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Inflation, debt, politics, and insurance at Project Syndicate

An essay at Project SyndicateInflation in the Shadow of DebtToday’s inflation is transitory, our central bankers assure us. It will go away on its own. But what if it does not? Central banks will have “the tools” to deal with inflation, they tell us. But just what are those tools? Do central banks have the will to use them, and will governments allow them to do so?Should inflation continue to surge, central banks’ main tool is to raise interest rates sharply, and keep them high for several...

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CPI Undershoot Illustrated

Typical headline – “U.S. Consumer Price Growth Cools, Smallest Gain in Seven Months“, and “Treasuries Rally After CPI Seen Pushing Off Taper: Markets Wrap” or “Consumer prices climbed more slowly in August, welcome news for the Fed“. Here’re the graphical depictions of the undershoot, first in levels (updating graph from yesterday’s post). Figure 1: CPI (blue), CPI nowcasts (light blue), Bloomberg consensus CPI (light green triangle), Core CPI (red), Core CPI nowcasts (pink), Bloomberg...

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Two Pictures – Money to Income and the Price Level

[For my Econ 435 students] Consider the following graphs. Figure 1 is M1 and M2 to real GDP (0.80 means 80%) for the United States. Figure 2 is M1 to real GDP on left scale, and CPI-all urban on the right scale (taking on a value of 100 in the period 1982-84). Figure 1: M1 in billions of $ divided by real GDP in billions of Chained 2012$, Seasonally Adjusted at Annual Rates (SAAR) (blue), and M2 divided by real GDP (brown). Money is seasonally adjusted, end-of-quarter figures. Source:...

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August CPI – Nowcasts

The CPI release for August numbers is tomorrow. As of today, here are the Cleveland Fed nowcasts for CPI and Core CPI: Figure 1: CPI (blue), CPI nowcasts (light blue), Bloomberg consensus CPI (red triangle), Core CPI (red), Core CPI nowcasts (pink), Bloomberg consensus core CPI (inverted brown triangle), all 1982-84=100, on log scale. NBER defined recession dates shaded gray. Source: BLS, Cleveland Fed (as of 9/10), Bloomberg (accessed 9/12), NBER, and author’s calculations. Inflation...

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Inflation – A Comprehensive Global Database, 1970-2021

From Ha, Kose, and Ohnsorge, One-Stop Source: A Global Database of Inflation: This paper introduces a global database that contains inflation series: (i) for a wide range of inflation measures (headline, food, energy, and core consumer price inflation; producer price  inflation; and gross domestic product deflator changes); (ii) at multiple frequencies (monthly, quarterly and annual) for an extended period (1970–2021); and (iii) for a large number (up to 196) of countries. As it doubles the...

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Inflation in the shadow of debt

(Note: This post uses mathjax equations. If you see garbled latex code, come to the original source.) The effect of monetary policy on inflation depends crucially on fiscal policy. In standard new-Keynesian models, of the type used throughout the Fed, ECB, and similar institutions, for the central bank to reduce inflation by raising interest rates, there must be a contemporaneous fiscal tightening. If fiscal policy does not tighten, the Fed will not lower inflation by raising...

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Inflation Outlook – Looking Forward to August Data

If the Cleveland Fed nowcasts are accurate, month-on-month CPI inflation will be down, core CPI rising slightly from 4 to 4.2% (annualized). Figure 1: Month-on-month annualized inflation from CPI-all urban (blue), and nowcast as of 8/30 (light blue square),  from personal consumption expenditure (PCE) deflator (black), chained CPI  (brown), sticky price CPI (green), and 16% trimmed mean CPI (red). Chained CPI inflation seasonally adjusted by author. Source: BLS, Atlanta Fed, Cleveland Fed,...

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Measured Inflation in July

A CNN headline notes “A key inflation measure rose at fastest pace in 30 years in July”, with that key inflation measure being the year-on-year (y/y) personal consumption expenditure (PCE) inflation. In point of fact, that headline was actually incorrect as annualized m/m inflation was actually slightly higher in June.  But in any case, by focusing on the y/y rate, they missed the main message In today’s release — that month-on-month (m/m) annualized PCE inflation was down sharply, from 6.6%...

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Guest Contribution: “Inflation Prospects: A Difficult Transition for Policymakers”

Today we are pleased to present a guest contribution written by Jongrim Ha (Senior Economist), M. Ayhan Kose (Chief Economist and Director) and Franziska Ohnsorge (Manager) from the World Bank’s Prospects Group. The findings, interpretations, and conclusions expressed in this blog are entirely those of the authors. They do not necessarily represent the views of the World Bank, its Executive Directors, or the countries they represent. The COVID-19 pandemic plunged the global economy into its...

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Messages from the (Bond) Market

Today, the CEA published a blogpost on how the administration’s infrastructure and Build Back Better plans won’t be inflationary. I think it’s of interest to see how the market (which will undoubtedly turn out to be wrong) thinks inflation and output will evolve. For medium term inflation expectations, I look to the five year inflation breakeven, and the expected inflation over the next five years as inferred using the breakeven and additional survey and market information. Figure 1: Five...

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