Thursday, September 29, 2016

"Inflation!" Sighting

Yeah but oil..... was.... at... $140... oh never mind.


Ignacio said...

Is good inflation is going up, even if oil is going up, and even if wages are stagnating? Am I right?

CB logic...

Matt Franko said...

Well I don't know how they can call it "inflation!" When prices have fallen from $140 to $40...

(Time Domain again... or lack thereof ...)

Tom Hickey said...

Good point, Matt. "Inflation" is one of those bullshit words that does double duty as descriptive and normative with a view toward prescription.

"inflation" as price increase has a pejorative emotional charge since most people hate rising prices, which they view as reducing their purchasing power since wage increases generally lag price increases, if they come at all. As a result the real wage declines.

So the big economic issue is over controlling "inflation."

However, "inflation" is a very ambitious term. In the first place, it is an estimate rather than an observable.

Secondly, asset appreciation is excluded from inflation while wage increases are considered "inflationary. So the term is loaded against workers.

Thirdly, inflation is used in ordinary language for any increase in "prices," even though it is technically defined as a continuous increase in the price level. The price level is an approximation rather than measurable directly. It's difficult comparing "inflation" historically and geographically because indices are computed differently based on different methodological assumptions.

Fourthly, The terminology is misleading. "Inflation" applies to any continuous rise in the price level even during recoveries, as gains against disinflation during the downturn. But there is no corresponding term, "deflation," for the fall in prices since "deflation" is defined as the rate of change of the price level falling below zero.

The correct terminology would be to contrast deflation as the rate of change of the price level below zero to the inflation as the rate of change of the price level above full employment, with full employment itself properly defined instead of in terms of a natural rate of interest and natural rate of employment, since this has been shown to be erroneous and misleading.

The the rate of change on the way down toward zero in downturns would be called disinflation and the rate of change on the upside during recover would be called "reflation" rather than inflation, which only occurs at full employment.

See Abba Lerner, Flation: Not Inflation