Inflation? No Thanks, already had some! (But not recently)

Zheng Liu and and Justin Weidner of the Federal Reserve Bank of San Francisco demonstrate that over the last couple of decades headline inflation effects have been ephemeral, and have not fed into core inflation increases.

They invoke anchored expectations, which I think might be some bastard relative of the confidence fairy.

At any rate, if you think we are in the midst of, or anywhere near to approaching an inflationary crisis, you are quite emphatically wrong.

BTW this does not mean that I refuse to recognize that headline inflation can be quite painful in the short term.  It does mean that making policy decisions based on headline inflation moves is an exercise in futility. 


H/T to DeLong.

Update (8/04):  BT left such a good comment that I'm hoisting it up to the main post.

Headline inflation since the imposition of strict money supply management starting in the 1980's is fundamentally a money re-allocation syndrome -- the re-allocation of money from other asset items to the chosen asset items. Thus why increases in headline inflation are not reflected by changes in overall inflation, prices of some things are going up, yes, but that is being accompanied by reductions in spending in other things, not by creation of new money to drive up prices across the board.

In other words, core inflation is a monetary event, and if there is no monetary event -- if there is no increase in the effective money supply because issued M2 is simply being stashed in the Fed's electronic vaults, for example -- there is no real inflation, just the actions of speculators moving their money around driving prices of a few asset types up and down according to the whims of Wall Street gambling. Making monetary decisions based upon the whims of Wall Street gamblers rather than upon hard money supply facts is thus about as reasonable as making decisions about what clothing to wear outside today based upon throwing dice. I assure you, that wearing your winter coat in August in the continental United States is rarely the proper thing to do, regardless of whether throwing a snake's eye when you throw your dice means "wear winter coat"...

- Badtux the Snarky Economics Penguin

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