What is the expected rate of American price inflation?

Here is Stephen Williamson:

We can use inflation swaps data, as Summers does; we can look at the breakeven rates implied by the yields on nominal Treasury securities and TIPS; and we can look at survey measures. What do people who do forecasting for a living, and who have access to all of that data, say? The Philly Fed’s most recent Survey of Professional Forecasters has predictions of PCE headline inflation for 2016 and 2017, respectively, of 1.8% and 1.9%, which is pretty close to the 2% PCE inflation target. A Wall Street Journal survey shows a CPI inflation forecast that seems roughly consistent with the December FOMC projections for PCE inflation. So, it seems that “most available data,” filtered through the minds and models of professional forecasters, suggests no less optimism than the FOMC is expressing in its projections, about achieving 2% inflation in the future.

Most of the post is about Summers, but I am more interested in noting that the Fed can indeed achieve — at least roughly — the rate of price inflation it desisres.  Under liquidity trap theories, you would think that price inertia would have worn off a bit by now, but if anything the American economy seems to be converging to somewhat higher rates of price inflation, which is not what the theory predicts.


Unrelated to the above (sorry) but I thought you might like these links: A call for ideas for a "Museum of Capitalism": http://www.museumofcapitalism.org/architecture-competition/ - and a Japanese bookshop that sells only one book at a time: http://www.theguardian.com/books/2015/dec/23/japanese-bookshop-stocks-only-one-book-at-a-time

So according to Summers' critics, by raising rates today there's the promise that rates will be lowered tomorrow, thereby generating more demand today due to the expectation of lower rates tomorrow. Whatever. I will point out the one sentence in the Summers' presentation that his critics ignored: "The complexity is that zero rates may be less abnormal than is supposed because of fundamental shifts in the saving investment balance." I suppose in some circles that sentence is nonsense, since by definition there can be no such imbalance. Yet, we are to believe that raising rates is expansionary because it creates an expectation of lower rates tomorrow.

I think liquidity trap explains quite well what happened. Just remember, monetarist theories would have said you would buy gold and prepare for rip roaring inflation with the expansion of the money supply. Didn't happen, did it. As you would say, "price inertia would have worn off by now...which is not what the [monetarists] theory predicts."

The story is that the trillions of dollars enpixelated by the Fed were used to buy non-performing assets of member banks. This phantom money was then deposited as reserves with the Fed. Very little of it went into circulation, except as salaries and bonuses for bank management. Thus the entire process was an exercise in post-modern accounting that had little to do with the purchase of capital goods like tractor tires or consumer products like carbon-frame bicycles but a lot to do with maintaining the apparent solvency of banks. There hasn't been enough money distributed into the economy to create price inflation. Right or wrong?

Except the Fed doesn't buy non-performing assets. It's balance sheet consists of 58% treasury securities and 41% government guaranteed mortgage securities. So while Fed bond buying may have improved the liquidity situations of banks, it didn't change the credit profile of their balance sheets at all.

Even if the Fed had engineered the "post-modern accounting" that you describe, why exactly would newly solvent banks simply park the money they got from selling their "non-performing assets" back at the Fed when they could lend that money out at a higher return? Either way it sounds like a liquidity trap.

If the $2 trillion of QE has really done little to generate real growth or inflation, then let's do even more until it does. What is the downside? e Calling the Fed balance sheet "bloated" is the same as complaining that the US government has not enough debt. Why on earth would this be a good thing?

Who's saying "do more QE?"

I was under the impression that those MBS are essentially non-performing even if USG is a surety.

Non-performing means non-paying which is another way of saying "in default." Fannie, Freddie, et al guarantee against default which means they'll step in to make all payments when due. So even if the underlying assets of the MBS are worth zero, the quasi-government guarantee assures investors are kept whole with regard to both principal and interest payments.

If a Fannie and Freddie guaranteed MBS is "non performing" that means the government has allowed the agencies to default on their obligations. That hasn't happened.

Government guaranteed mortgage securities are non-performing assets.

@Brian - "41% government guaranteed mortgage securities" - these are Liar loans and junk Ninja loans now owned by the Fed, no? And it's not a liquidity trap, but a solvency trap. The public recognizes that something rotten happened in 2007, that there's an overhang of dead houses on the market, and too much debt, hence they don't borrow. It's not a liquidity trap, but a Koo-sian balance sheet recession funk.

"these are Liar loans and junk Ninja loans now owned by the Fed, no?"

I can't say and I don't think anyone outside the Fed can say either because the Fed doesn't make those details public. But I don't think it matters to the current discussion. What we do know is that those MBS securities, regardless of how they were originally structured, are performing assets. Either they're performing because the underlying mortgages are performing or they're performing because the GSEs are honoring their guarantees, but they are performing.

And once again, even if what you say is true, wouldn't the Fed taking Liar and Ninja loans off bank balance sheets help repair bank solvency problems?

