Last Thursday’s column by Greg Ip, the Wall Street Journal‘s chief economic commentator, is strange in more than one way (see “Inflation Is Turning the Corner,” January 12, 2022). It seems to confuse changes in relative prices (for example, gasoline prices recently decreased relative to the prices of other goods and services) and changes in the general level of prices. In fact, a change in the general level of prices—the definition of inflation—gets added to the change in a specific relative price.
But let me focus on what appears to be a more elementary and less debatable error. Speaking of post-pandemic increases in the prices of housing, energy, and cars, Mr. Ip apparently tries to explain why prices are now decreasing as he writes:
Either demand self-destructs, or supply responds, or both, which happened to varying degrees in all of these markets.
The concept of self-destructing demand is a mystery. I don’t think we could find it in three centuries of economic literature, at least in mainstream economics. What can it mean? How can the demand curve for a good disappear from the market through self-destruction? For sure, one can imagine that the incomes of all consumers drop to zero, but this would not explain the “self” in “self-destruct.” I find it difficult to interpret the quoted statement in any other way than as follows: an increased demand generates a higher price, which in turn decreases demand—a literal self-destruction of demand through the higher price generated by the original increase.
In a previous EconLog post, I called that the yo-yo model: demand and supply bounce up and down non-stop. Ultimately, it implies that no price would ever move to a higher (or lower) equilibrium. The basic economic error is to confuse an increase (or decrease) in demand with an increase (or decrease) in quantity demanded (and mutatis mutantis for supply). A “change in demand” is defined in economics as a shift in the demand curve (or demand schedule); a “change in quantity demanded” is a move along a given demand curve. An upward shift in the demand curve, which is by definition a change caused by any other factor than the good’s own price, will normally cause an increase in the market price and a consequent increase in quantity supplied. (I write “normally” to account for the theoretical possibility that the long-term supply curve show constant or decreasing returns to scale.) Since we have a new demand curve, the increase in price cannot cause a decrease in demand, but only a decrease in quantity demanded along the new demand curve. Except if supply is totally inelastic, quantity supplied and quantity demanded on the market will have increased.
In short, demand cannot “self-destruct” because of a price increase. This is confirmed by the sentence just following the quote above:
In none [of those industries] are prices about to return to where they were before the pandemic.
This means that, after all, there is no self-destruction of demand, just a move along the supply curve. Using “demand” or “supply” in the economic sense avoids misleading, confusing, or contradictory statements. Otherwise, analysis self-destructs.
READER COMMENTS
Jon Murphy
Jan 17 2023 at 8:07am
I think your post about Ip highlights a problem I wrote about on Facebook a few weeks ago very well. The problem is of expert information communication.
The point that I raised was that nonexperts rarely communicate directly to experts. Often, it’s through a game of Telephone. Each individual has their own interpretation of the message and transmits their own interpretation. Consequently, there is some risk of the final message becoming garbled. That risk increases the number of people who are in the chain.
Ip is a good example because, as you highlight, his words are misleading. He’s trying to take technical data and convey it to a general audience. Consequently, he chooses words that convey the wrong impression and the readers of the WSJ may be misled.
Pierre Lemieux
Jan 17 2023 at 1:24pm
Jon: You correctly suggest an idea that I neglected: it may be that Mr. Ip does know the difference between demand and quantity demanded, but tried to convey it with a too simple and bad image (“self-destruction”). From what he wrote, we don’t know if that is the problem or if he does not himself understand the difference. What is certain is that he does not provide his readers with any tool to understand what happens when demand increases. I think one should not underestimate one’s readers’ intelligence; if they really don’t know economics, the solution is to teach them a bit of it through the example at hand, not to risk pushing them deeper into ignorance.
Todd Moodey
Jan 17 2023 at 11:31am
Pierre–
I think you’ve mis-stated the explanation of an upward shift in the demand curve in your paragraph about the “yo-yo model”: you say that such a shift is “…by definition a ceteris paribus change excluding all other factors than price…”, when in fact the shift is caused by changes in non-price determinants of demand (and therefore holding price constant). A change in quantity demanded, of course, is the result only of changing price, holding all non-price determinants constant.
