The Inflation Dog Didn’t Bark, But What About the Others?

By Eric Yeldan, Professor of Economics and Dean at the Faculty of Economics and Administrative Sciences Yasar University. Cross posted from Triple Crisis

The IMF released the April edition of its World Economic Outlook (WEO). One of the key analytical chapters (Chapter 3) of the Report is titled “The Dog that Didn’t Bark: Has Inflation Been Muzzled, or Was It Just Sleeping?” Its main argument (or rather sort of a mystery that needs to be resolved, in the words of its authors) is that over the course of the previous crisis episodes we used to witness severe increases in unemployment along with a simultaneous fall in inflation. Yet, during the current great recession there has been very little movement in inflation, while unemployment rates soared almost everywhere; —hence the metaphor: inflation (the dog…) does not respond (… bark). And the alleged mystery is but why?

The WEO suggests two candidates for explaining the mystery: the first one is based on the “structural unemployment has shifted” hypothesis, arguing that “the failure of inflation to fall is evidence that output gaps are small and that the large increases in unemployment are mostly structural.” The logical policy implication of this argument is that “… the monetary stimulus already in the pipeline may reduce unemployment, but only at the cost of overheating and a strong increase in inflation—just as during the 1970s”. Yet, by itself this argument does not provide much of an explanation, as the underlying causes of this structural shift still remains unanswered.

A second hypothesis that the WEO’s authors unapologetically side with is that “… the stability of inflation reflects the success of inflation-targeting central banks in anchoring inflation expectations and, thus inflation”. Accordingly, with the hard, and yet valuable, lessons learned over the 1990s, economists and central banks are now better rooted in addressing problems of price instability. These “lessons” had formed the basis of “credibility” for the central banks, which in turn, are now able to successfully anchor inflation expectations.

The orthodox mainstream inflation targeting (IT) literature had indeed maintained quite a number of venues to pursue this theme, arguing in many forms that those countries that resorted to the IT central banking practices tended to experience more stability in price levels, and that output losses against falling inflation were comparably lower (in contrast to non-IT’ers). What is cunningly common in almost all such prognostications, however, is the sheer omission of one of the most decisive forms of global division of labor in human history that had been revealed in its fullest extent over the 2000s. As the USA and the continental Europe claimed to graduate into the post-industrial, high technology service economies producing “finance”, the global manufacturing factories were shifting to the sweatshops of East Asia. As the global commodity markets were flooded with cheap consumer durables, the US alone had mopped 2 trillions of the 3 trillion dollars worth of aggregate current account surpluses from the global asset markets. This huge income transfer by way of financial strangulation enabled the “West” to suppress global wage demands and maintain low inflation while unemployment got entrenched at historically record high levels that the authors of the WEO refer to as “structural”.

The real question then is why, despite the alleged successes of the IT central banking framework in containing the volatility of inflation, the real evils of high unemployment, low rates of capital accumulation together with erratic rates of output and deepened social exclusion and polarization of incomes had been the observed norm at a global scale.

The authors of the WEO rather conveniently divert attention from these questions and prefer to focus on the “mysteries” of the flatness of the Phillips curve. The key problem is that ongoing financial globalization appears primarily to redistribute limited jobs across countries, rather than to accelerate capital accumulation and job creation across the globe. Current growth in the global economy is highly uneven and geographically too concentrated to generate sufficient jobs world-wide and, moreover, is associated with too little fixed capital formation. Under these conditions, price stability, on its own, will not suffice to maintain true macroeconomic stability, because, it will not secure financial stability and employment growth.[1]

The dog may indeed remain silent; but what about the others on the street?

[1] See, in particular, Epstein, Gerald and Erinc Yeldan, “Inflation Targeting, Employment Creation and Economic Development: Assessing the Impacts and Policy Alternatives” and the remaining articles in International Review of Applied Economics, 22(8), 2008.

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  1. mmckinl

    No inflation? Please … There is plenty of inflation. It is just that the “powers that be” rig the stats with gimmicks to under-report inflation.

    The question becomes: Why is there inflation when there is so much unemployment? The answer is the effects of climate change and peak oil production on food and fuel.

    This peak oil production problem is only going to make fuel more expensive. Climate change damage and rising fuel costs will only make food even more expensive.

    Over 95% of the world’s transportation fuel comes from oil. Any increase in that price echoes through the economy at each stage of a production cycle.

    Food needs oil for plowing, planting, herbicide, pesticide, harvesting, transport, processing, transport to wholesale, transport to retail … Oil increases hits the food chain 9 times!

    Every product we buy gets hit multiple times with any increase in oil prices. And usually the more necessary the product is the larger the percentage of the increase in oil price is to the overall price.

