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!

Revisiting Martin Feldstein, and The Married Lady Who Did Not Like Sex

A Benjamin Cole post

Flash report: Latest stats from U.S. are that hourly wages in May are up 2.0% YOY.

Readers bear with me, I will start with an analogy.

So, there was a married lady, who disliked sex, and thought marriage counseling was needed—for her husband. She thought he should appreciate her more-elevated virtues, her intellect, her taste in furnishings, her hostess skills, and her career. He should forget base gratifications.

Which brings to mind Martin Feldstein, Harvard econ prof, who has been preaching Inflationary End Times since at least 2009, as I pointed out in my last post here. In his last missive (June 29, for Project Syndicate) Feldstein warned wage hikes were going to run wild, threatening “accelerating” inflation. (Please note that inflation never threatens to rise to a higher level, such as 2.5%, and stay there. It always threatens to “accelerate.”)

But, the BLS just reported May wages were up a galloping 2% YOY. Even wages are not accelerating, let alone prices.

Why The Married Lady Story?

What do employers and employees really want from the economy? They want to make money, lots of it. Call it base gratification, if you will.

The Feldsteins of the world say there is a higher virtue that should be honored in the marketplace: that of zero inflation.

Feldstein is the married lady of macroeconomics.

Democracy

Let me pose this question: In a modern democracy, how will voters feel about free enterprise and capitalism if there are chronic “tight” labor markets?

How will voters feel if there is chronically high unemployment and weak labor markets and stagnant wages?

The Feldsteins of the world may wish to ponder the question.

Because a marriage should be about mutual gratification.

The “scene” that Feldstein supposedly is looking at:

Martin Feldstein Drags Out The Inflation Bogeyman One More Time Again

A Benjamin Cole post

The Federal Reserve must end its “excessively easy monetary policy [that] can no longer achieve a sustained increase in employment.”

So says (again) Martin Feldstein, renowned Harvard econ prof, old Reaganaut, writing on June 29 for the Project Syndicate.

Of course, Feldstein has been soap-boxing an inflationary doomsday since at least April 19 of 2009. Writing for the Financial Times, under the banner Inflation Is Looming On America’s Horizon, Feldstein said then only lower commodity prices were keeping inflation at bay, and stripping food and energy, that the CPI was already at 1.8%. “That is the good news: the outlook for the longer term is more ominous,” warned Feldstein.

The Fed was monetizing federal deficits, observed Feldstein, who literally concluded, “It is surprising that the long-term interest rates do not yet reflect the resulting risk of future inflation.”

We can hope Feldstein did not follow his own investment advice. In 2009, or all the subsequent years in which he has constantly rung the inflation klaxons.

And Now?

Evidently having given up on the QE-scaremongering, Feldstein now is running with a tight-labor markets argument. Rising wages will mean higher prices.

And indeed, average hourly earnings in May were up 2.3% YOY, and productivity has been weak. However, Feldstein ignores that for seven years, unit labor costs have been nearly dead in the water. From 2007 to 2015, unit labor costs are up about 7%, or less than 1% a year.

So, any increase in productivity going forward will tend to counteract higher wages, as has happened in the past. Really, a 2.3% annual wage increase is a reason for the monetary noose?

An Interesting Question

Suppose that the United States develops tighter labor markets, and official unemployment rates shrink.

In the 1990s, inflation ran between 4% and 1.5%, generally sinking as the decade went on. The unemployment rate shrank also, finishing the decade at 4.2%, well below the current 5.5% rate. So, based on recent history, the U.S. may not see that much of a budge in inflation.

But even if the U.S. did see some inflation—would it be a calamity to have tight labor markets and, say, steady 4% inflation? I mean, to anyone except central bankers and inflation-mongers?

How would the voters feel about free markets and capitalism if the U.S. had sustained tight labor markets and constant real wage growth? Or, conversely, lots of unemployment and wage stagnation?

Dudes, like I always say, print more money. When it is boom times in Fat City, voters will love making money the American way.

Feldstein made good, if right-wing PC, suggestions for structural reforms of labor markets. Sure, bring ‘em on. But the Fed should print lots of money too.

 

 

 

 

Surprise! Martin Feldstein, unwittingly, makes the case for nominal stability

In the WSJ, MF writes “The U.S. Underestimates Growth”:

…This is why we shouldn’t place much weight on the official measures of real GDP growth. It is relatively easy to add up the total dollars that are spent in the economy—the amount labeled nominal GDP. Calculating the growth of real GDP requires comparing the increase of nominal GDP to the increase in the price level. That is impossibly difficult.

But John Cochrane gives a “convenient” interpretation of MF in “Feldstein on Inflation“:

The basic idea is that inflation may be overstated, because it doesn’t do a good job of handling new products. As a result, real output growth may be a bit stronger than measured.  Marty runs through a lot of sensible conclusions.

He doesn’t talk about monetary policy, but that’s interesting too. So what if inflation really is (say) 3% lower than we think it is, and therefore real output growth is 3% larger than it really is?
That would mean we are a lot closer to “normal” of course.

It´s not Friedman´s Chicago any longer!

Note: Nominal Stability a.k.a. NGDP Level Targeting

Why doesn´t Martin Feldstein take a hike?

MF is back at his favorite subject: US inflation:

The Federal Reserve now faces the tough task of unwinding the easy-money policy that has helped bring about the current solid economic upturn. But its projected path for increasing the short-term federal-funds rate over the next few years is dangerously slow. Most members of the Federal Open Market Committee want the real interest rate to be negative at the end of 2015 and approximately zero at the end of 2016. Only in 2017 would the real fed-funds rate even exceed 1%.

Overall unemployment now is 5.5%. This has historically been regarded as about the lowest rate that can be sustained without starting an inflation spiral. The Fed is nevertheless projecting that its policies will cause unemployment to decline to 5% by the end of 2015 and even lower in the next two years. Historical experience suggests that means inflation would eventually increase year after year.

And on he goes, wrong on all counts!

But his views have become a stale joke. Six years ago [April 09], for example, he saw “inflation looming”:

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.

However, we know commodity and oil prices have fallen again – headline inflation is again courting negative rates while core prices are now up only 1.4% –  and the (inflation) outlook is anything but ominous! That´s not just hindsight. MF had (and has) only a few inflation-nutters of this caliber riding along.