Some of my fellow bloggers have been looking at inflation expectations and are worried that the Fed is pumping too much cash.
I am skeptical.
Inflation ultimately has to come through the interaction of supply and demand. Money creation may be the source of surging demand and hence higher prices but demand has to in fact surge. It is difficult to have Fed driven inflation in an environment of falling retail sales.
If consumers contract then businesses loose pricing power. Commodities ultimately have to follow business demand.
Friday, March 14, 2008
Immaculate Inflation
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6 comments:
Karl:
You're ignoring a much better explanation of inflation, which is that it is caused when the fed's issue of money outruns the fed's assets. You might be too young to have ever been taught about the real bills doctrine, but here's a place to start:
www.csun.edu/~hceco008/realbills.htm
Mike:
I haven't put enough time into my posts to be very clear. I am appologize for that. However, my point is that whatever the ultimate cause of inflation, the proximate cause must be an increase in nominal demand or a decrease in nominal supply.
Businesses will not raises prices because of abstract macroeconomic forces but because it is profitable to do so.
Business will raise prices (or cut quality/quantity at a given price) if it is unprofitable to not do so.
Abstract macroeconomic factors (read: Fed money supply creation) may not affect businesses directly, but do affect aggregate demand for business inputs like commodities.
Also, global consumer demand can be considered asymmetrical - U.S. consumers may have lost control of their wages, forcing a retrenchment of consumption as prices increase, but you don't have to subscribe to the decoupling thesis to realize that global wages and consumption are rising.
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