    We are seeing the end of growth (and capitalism) as we know it and the oligarchs trying desperately to protect their “paper wealth” from the inevitable day of reckoning.

    1. Massinissa

      You dont understand the article. Lets look at the first paragraph shall we?

      “Its main argument (or rather sort of a mystery that needs to be resolved, in the words of its authors) is that over the course of the previous crisis episodes we used to witness severe increases in unemployment along with a simultaneous FALL [emphasis added] in inflation. Yet, during the current great recession there has been very little movement in inflation, while unemployment rates soared almost everywhere;”

      Notice how it says FALL in inflation. There has been no FALL in inflation even with mass unemployment. Inflation has continued unabated. Thats the point of the article, not that theres no inflation. The article never implied that.

      1. mmckinl

        But there has been an increase in inflation, inflation has not remained the same. Food and fuel have gone up measurably.

        Governments have been using gimmicks such as substitution and others to hide real inflation and increases to inflation as well.

        So inflation has changed … to the upside in the face of huge unemployment …

      2. Mr. Jack M. Hoff

        Mass, the article states “there was very little movement” in inflation. So why are you stating that it doesn’t imply that? Sometimes you make no sense at all. Inflation in just about everything I buy or notice has increased dramatically since ’08. Where do you reside that you can escape that fact? Hell, my real estate taxes have doubled while values have fallen. Fuels twice as high. Beef’s 1/3 higher. My health insurance has increased 35%. Home and property insurance another 20%. Professionals I hire have inncreased their rates each year. Only through the fockedup veiw of a beurocrat can you even start to claim there’s been no or little inflation. The author is full of it.

        1. Massinissa

          Maybe im reading the article wrong, but from what I see, its mostly talking about inflation not falling, like it is ‘supposed’ to do under economic models.

          And I agree theres plenty of inflation. But there was already plenty of inflation, and the rate of inflation has stayed the same, steadily increasing at the usual rate. The article is just talking about why it has not fallen.

          Am I incorrect?

        2. Massinissa

          PPPS: By little movement in inflation I assumed what the article meant was that inflation was continuing at the previously high rate.

    2. Massinissa

      Oh but other than that one mistake in your first line, I agree with everything you say. Its just you sort of got the premise of the article confused is all.

      1. mmckinl

        What we have here is cost push inflation due to higher fuel prices … As prices accelerate higher demand destruction occurs.

        What the “powers that Be” are doing is pushing the demand destruction with austerity even though demand is down.

        They know that there would be even higher inflation should they follow through on heavy stimulus.

        Through austerity they can protect their paper wealth from inflationary threat.

        The economy is being used to pay the rentiers first and foremost while the bottom 99% suffer recession inflation.

        1. diptherio

          So what we need then is “fixed capital formation” in sustainable energy and permaculture. Agreed. And what we’re doing now isn’t accomplishing that.

          The post does get bogged down in Acadamese, but I appreciate any economist who is willing to state that “financial globalization” has been a failure. I also enjoy seeing the Phillips Curve take a few whacks. I recall my intro to Macro prof. explaining the basic concept to us while drawing an idealized curve on the board. He then overlayed some actual historical data and proceeded to create something vaguely resembling the Flying Spaghetti Monster. He then spent the rest of the hour explaining why the Phillips curve really was explanatory, even though the empirical data showed no correlation at all between unemployment and inflation.

          1. AK

            That is hilarious, only because it is exactly mirrors my experience in Macroeconomics 101 – and I would hazard a guess that I attended university on the opposite side of the planet to you.

            In a way, you have to congratulate the ruling elite – they sure understand consistency of message.

  2. brazza

    What if the basket of staples used to calculate CPI (and the relative weighting) is no longer relevant or accurate to actual consumption? Wouldn’t that skew inflation calculations? In other words, could life-styles be changing faster than (relatively disconnected) ivory-tower observers can keep up with?

    Also, commodity prices are not actually all in synch. Some would seem to be bucking trends. If those happen to be anomalously weighted in the index, they will tend to have an exaggerated influence on the index itself.

    From a real-life perspective where I live I see asset deflation and unemployment squeezing consumption and deflating assets further. While energy, transportation, telecommunications (some), and a handful of staple services are stable or rising. But even here the variable squeeze seems to be coming more from gov.mnt taxation, and cartel controls than basic pricing of raw goods.

    If I ignore stock and financial instrument magic-wand rise into the stratosphere, I’m seeing deflation everywhere. The powers-that-be are playing smoke-and-mirror games to convince themselves and everyone else that their reflation efforts are succeeding. I don’t see it … demand is plummeting.