Regards,
Todd
Pierre Lemieux
Jan 17 2023 at 1:09pm
Todd: You are right, of course. Thanks for pointing out my (barely forgivable) mistake. I just corrected it.
vince
Jan 17 2023 at 1:46pm
Isn’t Ip just saying that an increase in price, with supply fixed, is not sustainable? He points out that the price will eventually stop rising and in that way inflation would be transitory.
What I find poorly written is this–“But demand for such goods has softened as the pandemic recedes and the parts shortage improves.”–as if resolving a shortage of goods reduces demand.
Jon Murphy
Jan 17 2023 at 3:20pm
If price is rising because demand is rising, then as long as demand is rising price will rise as well, even with perfectly inelastic supply.
vince
Jan 17 2023 at 3:51pm
Sure, and Ip is saying it’s not a sustainable situation.
Jon Murphy
Jan 17 2023 at 5:11pm
But it is sustainable: as long as demand continues to rise, price will rise even with a fixed supply.
vince
Jan 17 2023 at 8:49pm
Not if Ip has assumed the money supply won’t accommodate it, a reasonable assumption in the current environment.
Pierre Lemieux
Jan 18 2023 at 12:45am
Vince: Prices are relative prices, thus unaffected by inflation if you believe that inflation is a monetary phenomenon (which Ip does not believe.) If inflation is 10% and expected to be 10%, all prices and wages ultimately increase by 10%, and relative prices and quantities remain unchanged. (There can be lags, of course, hence my “ultimately.”) If the demand for gasoline increases (demand curve shifts upwards), the price of gasoline will increase. But it will continue to increase only as long as consumers continue to assign an ever greater value to gasoline (relative to other goods and services). Inflation is a macroeconomic, not microeconomic, phenomenon; at any rate, it is important to distinguish between relative prices and the inflation component of nominal prices. Think about a consumer’s indifference map and budget constraint in terms of two goods, and what I have just said is easy to see.
vince
Jan 18 2023 at 1:00pm
Pierre wrote: “Prices are relative prices, thus unaffected by inflation if you believe that inflation is a monetary phenomenon (which Ip does not believe.)”
Sure I believe inflation is a monetary phenomenon. That’s why I suggested Ip was saying the price surge was unsustainable. He points out that the Fed recognized inflation wasn’t transitory and raised interest rates.
Jon Murphy
Jan 18 2023 at 1:16pm
Then demand isn’t “self-destructing”
vince
Jan 18 2023 at 1:49pm
“Then demand isn’t “self-destructing””
I’m suggesting what Ip may have meant., How do you know what Ip meant by self-destructing?
Jon Murphy
Jan 18 2023 at 2:02pm
He could have meant that, but then the use of the phrase “self-destructing” is wrong. That’s my point.
I don’t. That’s the problem. As Pierre points out, the sentence doesn’t make sense. Thus, best we can do is speculate as to what he really meant.
vince
Jan 18 2023 at 2:31pm
“He could have meant that, but then the use of the phrase “self-destructing” is wrong. That’s my point.”
And if he had meant that, then self-destructing makes sense. That was my point.
“Thus, best we can do is speculate as to what he really meant.”
Of course.
Jon Murphy
Jan 18 2023 at 4:27pm
Yes, if we abandon the key idea of communication that words have meaning, then it can make sense.
But it seems to me quite unreasonable to go that far.
vince
Jan 18 2023 at 4:57pm
It’s easy to say he didn’t communicate clearly. That’s obvious. The question is what he meant.
Spencer
Jan 17 2023 at 2:36pm
Money flows, the volume and velocity of money, went down 80 percent from Jan. 2013 to Jan. 2016. Oil went down 70 percent.
…
Money flows went down 54 percent from Feb. 2022 to Nov. 2022. Oil went down 40 percent, peak to trough.
