Expecting less inflation

inflationexp

Here is the associated WSJ article.  Yes oil is down and the Fed did a slight rate hike, but still the broader lesson is that we are moving into economic corridors we do not understand.  I don’t know that any theory has done a good job predicting inflation dynamics.  Wages are showing (finally) some very modest growth, so the “we were in a liquidity trap, deflation was delayed because wages are sticky, finally wage are falling” explanation also seems wrong.  I also don’t think we will be seeing another Fed rate hike anytime soon.

Comments

This article from the Atlanta Fed argues that when properly adjusted for liquidity and risk premia, market-implied inflation expectations have actually been remarkably stable:

http://macroblog.typepad.com/macroblog/2016/01/are-long-term-inflation-expectations-declining-not-so-fast-says-atlanta-fed-1.html

Haven't those expectations been consistently wrong on the high side lo this past decade?

I don't see the value of armchair theorizing about inflation expectations. There's a market for that.

If we're talking about five year breakevens, a decade really only contains two independent data points. A pretty far cry from statistical confidence.

Each year they set a new 5 year benchmark so over the last decade we have 5 complete periods, 1 period with 4 years of data, 1 with 3 years, etc.

Comments for this post are closed

What? That's not how statistics work.

Comments for this post are closed

Comments for this post are closed

Comments for this post are closed

Comments for this post are closed

You said:

"I don’t know that any theory has done a good job predicting inflation dynamics."

Not market monetarism? What sort of inflation dynamics did we predict, if not what we are getting?

I actually came to the comments to post "What about Scott Sumner's market monetarism?" before seeing your note.

So i think you have a good argument here. :)

Comments for this post are closed

As a layperson, I immediately thought of Scott Sumner when I read that comment. And as a layperson, I find myself asking out loud,"Is Tyler being serious?" far too often.

Comments for this post are closed

Respectfully, please outline what you mean by market monetarism in testable, falsifiable hypothesis terms (not here but in a paper). I'm not trolling you.

Comments for this post are closed

Yes the market monetarists are winning this debate hands down with the only coherent explanation of what's going on. I am struck by this comment by Tyler; "I also don’t think we will be seeing another Fed rate hike anytime soon." Isn't this very rapid agreement that the recent rate rise was a mistake as predicted ahead of time by many MMs? Tyler at the time the rise was being debated "fence sat" or said that we simply didn't know if the rate rise would be a good or bad idea. To me and many others, with absolutely no sign of inflation, it was a very clear mistake which is now being proven. The main question now is when will the rate rise be reversed and will it be reversed in sufficient time to avoid substantial damage to the economy. Historical lessons suggest that, because of the embarrassment a quick reversal will cause to the Fed and Yellen in particular, the reversal won't happen until some really bad things happen. This bureaucratic embarrassment factor is a great reason why all sensible people should favor a mechanical system, like Scott Sumner proposes, for adjustment of monetary conditions.

Comments for this post are closed

Just because you know what is wrong, Scott, and I believe you do, does not necessarily mean your answers are good for society. You understand correctly that money supply is slowed, helping to cause the Great Recession. But so many people want asset purchasing by the Fed, sort of like what Japan is doing with REITS. I don't know about that being good. Maybe. It beats negative interest rates and a cashless society.

But the Fed sneaking around mispricing risk so assets inflates is so wrong. Maybe, if we handle the Great Recession, which we are sort of still in, by fiscal policy, why wouldn't that work? I know of many people who were saved by FDR's policies. Now the Fed is sort of contributing to the highway repairs. I like that idea and it should continue. Will the Fed claw back the money so that the Republicans can say the Fed helped but really it was to avoid a tax hike? I don't know. But the Fed can buy better roads. Why not?

Comments for this post are closed

Comments for this post are closed

Though the wage growth is mostly because inflation is falling below target and liquidity traps don't necessarily lead to deflation though it would be a soft one.

Comments for this post are closed

FRB has shown the courage & leadership of a frightened toddler so I look for nothing from them. Had they done their job properly, we'd be at least 1.5 - 2.0% already and able to cut a bit. As it is, they are "about as useful as teats on a boar hog," as they say in the country.

"Had they done their job properly"

And how would that have been?

