April 7, 2014

Facebook has the "Poke" button...

And ThreeSources, the Monetary Policy Category.

AEI: Now is the time to preempt deflation

Anyone taking painkillers knows that it is important to ingest the medicine before the pain intensifies. You must be preemptive. If you delay taking that pill until you feel pain, you are in for some real discomfort before you feel relief.

The same is true with deflation. It is necessary to be preemptive. Deflation is self-reinforcing, so if you wait to offset it until prices are actually falling, you risk losing control. The resulting pain can be more substantial than the physical pain that results from delaying ingestion of painkillers, since those will eventually quell discomfort, and deflation's appearance suggests that it will intensify before you can get control of it.

Monetary Policy Posted by John Kranz at April 7, 2014 5:33 PM

Huh? What?

Oh yeah.

Can we agree that price deflation is possible in some items while there is simultaneous price inflation in others?

Posted by: johngalt at April 7, 2014 7:14 PM

No. Sorry, Uncle Miltie says "Everywhere and always a monetary phenomenon." That's our fundamental disconnect: the basket-of-goods measure is a proxy.

Posted by: jk at April 8, 2014 10:05 AM

Yeahbut, isn't that "proxy" what the author uses to conclude, "Inflation is falling in the United States, Europe, and China, suggesting a real threat of impending deflation that could cripple the global economy?"

Inflation may be "everywhere and always a monetary phenomenon" but economists always use consumer prices to measure it. So why are we supposed to pay any attention to them? Why is CPI valid when they cite it and not when I do? Argumentum ab auctoritate?

Posted by: johngalt at April 8, 2014 5:47 PM

My premise that prices on discretionary items are falling while essential items, with their inelastic demand curves, continue to rise was to be followed with a suggested cause. Namely, that income insecurity increases savings rates and reduces demand for discretionary items, thus reducing prices. 'People not buying stuff' is not a symptom or a cause of deflation. Further, it is certainly not a "monetary phenomenon."

Also notice that two of those essential items, food and energy, are explicitly omitted from the CPI basket. If we mean for the basket to be an inflation/deflation proxy, how can such omissions be justified?

Posted by: johngalt at April 9, 2014 12:55 PM | What do you think? [4]