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Economists split over inflation

"When asked what presents a bigger risk over the next year, 23 economists said accelerating inflation and 23 said slowing inflation." That comes from the Wall Street Journal's forecasting survey, and is probably making life really interesting inside the Federal Reserve right now.

I'd only add that this makes me think slowing inflation is a bit more likely than the survey suggests. Monetary economists are trained to worry about inflation. It's been at the core of the profession for decades now. It was the unconquerable problem when many of them came of age. For a solid half of those surveyed to say that inflation wasn't a problem after a deep recession and a huge amount of fiscal stimulus is pretty remarkable.

By Ezra Klein  |  April 16, 2010; 8:16 AM ET
Categories:  Economy  
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Comments

The good news is that the long-term steps likely recommended by the inflation hawks -controlling the deficit, avoiding a return to protectionism - are generally good policy anyway. As long as we don't overreact with short-term thinking that cuts off the recovery, we can probably come to some degree of economic consensus.

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Posted by: 898551828 | April 16, 2010 9:00 AM | Report abuse

In my youth I went through a stretch where I tried to dig deeply into macro. It was stuff like this -- 23 to 23 ties over fundamental issues -- that caused me to stop. If even people who dedicate their lives to the subject fundamentally disagree on fundamental issues, how is the dilettante supposed to have any idea what to think?

Posted by: ostap666 | April 16, 2010 9:28 AM | Report abuse

ezra- the other side of the coin is that the non-monetarists are never worried about inflation, so of course slowing inflation would be their overriding concern.
what you really need to know is how many belong in each camp.
even if both outcomes are equally likely, slowing inflation would be a far worse outcome.

Posted by: rt72 | April 16, 2010 10:00 AM | Report abuse

jdupton- that's exactly the problem though- inflation hawks call for cutting back spending right now, which would be disasterous.

Posted by: Quant | April 16, 2010 10:26 AM | Report abuse

I agree with ostap666 - it's incredibly hard to forecast things like inflation, especially out beyond several months. Having one economist suggesting 4.4% inflation over the next year and others at 0.0% strongly suggests that there is no reliable way to predict inflation. If there was, we would know it by now and all the economists would use that (and many forecasters would be unemployed).

As I look at it, cash inflation over the past year has been 3.2% (excluding owner's equivalent rent), and the funds rate is at 0.25%.

Nominal interest rates aren't necessarily a good measure of the stance of monetary policy, but I'm guessing that combination leads to accelerating inflation if not necessarily in a year but over the medium term (it looks like the economists surveyed are in much better agreement about that).

Posted by: justin84 | April 16, 2010 10:39 AM | Report abuse

Ezra
Do you think getting such low interest on
savings in the banks is hurting the recovery? Isn't it hard to spend money you don't get? What's your take on when interest rates on savings might rise?

Posted by: axto188 | April 16, 2010 11:26 AM | Report abuse

Quant,

I don't know about disasterous but it would definitely make the recession last longer but we may be doing that anyway on the back end with the enormous debt being increased. At the end result it will be something that is totally not predictable right now, ie how a potential decrease in our ratings as a country will be looked at by other countries. If we end up having to pay higher interest rates on our debt it will be much worse than if we cut back spending slightly now.

We're going to pay, its just a matter of how much and for how long.

Posted by: visionbrkr | April 16, 2010 11:39 AM | Report abuse

I've always had this problem with fiscal stimulus.

Let's assume that fiscal stimulus works, with a multiplier of 1.5x.

An $800 billion stimulus plan over 2 years increases GDP compared with it's previous time path by $1.2 trillion or $600 billion each year assuming $400 billion goes out the door each year.

Not all of the data is in yet, but let's say this is what we experience in terms of total GDP (nominal):

2008: $14.5 trillion
2009: $14.2 trillion
2010: $14.8 trillion

Without the stimulus, then it would have been:

2008: $14.5 trillion
2009: $13.6 trillion
2010: $14.2 trillion

What is the logical result for 2011 GDP now that stimulus funds are gone? $400 billion a year in spending goes away, and by the multiplier effect GDP should fall by $600 billion.

With stimulus and without, 2011 GDP should be about $14.9 trillion, assuming 5% 'organic' annual GDP growth. However, we need to pay interest on the $800 billion in debt. Also, if stimulus funds are invested, on average, in projects which provide a lower rate of return that what the private sector would have been done, GDP growth will be lower each and every year in the future under the stimulus scenario. It seems the best cas would be that the government invests better than the private sector and so growth is higher, but I don't think you can just assume that.

Posted by: justin84 | April 16, 2010 2:43 PM | Report abuse

The problem with your thinking, justin, is that the end of the stimulus doesn't make GDP fall. It simply stops making GDP rise at an accelerated rate. Also, the rate of interest on government debt right now is very, very low because of the economic contraction.

Regarding the article, I really wonder what the hell these so called economists are smoking. I would bet good money at short odds that we will not experience rapid inflation in the next year. A cursory glance at the employment data makes that clear. The fact that 23% can't apply the most basic rule of classical economic (the inverse relationship of unemployment and inflation) shows how useless the economic profession is in the face of politicization. Seriously, there should not be this kind of disagreement, it's like if a quarter of physicists couldn't agree on atomic theory.

Posted by: theamazingjex | April 16, 2010 5:45 PM | Report abuse

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