Inflation: why it seems understated

[RockOn]

Originally Posted by ladelfina

It's a far wider, deeper, more systemic transfer of wealth than anything so vulgar and obvious as taxation.

I really like that.

[Independent]

Originally Posted by ladelfina

I think the classical definition of inflation is an increase in the money supply. Usually this includes wage inflation (which in the US has not happened).

I'm not sure where you're getting the "classical" definition of inflation. Mine was from "Principles of Macroeconomics" by Mankiw.
I also tried Googling and got: define:Inflation - Google Search
The increase in the money supply is a possible cause of inflation. If the money supply increases faster than real production, and the velocity of money doesn't change, then you will get increasing prices. (This is for a closed economy.)

Let's think about production, consumption, and inflation in a basic way globally.
(I'm pulling these thoughts together as I go along, so bear with me).

The US GDP is $14 trillion.
70% of GDP is consumer spending.
Trade balance is -$827 billion. That translates into domestic purchases of $6.586 trillion and imports of $7.413 trillion.
If we assume that consumer vs. non-consumer spending is divided along the overall import/export lines, that means 70% of $7.413 trillion is consumer spending on overseas goods. If anything, consumers may be responsible for more purchases of imports, but let's be conservative. 70% of $7.413 trillion is $5.189, more than 1/3 of GDP.

Now if we look at the dollar, it has fallen against a the basket of world currencies by 25% over the last five years (Nov. 07, The Economist). 2006-2007 DXY went from 91-84; 2007-2008 84-76. That, to me, means that in 2006 and 2007, more than 1/2 of consumer spending ended up buying 8% less stuff, and then 10% again less stuff. And none of this would be counting any inflation in the countries of import which, in the case of Europe, is adding its yearly 2-3% in nominal price rises. Only by balancing out with marked deflation on the part that's the non-import side could one come up with a 3-4% overall inflation figure, right?

I'm also having trouble matching these numbers. I looked here: http://www.bea.gov/national/nipaweb/TableView.asp#Mid
and got gross imports to be 1/6 of GDP, not 1/2.

[ladelfina]

Can you have inflation w/o increasing the supply of money?

I definitely mis-understood the trade stuff. I'm having a bad day, looks like! Apologies. Sorry, it's too late to edit.. thanks for the correction, though, Independent. I still think the effect should be considered but it's less than I made it out to be.

[barbarus]

Originally Posted by Independent

I'm not sure where you're getting the "classical" definition of inflation.

Perhaps Milton Friedman's most pithy statement.

"Inflation is always and everywhere a monetary phenomenon."

i.e. Inflation is caused by only one thing. An increasing money supply/expanding credit.

Ask one of the moneterists on the board or pop in to the Economics Department at the University of Chicago..

[MichaelB]

Can you have inflation w/o increasing the supply of money?

Yes, if the supply of money were to stay the same and the availability of goods and services were to decline - for example, artificial scarcity coming from price controls, trade restrictions or sudden catastrophe.

Ladelfina, have you seen this paper?PIMCO - Glidepath Paper- 8-2007htm
While slightly inwardly focused on their product line, they do a good job of framing, identifying and quantifying the risks you mention.

They also discuss what I think is the single biggest financial risk US population faces - the transfer of risk from employers to individuals by changing pensions from DB to DC. Liability and asset management responsibility is being transferred to 10's of millions who don't have the education, training or tools to properly manage, and the most unfortunate consequences will not show for decades, fat too late for any effective remedy.

Michael

[Independent]

Originally Posted by ladelfina

Can you have inflation w/o increasing the supply of money?

I definitely mis-understood the trade stuff. I'm having a bad day, looks like! Apologies. Sorry, it's too late to edit.. thanks for the correction, though, Independent. I still think the effect should be considered but it's less than I made it out to be.

Like Michael says, you can have fewer goods and the same number of dollars. You could also move the dollars around more quickly (volatility), for example by holding less cash because you know that ATMs are convenient. Or, "money" could change while we're not looking. Maybe we're tracking currency and checking accounts as "money" and miss the fact that some people are using money market mutual funds like checking accounts.


I think your idea on trade makes conceptual sense. To the extent that we import goods, and the terms of trade become unfavorable, we lose real income. The Fed believes the best way to manage that loss is to have some inflation. So we consumers see the cost of imports going up while our incomes don't. But you need to start with 1/6 instead of 1/2.

[spazz]

Three more to add:
A decreasing unemployment rate ( excl stagflation of course), government deficits, and the depreciation of a local currency can all have an impact on the inflation rate