Sunday, April 21, 2013

Inflation (yawn) Watch, ...  

Maybe the Great Gold Unload last Monday was an indicator, but it's getting even harder to make a case for runaway (or even ambulatory) inflation in the US and most of the developed world.
But the bigger story behind McDonald’s falling margins is that weak demand, driven by high unemployment in much of the world, means that McDonald’s feels no real ability to raise its prices, even as many of its costs are stable or rising. The reason for falling margins, said Thompson, “is because consumers are very sensitive to price. So we don’t have the inflationary environment or the consumer sentiment environment to go out and take the kind of price increases that historically we did.”
It’s no one thing driving it; rather, it is a mix of things reflecting the overall economic environment: Cash-strapped consumers buying more value items off the dollar menu for which margins are low than premium products; fixed costs like management salaries, equipment depreciation, and rents that are stable to rising; and an inability to hike prices without seeing customers flee.
“We do believe this is not a structural kind of change,” Thompson continued. “We think that it is based  upon the economy at this point.”
In other words, what McDonald’s shows is one of the central realities shaping the economy: As long as growth remains depressed and unemployment high, whether in the United States or around the world, inflation probably isn’t the thing that policymakers need to stay awake at night worrying about. [More]
That doesn't mean any end to econopocalytic predictions from those who disagree with our monetary policy. I hear the phrase, "when, not if" in virtually every economic speech to ag audiences. But if "when" is a really, really long time from now, doesn't "if" become more applicable?

I am becoming suspicious that the "hardened" fear of inflation will last much longer than we can imagine. Inflation hawks, like hard-right politicians (significant overlap there, I would suggest), do not have tools for changing their minds. Consequently there cannot be rational, useful debate on actions that could change our approach to our economic problems.
Given the simplicity of the argument, the real questions is who they are trying to convince or, to put it differently, who are the ones who have opposing views on the inflation / unemployment outlook and monetary policy. I see two set of voices that are critical of the current central bank actions. First, there are those scared of inflation, or as Evanst put it, those who are afraid of "unlocking the long-ago-vanquished inflation demons from the dungeon". Given how low inflation has now be for decades and how anchored inflation expectations are, it is difficult to understand where those fears are coming from. The second argument might sound more rational:  if you want inflation to be around 2% in the long-term and given that we know that inflation will be higher one day when the recovery gets stronger, it might be ok to see inflation below target for a significant period of time (while the recovery is weak). But this argument depends on the slope of the Philips Curve. In a world where the Philips Curve is very flat (as it is for all these countries), it is very unlike that any fast reduction in unemployment will bring any significant inflation in the future. Therefore the fear of inflation when the recovery is strong, is not supported by the data either.
The panel discussion left me with a sense that over the years we have developed an unfounded fear of inflation and a very asymmetric view on what is admissible: being below the target is ok, being above cannot even be discussed as an option. And it was refreshing to see voting members of the monetary policy committees of the US Fed, Bank of England and Riksbank saying this explicitly -- it was just the ECB that was missing. [More]
I had thought by now I would be more leery of expecting a future of low inflation, but it seems the response of too many thought leaders virtually guarantees it.

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