Inflation, Feldstein´s Phobia

He´s been paranoid with inflation forever. Six and a half years ago, he wrote:

The US last week showed its first signs of deflation for 55 years, prompting inevitable fears of further deflation in the future. Yet the primary reason for the negative rate of US inflation is the dramatic 30 per cent fall of commodity prices. That will not happen again [what certainty]. Moreover, excluding food and energy, consumer prices are up 1.8 per cent from a year ago. That is the good news: the outlook for the longer term is more ominous.

After after various warnings in the interim period,

Today (where I´ve corrected his mentions of the CPI with the PCE):

The current inflation picture is more confusing. The annual (PCE)headline rate over the past 12 months was only 0.2% 0.3%, far short of the Fed’s 2% target. This reflected the dramatic fall in energy prices during the previous year, with the energy component of the consumer Personal Consumption Expenditure (PCE) price index down 13%. The rate of so-called (PCE)core inflation (which excludes energy purchases) was 1.8% 1.3%. Even that understates the impact of energy on measured inflation, because lower gasoline prices reduce shipping costs, lowering a wide range of prices.

The point is simple: When energy prices stop falling, the overall price index will rise close to 2%. And the FOMC members’ own median forecast puts inflation at 1.8% in 2017 and 2% in 2018.

Notice that low inflation is always due to commodity/oil prices and that will end! How can a Harvard professor be hooked in reasoning from a price change I´ll never fathom! He´s not alone because that´s exactly what´s going on with a bunch of FOMC members also.

“When energy prices stop falling, the overall price index will rise close to 2%”. Not true. In the two years prior to the tumble in oil prices, the price of oil was high and relatively stable. Nevertheless, inflation, both the headline and core PCE were gently falling!

What´s behind the fall in oil/commodity prices and the rise in the dollar over the past year or so is the downtrend in NGDP growth.

And that results from FOMC tightening. No need to increase rates, talk of “tightening” is sufficient to get the job done!