Sunday, January 30, 2022

Not All Observed Price Increases Are Inflation

I keep saying this, but this fleshes it out a bit more. \
The paper from Borio, Disyatat, Xia and Zakrajsek is, perhaps, even more challenging. It starts from the premise that the spiking prices we are currently witnessing across the advanced economies are not really inflation at all, or at least not in a conventional macroeconomic sense.

True inflation, in macroeconomic theory, is a generalised rise in the price level. And a generalised rise in the price level is distinct from a series of idiosyncratic changes in relative prices. To give a concentrate example: a world in which energy prices quadruple is a world in which the headline rate of measured consumer price inflation would certainly rise sharply, but what would be happening would be the price of energy – relative to other goods and services – increasing rather than a generalised rise in prices.

Inflation as understood from a monetary police perspetive is that it is a sustained increase in *the price level,* while headline "inflation" measures focus heavily on the Consumer Price Index or similar measures focusing on "what things cost to an imagined typical person."

The CPI and similar matter to people as an indicator of lived experience, of course, but most people who know better (because they are bad people* and want to make sure workers never get a raise again) are obscuring the fact that this is currently a change in relative prices, and that designing policy to reduce "inflation" when we don't actually have inflation would likely be, if effective, catastrophic.

Basically, driving the economy into a recession probably wouldn't even help! And, you know, would hurt!

*A giant problem in The Discourse is everyone is forced to pretend to assume good faith even among people whose job description is literally "paid by Evil Corp to lie whenever necessary." It's very frustrating! Only truly independent, and very intelligent (and perhaps sexy) bloggers like myself do not have to do this.