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drunkle.
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February 5, 2008 at 8:01 PM #148843February 5, 2008 at 8:05 PM #148860
Fearful
ParticipantRegarding core versus headline inflation, again, I think the rationale was to remove the volatility that food and energy prices presented.
The theory is that expectations of inflation tend to be self reinforcing – that is, expecting inflation leads people to spend earlier, increasing the money velocity, which increases the money supply, creating inflation. Therefore, if people are not expecting “core” spending categories to increase in price, they will not create inflation in those categories. Therefore, since the “core” inflation was generally more stable, it reduced people’s inflation expectations and thus created less inflation.
From a simple perspective, however, excluding a category of spending doesn’t make sense, because excluding a category of spending, even a volatile one, misstates the inflation of the remainder of the categories – if a certain money supply is being increasingly directed toward rising energy costs, then the prices of the remainder of the categories ought to go down. More money spent on gas means less money available for household furnishings, so higher gas prices ought to lead to lower household furnishings prices.
Note that expectations of deflation are also self perpetuating. Expecting prices to fall discourages spending, reduces money velocity, and so shrinks the money supply.
February 5, 2008 at 8:05 PM #148933Fearful
ParticipantRegarding core versus headline inflation, again, I think the rationale was to remove the volatility that food and energy prices presented.
The theory is that expectations of inflation tend to be self reinforcing – that is, expecting inflation leads people to spend earlier, increasing the money velocity, which increases the money supply, creating inflation. Therefore, if people are not expecting “core” spending categories to increase in price, they will not create inflation in those categories. Therefore, since the “core” inflation was generally more stable, it reduced people’s inflation expectations and thus created less inflation.
From a simple perspective, however, excluding a category of spending doesn’t make sense, because excluding a category of spending, even a volatile one, misstates the inflation of the remainder of the categories – if a certain money supply is being increasingly directed toward rising energy costs, then the prices of the remainder of the categories ought to go down. More money spent on gas means less money available for household furnishings, so higher gas prices ought to lead to lower household furnishings prices.
Note that expectations of deflation are also self perpetuating. Expecting prices to fall discourages spending, reduces money velocity, and so shrinks the money supply.
February 5, 2008 at 8:05 PM #148831Fearful
ParticipantRegarding core versus headline inflation, again, I think the rationale was to remove the volatility that food and energy prices presented.
The theory is that expectations of inflation tend to be self reinforcing – that is, expecting inflation leads people to spend earlier, increasing the money velocity, which increases the money supply, creating inflation. Therefore, if people are not expecting “core” spending categories to increase in price, they will not create inflation in those categories. Therefore, since the “core” inflation was generally more stable, it reduced people’s inflation expectations and thus created less inflation.
From a simple perspective, however, excluding a category of spending doesn’t make sense, because excluding a category of spending, even a volatile one, misstates the inflation of the remainder of the categories – if a certain money supply is being increasingly directed toward rising energy costs, then the prices of the remainder of the categories ought to go down. More money spent on gas means less money available for household furnishings, so higher gas prices ought to lead to lower household furnishings prices.
Note that expectations of deflation are also self perpetuating. Expecting prices to fall discourages spending, reduces money velocity, and so shrinks the money supply.
February 5, 2008 at 8:05 PM #148578Fearful
ParticipantRegarding core versus headline inflation, again, I think the rationale was to remove the volatility that food and energy prices presented.
The theory is that expectations of inflation tend to be self reinforcing – that is, expecting inflation leads people to spend earlier, increasing the money velocity, which increases the money supply, creating inflation. Therefore, if people are not expecting “core” spending categories to increase in price, they will not create inflation in those categories. Therefore, since the “core” inflation was generally more stable, it reduced people’s inflation expectations and thus created less inflation.
From a simple perspective, however, excluding a category of spending doesn’t make sense, because excluding a category of spending, even a volatile one, misstates the inflation of the remainder of the categories – if a certain money supply is being increasingly directed toward rising energy costs, then the prices of the remainder of the categories ought to go down. More money spent on gas means less money available for household furnishings, so higher gas prices ought to lead to lower household furnishings prices.
