Mainstream macro in the 1970s (which a lot of people seem to have gone back to) held that there was a NAIRU, meaning the non-accelerating inflation rate of unemployment. If unemployment was above that, inflation would fall. If it was below that, inflation would increase. So, policy should shoot for the NAIRU.
These days, unemployment is 8.3 percent, and inflation is increasing. Just sayin’.
Pointer from Mark Thoma.
[UPDATE: Along similar lines, a (the?) blogger at Sober Look writes,
if the economy is operating significantly below potential, inflation should have negative acceleration into a deflationary environment. However the two measures have diverged recently, indicating that the slack in the economy may not be that great.
Pointer from Tyler Cowen.]
READER COMMENTS
Jim Glass
Feb 19 2012 at 5:49am
…inflation is increasing
This claim is made citing CPIU? And the Cleveland Fed? Hello??
Here’s the increase in CPIU at an annual rate as per the just released numbers:
Last
12 months: 2.93%
6 months: 1.78%
3 months: 1.24%
“The Federal Reserve Bank of Cleveland reports that its latest estimate of 10-year expected inflation is 1.34 percent…”
Note the graph at the link. That’s not rising, it’s falling — to the lowest in 50+ years.
Bill Woolsey
Feb 19 2012 at 7:57am
The simple nairu model ignores supply shocks, but the “inflation is a monetary phenonenon” remains true in the long run. You just can’t watch inflation month by month, or even year by year.
However, I worry that the Taylor rule interfers with the process by which nairu operates.
The traditional story is that the high unemployment rate should slow the rate of wage increases (perhaps all the way to negative,) which will slow the growth in unit costs (perhaps all the way to negative,) which will slow inflation for goods and services.
Suppose the central bank is credible. It is saying that it will prevent this from occuring. There will be no slowing of inflation, according to the central bank.
Why slow your rate of price increase. The central bank is promising you a higher price.
For that matter, why ruin your reputation as a good employer. The central bank is promising you that you can cover higher labor costs with higher prices.
With a Taylor rule, it is the central bank that closes the output gaps by adjusting the policy rate downward. Of course, decreases in expected inflation raise the real interest rate. Especially when nominal rates are near zero, that makes promising to keep inflation on target essential.
Inflation targeting looks to be a mistake.
Badger
Feb 19 2012 at 10:23am
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Justin Irving
Feb 19 2012 at 10:52am
I have to go with Jim Glass
the CPI is rather noisy, it came in flat in November and December if I recall. Cleveland fed, and employer cost index also point to super low inflation in the medium run.
It will be interesting to see how the tidalwave of oil coming from shale deposits affects the supplyside of the economy. Drilling is starting to really pick up in Montana and Wyoming, should those places be comparable with North Dakota we could well have a major new Sustainable Pattern of Specialization and Trade through which to lower NAIRU.
Joe Cushing
Feb 20 2012 at 11:37am
I think we are being lied to about inflation. Prices are shooting up fast. Here is some anecdotal evidence from price increases over a year or less.
Reef salt for my aquarium Was $48, now $53
60″ X 48″ beveled glass mirror, was $208 now $326. This was a single price increase. I’ve been waiting to buy this mirror for some time.
10lb of protein powder was $86 now $97
I’m sure everybody has some examples. I suspect inflation is around 10%
ezra abrams
Feb 24 2012 at 1:17pm
Dear Sir: what would you tell a parent who doesn’t have a job, trying to support their children – sorry, we can’t create more jobs cause that would mean coupon clippers might loose some real value ?
sorry to be rude, but where on earth is your compassion or commonsense; how in H*** is 8%+ (maybe 15% in reality) unemployment acceptable at any level ???!!!
just sayin
Chris Murphy
Feb 24 2012 at 1:51pm
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