Thursday, September 18, 2014

Inflation Remains a No-Show (excerpt)

Despite all the liquidity provided by the major central banks since 2008, inflation remains remarkably subdued around the world. On September 2, I wrote: “If we knew six years ago about the extraordinary rounds of ultra-easy monetary policy that the major central banks were about to pursue, most of us would have predicted hyperinflation. Instead, the widespread worry is about deflation. Over the past five years, Milton Friedman’s dictum that ‘inflation is always and everywhere a monetary phenomenon’ hasn’t played out.”

I also observed that in the US there is clearly less slack in the labor market and in the overall economy than a year ago. Yet both wage inflation and price inflation remain remarkably low. I noted that there are lots of reasons why this is happening and may continue to do so. Globalization continues to keep a lid on wages. Easy money has financed excess capacity around the world, which is keeping a lid on prices. There have been lots of technological innovations, which tend to be deflationary. Low price inflation is keeping a lid on wage inflation.

So inflation isn’t always and everywhere a monetary phenomenon. Furthermore, deflation may be a monetary phenomenon if ultra-easy monetary policy boosts production capacity more than it does demand.

According to the IMF, the world CPI down-ticked to 3.2% during July. The inflation rate for advanced economies was just 1.6% y/y. That’s the 27th consecutive month of readings under 2%. The inflation rate for emerging economies fell to 5.3%, the lowest since October 2009.

Today's Morning Briefing: Yellen’s Theory of Relativity. (1) Fed is in no rush to hike rates. (2) What is the meaning of time? (3) Yellen says “considerable time” is data dependent, not date related. (4) So time is relative, or simply irrelevant. (5) Don’t watch the clock, watch the game. (6) PBOC stealthily injecting liquidity? (7) Inflation remains a no-show. (8) Friedman’s phenomenon remains a phantom. (9) Nonmonetary explanations for lowflation. (10) Europe is on the edge of deflation, while Japan edges away from it. (More for subscribers.)

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