…
Inflation is a monetary phenomenon. Inflation occurs when there is a chronic across-the-board increase in prices. or, looking at the other side of the coin, depreciation of money.
…
Inflation is not a temporary increase in the price level, nor a long-term increase in any particular prices.
…
From the standpoint of the economy no overall index, or average of all prices, exists. Therefore, no single figure exists which represents the value of money.
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The price indices are passive indicators of the average change of a group of prices. They do not reveal why prices rise or fall. Only price increases generated by DEMAND, irrespective of changes in SUPPLY, provide evidence of inflation.
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There must be an increase in aggregate monetary purchasing power, AD, which can come about only as a consequence of an increase in the volume and/or transactions’ velocity of money.
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The volume of money flows must expand sufficiently to push prices, up, irrespective of the volume of financial transactions consummated, the exchange value of the U.S. $ (reflected in FX indexes and currency pairs), and the flow of goods and services into the market economy.
…
Inflation cannot destroy real property nor the equities in these properties. But it can and does capriciously transfer the ownership of vast amounts of these equities thus unnecessarily accelerating the process by which wealth is concentrated among a smaller and smaller proportion of people. The concentration of wealth ownership among the few is inimical both to the capitalistic system and to democratic forms of government.
…
During the last five decades this country has experienced, in tandem, two types of inflation. One characterized by a relentless rise in consumer and producer prices. Inflation, at varying rates, has persisted irrespective of the cycles of the business economy. This phenomenon enabled economists to coin a new term stagflation; business stagnation accompanied by inflation.
…
The other inflation has been largely confined to rampant speculation in urban and rural real estate and stock ownership. This inflation has been so excessive it has produced the “boom and bust” characteristic of all past speculative orgies.
Pierre Lemieux
Jan 17 2023 at 3:22pm
Spencer: How can these hypotheses contradict my simple claim that the demand for cars. energy, housing, or any other specific good or service cannot “self-destruct” because of an increase in demand?
Spencer
Jan 18 2023 at 10:54am
Didn’t say that. But the Cantillon Effect works both ways. It depends upon Gresham’s law: “a statement of the least cost “principle of substitution” as applied to money: that a commodity (or service) will be devoted to those uses which are the most profitable (most widely viewed as promising), that a statement of the principle of substitution: “the bad money drives out good”.
Craig
Jan 17 2023 at 3:49pm
Mr. Ip’s article is entitled: “Inflation Is Turning the Corner, Much of inflation’s rise appears to have been transitory after all” and one can quickly see that Mr. Ip is a member of Team Transitory who are trying to snatch victory from the jaws of defeat. Initially the argument Team Transitory responded to criticism of the Fed’s loose monetary policy by opining that increases in the CPI were not actually related to that, but rather to transitory factors like supply chain issues. Now of course ever since the end of QE, and notwithstanding the conflict in the Ukraine, disinflation is now the trend and there has now even been a M/M negative reading in the CPI.
So does that mean the inflation was transitory after all? No. The money supply as measured by M2 is now, on a Y/Y basis, been declining and broader measures of money like Divisia M3/M4 are very much sideways, slightly positive on a Y/Y basis. As Milton Friedman indicated there are lags between the implementation of monetary policy and its impact on the CPI.
At the moment there is disinflation because the rate of growth of the money has declined considerably, not because it was ‘transitory after all’
Craig
Jan 17 2023 at 3:56pm
“In short, demand cannot “self-destruct” because of a price increase.”
I think what he is trying to describe is a situation where people shift away and substitute and once they substitute the substitution is sticky and they’re not coming back any time soon, ie gas goes to $5 and a person decides to buy a Tesla. I THINK that’s what he’s trying to describe, albeit inartfully? …. but I digress.
