tearing through Libya, the world’s 13th-largest oil exporter. The price of a barrel of Brent crude now hovers around $115. On February 24th, however, it rose to almost $120, as traders realised that they might have to do for a while without some or all of Libya’s exports: some 1.4m barrels a day (b/d), or about 2% of the world’s needs.
The entire article is linked here.
Feb 9th 2011, 23:01 by G.I. | WASHINGTON
FOR those convinced that America is on the verge of becoming Weimar Germany, the high price of oil and gold are exhibits one and two. Often forgotten is the fact that both are traded in global markets and reflect global, not American, demand. Failing to appreciate the distinction can lead to policy mistakes. Just look at 1998.
A financial crisis tipped east Asia into a deep recession in 1997-98, which spread to Russia and then the United States via Long Term Capital Management. To cushion the spillover to America, the Fed first aborted a nascent monetary tightening cycle, then actually cut interest rates. It could do so in part because collapsing Asian demand crushed the price of oil, sending headline inflation below 2%. Read the rest of this entry »
Price-level targeting could make monetary policy more potent—or just more confusing
Oct 28th 2010
There may in any case be another way to achieve the same stimulus. What matters for boosting demand is the real interest rate—the nominal rate minus expected inflation—since inflation reduces the burden of repaying debt. If nominal rates cannot fall any further, why not raise expected inflation? Central bankers have roundly rejected the most obvious way to do that. Raising official inflation-rate targets, they say, would destroy years of hard-won credibility. But they are more receptive to another idea: targeting the level of prices rather than the inflation rate.
The entire article is linked here.
Even if governments could create inflation, they may not want to
Jun 3rd 2010
[Greg Ip] IN THE short run inflation is an economic phenomenon. In the long run it is a political one. This week The Economist asked a group of leading economists whether they reckoned inflation or deflation was the greater threat; this was our inaugural question in “Economics by invitation”, an online forum of more than 50 eminent economists. The rough consensus was that in the near term, as Western economies struggle to recover, the bigger worry there is deflation. But as the time horizon lengthened, more experts cited inflation, because it seems the most plausible exit strategy for governments trying to deal with crushing debts. “Deflation is not a lasting threat,” wrote Arminio Fraga, a former president of Brazil’s central bank. “The more interesting question is whether they can manage to keep inflation down over time under the regime of fiscal irresponsibility now prevailing almost everywhere.”
Inflation figures fuel a debate over when the Fed should tighten
Mar 18th 2010 | WASHINGTON, DC | From The Economist print edition
[Greg Ip] TRACKING American interest rates is like watching paint dry. At its meeting on March 16th the Federal Reserve left its short-term rate target between zero and 0.25% for the tenth consecutive time, and, given “subdued inflation trends”, said it would probably leave it there for an “extended period”.
But just how subdued is inflation really? Frustratingly, the latest data provide ammunition for both the hawks, who question the need for extended low rates, and the doves, who don’t. Read the rest of this entry »
In the tussle over whether deflation or inflation is the bigger threat I’ve been firmly in the deflation camp. In the last few weeks, though, I’ve tiptoed closer to neutral. Core inflation hasn’t dropped as much as I’d expected to date, and the drop that has occurred seems entirely due to owners’ equivalent rent. Goods prices inflation has been surprisingly sturdy.