September 01, 2003

When Does Inflation Begin to Do Serious Damage?

Stan Fischer: :Saying that 40% per year is the inflation rate at which inflation starts to seriously reduce economic growth--that is much too high. Think 10% per year as the rate instead."

Posted by DeLong at September 1, 2003 08:36 AM | TrackBack

Comments

The threshold depends on the structure of the economy you are talking about. Here in the USA I can hedge against inflation without moving from in front of my computer. In many of the countries I visit in Africa it can take days to move money from one account to another or overseas if the desired accounts dont exist domestically. There is no universally applicable threshold of damaging inflation. Having said that, and having had personal experience of high and variable inflation rates, I got seriously bummed long before we reached 40%

Posted by: steve kyle on September 1, 2003 08:48 AM

Watching how China has developed a tendency to deflation despite such rapid growth, I wonder whether we should not expect this in South Africa and other African economies that enter on rapid growth. A pleasing prospect in all, if South Africa and Nigeria can draw heavily on under-used labor.

Posted by: anne on September 1, 2003 09:08 AM

Thinking further, sharp inflation in a developing economy may be a most important danger sign. As under-used labor is better employed, wages will be low for some time and that should lessen inflation pressures unless the monetary authorities are irresponsible. Nelson Mandela always refers to an early emerging Singapore as a proper model for developing South Africa.

Posted by: anne on September 1, 2003 09:15 AM

But we are still living through a period of rampant inflation - in real estate and arguably also still in the stockmarket. Of course, unlike the other type of inflation the effects, at any rate in the short run, are for a great many people exceedingly pleasant. Who would not be thrilled to see their most important asset - their home - increase in value by 200-300%, as has been the case in London over the last few years?

One wonders though what kind of a price we are all going to have to pay for the kind of rampant personal profligacy that such asset inflation has engendered? With, inter alia, a soaring balance of trade deficit, record personal debt, average house prices between 5-7 times average income, one imagines that the price, at least in the UK, is going to be far higher than anyone at the moment, drunk as most of us are on the heady wine of cheap and easy money, cares to admit.

Posted by: Pooh on September 1, 2003 09:29 AM

"But we are still living through a period of rampant inflation - in real estate and arguably also still in the stockmarket.....drunk as most of us are on the heady wine of cheap and easy money, cares to admit."

Which type of inflation do you believe a central bank should respond to? Or what combination? During periods of high inflation and low asset prices, would you suggest a central bank should fix the inflation or directly attempt to pump up the asset prices?


"the kind of rampant personal profligacy that such asset inflation has engendered"

Is this a moral judgement or an economic one? Where are all of the economic symptoms of profligacy such as inadequate investment and scarcity of goods and services? If anything, the current problem is that asset prices are high due to high global demand for savings and a lack of profligacy. If wealthy people and Asian countries don't feel like consuming their share of production, what's wrong with other people consuming it for them (especially given current low interest rates) ?

Posted by: snsterling on September 1, 2003 10:35 AM

It would seem to me that inflation as a problem might not exist since the oil companies have noticeably increased prices under the pretense of not being able to refine during the east cost blackout and/or pipline ruptures (in Phoenix metro area) like in this article from the front pages of The Arizona Republic:

Most retailers passed on that increase but, with some notable exceptions, did not add substantially to the price they had to pay for the fuel.

So who made the profits?

Petroleum industry consultant and consumer advocate Tim Hamilton, a former service station owner from Olympia, Wash., said the answer to that question is relatively simple.

"Arco, Texaco and so on, those are your winners," he said. "When prices spike, the money goes right out of the Arizona economy and right into a Texas bank account for an oil company. If you don't stop oil companies from manipulating the market and controlling all the volume, then you end up with a real uncompetitive price."

So now we're getting this from the oil companies:

"Some people will say this is price-gouging by refiners, and it's true that they profit," he said. "But when you sell something you own, like a house, you sell it at the price the market will give you. The same thing happens with the refiners."

Price data from government and private sources show that, while the bench mark spot price of crude oil rose only 4 cents per gallon between July 28 and Aug. 22, the Los Angeles refined price rose 38 cents and the west Phoenix "rack" prices paid by many tanker trucks jumped by 50 cents.

The oil company monopolies in the energy industry have decided to charge whatever the market will bear.

I think the oil industry is making a run on market because, at least if you ask me, Bush does not look like he will get re-elect (or selected) since lets face it, Bush told WAY to many noticeable lies to the American public.