Pierre Lemieux
Jan 17 2023 at 7:16pm
Craig: The substitution effect is exactly what happens along the demand curve. We can introduce price expectations quite easily in the analysis. Price expectations (future expected prices) can shift a demand curve, depending on the time period considered. Goods are more or less good substitutes over time. If somebody thinks that the price of electric automobile services are going to be lower not too far the future, his short-run demand for gasoline cars will shift down. But note that if he later realizes that his expectations were wrong–that price of electric automobile services will actually increase–his demand curve for gasoline automobile services will shift up again. It is analogous to the ordinary substitution effect: when the price of new cars increases, the demand for used cars (a substitute) increases too; but it is not sticky, as we can see it decreasing now. (See my post “No Mystery in the Current Used-Car Market” on this.)
Spencer
Jan 18 2023 at 10:59am
That’s like behavioral economics. Economics is a science. Everything is preprogrammed.
Jon Murphy
Jan 18 2023 at 12:02pm
Pierre,
I think I see the point Craig is making. Perhaps I can rephrase it a little:
I believe Craig is making a 2nd Law of Demand argument. As long as the price remains relatively high, the elasticity of demand increases as people search out and develop more substitutes. In the longer run, enough substitutes or competitive products could develop that case the demand curve to fall, not merely become more elastic.
Pierre Lemieux
Jan 18 2023 at 8:52pm
Jon: Interesting point. In a Hicks-Allen-Samuelson perspective (that is, with ordinal utility functions), I suppose the new substitute would be represented by a new dimension in utility space. Then the demand curve could (depending on the actual forms of utility functions) shift down. But that would be in the quite long run. In this case, we could make sense of Mr. Ip’s statement.
Pierre Lemieux
Jan 17 2023 at 7:21pm
Craig: I agree with your main point here. Perhaps the Wall Street Journal should hire you.
Warren Platts
Jan 18 2023 at 10:12am
Well, isn’t “self-destruction” of demand kind of implied by the Paradox of Thrift explanation for recessions? If consumers decide to save instead of consume, aggregate demand can radically shift downward, and since it’s all based on, perhaps, an irrational fear of the future, wouldn’t that make it a “self-destruction”? Maybe that’s what Mr. Ip was thinking about?
Jon Murphy
Jan 18 2023 at 10:33am
Saving doesn’t represent a destruction of demand, though, but rather a re-alignment. Saving moves consumption from the present to the future.
Besidesm Ip isn’t making a savings argument. He’s talking about inflation.
Warren Platts
Jan 18 2023 at 1:19pm
Well then, Jon, you might want to edit the Wikipedia article on the Paradox of Thrift, because this is what it says:
The decline in demand due to a decline in spending/increase in savings in turn would be disinflationary. Moreover, even if current savings represents future consumption, since the total amount of savings can be reduced because of the slowdown in the economy, future demand can also be reduced as a result.
Jon Murphy
Jan 18 2023 at 1:42pm
No need to edit the Wikipedia article. It is correct. And it doesn’t contradict me. We’re just looking at different time periods. Keynes’s model is just looking at time period t. I’m looking at t, t+1, t+2…t+n. Savings, as I said, moves spending from t to t+n. I mean, that’s what saving is. Savings is not destruction of demand. You may wish to check out the concept of “consumption smoothing.”
I mean, generally speaking no, unless something really bad happens. But Ip isn’t taking about corner solutions.
Regardless, again, Ip isn’t making a savings argument. He is talking about inflation.
vince
Jan 18 2023 at 1:52pm
“Regardless, again, Ip isn’t making a savings argument. He is talking about inflation.”
So is Warren. He wrote: “The decline in demand due to a decline in spending/increase in savings in turn would be disinflationary.”
Jon Murphy
Jan 18 2023 at 1:59pm
No. Warren is trying to justify Ip’s argument. Warren imputes an (incorrect) theory of saving here, but Ip’s argument is not one of saving.
Jon Murphy
Jan 18 2023 at 2:22pm
Let me be more clear:
Ip appears to be arguing that the rising price level itself is causing a reduction in aggregate demand. Now, unless one rejects price theory, that statement as literally interpreted is incorrect. Rising prices can reduce quantity demanded (assuming demand doesn’t shift). But prices are the outcome, not the input.
