Is There Really A Trade-Off Between Inflation And Unemployment? — Brian Romanchuk

Rather than attempt to explain what the mainly neoclassical economists are going on about, I want to step back and try to translate their debate into terms that would be understood by people who do not share the same assumptions. I am pretty sure that post-Keynesian economists have a lot to say about the topic as well, but once again, they tend to be discussing wonkish points that would elude an outsider.…

I have an engineering background, and engineering is largely the science of trade-offs. I have no strong objections to qualitative discussions, but I would argue that we need to at least know the sign of the exchange ratio between two variables in order to say that there is a trade-off between them.

Very simply, if we can have a policy that lowers both the unemployment rate and the inflation rate (or at least leaves inflation unchanged), we cannot pretend there is a meaningful "trade-off" between them.

And this is hardly theoretical: in the United States, we saw a near monotonic decrease in the unemployment rate after the Financial Crisis, yet the inflation rate has done absolutely nothing interesting....

Bond Economics
Is There Really A Trade-Off Between Inflation And Unemployment?
Brian Romanchuk

Brian Romanchuk — Brief TIPS Market Comment

The U.S. inflation-linked bond (TIPS) market is in an interesting position right now. Inflation protection seems cheap, but the question always remains: is it cheap for a reason? Unfortunately, I am not able to answer that question, I am going to just briefly outline the debate….

Bond Economics 

Brief TIPS Market Comment
Brian Romanchuk

Dean Baker — Does China's 2.5 Percent Inflation Rate Really Explain the Decline in the Value of Its Currency Against the Dollar?

The vast majority of economists believe that the Fed's asset holdings keep down U.S. interest rates. It is inconsistent to believe that the Fed's holdings of U.S. assets keep down interest rates here, but China's holding of foreign assets does not keep down the value of its currency.

Beat the Press
Does China's 2.5 Percent Inflation Rate Really Explain the Decline in the Value of Its Currency Against the Dollar?
Dean Baker | Co-director of the Center for Economic and Policy Research in Washington, D.C

Brian Romanchuk — Why Is A Positive Inflation Rate A Good Thing?

One of the questions that often comes up in economic discussions is: why is a positive inflation rate seen as a good thing? There are a few angles to this question, which makes it somewhat more complex. I am somewhat ambivalent on the subject, but I believe the best answer lies in the area of political economy, not economic theory.…

Bond Economics
Why Is A Positive Inflation Rate A Good Thing?Brian Romanchuk

Jason Smith — It's the 80s!

Interesting look at the history.

Information Transfer Economics
It's the 80s!
Jason Smith

Craig Torres — U.S. Stats Officials Say Measurements of GDP, Inflation Are Off

Top officials from two U.S. government economic-statistics agencies said their measurement tools are understating growth and overstating some components of inflation by modest amounts, while cautioning that this doesn’t explain the sluggish expansion in recent years....

Bloomberg
U.S. Stats Officials Say Measurements of GDP, Inflation Are Off

Craig Torres

ht Yves Smith at Naked Capitalism

TASS — Russia’s Elvira Nabiullina named 2016 European Central Banker by The Banker magazine

UK-based finance magazine The Banker named Elvira Nabiullina, who is the head of the Central Bank of Russia, as the European central banker of the year in 2016.

The Banker cited as one of the most important reasons to rank Nabilullina as the top 2016 European Central Banker her achievements in controlling Russia’s inflation rate.

"The efforts of the Central Bank head has led to the fact that the rate of inflation by the end of 2016 fell below 6% from 12.9% in 2015," according to the British magazine....

TASS
Russia’s Elvira Nabiullina named 2016 European Central Banker — The Banker magazine

Narayan Kocherlakota — The Fed Must Attack Low Inflation

Maintaining inflation near 2 percent is important because it provides consumers and businesses with certainty. It's like a yardstick -- if people are counting on it to be 36 inches long, being an inch short is as bad as being an inch over.

Borrowers and lenders, for example, need to know how much a dollar will be worth when the time comes to pay it back. Below-target inflation punishes borrowers by making it more expensive than expected to pay off their loans.

Persistently low inflation can also lead the public to expect more of the same. This makes interest rates look higher when the effect of inflation is taken into account -- a phenomenon that hurts the Fed's ability to help the economy by lowering rates.

This is completely crazy. Central banks are premised on maintaining low stable inflation.

The problem is not low stable inflation under 2%. This is not causing economic malaise.

The issue is insufficient effective demand. Firms are reticent to invest even at historically low interest rates because of lagging demand for their products.

In addition, the world is experiencing the end of a long commodity bubble as China rebalances and Europe wrestles with the effects of a flawed currency union.

With "experts" like this, we are so screwed.