Note that expectations of deflation are also self perpetuating. Expecting prices to fall discourages spending, reduces money velocity, and so shrinks the money supply.
February 5, 2008 at 8:05 PM #148848Fearful
ParticipantRegarding core versus headline inflation, again, I think the rationale was to remove the volatility that food and energy prices presented.
The theory is that expectations of inflation tend to be self reinforcing – that is, expecting inflation leads people to spend earlier, increasing the money velocity, which increases the money supply, creating inflation. Therefore, if people are not expecting “core” spending categories to increase in price, they will not create inflation in those categories. Therefore, since the “core” inflation was generally more stable, it reduced people’s inflation expectations and thus created less inflation.
From a simple perspective, however, excluding a category of spending doesn’t make sense, because excluding a category of spending, even a volatile one, misstates the inflation of the remainder of the categories – if a certain money supply is being increasingly directed toward rising energy costs, then the prices of the remainder of the categories ought to go down. More money spent on gas means less money available for household furnishings, so higher gas prices ought to lead to lower household furnishings prices.
Note that expectations of deflation are also self perpetuating. Expecting prices to fall discourages spending, reduces money velocity, and so shrinks the money supply.
February 5, 2008 at 10:38 PM #148968robson
ParticipantGood analysis. The theory of self reinforcing inflation expectations makes sense. However, many economic theories don’t work well when put into reality due to faulty assumptions. Is there any study that has shown that this reporting method slows inflation after including food and energy?
February 5, 2008 at 10:38 PM #148866robson
ParticipantGood analysis. The theory of self reinforcing inflation expectations makes sense. However, many economic theories don’t work well when put into reality due to faulty assumptions. Is there any study that has shown that this reporting method slows inflation after including food and energy?
February 5, 2008 at 10:38 PM #148882robson
ParticipantGood analysis. The theory of self reinforcing inflation expectations makes sense. However, many economic theories don’t work well when put into reality due to faulty assumptions. Is there any study that has shown that this reporting method slows inflation after including food and energy?
February 5, 2008 at 10:38 PM #148895robson
ParticipantGood analysis. The theory of self reinforcing inflation expectations makes sense. However, many economic theories don’t work well when put into reality due to faulty assumptions. Is there any study that has shown that this reporting method slows inflation after including food and energy?
February 5, 2008 at 10:38 PM #148613robson
ParticipantGood analysis. The theory of self reinforcing inflation expectations makes sense. However, many economic theories don’t work well when put into reality due to faulty assumptions. Is there any study that has shown that this reporting method slows inflation after including food and energy?
February 6, 2008 at 8:42 AM #148663Fearful
ParticipantI don’t know. I didn’t make up the theory; I think I read it in something published by a FRB governor.
It’s a little eerie to think just how little control the central bank has over the money supply. Even if the bank was solely responsible for money creation, e.g. by printing only currency, they could do nothing about people taking that currency and stuffing it under mattresses – effectively taking it out of the supply.
February 6, 2008 at 8:42 AM #149019Fearful
ParticipantI don’t know. I didn’t make up the theory; I think I read it in something published by a FRB governor.
It’s a little eerie to think just how little control the central bank has over the money supply. Even if the bank was solely responsible for money creation, e.g. by printing only currency, they could do nothing about people taking that currency and stuffing it under mattresses – effectively taking it out of the supply.
February 6, 2008 at 8:42 AM #148946Fearful
ParticipantI don’t know. I didn’t make up the theory; I think I read it in something published by a FRB governor.
It’s a little eerie to think just how little control the central bank has over the money supply. Even if the bank was solely responsible for money creation, e.g. by printing only currency, they could do nothing about people taking that currency and stuffing it under mattresses – effectively taking it out of the supply.
February 6, 2008 at 8:42 AM #148932Fearful
ParticipantI don’t know. I didn’t make up the theory; I think I read it in something published by a FRB governor.
It’s a little eerie to think just how little control the central bank has over the money supply. Even if the bank was solely responsible for money creation, e.g. by printing only currency, they could do nothing about people taking that currency and stuffing it under mattresses – effectively taking it out of the supply.
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