July 17, 2012

AT THE INTERSECTION OF IDEOLOGY AND REALITY LIES DEFLATION:

Inflation Hawks Like Me Got It Wrong in 2009 (Timothy B. Lee, 7/17/12, Forbes)

The inflation rate has been falling steadily since last year. Prices rose just 1.7 percent between June 2011 and June 2012--below the Fed's 2 percent inflation target. "Core" inflation, which excludes volatile food and energy prices, has been remarkably stable; prices rose 2.2 percent between June 2011 and June 2012.

This isn't what we inflation hawks expected. For example, in late 2009 economists Bob Murphy and David Henderson made a bet about inflation between then and 2013. Murphy, the hawk, bet that a year-over-year price increase of more than 10 percent would occur before January 2013. It's theoretically possible that Murphy will be vindicated by a last-minute inflation surge over the next six months, but I doubt even Murphy is expecting to win the bet at this point.

When the world fails to behave the way you expected, that's a good reason to (in Ayn Rand's words) check your premises. Personally, I've become much more sympathetic to the market monetarist views of people like Scott Sumner over the last year. Sumner was one of the few observers who understood in 2009 that monetary policy was too tight. We should have listened to him in 2009, and we should be listening to him today.

Posted by at July 17, 2012 6:12 PM
  

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