For the past 70 years (yes, since 1951), I have been watching my fellow Argentinians talk about inflation (less than 10% per year), high inflation (around 20%), very high inflation (around 50%), hyperinflation (around 50% but per month). I have also watched and studied the inflationary experiences of other Latin American countries.
My first rule is that if a country has an inflation rate of over 10% per year over a period of at least three years regardless of what price index is used, then we can conclude that the national government is financing all or part of its deficit by relying on the inflation tax.
My second rule is that if a country has a sharp increase in all price indexes in a period of not more than 3 months (say over 20% from January to April) followed by much lower increases (say monthly rates of no more than 1%) then there was a need to adjust relative prices through increases in some nominal prices, and the adjustment doesn't amount to inflation.
My third rule is that any combination of an initial sharp increase in all price indexes with monthly rates of more than 1% over a period longer than 3 months, then the relative-price adjustment has failed and be ready for another adjustment.
My fourth rule is that in any other situation one has to pay close attention to mix signals from price indexes. Check first for relative-price adjustments and their effects on price indexes. Then check the convergence of all price indexes to the same inflation rate. Always remember that there are significant differences in how nominal prices of the many goods and services change over time.
We can apply those rules to discuss the details of all past experiences in all countries after WWII. To apply them to the understanding of what is going on in the U.S., we should start by looking at what has been happening with all price indexes, separating between indexes in which a few goods account for at least 40% of the basket and all others. A final judgement must be delayed until at least January 2022.
Also, remember that the available data on government expenditures and their financing are not reliable and hardly relevant to determine the relative importance of the inflationary tax and debt financing. That's true in Argentina, and everywhere, including the U.S.
Looking at the 3-month-over-3-month inflation rate is a useful way to smooth out unusual factors, so the suggestion of a near-term 8% annual rate of inflation rate is apt. The question is whether high inflation (e.g. greater than 2.5% or 3% annual rate) will be with us for a while because, if so, then interest rates will have to go up more than otherwise. (And currently interest rates are low mainly because of central bank financial repression around the world.) Lots of arguments on both sides of the question of persistent high inflation to come. My sense is that cat is already out of the bag and inflation fighting will be the next phase of monetary policy, sooner than central bankers are saying publicly.
Nice breakdown of that. I have been scratching my head about how they are calculating and then reporting on inflation lately, but haven't had the time or energy to dig into it. That 8% number is pretty scary; I am going to have to ask for a larger than average raise to keep up.
Another thought experiment with inflation: Arnold points out that selection of a base period affects the picture of inflation that one observes. Consider that we don't know what the right base period is. Suppose we are utterly agnostic in that choice and assume the base period is all the available CPI data. Depending on which database one uses, those data go back to 1946 (CPI All Urban Consumer seasonally adjusted, the currently published or "headline" index), 1913 (the non-seasonally adjusted version of same), approximately 1885 (Robert Shiller's data base on stock prices), and perhaps even a couple hundred years or more (Department of Commerce's Historical Statistics of the United States). Let's use the more recent data base from 1946. Suppose that we desired inflation to have averaged 2% per year for the last 75 years or so. What would current price levels (the CPI) have to do to bring CPI inflation in line with that long-run target? They would have to decline approximately 38% given that the average inflation rate for the last 75 years has been closer to 3% than 2%, despite the last 10 years of sub-2% inflation. So, one could argue we've had too much inflation for long, long time, not too little. I'm not suggesting that we suffer a 38% deflation in one fell swoop. I am suggesting that the last 10 years of inflation averaging about 1.8% is good enough. Running the economy "hot" to bring average inflation above 2% (over what period time and relative to what base???) is simply unnecessary.
“But food and energy were not the drivers of the recent run-up in the CPI. In contrast to past transitory upticks in inflation, in April and May the core CPI increased by more than the overall CPI. The food and energy sectors actually exerted a slight moderating influence.”
Did you mean to say that overall CPI increased by more than core CPI?
