Inflation is starting to come down, but there is a lot in the inflation numbers that we just take for granted or that we do not think about. For example, if we use the shadow stats which calculates inflation using the basket devised in 1980, we will much higher inflation. In fact, inflation will be at the highest levels recorded.
A new paper shows the deviation of the adjusted core inflation versus the real Fed funds rate is at the greatest levels ever recorded and similar to what we have seen in the 1970's. See "Comparing Past and Present Inflation". This paper uses the current methodology and applies it back in time to find that the current inflation peaks are closer to past inflation peaks than the official series would suggest. The official series makes adjustment along the way. The Volcker era rate of disinflation is significantly lower because the peak was never as high.
This data can lead to several interpretations. One, the 1970's inflation was not as high as official reports. Two, the current inflation is more dramatic than believed when compared with a similar methodology. Three, to get the same decline in inflation may require more draconian Fed policy action. Four, the size of the current inflation mistake is more like the inflation mistakes of the 1970's.
The inflation problem is far from solved.
No comments:
Post a Comment