Everyone knows that the cost of living has risen significantly in the past seventy-five years; recently, at rates now not seen since the Eighties. The salary for which I began at The Boston Globe, $28,500, doesn’t go as far today as it did in 1978. To understand a little better why this has is happening, try this simple trick: think of rising prices as a matter of the
"Never in the course of millennia has [dollar depreciation} been reversed in a currency that endured.. " True overall, but we have gotten deflation (dollar inflation) in depressions, because demand collapses faster than supply. Demand collapses because banks suddenly cut off credit, while it's hard to turn off supply in the pipeline. The Fed has far more influence on banks than on producers, thus more influence on demand than on supply.
it is my impression the most significant cost push is now, and will increasingly be environmental degradation. Economists, or perhaps more pointedly, their employers, choose to be willfully blind to the real costs of what they think of as 'development', which ultimately seems to be based on degradation. As this problem continues to make the real costs more apparent, the data, analysis and terminology - and political will - remain woefully inadequate to better acknowledge, let alone treat the cause as it exists today, let alone into the near future: https://www.cbc.ca/radio/whatonearth/canada-greenhouse-gas-climate-reporting-1.6528330
This column prompts several observations, in no particular order.
1) Regarding what you describe as cost push inflation, this is not such a foreign idea. Milton Friedman makes the point that inflationary expectations, once baked into an economy become their own force encouraging more inflation. And Robert Lucas and Tom Sargent further developed this in elaborating work on rational expectations. Sargent's "End of Four Big Inflations https://ideas.repec.org/h/nbr/nberch/11452.html (probably behind a paywall), explores the way in which expectations accelerated inflation in interwar Europe, and the extent to which a solution rested on changing expectations.
2) Focusing only on aggregate prices misses the role that relative prices play in allocating goods and services in a market economy. One of the real costs of inflation is the noise that general price increases introduce to market signals from changes in relative prices.
3) The cost of living ultimately depends on the relative price of an hour of labor. As Brad DeLong elegantly illustrates https://www.nber.org/system/files/working_papers/w7569/w7569.pdf the cost of pretty much everything relative to an hour of work has fallen dramatically over the 20th century. Less so recently.
4) Some inflation assists with the relative price shifting, because it provides a mechanism for reducing the cost of labor without cutting nominal wages, which is very hard for businesses to do (in some sense this is the flip side of the noise argument).
5) Inflation has important distributional consequences because it reduces the real value of financial assets such as loans that are repaid. As such it can have important effects on the distribution of wealth.
6) Part of the reason that monetary policy makers face the difficulties they do is the dysfunction of the legislative and executive branches of government. In the absence of sensible fiscal policy , monetary policy has been called on to do double duty.
"Never in the course of millennia has [dollar depreciation} been reversed in a currency that endured.. " True overall, but we have gotten deflation (dollar inflation) in depressions, because demand collapses faster than supply. Demand collapses because banks suddenly cut off credit, while it's hard to turn off supply in the pipeline. The Fed has far more influence on banks than on producers, thus more influence on demand than on supply.
it is my impression the most significant cost push is now, and will increasingly be environmental degradation. Economists, or perhaps more pointedly, their employers, choose to be willfully blind to the real costs of what they think of as 'development', which ultimately seems to be based on degradation. As this problem continues to make the real costs more apparent, the data, analysis and terminology - and political will - remain woefully inadequate to better acknowledge, let alone treat the cause as it exists today, let alone into the near future: https://www.cbc.ca/radio/whatonearth/canada-greenhouse-gas-climate-reporting-1.6528330
This column prompts several observations, in no particular order.
1) Regarding what you describe as cost push inflation, this is not such a foreign idea. Milton Friedman makes the point that inflationary expectations, once baked into an economy become their own force encouraging more inflation. And Robert Lucas and Tom Sargent further developed this in elaborating work on rational expectations. Sargent's "End of Four Big Inflations https://ideas.repec.org/h/nbr/nberch/11452.html (probably behind a paywall), explores the way in which expectations accelerated inflation in interwar Europe, and the extent to which a solution rested on changing expectations.
2) Focusing only on aggregate prices misses the role that relative prices play in allocating goods and services in a market economy. One of the real costs of inflation is the noise that general price increases introduce to market signals from changes in relative prices.
3) The cost of living ultimately depends on the relative price of an hour of labor. As Brad DeLong elegantly illustrates https://www.nber.org/system/files/working_papers/w7569/w7569.pdf the cost of pretty much everything relative to an hour of work has fallen dramatically over the 20th century. Less so recently.
4) Some inflation assists with the relative price shifting, because it provides a mechanism for reducing the cost of labor without cutting nominal wages, which is very hard for businesses to do (in some sense this is the flip side of the noise argument).
5) Inflation has important distributional consequences because it reduces the real value of financial assets such as loans that are repaid. As such it can have important effects on the distribution of wealth.
6) Part of the reason that monetary policy makers face the difficulties they do is the dysfunction of the legislative and executive branches of government. In the absence of sensible fiscal policy , monetary policy has been called on to do double duty.