For the past 70 years (yes, since 1951), I have been watching my fellow Argentinians talk about inflation (less than 10% per year), high inflation (around 20%), very high inflation (around 50%), hyperinflation (around 50% but per month). I have also watched and studied the inflationary experiences of other Latin American countries.
My first rule is that if a country has an inflation rate of over 10% per year over a period of at least three years regardless of what price index is used, then we can conclude that the national government is financing all or part of its deficit by relying on the inflation tax.
My second rule is that if a country has a sharp increase in all price indexes in a period of not more than 3 months (say over 20% from January to April) followed by much lower increases (say monthly rates of no more than 1%) then there was a need to adjust relative prices through increases in some nominal prices, and the adjustment doesn't amount to inflation.
My third rule is that any combination of an initial sharp increase in all price indexes with monthly rates of more than 1% over a period longer than 3 months, then the relative-price adjustment has failed and be ready for another adjustment.
My fourth rule is that in any other situation one has to pay close attention to mix signals from price indexes. Check first for relative-price adjustments and their effects on price indexes. Then check the convergence of all price indexes to the same inflation rate. Always remember that there are significant differences in how nominal prices of the many goods and services change over time.
We can apply those rules to discuss the details of all past experiences in all countries after WWII. To apply them to the understanding of what is going on in the U.S., we should start by looking at what has been happening with all price indexes, separating between indexes in which a few goods account for at least 40% of the basket and all others. A final judgement must be delayed until at least January 2022.
Also, remember that the available data on government expenditures and their financing are not reliable and hardly relevant to determine the relative importance of the inflationary tax and debt financing. That's true in Argentina, and everywhere, including the U.S.
Looking at the 3-month-over-3-month inflation rate is a useful way to smooth out unusual factors, so the suggestion of a near-term 8% annual rate of inflation rate is apt. The question is whether high inflation (e.g. greater than 2.5% or 3% annual rate) will be with us for a while because, if so, then interest rates will have to go up more than otherwise. (And currently interest rates are low mainly because of central bank financial repression around the world.) Lots of arguments on both sides of the question of persistent high inflation to come. My sense is that cat is already out of the bag and inflation fighting will be the next phase of monetary policy, sooner than central bankers are saying publicly.
Nice breakdown of that. I have been scratching my head about how they are calculating and then reporting on inflation lately, but haven't had the time or energy to dig into it. That 8% number is pretty scary; I am going to have to ask for a larger than average raise to keep up.
Another thought experiment with inflation: Arnold points out that selection of a base period affects the picture of inflation that one observes. Consider that we don't know what the right base period is. Suppose we are utterly agnostic in that choice and assume the base period is all the available CPI data. Depending on which database one uses, those data go back to 1946 (CPI All Urban Consumer seasonally adjusted, the currently published or "headline" index), 1913 (the non-seasonally adjusted version of same), approximately 1885 (Robert Shiller's data base on stock prices), and perhaps even a couple hundred years or more (Department of Commerce's Historical Statistics of the United States). Let's use the more recent data base from 1946. Suppose that we desired inflation to have averaged 2% per year for the last 75 years or so. What would current price levels (the CPI) have to do to bring CPI inflation in line with that long-run target? They would have to decline approximately 38% given that the average inflation rate for the last 75 years has been closer to 3% than 2%, despite the last 10 years of sub-2% inflation. So, one could argue we've had too much inflation for long, long time, not too little. I'm not suggesting that we suffer a 38% deflation in one fell swoop. I am suggesting that the last 10 years of inflation averaging about 1.8% is good enough. Running the economy "hot" to bring average inflation above 2% (over what period time and relative to what base???) is simply unnecessary.
“But food and energy were not the drivers of the recent run-up in the CPI. In contrast to past transitory upticks in inflation, in April and May the core CPI increased by more than the overall CPI. The food and energy sectors actually exerted a slight moderating influence.”
Did you mean to say that overall CPI increased by more than core CPI?
Gulp.