    1. diptherio

      From what I can tell, job hunting, with the exception of high-skill jobs, wages have come down considerably since the GFC. But lower wages is also lower labor costs, which may be why the PTB think we’re in a recovery. Meanwhile, the CNA who takes care of your grandma can earn $8.50/hr today for a doing a job that I started at $9.25/hr in 2006. Them that’s got shall get, and them that’s not shall lose, as Lady Day used to say…

  3. digi_owl

    There has been no inflation because all the supposedly printed money has not made its way into the general market. They are sitting on the company ledgers of the various banks that it was handed to, or invested in various paper assets far removed from the commodity industry producing for high street consumption.

    This in contrast to the infamous stagflation, that in large part was driven by easier access to individual/private/consumer credit. While the actual commodity producing industry was shut down or shifted outside the domestic market.

    What little excess cash people manage to scrounge up goes towards dealing with a mountain of stale credit.

    1. WI Quarterback

      More like the central bank money is “purchasing” mountains of bad debt listed as “assets” on their financial statements. These fictitious assets are largely CDS and other derivative instruments.

      They are also quietly purchasing foreclosed properties at mark-to-what-I-need-it-to-be to avoid margin calls fails or stock implosions. There is an abandoned house next to mine owned by BoA that has four foot piles of garbage in the yard, missing doors and windows, plumbing, A/C stripped, and profane graffiti sprawled on it. I know of several attempts to buy the property, but BoA refuses to sell. They are demanding $200K more than its worth. Why? Because they have thousands just like it on their books.

      Retiring debt by paying it off (or writing it off) makes that portion of the money supply disappear. The central bank money is only replacing money on the books that is not really there. That is why these gigantic “stimulus” injections are not causing inflation at any level near what the theories would suggest. Austerity, and I believe even wars of late are largely used to give the public a premise that they can swallow. Without these criminally necessary red herrings, the actual mendacious frauds would be all to clear.

      i think that there are many politicians that understand this but feel trapped because of the potential for unprecedented unrest and catastrophe. Therefore, they do their best to try to negotiate with the predators that get stronger every day, and the predators won’t give an inch. Many other politicians are just innocently clueless, or criminals themselves.

      Bottom line is what we are doing is not working, and at some point that laws of physics and human nature will force a reckoning. I don’t know the answer, but a lot is at stake for this batch of humanity. I pray that someone is wise and brave enough to help back the system from the ledge.

      1. Paul W

        What the central bankers are doing isn’t working! What a surprise. They’ve been the ones in charge as their global economy crashed so, I guess, we should expect the fools to now be able to fix it.

        First step in the right direction would be to take away the power of all those responsible for the economy over the past 25 years. Second step would be to recognize that easy money is responsible for this problem and the bubbles and crisises shall keep on coming until we try to regain the value of money again.

        The trouble with step one is that those in power reserve the right to keep screwing up(mainly because they can continue to enrich themselves and their friends while beggaring the rest of us) and they are not going anywhere. The problem with step two is that average people wish to blame everything on the powers that be and don’t wish to take some responsibility for what has happened.

        End result: we continue with the band aid approach until the day of reckoning when it all falls apart.

        1. F. Beard

          Second step would be to recognize that easy money is responsible for this problem … Paul W

          No. The problem is that the banks have looted nearly the entire population with their form of unethical money creation. Right now we need a lot of easily created fiat to be distributed to the entire population as restitution along with at least a temporary ban on new credit creation.

          1. WI Quarterback

            Exactly. So often the phrase “easy money” is used to support a narrative directing 100% of blame on the borrower for supposedly borrowing well beyond their means. When the more interesting issue to consider is fractional reserve banking, where banks are loaning money THEY DONT HAVE to be paid back plus interest – money can’t get easier than THAT.

            Further, although there are a fair number of borrowers ‘beyond their means’, there are also a not insignificant number that have their means to pay dropped out from under them due to the second and third order affects of “easy money” changing the markets, commodity prices, and labor rates through bubbles.

            With TBTF, the banks win either way. Plus, with a free flowing Fed discount window, and bankruptcy “reforms”, they get made whole on paper AND get all the real assets too.

  4. Ignacio

    Inflation? In Theoclassical catechism inflation is the mother of all beasts. Any sacrifice will be required to control inflation. Is the economic equivalent to mexicali/aztec sun-god that required so many hearts to be appeased.

    1. Massinissa

      Austerian: Ermagawd, we are becoming Zimbabwe/Weimar! Quick, cut government spending or else we become weimar! Do it NAOW!

      *has heart attack from stress and dies*

  5. stevewarton

    We need some new versions of the CPI.

    Version 1: for the bottom 50% … the basket of goods would be very different.

