The Fed: Mixed feelings and US deflation

Deflation absorbs the United States, the Fed is not against

In brief: Deflation will be the new reality for impoverished U.S.. A new wave of crisis comes from overseas.

When the policy of the Fed met in Washington to measure the economic pulse and to identify policies, their thoughts were busy prices. And to be precise – they fall. Can not say that we are now suffering from deflation. Consumer Price Index, excluding food and energy, in April and May grew by 0.9% on an annualized basis – a slight increase in 44 years.

The favorite measure of inflation the Fed, the index of personal consumption expenditures, rose by 1.2% for 12 months. The U.S. economy is currently experiencing disinflation, ie period of slower growth in prices rather than deflation, which is accompanied by a fall in prices. In general, moderate deflation – it is not so bad. To get started is to say that if the Fed wants to achieve one of its objectives – price stability – the unofficial target level of inflation of 1.5-2% is clearly not contribute to it. 2% th annual inflation rate corresponds to 48.6%-th price increase for 20 years. After 35 years, prices will double. Those who doubt these calculations, let look at the inflationary impact of the great moderation in U.S. dollar. Each month the Bureau of Labor Statistics includes the purchasing power of consumers in the lower part of Table 1 report on the CPI, using as the base period 1982-1984. or 1967

Good and bad news

Let’s start with the good news. In May, U.S. From 1982-1984 he. You could buy goods and services by 46 cents. It provided that in 1982 inflation was still high, but fell to 2% only by 1986, however, the loss of the dollar, more than half of its purchasing power can not be reconciled with the notion of price stability. The bad news is that the dollar in 1967 today you can buy goods and services only 15 cents. Each year inflation exceeds the target level, so if the Fed is serious in achieving price stability, it needs to reduce inflation. Otherwise, the pricing will be asymmetric. “There is nothing wrong in the short term minor deflation”, – said Marvin Goodfriend, an economics professor at Carnegie Mellon University in Pittsburgh. “The trouble is that a slight deflation of lower inflation expectations. Now the Fed is afraid of this.” Anyone who remembers the Great Depression and the lost decade in Japan, frightened. During the Great Depression, the Fed allowed the money supply decline by one third. At the moment, the most common indicator of money supply, M2, slowly but surely growing.

Japan as a model

After the stock market crash and explosion of a bubble in property prices in 1989, Japan could not solve the problem of their zombie banks. And, according to Michael Bordo, an economics professor at Rutgers University in New Brunswick, New Jersey, in the center of the Japanese economy is just the banking sector. ” The Fed justifies the attempt to achieve price stability by means of a positive target level of inflation so that price indexes overstate the CPI and PCE inflation. At least, so we are told. Although I’m not so sure. And Mr. Goodfriend, too. “In order to avoid price increases business began to use modern administrative technologies, allowing to pass price increases on the consumer,” – he says. It’s just what to say, if the art of buying goods or using the service requires the ability to navigate through endless automated telephone menu. Degradation of individual services – come to mind airfare – is subjective and therefore can not be studied using the adjustment process as the Bureau of Labor Statistics. But this does not mean that it will be painless.

According to the report, the Fed’s last meeting in April assessment of inflation risks were “mixed.” Some believe that inflation threatens to decline due to excessive weakening of the economy. Others worry about rising inflationary expectations, which fell after commodity prices fell, and the financial crisis in Europe has struck yet another hole in the boat, floating towards recovery. Perhaps that’s enough about the credibility of the Fed. If financial markets believe that it will achieve price stability, inflationary expectations will rise and fall from day to day in response to economic data and world events. In the United States with their problems in the housing market, where there is a decline in bank lending, and consumers remain cautious, the economy is still far from stable growth phase, when it will be possible without the effects of higher interest rates. When inflation expectations are not equal to zero, the Fed should be more serious about price stability. And for this it should be included in the political strategy of a short period of slight deflation.

Anrey Torbinski
2010-07-25 12:37, Economics.

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