Bloomberg View
The Fed Must Attack Low Inflation
Narayan Kocherlakota | Lionel W. McKenzie professor of economics at the University of Rochester, and president of the Federal Reserve Bank of Minneapolis from 2009 through 2015

Jason Smith — Is CPI an information-theoretic measure of labor force size?

Interesting speculation on inflation rate.

Information Transfer Economics
Is CPI an information-theoretic measure of labor force size?
Jason Smith

David Ruccio — What is inflation?

What is inflation? = What does "inflation" mean?

Many things, and different things to different people, since it is not an observable but an estimate based on choice of standards of measurement and subject to the limitations of measuring aggregates. There is no such "thing" as inflation, and economists even disagree over its technical definition and measurement.

Professor Ruccio is unimpressed with the official narrative:

My own view, for what it’s worth, is the real rate of inflation for consumer goods is higher than the official rate of 2.2 percent (over the past 12 months), thereby understating the extent to which working people are facing rising prices for the commodities they need to purchase in order to maintain themselves and their families. In addition, most people are receiving wages and salaries that simply are not rising much more, from one year to the next, than the official inflation rate. 

Therefore, it’s not surprising that people are feeling squeezed and find the kinds of economic policies advocated by mainstream economists quite strange—both the call for austerity by conservative economists (based on the idea that galloping inflation is right around the corner) and the call for more inflation (based on the idea that real interest rates should be negative, in order to boost economic activity). Neither policy—abounding as they are in metaphysical subtleties and theological niceties—would help working people who, right now, are facing both rising prices and stagnant incomes.

Then there is the issue of assets "appreciating" (good) but not "inflating" (bad) whereas goods prices are never said to "appreciate" but only "inflate." Disconnect?

Occasional Links & Commentary
What is inflation?
David F. Ruccio | Professor of Economics University of Notre Dame Notre Dame

Brian Romanchuk — Primer: What Is Breakeven Inflation?

Is the bond market a better guide to inflation expectations than surveys?

The breakeven inflation rate is a market-based measure of expected inflation. It is the difference between the yield of a nominal bond and an inflation-linked bond of the same maturity.

Since investors' money is on the line, they presumably have an interest in pricing inflation correctly. It is viewed as a more reliable measure of inflation expectations than those measured by surveys. In this article, I explain how this concept is used in bond market economic analysis.

Bond Economics
Primer: What Is Breakeven Inflation?
Brian Romanchuk

Walter Hickey — POLL: Americans Think Inflation Is Way Higher Than It Really Is

A new Business Insider-SurveyMonkey Audience poll has found that Americans know shockingly little about the budget, federal deficits and other major economic indicators....31% of respondents on our survey got the inflation rate within a point of the correct answer.

 But more often, respondents drastically overestimated inflation. 39% said the inflation rate was at least 5%.

22% thought inflation was in double digits.

On average, respondents said inflation is 32%. That number is skewed by a handful of respondents who gave answers in the three and four figures, contending that we are already experiencing Weimar-style hyperinflation....

The Cleveland Fed surveyed 20,000 people between 1998 and 2001 and learned that on average Americans thought inflation was 6%. Over that period, the actual average inflation rate was 2.7%.

Business Insider
POLL: Americans Think Inflation Is Way Higher Than It Really Is
Walter Hickey

Entirely understandable since the most volatile prices that are factored out of CPI are the one that people notice most. But still, pretty ignorant. And some people are clearly bonkers.

Bill McBride — Fed: Household Debt Service Ratio near lowest level in 30+ years

These ratios show the percent of disposable personal income (DPI) dedicated to debt service (DSR) and financial obligations (FOR) for households.... 

This data has limited value in terms of absolute numbers, but is useful in looking at trends.

Combo of low rates and deleveraging. No credit boom on the horizon. Fed reports inflation trending down too. Housing starts remain weak but increasing slowly. Tepid recovery continues.

Calculated Risk
Fed: Household Debt Service Ratio near lowest level in 30+ years
Bill McBride

Bill McBride — Bernanke: How are long-term rates likely to evolve over coming years?

Bernanke: "...it is useful to decompose longer-term yields into three components: one reflecting expected inflation over the term of the security; another capturing the expected path of short-term real, or inflation-adjusted, interest rates; and a residual component known as the term premium. Of course, none of these three components is observed directly, but there are standard ways of estimating them....

"If, as the FOMC anticipates, the economic recovery continues at a moderate pace, with unemployment slowly declining and inflation expectations remaining near 2 percent, then long-term interest rates would be expected to rise gradually toward more normal levels over the next several years."

Calculated Risk
Bernanke: How are long-term rates likely to evolve over coming years?
Bill McBride