"wouldn’t the Fed taking Liar and Ninja loans off bank balance sheets help repair bank solvency problems?"

I thought that was the whole point. Even though it was politically disgusting since so many people had already made off with the profits from loans/mortgages that (in retrospect?, but come on, NINJA loans ...) were never likely to perform well, the main goal was to ensure bank solvency.

Chuck, I agree. Fed purchases of UST and MBS put liquidity/cash and due from into member banks' balance sheets, the critics on both sides would call it "Wall Street." How would Fed asset purchases add cash/liquidity into American citizens' balance sheets?

I think that until recently, banks' commercial and industrial lending was depressed.

What's the rationale for a bank buying a treasury certificate, selling it to the Fed, and then depositing the enpixelated money in a Fed reserve account?

It's worth remembering that "most available data [as] filtered through the minds and models of professional forecasters" has a near-perfect record in the post-financial-crisis era of overstating the rate of recovery, inflation, and expected interest rates. What makes us so certain that the most recent forecasts are any better than all the previous ones?

BTW, isn't Williamson the guy who not long ago published a model arguing that raising interest rates would cause inflation to rise?

There is a big list of ~36 countries here.

~27 of those now have yearly inflation below 2%.

What's up with that?

Ultimately stagnation arguments came down to those who admitted few great wage and price drivers, and those who argued that the great progress we see matters, even when it is free. Or at least cheap.

I think I am in the Summers camp, while thinking Twitter is going great work, even if they can't make a buck at it.

While I'm sure a lot of people are getting lots of value out of these near-zero-marginal-cost innovations, and are getting better informed as a result, they are also providing uncensored platforms for ridiculous amount of misinformation, including extremists of all sorts, who in previous days rarely would have found much validation in the broader world.

I used to be very hopeful that all of these innovations would be great for democracy and the state of knowledge in general, but given the extent to which various platforms are being used to promote hate speech, or even just to disseminate inflammatory stereotypes, I'm no longer so sure.

Every crazed notion out there can find validation in some community on the net. There are plenty of examples of the good sides of this,

Relating it to inflation? Well, I'm easily critical of GDP as a measure of wellbeing, but there is something to be said about the value of things for which no one is willing to pay.

How many contributors to https://twitter.com/hashtag/WhiteGenocide?src=hash, which promotes manipulative messages to legitimize white supremacy and racism under some delusional/paranoid fears, would pay cold hard cash to disseminate their propaganda?

I think it's too early to say whether the proliferation of free digital age services, due to zero marginal cost, are a net gain for society.

There are certainly social risks, but spending a moment more on the economics, wasn't this the year that people realized that technology-driven deflation might not just be a futurist's risk, but real before our eyes? Marc Andreessen's "Software Eats The World" was reinvented a bit, to include the idea of falling demand for physical resources and for energy.

Maybe it's easy to feel the future has changed after two and a half cups of coffee .. but that's the way it feels now.

For anyone who cares about the economics

Non-technologists Believe ..

It is about jobs hollowing, but I would think that is also deflationary, because more is done by low wage workers and machines.

Happy individualized holiday of your choice.

I'm pretty sure it's less than 2%. If you disagree you can place a bet (a tax on bullshit) to that effect.

"...inflation for 2016 and 2017, respectively, of 1.8% and 1.9%..."

Do you accept that the professionals can measure price inflation with a tenth-of-a-percent accuracy, as a general premise of this inflation analysis?

What is the practical margin of error in such inflation calculations?

Well, inflation is an amorphous concept. If you want to talk about something more concrete like CPI or PCE, yes, I think these indices can be measured within 0.1% or so.

I had the impression that the article was about *forecasting* future inflation; not the accuracy of measuring *historical* inflation. The "amorphous concept" aside (can we all agree on the heuristic adjustments?), are you confident that an inflation *forecast* as mentioned by Guy, above, is generally accurate to one-tenth of one-percent? Here, the issue was a forecast for one and two years out---i.e., "inflation for 2016 and 2017, respectively, of 1.8 and 1.9 percent..."

Even measurements of historical inflation don't, even by BLS own estimates, generally do much better than that:


With the additional caveat mentioned there that measuring historical inflation over short periods is often subject to as much error as the estimate itself.

It seems to me that we do not have a definition of "inflation" that is any more accurate than about plus or minus one or two percent per year (or worse). Add in measurement problems and we are just arguing over noise.

Tyler, I think you left out a verb:

"...the Fed can indeed — at least roughly — the rate of price inflation it sets out to achieve"

Should there be a verb before "the rate"? Should it be "achieve"? Or something else?

If you look at implied inflation from TIPS spreads, there's actually more probability of *deflation* than 1.5-2.0 pct inflation. So either the market is wrong (and so we can all go out and become mega billionaires) or the "experts" are wrong. I'm going to go out on a limb and say the latter is more likely.

What is the increase in taxation?

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