Where’s the inflation in developed world?

This question is actually posed to BIS’s Mr Hyun Song Shin. The interview reminds you of this post on death of economics. I mean such is the chaos in thinking and explanation. No one has a clue really.

He says based on the traditional economic story we should have had some inflation. But we don’t:

Mr Shin, everybody expected to see inflation this year, but prices are hardly rising. What’s happened?

Economists are still struggling to figure out the full story on inflation. The simple stories that people tell are no longer adequate. These simple stories are domestic and short-term: If the economy is depressed, you have low inflation. If the economy is overheated, you have high inflation. We are realising that this cannot be the full story. Otherwise we should be seeing higher inflation by now.

Inflation is only 0.2% in Europe and 0.5% in the US, although the central banks are doing everything in their power to drive it up to 2%. What’s going wrong?

Inflation is not only a domestic and short-term phenomenon – the kind of phenomenon monetary policy can influence. Inflation also depends on global and long-term factors. The most important story is global. Ultimately, inflation is falling nearly everywhere in the world.

Why?

In the short term, that’s down to the fall in the price of oil and other commodities. The low oil price lowers the price for fuel and thereby affects inflation. But there are important long-term stories as well.

For example?

Globalisation and demography. When the emerging economies started to produce for the world markets, we suddenly had a lot more supply, a so-called supply shock, which put pressure on prices and kept them low. That is one global long-term story. Then there are the long-term domestic factors. Even in countries that are not so open to the world market, we have seen inflation falling. One possible reason is demography – although some economists disagree. If you have an old population, there is a greater need to save. That leads to less consuming, so lower demand, which in turn leads to subdued inflation. You can see that in Japan, for example.

How do central banks fit into this story?

If you have a short-term view of the world and believe that a short-term lack of demand is the main reason for low inflation, this is where central banks play a role. You would say: Inflation is not close to 2%, so we have to use expansive monetary policy to help replace this missing demand. But that is too simple, as discussed already. There are multiple factors that alter inflation; not all of them can be influenced by central banks.

It is amazing how the blame games are really played without looking at the real issues. The real problem is economics as a subject has become way too technical and mechanical. We are taught these standard ideas and anything else in either poor economics or an anomaly which will just fritter away. Now the anomaly has become the main thing and the so called economics rules an anomaly.

 

 

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