conversableeconomist

Hyperinflation and the Zimbabwe Example

Back in the Paleolithic era when I was learning economics, Germany\’s hyperinflation of the 1920s was the classic example of hyperinflation. When I was teaching intro economics classes in the late 1980s, I would use hyperinflation examples from Latin America, and by the mid-1990s, I could use examples from eastern Europe after the collapse of the Soviet Union. But for the next few years, I suspect, the canonical example of hyperinflation will be what has happened in Zimbabwe from 2007-2009, which has the dubious distinction of being the only hyperinflation of the still-young 21st century. Janet Koech of the Federal Reserve Bank of Dallas offers a nice overview of \”Hyperinflation in Zimbabwe,\” which appears in the Annual Report of the Globalization and Monetary Policy Institute. 

Koech reports: \”From 2007 to 2008, the local legal tender lost more than 99.9 percent of its value.\” Here\’s a picture of the infamous $100 trillion bill, issued in 2009. The existence of the bill is black comedy, because represents economic devastation for the 12 million or so people of Zimbabwe.

Hyperinflation doesn\’t have a precise definition, but a common rule-of-thumb is that it occurs when the rate of price inflation exceeds 50% per month. If this rate is compounded over a year, prices multiply by a factor about 130 in a year. Here\’s the monthly inflation rate taking off in in Zimbabwe.

Zimbabwe\’s economic disaster was built on terrible economic policy and bad luck. A combination of droughts and ill-designed land \”reforms\” savaged production of important crops like maize and tobacco. Government spending was nearly uncontrolled. Foreign debts mounted. And then the government of Zimbabwe tried to solve its problems by turning on the printing presses.

Koech writes: \”Hyperinflation and economic troubles were so profound that by 2008, they wiped out the
wealth of citizens and set the country back more than a half century. In 1954, the average GDP per
capita for Southern Rhodesia was US$151 per year (based on constant 2005 U.S.-dollar purchasing power-parity rates). In 2008, that average declined to US$136, eliminating gains over the preceding 53
years …\”

Hyperinflation causes extraordinary contortions in an economy. When all prices are rising dramatically all the time, comparing prices become essentially impossible, and the price mechanisms itself breaks down. Koech describes (footnotes omitted):

\”The Economic Times newspaper noted on June 13, 2008, that “a loaf of bread now costs what 12 new cars did a decade ago,” and “a small pack of locally produced coffee beans costs just short of 1 billion Zimbabwe dollars. A decade ago, that sum would have bought 60 new cars.” At the height of the hyperinflation, prices doubled every few days, and Zimbabweans struggled to keep their cash resources from evaporating. Businesses still quoted prices in local currency but revised them several times a day. A minibus driver taking commuters into Harare still charged passengers in local currency but at a higher price on the evening trip home. And he changed his local notes into hard currency three times a day.

The government attempted to quell rampant inflation by controlling the prices of basic commodities and services in 2007 and 2008. Authorities forced merchants—sometimes with police force—to lower prices that exceeded set ceilings. This quickly produced food shortages because businesses couldn’t earn a profit selling at government-mandated prices and producers of goods and services cut output to avoid incurring losses. People waited in long lines at fuel stations and stores. While supermarket shelves were empty, a thriving black market developed where goods traded at much higher prices. Underground markets for foreign exchange also sprang up in back offices and parking lots where local notes
were converted to hard currencies at much more than the official central bank rate. Some commodities, such as gasoline, were exclusively traded in U.S. dollars or the South African rand, and landlords often accepted groceries and food items as barter for rent.\”

Here are some manifestations of hyperinflation: empty supermarket shelves (after all, anything real will hold value better than a hyperinflating currency) and gallows humor.

By early 2009, no trust in the Zimbabwe currency remained, and the Zimbabwe economy essentially \”dollarized.\” Koech writes: \”While the South African rand, Botswana pula and the U.S. dollar were granted official status, the U.S. dollar became the principal currency. Budget revenue estimates and planned expenditures for 2009 were denominated in U.S. dollars, and the subsequent budget for 2010 was also set in U.S. dollars. An estimated four-fifths of all transactions in 2010 took place in U.S. dollars, including most wage payments …\”

Here\’s the Dishonor Role of Hyperinflations during the last couple of hundred years.

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Consumer Price Index vs. Personal Consumption Expenditures Index

 The Consumer Price Index (CPI) from the Bureau of Labor Statistics is the measure of inflation that gets the most attention, both from the media and in most intro econ classrooms. But I\’m thinking that the Personal Consumption Expenditures (PCE) index measure of inflation should start to get equal or perhaps even greater attention.