Buy 300 million $10,000 100 year bonds, one for every Social Security number where the person holding it is living.

Who's going to buy $3 trillion dollars in 100 year bonds? And who's going to sell them?

Buy: The Fed
Sell: The US Treasury

Comments for this post are closed

Comments for this post are closed

Can't. The Republicans won't lift the debt ceiling. Certainly not by anywhere that much. Issue the damned $5 trillion coin, or five $1 trillion coins and destroy that road block for a while.

Comments for this post are closed

Comments for this post are closed

Comments for this post are closed

Comments for this post are closed

All those in the article saying market-based expectations are meaningless should go out and become billionaires betting against them, no?

Comments for this post are closed

The only rational measure of inflation is the cost of replacement reproduction. A variety of factors conspired to make that cost for the middle class explode, during the years of Boomer fertility, by an order of magnitude greater than the official inflation statistics -- hence the demographic collapse now being filled by immigration. Only one of those factors was increasing centralization of wealth. Others were a bidding war (between families, business, civil service and the welfare state) for the fertile years of female boomers, the advent of widespread birth control (and abortion), academic indoctrination that "genes don't matter" (so the most intelligent women would see only social good in foregoing child birth), the portrayal of middle class men as, at best, buffoons and, at worst, philandering disco boys, the portrayal of marriage as a route to middle age divorce and poverty for women while a "career" would be immune to their (in retrospect virtually certain) "corporate downsizing" at approximately the age when their glass ceiling execs would no longer find them sexually attractive... etc.

The "middle class" in terms of the cost of replacement reproduction has virtually disappeared.

While the cost of replacement reproduction might be cheaper in less developed societies, it's a greater proportion of their income. But they reproduce anyway. Spengler explains it: http://nailheadtom.blogspot.com/2014/09/according-to-oswald-spengler.html

The middle classes of developed countries have below replacement reproduction. Their incomes are insufficient for replacement reproduction. Less developed countries with replacement reproduction have incomes sufficient for replacement reproduction, so they're not spending a greater proportion of their incomes on replacement reproduction.

"Their incomes are insufficient for replacement reproduction."

No, their incomes are easily sufficient for replacement reproduction. Rather than raise children, they prefer to spend their money on other things, magic phones, Caribbean cruises, BMW i8s, time shares in Cabo San Lucas, season tickets to Angels games and North Face clothing.

No, it's not because of inflation in the cost of replacement reproduction. A variety of factors conspired to make that cost for the middle class explode, during the years of Boomer fertility, by an order of magnitude greater than the official inflation statistics — hence the demographic collapse now being filled by immigration. Only one of those factors was increasing centralization of wealth. Others were a bidding war (between families, business, civil service and the welfare state) for the fertile years of female boomers, the advent of widespread birth control (and abortion), academic indoctrination that “genes don’t matter” (so the most intelligent women would see only social good in foregoing child birth), the portrayal of middle class men as, at best, buffoons and, at worst, philandering disco boys, the portrayal of marriage as a route to middle age divorce and poverty for women while a “career” would be immune to their (in retrospect virtually certain) “corporate downsizing” at approximately the age when their glass ceiling execs would no longer find them sexually attractive… etc.

Comments for this post are closed

"academic indoctrination that “genes don’t matter” (so the most intelligent women would see only social good in foregoing child birth)"

This is ahistorical. The eugenicists of the 1920s were also complaining about how the best and brightest tended to have fewer children than the poor and working classes and that this had negative implications for the future (read Margaret Sanger, for instance). This was before any such "academic indoctrination" had a chance to set in. The reasons the well-off and well-educated have fewer or no children have existed for at least 100 years and don't appear to have much to do with ideology.

Comments for this post are closed

We're not talking about the "well-off" here. We're talking about the middle class, many of whose parents or grandparents were poor or working class. Most women (and men) weren't well educated in the 20s. Middle class boomer women were educated at unprecedented levels

Comments for this post are closed

Being well off is associated with more children for both men and women, while being well educated is especially associated with fewer children for women:

http://www.overcomingbias.com/2011/06/the-rich-have-more-kids.html

Comments for this post are closed

Comments for this post are closed

Comments for this post are closed

Comments for this post are closed

"The only rational measure of inflation is the cost of replacement reproduction."