Increased interest rates can reduce AD, both by discouraging investment and by increasing savings. But neither of those represent demand “destruction,” nor “self-destruction,” unless we change the definition of “destruction.”
So, my objections are threefold:
First: It is wrong to claim that savings results in “demand destruction.” Savings is a reallocation of demand from the present to the future
Second: Ip is making a claim that, taken literally, defies the logic of price theory. He is not arguing that people are saving more.
Third: To try to apply “destruction” to Warren’s interpretation of savings is incorrect or would require a new definition of “destruction.”
Warren Platts
Jan 18 2023 at 6:41pm
I’m not trying to justify Mr. Ip’s argument. I have no axe to grind. I’m merely offering a more charitable interpretation of his article. The quote that Pierre provided doesn’t really entail that Mr. Ip was saying that self-destruction of demand was caused by rising prices. My point was there are other reasons demand might self-destruct. Namely, high inflation and everything that goes with that might be taken as a sign of hard times to come, and so people might rationally reduce consumption, and hence aggregate demand.
And the reduction of spending on consumption–and consequent disinflationary pressures–does have to do with savings, because, literally by mathematical definition, other things being equal, a reduction in consumption is literally an increse in savings.
Moreover, the claim that savings must equal future consumption is a false, red herring. For one thing, Mr. Ip’s article isn’t about what might happen 5 or 30 years from now, but what is happening in this year. More importantly, it’s not even the case that savings equals future consumption: the savings could equally be applied to paying off debt. And in an environment with rising interest rates, that would be completely rational.
As for the definition of “self-destruction”, Mr. Ip’s usage is well within the ordinary language. If someone says the New England Patriots “self-destructed” in the playoffs, that doesn’t mean the football team ceased to exist. It simply means that temporarily, they ceased to be effective.
Jon Murphy
Jan 19 2023 at 6:57am
Yes, and as I said to vince above, if we cease to believe words have meaning, we can interpret his article in any way one wants.
If you want to argue that high inflation can cause people to save more, and thus reduce AD in the near term, that is fine. But that is not the argument Ip is making, and thus not a reasonable interpretation of what he wrote. It’s an alternative hypothesis.
Spencer
Jan 18 2023 at 11:57am
The YoY PPI fell to +6.2% (the lowest since March 2021)
Parse DT; R-gDp; inflation
01/1/2022 ,,,,, 0.235 ,,,,, 1.998
02/1/2022 ,,,,, 0.166 ,,,,, 2.011
03/1/2022 ,,,,, 0.128 ,,,,, 1.633
04/1/2022 ,,,,, 0.113 ,,,,, 1.382
05/1/2022 ,,,,, 0.110 ,,,,, 1.320
06/1/2022 ,,,,, 0.111 ,,,,, 1.231
07/1/2022 ,,,,, 0.088 ,,,,, 1.195
08/1/2022 ,,,,, 0.124 ,,,,, 1.280
09/1/2022 ,,,,, 0.072 ,,,,, 1.143
10/1/2022 ,,,,, 0.069 ,,,,, 1.094
11/1/2022 ,,,,, 0.085 ,,,,, 0.847
12/1/2022 ,,,,, 0.060 ,,,,, 0.519
01/1/2023 ,,,,, 0.056 ,,,,, 0.529
02/1/2023 ,,,,, 0.054 ,,,,, 0.473
03/1/2023 ,,,,, 0.061 ,,,,, 0.393
04/1/2023 ,,,,, 0.067 ,,,,, 0.376
05/1/2023 ,,,,, 0.031 ,,,,, 0.329
06/1/2023 ,,,,, 0.055 ,,,,, 0.266
07/1/2023 ,,,,, 0.071 ,,,,, 0.243
08/1/2023 ,,,,, 0.081 ,,,,, 0.237
09/1/2023 ,,,,, 0.088 ,,,,, 0.246
10/1/2023 ,,,,, 0.087 ,,,,, 0.227
11/1/2023 ,,,,, 0.087 ,,,,, 0.224
12/1/2023 ,,,,, 0.086 ,,,,, 0.194
The rate-of-change in inflation had never been above 1.0 before Covid.