For starters, I hadn\’t known–although I probably should have known–that when the Federal Reserve looks at rates of inflation, it focuses more on PCE than on CPI. The announcement of this policy change was buried in a footnote in the Fed\’s  Monetary Policy Report to the Congress, February 17, 2000. There\’s some jargon in the quotation, which I\’ll unpack in a minute, but here\’s the comment:

\”In past Monetary Policy Reports to the Congress, the FOMC [Fed Open Market Committee] has framed its inflation forecasts in terms of the consumer price index. The chain-type price index for PCE draws extensively on data from the consumer price index but, while not entirely free of measurement problems, has several advantages relative to the CPI. The PCE chain-type index is constructed from a formula that reflects the changing composition of spending and thereby avoids some of the upward bias associated with the fixed-weight nature of the CPI. In addition, the weights are based on a more comprehensive measure of expenditures. Finally, historical data used in the PCE price index can be revised to account for newly
available information and for improvements in measurement techniques, including those that affect source data from the CPI; the result is a more consistent series over time. This switch in presentation notwithstanding, the FOMC will continue to rely on a variety of aggregate price measures, as well as other information on prices and costs, in assessing the path of inflation.\”

So what is all this stuff about a \”PCE chain-type index\” compared to the \”fixed weight nature of the CPI, and how the PCE is \”a more comprehensive measure of expenditures,\” and how \”historical data in the PCE price index can be revised? For explanations of these differences, Phil Davies of the Minneapolis Fed offers a nice discussion of the CPI and PCE, along with much description of how price indexes have evolved over time, in \”Taking the Measure of Prices and Inflation,\” appearing in the December 2011 issue of the Region. For a FAQ page at the Bureau of Economic Analysis website comparing the CPI and PCE, look here. For a more detailed discussion of differences, see this article in the November 2007 Survey of Current Business.

As a starting point, here\’s a graph showing the difference between the CPI and the PCE, showing annual percentage changes in inflation according to each measure. Clearly, the difference between them isn\’t large. But just as clearly, the rate of inflation tends to be a little lower when using the PCE (the blue line is more often below the red than not(, and the rate of deflation in 2009 was a little smaller using the PCE, too.

There are four ways in which PCE differs from the CPI. I\’ll use the names the BEA gives them:

1) The scope effect. The two indexes cover similar but not identical categories of personal spending. Here\’s Davies from the Minneapolis Fed: \”[The PCE measures a broader swath of personal consumption than the CPI. For instance, the PCE captures expenditures by rural as well as urban consumers and includes spending by nonprofit institutions that serve households. And while the CPI records only out-of-pocket spending on health care by consumers, the PCE also tracks personal medical expenses paid by employers and federal programs such as Medicare. However, over 70 percent of the price data in the PCE is drawn from the CPI.\”

2) The weight effect. When combining all sorts of individual prices into an overall price index, those categories where people spend more get greater weight than those categories where people spend less. But the PCE and CPI  use different weights. Davies explains: \”The CPI reflects reported consumption in the Consumer Expenditure Survey, conducted for the BLS by the U.S. Census Bureau. To determine its expenditure shares, the PCE relies on business surveys such as the Census Bureau’s annual and monthly retail
trade surveys. Shelter accounts for the biggest difference in weighting between the two indexes; the share of personal spending devoted to housing is larger in the CPI because nonshelter expenditures in the CES are less than those estimated from business surveys.\”

3) The formula effect.  Here\’s the simple way to think about a price index: Identify a basket of goods, which has a certain quantity of each good in the basket, which represents consumption for a typical household. Calculate what it would take to buy that basket of goods at one date, and then calculate what it would take to buy the basket of goods at year later. Prices of some  individual goods will rise  while others will fall, but the change in the cost of the total basket of goods will be the amount of inflation.  For a long time, the Consumer Price Index was calculated with this \”basket of goods\” approach.

But as economists have long pointed out, this \”basket of goods\” approach oversimplifies in a way that surely overstates the true rise in the cost of living. There are two classic difficulties. One is that the basket of goods which represents consumption at the earlier time will not include newly created goods or improvements in the quality of goods that are available to people at the later time. Second, the basket of goods at the earlier time only made sense because it reflected prices at that time. Imagine that inflation was zero overall in a given year, but  prices shifted about so that people will naturally adjust their consumption , buying less of what is relatively more expensive and more of what is relatively cheaper. Thus, the basket of goods at the earlier time won\’t be a fair representation of what households would buy in a different configuration of prices at the later time.

