The dovish San Francisco Fed has a new paper out to back-up quantitative easing.
The paper argues that price inflation is lower than it seems due to distortions in food and energy. An alternate measure that weights consumer spending in all categories (PCE) shows sustained disinflation like we haven’t seen in decades:
While the current share of disinflationary expenditure categories is not unprecedented, the magnitudes of deceleration in inflation are the largest seen since the 1981 recession. The main difference between slowing prices in the early 1980s and current disinflation is that the large deceleration during and after the 1981 recession was due to a severe tightening of monetary policy. This tight policy stance significantly reduced inflation in 1982 and is sometimes called the Volcker deflation after then-Federal Reserve Chairman Paul Volcker (Blanchard 1984). By contrast, the most recent recession was caused by the bursting of the housing bubble and the ensuing financial crisis. Despite exceptionally low interest rates, the breadth of disinflation has remained quite large since the beginning of the last recession. In October 2010, half of consumer spending was on items whose inflation rate had declined 1.2% or more over the past year. Moreover, the current acceleration of headline inflation has been due to the volatile food and energy expenditure categories. Core inflation is currently decelerating.
Likewise, while the energy-distorted PCEPI shows deflation during the recession, PCE suggests that inflation has never been lower than it is right now.
For a contrary view, see 8 reasons why no one believes Bernanke’s deflation warnings >
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