A good example of one is John Williams:
“My own view is that it has been not that baffling,” Mr. Williams said, referring to low inflation. He noted that prices in some sectors such as health care and cellular services have been hit by downward movements, and that prices typically reflecting developments in the economy have been rising.
“With a strong economy, history teaches us that inflation tends to move up,” he said.
Mr Williams thinks inflation is a price phenomenon. Relative prices are always moving. Some prices fall while others increase. That´s the signaling nature of prices. Inflation, however, is a continuous rise in the overall price level.
That´s simply not happening. In fact, lately, inflation, as reflected by any measure of overall prices – headline PCE, core PCE or the GDP deflator – has fallen and all are below the 2% target level.
Williams than appeals to the false view that “growth spells inflation”. History teaches no such thing. The two charts below show the short-term relation between growth and inflation for two alternative measures of inflation. There´s no relation!
The next chart shows the long-term relation, using ten-year averages of real growth and headline PCE inflation.
Williams says we have a “strong economy”. Maybe in his dreams. What shows up is that the “Bernanke shock” was a negative aggregate demand shock, pulling down real growth and weakening inflation.
As we´ve argued elsewhere, the Fed´s tightening bias is “faith-based”. Unfortunately, that faith is misplaced.