There are at least partial solutions to these problems, but they increase the level of complexity in the calculation. For example, those who put together the \”basket of goods\” now rotate continuously what is included in the basket, so that as new goods are invented and old ones improved, they can enter the basket of goods being measured. In addition, they use mathematical formulas which take into account how people substitute between goods that relatively are more or less expensive, so that the pure effect of overall inflation in the price level can be separated out. While the CPI uses a mathematical formula that allows for some substitution in response to changes in relative prices (the \”fixed weight\” to which the Fed was referring in 2000), the PCE uses a formula that allows for a greater degree of substitution (the \”chain-type index\” to whih the Fed was referring in 2000).

4) Other effects.  There are some other minor differences in the CPI and PCE indexes, including how they do seasonal adjustments, how they treat airline fares, and some other issues.

Finally, one remaining difference between the CPI and the PCE is that the CPI, once published, is not revised. The CPI is used for contracts and for legislation–like adjusting Social Security benefits. The data series of the CPI over time was calculated using evolving methodologies,and when the way in which the CPI is calculated changes, no one goes back and recalculates historical CPI figures. The PCE is not tied up in such issues, and like the GDP estimates themselves, it is revised and altered over time, as adjustments are made to data and methods.  When the methods for calculating PCE are revised, these methods are then applied to all of the historical data as well, so that the PCE shows you a measure of how inflation affects personal expenditures over time, using a common methodology.

It may seem highly unlikely to think about teaching and using the PCE, rather than the CPI, as a measure of inflation. But remember a few decades ago when it seemed highly unlikely to think about moving from GNP to GDP–and now GDP is used almost all of the time.

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Will Federal Debt Lead to High Inflation?

In the Fall 2011 issue of the National Interest, John H. Cochrane explores the \”Inflation and Debt\” connection. He points out that most economists don\’t see it as very likely that government debt will be the proximate cause of inflation. They point to the sluggish economic recovery, which tends to hold down price and wage levels. They believe that if inflation gets started, the Federal Reserve can act to nip it in the bud.

Cochrane takes the other side of this argument. He writes: \”As a result of the federal government\’s enormous debt and deficits, substantial inflation could break out in America in the next few years. … The key reason serious inflation often accompanies serious economic difficulties is straightforward: Inflation is a form of sovereign default. Paying off bonds with currency that is worth half as much as it used to be is like defaulting on half of the debt. And sovereign default happens not in boom times but when economies and governments are in trouble.\”

Can the Federal Reserve stop inflation? Cochrane argues that much of the conventional economic thinking about anti-inflation policy assumes a background of a reasonably sound fiscal policy. \”[R]easonably sound fiscal policy .. is the central precondition for stable inflation. Major explosions of inflation around the world have ultimately resulted from fiscal problems, and it is hard to think of a fiscally sound country that has ever experienced a major inflation. So long as the government\’s fiscal house is in order, people will naturally assume that the central bank should be able to stop a small uptick in inflation. Conversely, when the government\’s finances are in disarray, expectations can become \”unanchored\” very quickly. … But what if our huge debt and looming deficits mean that the fiscal backing for monetary policy is about to become unglued?\”

Cochrane cites familiar evidence that federal indebtedness  is on an unsustainable path. He suggests that a process of \”fiscal inflation\” will unfold in this way:

 \”[O]ur government is now funded mostly by rolling over relatively short-term debt, not by selling long-term bonds that will come due in some future time of projected budget surpluses. Half of all currently outstanding debt will mature in less than two and a half years, and a third will mature in under a year. Roughly speaking, the federal government each year must take on $6.5 trillion in new borrowing to pay off $5 trillion of maturing debt and $1.5 trillion or so in current deficits.\”

\”As the government pays off maturing debt, the holders of that debt receive a lot of money. Normally, that money would be used to buy new debt. But if investors start to fear inflation, which will erode the returns from government bonds, they won\’t buy the new debt. Instead, they will try to buy stocks, real estate, commodities, or other assets that are less sensitive to inflation. But there are only so many real assets around, and someone has to hold the stock of money and government debt. So the prices of real assets will rise. Then, with \”paper\” wealth high and prospective returns on these investments declining, people will start spending more on goods and services. But there are only so many of those around, too, so the overall price level must rise. Thus, when short-term debt must be rolled over, fears of future inflation give us inflation today — and potentially quite a lot of inflation.\”