The rate-of-change in R-gDp doesn’t become negative, indicating no recession.
These ROC’s underweight Vt. E.g., as money peaked in FEB, money flows didn’t peak until JUN. Ergo, Vt made up the difference. Unless Vt falls, there will be no recession.
Spencer
Jan 18 2023 at 1:52pm
Remember the stagflationists? “Rethink 2%”
The CPI has been above the 2% level for 22 months. And real wages have been negative for 21 months. The economy is being run in reverse.
David Seltzer
Jan 18 2023 at 3:00pm
Pierre: A person reading Mister Ip’s WSJ article might have understood the difference between demand and quantity demanded if he said, “demand reflects consumer preferences. Prices do not reduce or raise demand. Rather, they alter the amount required.”
AMT
Jan 18 2023 at 8:44pm
Really?
https://en.wikipedia.org/wiki/Demand_destruction
https://www.investopedia.com/demand-destruction-5222107
The price of beef goes way up, so consumers decide to experiment with some substitutes and learn of a few really good chicken and pork recipes. So even when beef prices fall back down, they have new preferences and already changed their purchase habits so the demand for beef is permanently reduced.
This extremely simple concept is not only a mystery, but it “cannot” happen?
Pierre Lemieux
Jan 18 2023 at 10:17pm
AMT: If you study the Demand Theory section of a microeconomics textbook, you will see that the substitution effect you describe is precisely what happens along a demand curve. (The only exception is the one noted by Jon above, which I acknowledged in my reply, with the necessary caveats.) A piece of advice: Wikipedia is not the place to learn economics; the article to link to makes exactly the error of the yo-yo model. (Investopedia is very weak too on this topic. Pardon my bluntness, but boxes of Cracker Jacks are no good either.) Please read my post on the yo-yo model, linked to in the post above. You are on a good path with EconLog!
AMT
Jan 19 2023 at 12:17pm
I am describing a change in preferences. That is obviously a shift in the demand curve. In my example, this occurs AFTER the initial move along the demand curve. Please read more carefully.
Pierre Lemieux
Jan 19 2023 at 1:08pm
AMT: There is a reason (well explained by Gary Becker–see The Economic Approach to Human Behavior [Chicago: University of Chicago Press], notably p. 5) why economists assume that preferences don’t change. If we assume that preferences change, we can find an ad hoc explanation for everything. Why did the criminal attack an old lady instead of a football player like last time? Because his preferences changed! Why did Jones, who always buy new cars, bought a used one during Covid? Because his preferences have changed, of course! That’s another example of why it is important to learn economics!
AMT
Jan 19 2023 at 3:15pm
You mean where he says:
”The preferences that are assumed to be stable DO NOT refer to market goods and services, like oranges…” (emphasis added)…?
Further, you did not say anything about whether you should avoid assuming changing preferences, you said it was impossible, and outside of mainstream economic theory.
Even still, I do say it is a good idea to assume no change in demand to try to make predictions or explain outcomes so that you can identify other causal variables, but that is COMPLETELY different from saying demand CANNOT change according to economic theory, which is obviously false.
I certainly think it is important to learn economics, but it is quite clear you are the one that needs to do the learning. I’m not surprised you misread my post when you get Becker completely wrong too.
Pierre Lemieux
Jan 19 2023 at 8:13pm
To AMT: Where would I have said that “demand CANNOT change according to economic theory”? Certainly not in my post above. Certainly not in the yo-yo model post I linked to there. Certainly not in my recent Regulation article:
AMT
Jan 19 2023 at 11:07pm
ROFL!
Jon Murphy
Jan 19 2023 at 6:38pm
If you’re describing a change in preferences, then that is unrelated to inflation.
