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TraderWalrus
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The question of low inflation

October 12th, 2017, 9:05 am

It has been reported for quite a while now, including in the recently published protocols, that the Fed is perplexed about inflation staying low despite unemployment figures going down, together with slow but steady climb in wages.

How can it be explained? did Americans increase the portion they save out of their salaries?
 
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Martinghoul
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Re: The question of low inflation

October 12th, 2017, 11:49 am

You've chosen such a trivial question to ask...
 
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TraderWalrus
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Re: The question of low inflation

October 12th, 2017, 3:20 pm

Is there a trivial answer then?
 
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Martinghoul
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Re: The question of low inflation

October 13th, 2017, 10:11 am

I was being sarcastic, actually...  It's quite complicated, actually, and there are lots and lots of theories and potential explanations.
 
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TraderWalrus
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Re: The question of low inflation

October 13th, 2017, 11:50 am

Yeah, I suspected you were just after I replied :-) If the Fed is clueless I guess there isn't a clear answer. 
However it will be interesting to hear some opinions. Apart from from people saving more and spending less, another reason I can think of is that there is indeed increased spending but in goods / services that are not well represented in the way inflation is calculated, or that supply of those, or competition between companies providing them, is somehow increasing at a high pace as well. I wonder if there's convincing evidence to any of the possible explanations.
 
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Paul
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Re: The question of low inflation

October 13th, 2017, 12:11 pm

1. Do you have stats for us?
2. And description of what is in the inflation indexes?
3. And data for what people are spending $ on nowadays? Is that changing?
4. Is there any way of measuring 'competition'?
5. Is there any incentive for anyone to manipulate the numbers?
 
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Traden4Alpha
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Re: The question of low inflation

October 13th, 2017, 12:39 pm

Some would say it's the effects of intensive global trade (at the macro scale) and online retail (at the microscale) that have created intense price competition and forestalled inflation.

If suppliers, retailers, and workers are all reluctant to ask for more money, neither prices nor wages will escalate.

Thus, one's dollars, euros, or pounds might buy an ostensibly identical basket of goods over time, but potentially vary in who they are being bought from (e.g., China, Africa) depending on the latest ranking of options by price in an online market (e.g. Amazon).

I'd think that inflation isn't inevitable because it's really a side effect of friction (search & switching costs for lower-cost products or labor) and mismanagement (letting demand outstrip supply). Thus inflation might disappear if corporations reduce their frictions and mismanagement through better visibility in markets and better management of supply chains.
 
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ppauper
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Re: The question of low inflation

October 13th, 2017, 8:42 pm

there's a school of thought that the fed has exported inflation to china
the chinese currency is pegged to USD
chinese exporters receive USD for their export products and sell them to the people's bank of china at the pegged exchange rate
the chinese central bank prints chinese currency to pay for the purchase of the USD
hence inflation in china
Last edited by ppauper on October 14th, 2017, 5:29 am
 
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Martinghoul
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Re: The question of low inflation

October 13th, 2017, 9:03 pm

If you want to get a sense of some new "macro" ideas that could explain some of the phenomena discussed, this paper has been mentioned:
http://pages.stern.nyu.edu/~xgabaix/papers/brNK.pdf

Xavier Gabaix has, generally, done interesting research.
 
jaw
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Re: The question of low inflation

October 17th, 2017, 9:09 am

You might want to have a look at Warren Mosler's site.
on Jobless claims:
"These remain impossibly low historically, particularly on a population adjusted basis. To me this further confirms my suspicions that the reason for the lower claims is that they’ve been made a lot harder to get than in prior cycles. Consequently, markets are getting a ‘false signal’ as to underlying employment conditions, and, more importantly, the ‘automatic fiscal stabilizer’ effect has been largely neutralized, which means a return to growth will require that much larger of a pro active fiscal adjustment"
http://moslereconomics.com/2017/10/05/trade-jobless-claims-kelton-nyt-op-ed/
On inflation.
"So the Fed sees all this, and indicates that they are leaning to another rate hike in December, as they continue to forecast increases in inflation that, after many years of similar forecasts, have yet to materialize. And they list every reason for the low inflation indicators, except for a lack of aggregate demand (low spending), when all of the above charts support a low demand story, as does all of the other weak data released last week- personal income, housing starts and sales, etc."
http://moslereconomics.com/2017/10/02/credit-check-expectations-vs-spending-inflation-comments-fed-policy/
 
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TraderWalrus
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Re: The question of low inflation

October 19th, 2017, 4:19 pm

Further views here:
https://www.forbes.com/sites/vincentdel ... 0808db740f
The author gives four reasons for low inflation:
- Demographic deflation: aging population has less reserves to spend.
- Technological deflation: "hedonic adjustments" represent lower inflation then actual, and sharing economy has strong deflationary effects (Uber, Airbnb etc)
- Union deflation: less and less workers belong to a union, hence lower negotiating power vs. employers
- Globalization deflation: reductions on barriers to free trade and addition of more "labor, brains and savers" results in a more efficient global economy
 
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Alan
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Re: The question of low inflation

October 19th, 2017, 7:19 pm

OK, here is my theory, cooked up in the last 2 minutes:

Inflation rate = Exogenous shock inflation impulse + short-term interest rate

In the absence of exogenous shocks ... well, there you go. As the Fed raises rates, they'll get whatever (floor) level of inflation they want and the issue will fade. Easy!   :D
 
jaw
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Re: The question of low inflation

Yesterday, 9:09 am

"As the Fed raises rates, they'll get whatever (floor) level of inflation they want and the issue will fade. Easy!"
Aha, a Neo-Fisherite!
http://bruegel.org/2015/07/blogs-review-understanding-the-neo-fisherite-rebellion/
 
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Alan
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Re: The question of low inflation

Yesterday, 3:20 pm

Cool! Thanks for the link -- I didn't realize this obvious view had a name. However, the rationales in the link sound rather complicated. My notion was simply that, whatever the short-rate is, its effect flows through to every decision, it devalues money at that rate, and so serves as an obvious anchor for the inflation rate. 

But I like the graph at the link ("Mild Neo-Fisherian View") that shows that the initial response of inflation to a big short-rate increase is typically in the opposite direction. I do remember how the Fed cooled off some run-away inflation in the early 80's by sharp Fed Fund rate increases, so I admit the theory has to be more complicated and have plausible dynamics.    

It reminds me of how the expected return in the stock market responds to volatility shocks. A big increase in volatility *has* to produce a higher expected return -- but the market achieves this by initially falling. Ditto I guess for a big increase in short rates vs. inflation rate expectations. 
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