Cochrane argues that investors are already worrying about even the current low rates rates inflation, given the prevailing ultra-low interest rates, and that the result could be a slow-motion financial run:

\”Just how low are today\’s rates? The one-year rate is now 0.2%; the ten-year rate is about 2%, and the 30-year rate is only 4%. We have not seen rates this low in the post-war era. Furthermore, inflation is still running at around 2-3%, depending on exactly what measure of inflation we choose. If an investor lends money at 0.2% and inflation is 2%, he loses 1.8% of the value of his money every year. Such low rates are therefore unlikely to last. … But both the Fed\’s desire to keep rates this low and its ability to do so are surely temporary. …

\”A \”normal\” real interest rate on government debt is at least 1-2%, meaning a 4-5% one-year rate even if inflation stays at 2-3%. A loss of the special safety and liquidity discount that American debt now enjoys could add two to three percentage points. A rising risk premium would imply higher rates still. And of course, if markets started to expect inflation or actual default, rates could rise even more. …

\”These dynamics essentially add up to a \”run\” on the dollar — just like a bank run — away from American government debt. Unlike a bank run, however, it would play out in slow motion. … The United States rolls over its debt on a scale of a few years, not every day. So the \”run on the dollar\” would play out over a year or two rather than overnight…. Like all runs, this one would be unpredictable…. For that reason, I do not claim to predict that inflation will happen, or when. This scenario is a warning, not a forecast. Extraordinarily low interest rates on long-term U.S. government bonds suggest that the overall market still has faith that the United States will figure out how to solve its problems…. But we are primed for this sort of run. All sides in the current political debate describe our long-term fiscal trajectory as \”unsustainable.\”… As with all runs, once a run on the dollar began, it would be too late to stop it…. Neither the cause of nor the solution to a run on the dollar, and its consequent inflation, would therefore be a matter of monetary policy that the Fed could do much about. Our problem is a fiscal problem — the challenge of out-of-control deficits and ballooning debt. Today\’s debate about inflation largely misses that problem, and therefore fails to contend with the greatest inflation danger we face.\”

As Cochrane readily states, his analysis of the threat of a fiscal inflation is unconventional, and I\’m not yet a  convert. But I do think that his analysis hits a number of key points that deserve serious consideration.

The current path of federal borrowing is unsustainable–not this year or next year, but probably in the middle-term and certainly in the long term. Investors are not going to be eager to hold these burgeoning levels of debt. If the very low nominal interest rates and negative real rates that such debt is currently paying continue, investors will start looking for other assets. (Gold, anyone?)  If the interest rates on federal debt start rising, the federal debt problem will become much more severe in a hurry–and investors will continue to be less interested in investing. In this setting, the Federal Reserve is likely to be in an unpleasant pickle. The Fed has already taken up, at least in part, the task that it had during and after World War II of making it cheaper for the government to borrow–if necessary, by having the Fed buy Treasury debt directly. There will be heavy political pressure on the Fed to keep doing this–in effect, protecting the U.S. government from the costs of heavy borrowing by printing money. This scenario could play out as inflation, although I\’m less confident of that prediction than Cochrane. It might result in a heavy shock to the U.S. financial system, which is still struggling to recover from the problems of 2008 and 2009.

The bottom line is that the government needs to enact actual policies–not vague promises about policies that could be enacted in the future–that will reduce the path of future budget deficits. I\’d start with some steps that should be relatively (if not actually) easy, like phasing in a later retirement age a month per year over the next few decades. This step would make a substantial difference to Social Security and a modest difference to Medicare (because  such a large share of Medicare expenses happen later in life, not in the year or two right around retirement). A next step might be to resurrect many of the recommendations of the National Commission on Fiscal Responsibility and Reform–the so-called Bowles-Simpson commission–that  President Obama first appointed, but then ignored. I don\’t know whether Cochrane is correct that the federal debt problems will cause an inflation problem in the next few years, but on the present path, federal borrowing is going to bring a highly unpleasant crunch of some sort.

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Turkey Demand and Supply, and the Thanksgiving Dinner Price Index

(Originally appeared on Monday, 11/21. Bumped to today for your Thanksgiving entertainment.)

As Thanksgiving preparations arrive, I naturally find my thoughts veering to the evolution of demand for turkey, technological change turkey production, market concentration in the turkey industry, and price indexes for a classic Thanksgiving dinner. Not that there\’s anything wrong with that.

