Why talk about the “living” when they´re handsomely compensated to elucubrate about the “dead”?

Walking dead_0

My partner James Alexander sent me something that gave me this idea…

And the “dead”, as you may have surmised, is Inflation!

As the chart depicting (from the Atlanta Fed Inflation Project) the flexible and sticky CPI YoY inflation makes very clear, inflation has been dead for at least a quarter century.

Walking dead_1

What the chart makes clear:

  1. An inflationary process, like during the “Great Inflation” of the 1970s, is characterized by increases in both the flexible and sticky components of the CPI (or any other price index)
  2. When you have price shocks like in the 00s, where between 2003 and 2008 oil shocks were prevalent, the flexible components “swing along” while the sticky components “stay put”. That´s the outcome when the Fed is successful in maintaining nominal stability (satisfactory NGDP growth along an adequate trend path).
  3. When, as in 2008, the Fed, suddenly fearful of price shocks that disturb the flexible components, engineers a massive demand shock (deep drop in NGDP) to quench “inflation”, the result is a long depression! Note that even the sticky prices are affected!

To justify their handsome remuneration, our sages at the Fed keep “talking-up” a problem that has long been dead. Much easier than worry about the (sometime barely) living!

3 thoughts on “Why talk about the “living” when they´re handsomely compensated to elucubrate about the “dead”?

  1. There is no chance that inflation will get out of control when the 10 year Treasury is paying less than 2.5%. For 95 years, the Fed paid zero IOR. That is normal and ending the payment of IOR is what needs normalizing the most. Before raising IOR again, the Fed should start normalizing the size of its balance sheet. Why not commence shrinking the balance sheet by $5 billion or $10 billion per month? That rate can be increased once core PCE meets or exceeds 2% for 3 months.

  2. The chart seems to show mild inflation in the sticky components from late 2013 to the end of 2015 (as far as the chart runs), while the flexible components plunged late 2013-late 2014 and then partly rebounded in the second half of 2015. If swings in the flexible components reflect supply shocks, which the Fed should ignore in setting monetary policy, the Fed’s performance since late in 2013 looks (from this chart, at least) pretty good, does it not?

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