Yellen´s “Sunday Sermon”: A broken record

On Sunday, October 15, Yellen, among other central bank chiefs, gave a talk to a group of international bankers.

Her usual story regarding low inflation was present:

Inflation readings over the past several months have been surprisingly soft, however, and the 12-month change in core PCE prices has fallen to 1.3 percent. The recent softness seems to have been exaggerated by what look like one-off reductions in some categories of prices, especially a large decline in quality-adjusted prices for wireless telephone services.

My best guess is that these soft readings will not persist, and with the ongoing strengthening of labor markets, I expect inflation to move higher next year. Most of my colleagues on the FOMC agree.

However, to hedge her bets she says:

To be sure, our understanding of the forces that drive inflation is imperfect, and we recognize that this year’s low inflation could reflect something more persistent than is reflected in our baseline projections.

The fact that a number of other advanced economies are also experiencing persistently low inflation understandably adds to the sense among many analysts that something more structural may be going on.

She had better sit down to wait for her Phillips Curve guest to show up since there is no tradeoff between unemployment and inflation. Any inflation rate is consistent with any unemployment rate.

The charts exemplify.

Her intuition that since a “number of other advanced economies are also experiencing persistently low inflation understandably adds to the sense among many analysts that something more structural may be going on” is correct. However, the reason is not “structural”, but monetary.

The charts below show that monetary policy was synchronized in a large swath of advanced economies. They all severely tightened together, and never undid the damage, with all those economies remaining in differing states of depression.

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