The last time the U.S. Department of Agriculture did a detailed \”Overview of the U.S. Turkey Industry\” appears to be back in 2007. Some themes about the turkey market waddle out from that report on both the demand and supply sides.

On the demand side, the quantity of turkey consumed rose dramatically from the mid-1970s to the mid-1990s, but since then has declined somewhat. The figure below is from the USDA study, but more recent data from the Eatturkey.com website run by the National Turkey Federation report that U.S. producers raised 244 million turkeys in 2010, so the decline has continued in the last few years. Apparently, he Classic Thanksgiving Dinner is becoming slightly less widespread.


On the production side, the National Turkey Federation explains: \”Turkey companies are vertically integrated, meaning they control or contract for all phases of production and processing – from breeding through delivery to retail.\” However, production of turkeys has shifted substantially, away from a model in which turkeys were hatched and raised all in one place, and toward a model in which all the steps of turkey production have become separated and specialized–with some of these steps happening at much larger scale. The result has been an efficiency gain in the production of turkeys.  Here is some commentary from the 2007 USDA report, with references to charts omitted for readability:

\”In 1975, there were 180 turkey hatcheries in the United States compared with 55 operations in 2007, or 31 percent of the 1975 hatcheries. Incubator capacity in 1975 was 41.9 million eggs, compared with 38.7 million eggs in 2007. Hatchery intensity increased from an average 33 thousand egg capacity per hatchery in 1975 to 704 thousand egg  capacity per hatchery in 2007.

Turkeys were historically hatched and raised on the same operation and either slaughtered on or close to where they were raised. Historically, operations owned the parent stock of the turkeys they raised supplying their own eggs. The increase in technology and mastery of turkey breeding has led to highly specialized operations. Each production process of the turkey industry is now mainly represented by various specialized operations.

Eggs are produced at laying facilities, some of which have had the same genetic turkey breed for more than a century. Eggs are immediately shipped to hatcheries and set in incubators. Once the poults are hatched, they are then typically shipped to a brooder barn. As poults mature, they are moved to growout facilities until they reach slaughter weight. Some operations use the same building for the entire growout process of turkeys. Once the turkeys reach slaughter weight, they are shipped to slaughter facilities and processed for meat products or sold as whole birds.

Turkeys have been carefully bred to become the efficient meat producers they are today. In 1986, a turkey weighed an average of 20.0 pounds. This average has increased to 28.2 pounds per bird in 2006. The increase in bird weight reflects an efficiency gain for growers of about 41 percent.\”

U.S. agriculture is full of these kinds of examples of remarkable increases in yields over a few decades, but they always drop my jaw. I tend to think of a \”turkey\” as a product that doesn\’t have a lot of opportunity for technological development, but clearly I\’m wrong. Here\’s a graph showing the rise in size of turkeys over time.

The production of turkey remains an industry that is not very concentrated, with three relatively large producers and then more than a dozen mid-sized producers. Here\’s a list of top turkey producers in 2010 from the National Turkey Federation: 


For some reason, this entire post is reminding me of the old line that if you want to have free-flowing and cordial conversation at dinner party, never seat two economists beside each other. Did I mention that I make an excellent chestnut stuffing? 

Anyway, the starting point for measuring inflation is to define a relevant \”basket\” or group of goods, and then to track how the price of this basket of goods changes over time. When the Bureau of Labor Statistics measures the Consumer Price Index, the basket of goods is defined as what a typical U.S. household buys. But one can also define a more specific basket of goods if desired, and for 26 years, the American Farm Bureau Federation has been using more than 100 shoppers in states across the country to estimate the cost of purchasing a Thanksgiving dinner. The basket of goods for their Classic Thanksgiving Dinner Price Index looks like this:

The top line of this graph shows the nominal price of purchasing the basket of goods for the Classic Thanksgiving Dinner. One could use the underlying data here to calculate an inflation rate: that is, the increase in nominal prices for the same basket of goods was 13% from 2010 to 2011. The lower line on the graph shows the price of the Classic Thanksgiving Dinner adjusted for the overall inflation rate in the economy. The line is relatively flat, which means that inflation in the Classic Thanksgiving Dinner has actually been a pretty good measure of the overall inflation rate in the last 26 years. But in 2011, the rise in the price of the Classic Thanksgiving Dinner, like the rise in food prices generally, has outstripped the overall rise in inflation.

Thanksgiving is my favorite holiday. Good food, good company, no presents–and all these good topics for conversation. What\’s not to like?

