Greg Ip

Articles by The Economist’s U.S. Economics Editor

Archive for the ‘Inflation’ Category

Economics focus: Level Worship

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Price-level targeting could make monetary policy more potent—or just more confusing

Oct 28th 2010

[Greg Ip] EVER since Ben Bernanke, the chairman of the Federal Reserve, signalled in the summer that he stood ready to keep using unconventional monetary policy to shore up America’s fragile economic recovery, expectations have been building that the Fed will launch a second programme of quantitative easing (QE)—the purchase of bonds with newly printed money. That moment is likely to come at the Fed’s meeting on November 2nd-3rd. Whether QE2 can live up to the hype is another matter. QE aims to stimulate demand by lowering nominal long-term interest rates, much as conventional monetary easing works by lowering short-term nominal rates. But with short-term rates already close to zero and long-term rates also very low, the room for further reductions in nominal rates is tight.

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.

Written by gregip

October 28, 2010 at 3:13 pm

Economics focus: A winding path to inflation

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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.”

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June 3, 2010 at 3:18 pm

The inflation rate: Price puzzle

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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 »

Written by gregip

March 18, 2010 at 4:00 pm

Dialing back the deflation watch

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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.

Yesterday’s report by the Congressional Budget Office also prompted me to reexamine my assumptions. Read the rest of this entry »

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January 28, 2010 at 6:05 am

America’s Federal Reserve: On the mend

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The original article is linked here.

Jul 21st 2009 | WASHINGTON, DC
From Economist.com

 

The Fed’s chairman talks up the economy

AP
BenBernanke
 

 

IT HAS been a long time since comments on the economy by an official of America’s Federal Reserve comments could be described as cheerful. Yet there was no denying the upbeat tone of Ben Bernanke’s testimony to Congress on Tuesday July 21st.

Markets have experienced “notable improvements,” the Fed’s chairman told Congress. The fear of investors has “eased somewhat,” and “many markets are functioning more normally.” As for the economy, consumer spending has been stable, the drop in the housing market has moderated and many “of our trading partners are also seeing signs of stabilisation.” His fingers may be crossed but it is clear that Mr Bernanke thinks the recession, if not over now, soon will be.

That is a far cry, though, from seeing a threat from inflation and Mr Bernanke made it clear that the federal funds target rate, now near zero, will remain there for a long time. Read the rest of this entry »

Written by gregip

July 21, 2009 at 5:41 pm

Economics focus: Put out

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The original article is linked here.

Economics focus

Put out

Jul 2nd 2009
From The Economist print edition

Uncertainty over the size of the output gap complicates the task of central banks

HAVING raised the alarm on deflation, the Federal Reserve has now begun to sound the all clear. The statement it released after its policy meeting on June 24th notably omitted the warning from its three prior meetings that “inflation could persist for a time below rates that best foster economic growth and price stability”. To be sure, with the economy gradually finding a bottom and the rate of decline in home prices slowing, the chances of a downward spiral of deflation and economic activity have diminished. Yet it seems premature to write off the threat as long as a large output gap persists. Read the rest of this entry »

Deflation in America: The greater of two evils

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The original story is linked here.

May 7th 2009
From The Economist print edition

Inflation is bad, but deflation is worse

 
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MERLE HAZARD, an unusually satirical country and western crooner, has captured monetary confusion better than anyone else. “Inflation or deflation,” he warbles, “tell me if you can: will we become Zimbabwe or will we be Japan?”

How do you guard against both the deflationary forces of America’s worst recession since the 1930s and the vigorous response of the Federal Reserve, which has in effect cut interest rates to zero and rapidly expanded its balance-sheet? Read the rest of this entry »