{"id":294560,"date":"2010-02-08T10:36:37","date_gmt":"2010-02-08T15:36:37","guid":{"rendered":"tag:http:\/\/www.economist.com,2009:21004734"},"modified":"2010-02-08T10:36:37","modified_gmt":"2010-02-08T15:36:37","slug":"whats-the-real-worry","status":"publish","type":"post","link":"https:\/\/mereja.media\/index\/294560","title":{"rendered":"What’s the real worry?"},"content":{"rendered":"

A FEW weeks ago, my colleague argued<\/a> that while the threat of deflation should still be on central bankers’ radar, inflation is the more likely to become a problem. He wrote:<\/p>\n

\n

Core inflation hasn\u2019t dropped as much as I\u2019d expected to date, and the drop that has occurred seems entirely due to owners\u2019 equivalent rent. Goods prices inflation has been surprisingly sturdy.<\/p>\n

Yesterday\u2019s report<\/a> by the Congressional Budget Office also prompted me to reexamine my assumptions. The CBO has raised its CPI inflation rate forecast for 2010 to 2.4% from 1.7%, while leaving the 2011 forecast at a still very low 1.3%. It marked down even more its forecast of inflation as measured by the GDP price index…<\/p>\n

Some of the inflation revision is because of the lower dollar, which is putting upward pressure on prices of tradable goods. The CBO also seems to think higher unemployment is exerting less disinflationary influence than traditional estimates of this relationship, called the Phillips Curve, assume. Inflation hawks at the Fed and elsewhere have made this argument for some time; I find it interesting the CBO is giving it some credence since, like me, the CBO puts a lot of stock in the Phillips curve.<\/p>\n

I haven\u2019t switched my deflation alarms off altogether. Goldman Sachs has argued that most of the sturdiness in inflation to date reflects just four categories: gasoline, cars, tobacco, and medical care, and \u201conly the last of these seems likely to repeat its contribution from 2009.\u201d Moreover, the most direct evidence of the output gap\u2019s impact is wage growth, which continues to slow.<\/p>\n

But the odds of outright deflation, as opposed to very low inflation, seem to have diminished a lot.<\/p>\n<\/blockquote>\n

At least one Fed banker agrees<\/a>. A month ago, I probably would have said that while inflation basically posed no threat in the short- to medium-term, the risk of deflation had been more or less eliminated thanks to Chinese growth and the effect of ample central bank liquidity on asset prices. Now, I’m not so sure. Markets have lost nearly 7% of their value in the past two weeks. Commodity prices have tumbled, as well. China’s government is tightening. The American economy has yet to return to steady job growth, and the momentum in American housing markets appears to have hit a winter plateau (while rents continue to decline). Loan demand among businesses and households continues to weaken. James Hamilton reviews the evidence and concludes<\/a>:<\/p>\n

\n

My bottom line: the scales tipped last week in the direction of near-term deflationary pressures, despite the strong 2009:Q4 U.S. GDP report and falling unemployment rate.<\/p>\n<\/blockquote>\n

I’d have to agree. This is a dangerous time for the global economy. Policymakers seem to be overestimating the return to stability. I’d say the argument for forgetting about inflation entirely until we see two quarters of core inflation at or above a 3% annual rate is quite strong.<\/p>\n","protected":false},"excerpt":{"rendered":"

A FEW weeks ago, my colleague argued that while the threat of deflation should still be on central bankers’ radar, inflation is the more likely to become a problem. He wrote: Core inflation hasn\u2019t dropped as much as I\u2019d expected to date, and the drop that has occurred seems entirely due to owners\u2019 equivalent rent. […]<\/p>\n","protected":false},"author":4534,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[7],"tags":[],"class_list":["post-294560","post","type-post","status-publish","format-standard","hentry","category-news"],"_links":{"self":[{"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/posts\/294560","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/users\/4534"}],"replies":[{"embeddable":true,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/comments?post=294560"}],"version-history":[{"count":0,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/posts\/294560\/revisions"}],"wp:attachment":[{"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/media?parent=294560"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/categories?post=294560"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/tags?post=294560"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}