price dispersion underlies the inflation/deflation debate

[jk]

http://www.clevelandfed.org/research.../inflation.cfm



While the shorter-term trends in the retail price measures seem to suggest on the surface that inflation rates slowed during the month, the curious component price distribution makes it difficult to identify any underlying trend among retail prices. Indeed, a mere 10 percent of the CPI registered price increases in the 0 percent to 3 percent range—the range which most economists consider to be consistent with the current inflation trend. The monthly price declines offset the sizeable monthly price increases: Either prices were falling (34 percent of the CPI), or rising in excess of 3 percent (about 55 percent).

CPI Component Price Change Distribution

[Finster]

Re: price dispersion underlies the inflation/deflation debate

http://www.clevelandfed.org/research.../inflation.cfm

While the shorter-term trends in the retail price measures seem to suggest on the surface that inflation rates slowed during the month, the curious component price distribution makes it difficult to identify any underlying trend among retail prices. Indeed, a mere 10 percent of the CPI registered price increases in the 0 percent to 3 percent range—the range which most economists consider to be consistent with the current inflation trend. The monthly price declines offset the sizeable monthly price increases: Either prices were falling (34 percent of the CPI), or rising in excess of 3 percent (about 55 percent).

Bryan and Molloy make the common cardinal error of obsessing over the gnat on the curtain whilst an elephant stands in the middle of the room.

Endemic to the Fed and most of conventional economics, perhaps. But no matter how detailed the study of consumer prices, they can't get an accurate read on price inflation if they ignore the whole rest of the world of prices. Consumer prices are but one set of prices in the world. Asset prices, in particular, are the canaries in the inflation mine, and the Fed's dismissmal (to the extent it even bothers to acknowledge them) of them is what leads it to usually be behind the curve.

This is what led the Fed to be excessively expansionary in the 1920s, 1960s, and again in the 1990s. And inevitably to the consquences of the 1930s, 1970s, and 2000s. Even house prices, which could have raised red inflation flags in 2001-2005, get massaged right out of the CPI through the use of owner's equivalent rent.

In effect, conventional economics pretends there is such a thing as "good" inflation and "bad" inflation. Inflation is "good" when it is showing up in the prices of assets like stocks and houses, but "bad" when it is showing up in the prices of consumables like oil, gasoline, health care, and food. But there is no way to have one without the other.

If you depreciate the dollar relative to assets, eventually you will find you have depreciated it against everything else, too.

[WDCRob]

Re: price dispersion underlies the inflation/deflation debate

In EJ's instance of "dollars coming home" via foreign purchases of stock, land, commercial real estate and the like why will inflation in those assets spill over to consumer goods?

It's not intuitively obvious why it's not possible for different segments of dollar owners to pursue different assets, and inflate those selectively.

[Finster]

Re: price dispersion underlies the inflation/deflation debate

In EJ's instance of "dollars coming home" via foreign purchases of stock, land, commercial real estate and the like why will inflation in those assets spill over to consumer goods?

It's not intuitively obvious why it's not possible for different segments of dollar owners to pursue different assets, and inflate those selectively.

Over short time frames, it's not only possible, but reality. The dollars slosh first one way, then another. Over the run, however, the value of the dollars has nothing to do with the ratio of the value of stocks to loaves of bread, or the ratio of the value of houses to barrels of oil. They simply cancel out of the algebra.

[WDCRob]

Re: price dispersion underlies the inflation/deflation debate

At some point for that to happen, foreigners would need to buy consumer goods using dollars though, right? Or is there a nother way for repatriated dollars to find their way into consumer goods?

If the stock holdings that were purchased with the once-overseas dollars are subsequently sold the foreigners are holding dollars again. And at first blush it seems that as long as they're buying and selling only financial assets the dollars have no opportunity to work their way into consumer goods.

I suspect I'm wrong here, so will ask: how do foreign-held dollars work their way from financial assets into consumer goods if the foreign holders of dollars aren't purchasing consumer goods?

[Finster]

Re: price dispersion underlies the inflation/deflation debate

At some point for that to happen, foreigners would need to buy consumer goods using dollars though, right? Or is there a nother way for repatriated dollars to find their way into consumer goods?

If the stock holdings that were purchased with the once-overseas dollars are subsequently sold the foreigners are holding dollars again. And at first blush it seems that as long as they're buying and selling only financial assets the dollars have no opportunity to work their way into consumer goods.

I suspect I'm wrong here, so will ask: how do foreign-held dollars work their way from financial assets into consumer goods if the foreign holders of dollars aren't purchasing consumer goods?

Indeed, and they do. Witness how many times high oil prices have been chalked up to "demand" from China etceteras ... not to mention copper, nickel, cement ... they clearly haven't deployed all their dollars that way ... yet ...