Keynes; “The difficulty lies, not in the new ideas, but in escaping from the old ones”

An old idea never relinquished is the one that sees inflation as a cost phenomenon, or the result of “cost-push.”

A recent op-ed by Peter Hooper, managing director and chief-economist of Deutsche Bank Securities, and more significantly a 26-year veteran of the Federal Reserve Board in Washington, DC, provides a good illustration.

According to him, “the Trump administration doesn’t seem concerned about this. It has taken at least six actions that have either actually or potentially boosted inflationary pressures. As a result, it has risked making our next economic downturn more severe.”

The first is the “classic” Phillips-Curve reasoning:

Historical experience — and recent evidence at the state level — indicates that the further unemployment drops below NAIRU, the higher wages and price inflation go up.

The others include, “weak dollar policy”, “hospital inflation” due to rollbacks in the ACA, Trumps “trade wars”, the repeal of “net neutrality rules” and “withdrawing from Iran´s nuclear agreement which will increase oil prices”.

Curiously, despite spending more than a quarter-century at the heart of monetary policymaking, Peter Hooper does not think monetary policy has any role in inflation. In fact, he implies that the Fed is powerless to control inflation, which is all “cost-push.”

The charts below show PCE core inflation and instances of oil and dollar shocks. In those instances, oil prices more than double in a relative short period and the dollar falls by 10% or more.

To all, inflation said: “My dear, I don´t give a damn”.


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