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The Dispute over "Core Inflation"

Is there a danger of inflation taking off? When the price of gasoline and food shoot through the roof, it seems like it. But central bank officials calmly comment that it makes more sense to focus on \”core inflation,\” which strips out energy and food prices, on the grounds that these prices fluctuate a relatively large amount, and thus give a distorted view of the inflation that is actually occurring. Of course, this leads a lot of distraught citizens to respond that they have to pay for energy and food, whether the central bank thinks that those prices are relevant or not.

Zheng Liu and Justin Weidner of the San Francisco Fed  argue that \”headline inflation,\” which is the announced rate of inflation including energy and food, does tend to converge to \”core inflation,\” which strips out those factors, which implies that a central bank focus on core inflation makes sense. On the other side, James Bullard of the St Louis Fed argues in \”Measuring Inflation: The Core is Rotten,\” that the Fed should focus on headline inflation.


As a starting point, here\’s a figure from Liu and Weidner showing headline and core inflation over time.



The figure suggests several interesting patterns and lessons. 


1) Over time, headline inflation is a lot more volatile than core inflation. This is often used to upports the Fed case that focusing on core inflation makes sense, because focusing on headline inflation raises a risk of  overreactions and excessive volatility in monetary policy. However, as Bullard points out, reacting to a less volatile measure of core inflation poses risks of overreacting, too. Bullard writes: 
\”On the topic of the volatility of headline inflation, the headline index can be smoothed in any number of other ways that stop short of ignoring a wide class of important prices in the economy. One simple way is to consider headline inflation measured from one year earlier, but there are many others. To the extent that the volatility of headline inflation is a problem, there are better methods of addressing that than to simply dismiss troublesome prices.\”


2) There is dispute over whether core inflation is a better predictor of future inflation than headline inflation. As Liu and Justin Weidner write: \”In the 1960s through the 1980s, deviations of headline inflation from core seem to have been resolved by core inflation catching up with headline. For example, the two episodes of high headline inflation in the 1970s were followed by significant run-ups of core inflation. However, since the early 1990s, core inflation has remained stable despite fluctuations in headline. This observation is confirmed by empirical studies and formal statistical analysis showing that the behavior of inflation has substantially changed since the late 1980s and early 1990s …\” On the other side, Bullard sets a skeptical standard for such evidence: \”Suppose we have a full model of the inflation process, one that includes expected inflation, measures of real activity, and measures of the stance of monetary policy. We then add core inflation as a variable to this model and assess the marginal predictive value of core inflation given all other variables. If the marginal value of adding core inflation in this context is positive, one might then have a claim that core inflation contains some “special” information over and above information coming from the rest of the economy concerning the future course of inflation. I have not seen convincing evidence of this type.\”


3) Are movements in energy and food prices just adding volatility to measured of inflation, before they return to near long-run levels, or are they in the middle of ongoing trends? Bullard warns that we have common examples of long-term trends in certain price levels, and so this possibility shouldn\’t be disregarded. \”One might also reasonably question the “temporary” characterization of the shift in energy and other global commodity prices. It is certainly true that we should not expect energy prices to increase faster than the general price level without limit. But it is also true that there are wellknown
examples of long-term secular trends in certain prices. One example is medical care prices, which for decades have generally increased faster than the headline CPI index. Another example is computing technology, where prices have more or less continuously declined per unit of computing power, even as other prices have continued to rise. So it is possible—and indeed it does happen—that whole sectors of the economy experience relative price change.\”


My own sense is that its almost always possible to construct a situation in which an overly mechanical rules for central bank behavior won\’t work well. The central bank should certainly look at what factors are affecting headline inflation, and adjust its reactions in light of which factors seem to be operating. Such adjustments will sometimes have the affect of looking at \”core inflation.\” But announcing publicly that core inflation is your goal and defending that goal in front of incredulous citizens and reporters seems overly rigid and a certain PR disaster.

Fear of inflation really should the least of our economic troubles during this Long Slump of a quasi-recovery. Indeed, a bit more core inflation would cut real wages, which might help a bit in increasing hiring. It  would reduce the federal debt burden as a share of GDP (because past debts could be repaid in inflated dollars). It would made a deflationary scenario much less likely, which allow the Federal Reserve to stop running near-zero interest rates and start getting the financial sector back on a more normal footing. A few weeks back I asked one of my macroeconomist friends whether we should be worried about a resurgence of inflation. He replied: \”We should be so lucky.\”