On how inflation can start to become nagging:
That is, every time [the seller] reset the price at which it will mark it both to compensate for past inflation and to anticipate future inflation. If it changed the price once a year, it would increase the price by 10 percent per reset.
And if more valuers act this way, it means overall prices will rise 10% a year, even in the absence of new inflationary pressures – that is, even with equilibrium supply and demand. and the economy is not overheating. This is what we mean by a lot when we talk about “embedded” inflation.
Now, suppose that policymakers want to reduce inflation. They have a problem: inflation has a lot of inertia. To lower prices, they need to give sellers a reason not to raise prices as much as they did in the past. They can do this by pushing the economy into recession. And if the recession is deep enough and long enough, the economy can get rid of inflation: not only do sellers stop raising prices rapidly, they will begin to expect lower inflation in the future, meaning increases lower prices, etc. Eventually the economy can be re-adjusted, with inflation rates permanently lower.
However, it’s an extremely expensive process, as we saw in the 1980s. So you really don’t want to let inflation dip in in the first place. But how do you know if that’s happening?
And what can happen when the pandemic “recovery” begins:
So I hope to see lots of price cuts outside of food and energy – some stemming from the “fundamental effect,” that is, a rebound in prices that fell during the worst of times. Translation, some of which are due to these blockages. You can see some of that in the latest consumer price report. For example, regular rent increased only 0.1% in March, but rent away from home increased 6.6%.
This shows that in the coming months, the numbers will not speak for themselves. Headline inflation is sure to be a poor guide to what’s really going on, even worse than 2011-12. Even core inflation as is often measured can be misleading.
This does not mean that we should completely reduce the inflation risk. That means we’ll need to start with whatever inflation results we get, and try to be as objective as possible, to find out if they’re really the reason. to worry or not.