Jon Murphy
Jan 20 2023 at 12:03pm
I was thinking more on Craig’s comment (which, as I state above, I understand to be a 2nd Law of Demand argument) and AMT’s comment, which is a change in preferences argument. The more I think on them, the less correct either seem to be for inflation. In both cases, the story relies on relative changes. But inflation is a general change.
A change in inflation would be independent from a change in preferences (except insofar as a reweighing of the inflation metric is required, in which case we are dealing with a measurement issue).
The 2nd Law of Demand also cannot apply as it is a relative pricing law.
So, if we seek to understand Ip’s argument through either of those interpretations, we have to conclude that Ip both misrepresents demand and inflation.
Craig
Jan 20 2023 at 2:27pm
I also am wondering aloud if Ip might also be thinking of the bullwhip effect? In other words, retailers, facing the excess demand from inflation were caught off guards with respect to inventory so to try to keep up they have a tendency to overorder, their inventories go up and then the retailers’ demand less as things return to normal? Just spitballin’
Jon Murphy
Jan 20 2023 at 2:44pm
I was thinking along those lines too, especially in mid 2021.
Pierre Lemieux
Jan 20 2023 at 2:46pm
Craig: That would be a case of inflation distorting price signals, which is possible. But it has little if anything to do with the increase in a good’s price “self-destructing” demand for that good.
Pierre Lemieux
Jan 20 2023 at 2:36pm
Jon: That’s also how I interpret Mr. Ip’s column. First, he confuses inflation and relative prices changes. Second, he suggests that demand can “self-destruct” through relative price changes, which doesn’t make sense (especially the “self”). Trying to save his argument by introducing inflation brings back his first confusion.
Craig
Jan 22 2023 at 6:04pm
One last thing to consider of course is that writers need to write, right? 😉 Meaning of course he has a certain quota and he needs to produce something.
Warren Platts
Jan 20 2023 at 5:32pm
I still think you all are giving Mr. Ip short shrift. He’s talking about three different kinds of inflation: (1) there’s “transitory inflation” that’s caused by temporary supply & demand imbalances; (2) “underlying inflation” that is the general inflation left over after the transitory kind resolves itself; and (3) “overall inflation” that is a combination of transitory and underlying inflation.
Now, you guys want to say that “transitory inflation” isn’t properly called inflation at all; those are merely relative price changes as people substitute durable goods for services during the lockdown. OK fair enough, but Mr. Ip isn’t doing any harm by referring to transitory inflation because he makes the distinction between transitory and underlying inflation quite clear. And the headline number the government puts out is the “overall” inflation and it’s not obvious how to separate out the underlying inflation from the relative price change rise in prices.
As for the transitory inflation “self-destructing” that can be taken in two senses: (1) in the strict, academic sense as when consumers cope with superhigh hydrocarbon prices by investing in fuel efficient cars, EVs, heat exchangers & solar panels that causes a permanent downward shift of the demand curve; and (2) as simply a colorful way of saying that the demand curve shifts down to where it was prior to the lockdowns as people resume taking vacations, eating out, and paying for other people-intensive services instead of buying durable goods.
The overall point of the article — that the transitory relative price change component of the reported overall inflation is larger than previously thought — is a notable one that should allow us all to breathe a small sigh of relief.
Sure, Mr. Ip’s article could have used some extra copy-editing (and who has ever written an article that couldn’t stand a little extra copy-editing?) but I don’t see any fundamental errors here.
Jon Murphy
Jan 20 2023 at 5:43pm
Again, if it’s demand curves shifting about and people looking for substitutes, then it’s not inflation, transitory or otherwise.
Warren Platts
Jan 21 2023 at 5:30pm
Right. So the argument boils down to arguing about the proper definitions of words and not fundamental theory…
Pierre Lemieux
Jan 21 2023 at 7:41pm
No. About concepts that help build a useful theory. “Demand” does not mean anything. It is derived from concepts such as indifference map and budget constraint (all of which have a precise and mathematical expression).
Comments are closed.