Why?

Comments for this post are closed

Comments for this post are closed

The Iron Law of Wages states that "real wages always tend, in the long run, toward the minimum wage necessary to sustain the life of the worker". Before birth control and entry of women into the workforce, "life of the worker" did not need to take into account "the minimum necessary to sustain the workforce" since replacement reproduction was implied by "the life of the worker".

Nowadays, however, wages have fallen below the minimum wage necessary to sustain the life of the workforce and thus we are seeing demographic collapse in the developed countries.

Brian,

Plenty of high income people actively chose to have small families. The demographic collapse isn't just the result of declining wages. It's a cultural shift, not just an economic one.

Vietnam, the world's fastest growing economy, is experiencing rapid declines in the average fertility rate.

The 1970s and 1980s saw rapid economic growth in Japan alongside the fastest declines in average fertility rates.

That's completely consistent with my comment.

The "cultural shift" involved things such as birth control and entry of women into the workforce. Wages have now fallen below the minimum wage necessary to sustain the life of the workforce and thus we are seeing demographic collapse in many countries.

It might be possible to translate Marx and come up with that statement. Middle class wages, even if they have fallen, haven't fallen so far as to prohibit sustaining the life of the workforce. In fact, even the "poor" in western countries are incredibly rich compared to the fairly well-off of just a couple of generations ago.

Middle class incomes have fallen below the cost of replacement reproduction, hence the demographic collapse of the middle class now being filled with immigration.

Your comment about people being "incredibly rich" now is like the appeals to "hedonic value" by the elites, such as the NYT:

http://www.zerohedge.com/news/2014-05-02/magic-100-hedonic-deflation-one-chart

to explain why people should be content with having their people in demographic collapse due to the exploding cost of replacement reproduction.

I guess we're supposed to believe that if the commandant at Auschwitz had supplied each Jew with a Blu-Ray player, flat screen TV and the entire collection of nearly 200 Holocaust movies that have been made, they would be living a life that even the kings of old would have envied.

Of course, the Nazis didn't have Prozac to hand out to their guests, so our current elites are much more humane....

Comments for this post are closed

"Middle class incomes have fallen below the cost of replacement reproduction"

No. People prefer an iPhone and longer holidays to having more children. They can afford to have more children but make different choices than they used to, something that is largely possible due to condoms and the pill.

Comments for this post are closed

So what is the cost of replacement reproduction in the US, Bolivia and Niger in US dollars?

Comments for this post are closed

Nathan W,

In other words, the cost of replacement reproduction went up, and incomes did not keep up:

http://www.overcomingbias.com/2011/06/the-rich-have-more-kids.html

Comments for this post are closed

Comments for this post are closed

Comments for this post are closed

Comments for this post are closed

Comments for this post are closed

Core inflation is already 2%, with a massive "deflationary" drag from oil. Trump will deport 10 million low wage workers and their public welfare consuming dependents, possibly upwards of 20 to 30 million people. It'll be off to the races after a quick and deep recession, which will be blamed on Obama, the Fed, falling oil prices and China.

Doesn't core inflation exclude energy prices

Yes, and core inflation isn't 2% anyway.

Comments for this post are closed

Comments for this post are closed

Comments for this post are closed

How much of the inflation reflects the changing demographics of the developed world. Maybe the Big Bad Inflation of the 1970s was caused by massive increases to especially AD and AS curves as the Boomers started adulthood. Now we are on the other side of the Boomer coin and now the AD and AS are dropping with increased retirement and decreased consumption. So in other words, we are becoming 1990s Japan at different rates.

Of course, this completely contradicts Alan Greenspan theory on falling population growth will cause high inflation that did not deal with the Japanese reality of the last 25 years.

Collin
Russia for instance has booming inflation, but their demographics are poor. So demographics are not the only story. It is always possible that there are extra deflationary forces around (like demongraphics) but that doesn't mean that these can't be countered by a central bank determined to inflate. Everyone would agree surely that if the Fed decided to deposit 1 billion dollars in each US citizens account that this would cause prices to rise, despite any demographic issues? So it really does come back to Central Bank policies. If the CBs of the west want to raise inflation then they can.