    Version 2: For the top 5%.

    I dare say the two would have very different results.

    1. HotFlash

      Indeed yes. I have been thinking about that and concluded that inflation exists but is necessarily restricted to where the money is. For instance, CEO pay, the market and multi-million dollar condos.

  6. washunate

    I appreciate that the article observes inflation hasn’t declined, but I think even saying inflation is steady is understating the problem. The money supply has expanded rapidly.

    Now, I agree CPI as currently calculated has been relatively steady, but I don’t know what insight CPI reveals other than the desperation of politicians to hide what is actually happening in our economy as we shift wealth upward from workers to TPTB. Stagflation is the only logical outcome of such massive wealth concentration; without it, there’s no productive wealth to skim.

    I would suggest that the dog actually is barking, with increasing urgency and volume. Huge and growing numbers of people cannot afford basic, quality healthcare, food, housing, leisure activity, education, etc. But because this is a long, slow trend that starts at the bottom and works its way up, it takes awhile for those in more comfortable positions to realize the problems lower down the food chain.

  7. Susan the other

    Yesterday Varoufakis used the phrase “the indefensible idea of a private central bank.” We need a public central bank. Bernanke’s dual mandate is a deception. He is required to protect against inflation by keeping unemployment at the level required to prevent inflation. He is not required to work with Congress to fund employment projects. And when an economy is as messed up as ours is with the debris of the great securitization fraud strewn everywhere, combined with other serious problems like global warming, and he is forced to infuse the banksters with enough money to keep functioning because they trashed the entire world, then Bernanke has to make sure there is very high unemployment so inflation does not take off and bankrupt both the banks and Treasury . Fox in the henhouse.

    1. washunate

      I sympathize with the sentiment, but I think this notion that the Fed is the main impediment is misguided. The problem is the President and Congress, not the Fed. In fact, the Fed has gone out of its way to monetize every dollar that the government has wanted to spend.

      Now, the Fed is partly responsible for lack of regulation and enforcement of many rules, but that’s a separate issue from specific public policies to deal with unemployment, like universal unemployment insurance, universal health insurance, raising the minimum wage, and rebuilding our infrastructure.

        1. washunate

          Sweet! Sorry, I have oversensitive radar sometimes to the perspectives that inadvertently (or purposefully) deflect blame away from the Democrats in power over the past few years. The lasting power of the notion that Democratic leaders and pundits somehow aren’t responsible for their own words and deeds intrigues me.

          They’re just so helpless in the face of those evil, all-powerful Republicans :)

  8. Biljana Donceva

    The IMF looked at the historical experience of similar budget cuts, but I don’t think we can implement the same methods because world looks very different today. However, I agree that cuts are required and they are the only suitable remedy to this situation.

    1. Hugh

      Far from being an objective anaylyst, the IMF is a neoliberal tool of the looters. So when you say cuts are required, my question is cuts from whom? How about cutting back on the looting? How about taxing back the loot the kleptocrats have accumulated?

  9. Wat Tyler

    Hasn’t Paul Krugman covered the condition of a liquidity trap at the zero lower bound interest rate (See: Lost decades, Japan),combined with fiscal austerity due to misplaced debt hysteria, over and over again? This is not rocket science folks. How can there be inflation when both the public and private sectors are delevering and we have a demand shortfall due to high and long term unemployment and stagnent wages.


    1. KnotRP

      If I’m a “bank” (i.e. a trading operation that the Fed gave protection to, along with access to 0.25% money), I can take that free credit with the attached promise that it will be extended for a long time, and lever into assets, like oil supplies. Many people think of inflation as monetary,
      but the ability to lever up and deploy that phantom purchasing
      power into assets is definitely inflationary for the things
      you might need, which produces deflation in everything you
      can cut down or do without.

      1. KnotRP

        So, producing any measure which is an
        average of (1) inflation (in the things you need)
        with (2) deflation (in the things you can do without),
        and…poof…everything looks fine. What inflation?

        What we have here is a total failure to appreciate
        complex systems.

  10. Hugh

    Permanent high unemployment is only structural in the sense that in a kleptocracy, it is one of several mechanisms to suppress wages and keep workers cowed. That is it is a feature, not a bug.

    All gains in productivity and the benefits of ZIRP and the QEs go to capital and the rentier class of kleptocrats. This money doesn’t enter into the real economy, but primarily floats around in the paper economy where paper “profits” are higher than in the real and mundane world. However, the paper economy does create a certain amount of inflation in the real economy indirectly through speculation on commodities pricing which does have real observable effects on people’s pocketbooks. As in so much else, this is just another form of extraction or looting from us.

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