When I was in legal assisting class at the local community college, I was told by an instructor (a attorney too) that people could file class action lawsuits against price gouging if someone like for instance the "dairy industry" hiked the price of milk. If milk was artificially inflated as a commodity that the impoverished citizens and their children would be force then to do without.

Why then do we have this unregulated energy cost?

I've read articles that say several trucking companies have file for bankruptcy and that the smaller trucking companies have a hard time staying in business every time the gas jumps even twenty cents or more over a few short weeks. Transportation industreis having signed contracts that can't be re-negotiate being legal and binding and all that now have insufficient surcharge fees and thus becomes the problem for the entire economy, at least that's the very viewable scene to me.

So I still don't see sharp inflation as a problem I guess. Those sharp increases in energy cost are surely going to be handed off to consumer one way or another.

Posted by: Cheryl on September 1, 2003 10:38 AM

opps I
m sorry that should have It would seem to me that deflation as a problem might not exist. I got my ecomony term mixed-up.

Posted by: Cheryl on September 1, 2003 10:42 AM

oops, sorry got my terms mixed up. That should read:

It would seem to me that deflation as a problem might not exist anymore since the oil companies have noticeably increased prices.

Posted by: Cheryl on September 1, 2003 10:47 AM

oops, sorry got my terms mixed up. That should read:

It would seem to me that deflation as a problem might not exist anymore since the oil companies have noticeably increased prices.

Posted by: Cheryl on September 1, 2003 10:47 AM

oops, sorry got my terms mixed up. That should read:

It would seem to me that deflation as a problem might not exist anymore since the oil companies have noticeably increased prices.

Posted by: Cheryl on September 1, 2003 10:48 AM

One criterion is that inflation becomes a problem at the point when you ought to be using 'half-life' as its natural measure, rather than annual percentage rate.

Matt

Posted by: Matt on September 1, 2003 10:58 AM

Perhaps this is a lame point to make, but not too long ago I downloaded the CPI data from the Bureau of Labor Statistics (BLS) and discovered a weekly rate of inflation that looked like a seismograph. I did this for other periods, such as the late 1970's, and was astonished to discover the same thing--from "close up" the actual weekly, or monthly, rate of inflation jolted up and down wildly, with a month of (annualized) 25% inflation followed by a month of 2% or less.

I did the same thing with the inflation numbers by region and noticed huge temporal divergences. Basically the pattern I picked up was that inflation was a series of price shocks originating at different points and rippling outward. The phenomenon discussed in econ classes, of a steady upward-sloping curve in prices, is a drastic simplification which should, IMO, be set aside at least once and spelled out to students as price shocks. The shocks themselves are pretty much the same size and "shape"--the difference between a high inflation period and a low inflation period is their frequency.

Steve Kyle seems to be right on about the structure of the economy. I think the impact of the economic structure has a lot to do with the role of liquidity in production and the effect of these price shocks on that.

Pooh could be accurate about inflation too; the deflation corresponds to a hangover after the drunken binge. As for his moral judgement, admit I think it certainly applies here in USA where the income effect coupled with the income transfer effect of these price shocks has RUINED social capital.

Posted by: James R MacLean on September 1, 2003 01:48 PM

A slight aside. Back in the early 80's we had double digit inflation which the government was trying to say was only 9% in reality or single digit and maybe only 11% at the worse. I had owned for a little over 2 years and at that time the price of all my utilities basically doubled. They seperated trash hauling from the water/sewer bill and that went from $20 to $90 total. Rich people said they were unable to sell their houses and suffered (deflation?) and that was a major factor on how the inflation rate was decided.
I guess it all depends on who's ox is gored.

Posted by: PCD on September 2, 2003 06:32 AM

the inflation is what we blame for getting myself angry at Jean claude Trichet,

Posted by: ale on September 2, 2003 01:35 PM

Inflation always causes damage, even when it's only one percent. It is the same fault that governments did again and again and propably never will understand: Inflation causes an unearned shift of income from one group to another and thus causes frustration and decreases investor confidence. The most recent example is the US inflation which caused the stock bubble that busted in 2001. It was a hidden inflation, not showing up in the consumer price index but in enormously increasing stock prices. The same development occurs today in the real estate market. And the cause of all that trouble is the monetary policy of the fed, which pumps money into the market, without even thinking about stability. If this goes on, we will never have a stable economic environment. Do the math: 12% growth in money less 3% gdp growth...makes 9% inflation!

Posted by: Nima Mahdjour on October 20, 2003 08:14 PM
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