Of course demographics is not the only reason why inflation or deflation has appeared. And yes the Russian oil based economy is suffering from massive inflation. However, the developed world (East Asia, Europe & North America) has seen hardly had a serious inflation since the Great Recession despite breaking every rule of Macroeconomic textbook in 1989.

Colin - think of it like this, demographics is like a bend in the road, the Fed is steering the car. If they don't adjust the position of the steering wheel to go round the bend, is it the fault of the road or of the driver?

And the lack of inflation in the Western World since the GFC is entirely explainable by text book economics. If you go to any macro economic text book it will explain what happens when a central bank engages in monetary tightening when inflation is below their target. The ECB did this in 2011 for instance, and the Fed just did it last year.

Complicated epicyclic style explanations are fun, but shouldn't you start with the simple explanations first?

Comments for this post are closed

Comments for this post are closed

Comments for this post are closed

Comments for this post are closed

Fiscal and demographics and commodity cycle and real growth explain inflation. No monetarist theory brings anything useful.

+1. Tom Warner is 100% right. As for hyperinflation, it falls under 'no real growth and printing money too quickly for people to adjust causes hyperinflation'. Anybody who like Keynes, like the Market Monetarists, who thinks the long term is a series of short terms and therefore, due to sticky wages and money illusion, printing money can influence real growth is a fool peddling snake oil (yes, I'm looking at you Scott Sumner).

What about Summers who you used to go around posting about over and over?

Comments for this post are closed

Comments for this post are closed

Russia completely refutes your thesis all by itself .

I disagree with Tom, but I the line of thinking that a single counterexample is GENERAL proof against the usefulness of an idea is, I think, not the right way to think in a world which is very complex, and where some ideas are more useful than others at different times, and vice versa.

Comments for this post are closed

Comments for this post are closed

Comments for this post are closed

I went thru the WSJ article.

The article mentions oil prices and sort of implies that oil prices drive inflation.

My question - Is the cost-push inflation theory still valid ?

I am referring to the article - Inflation - The Cost-Push Myth - By Dallas Batten - Inflation_Jun_Jul 1981, Federal Reserve Bank of St. Louis.

Comments for this post are closed

There is a remarkably strong correlation in recent years between (1) crude oil prices, and (2) breakeven 5-year 5-year-forward expected inflation from the TIPS market.

Why should a drop in oil prices NOW, a notoriously volatile commodity, affect long-run expected inflation? It doesn't seem to make sense, but the correlation is very strong. The theory on the Street is that falling oil prices reduce the inflation risk premium.

From public statements, it appears Yellen endorses that theory. The Fed has been dismissive of movements in the TIPS market.

"Why should a drop in oil prices NOW, a notoriously volatile commodity..."

What is a better predictor of oil prices in the future than oil prices today? If you have an answer to that then why are you not a billionaire?

Comments for this post are closed

Comments for this post are closed

Does the Fed just lack the willingness to create inflation? Are they confused?

Comments for this post are closed

I find it interesting how discussions related to inflation and monetary policy never mention velocity.

Milton Friedman seemed to be to struggle to explain changes in velocity, but he always considered it a critical metric when studying monetary policy and inflation.

https://research.stlouisfed.org/fred2/graph/?id=M2V,M1V,MZMV,

Explains the low inflation and proves the Fed has been pushing string for 6-7 years.

The ideology that believes profits must never track the interstate on savings has forced slashing of labor costs to increase profits, but slashing labor costs drags down gdp, and the profits go into stagnant pools of money without being paid to workers who then buy stuff.

Comments for this post are closed

judy, judy, judy judy . . .

Comments for this post are closed

They should maintain the nominal GDP trend.

This may be very important if we are slipping into recession.

Comments for this post are closed

OK, assume we are slipping into a recession.

Exactly what should the Fed do to maintain nominal GDP growth?

This is a serious question that I am not sure how to answer.

They reverse the recent rate hike and resume QE. Will that do it?

Is that what Scott Summer would recommend?

Yes, and lower interest on reserves

Comments for this post are closed

Comments for this post are closed

Comments for this post are closed