Thursday, September 15, 2005

Alan Reynolds misses the point about inflation

Alan Reynolds' latest column starts out pretty good. First he attacks the broken-window fallacy of some journalists and economists. He even starts out good on the issue of inflation by pointing out that a autonomous increase in oil prices will have a deflationary and not inflationary effect on other prices, the same point I made in my LRC article on core inflation, although he neglects to mention the purely statistical effect of lowering "equivalent rent" of home owners.

But he seem to miss the point of this fact completely by saying that this makes the energy price increase less worrisome since this means that "core" inflation wont rise as a result of this. The point I made was that this shows that "core" inflation will not reflect "underlying" inflation.

Alan Reynolds' obsession on "core" inflation again reflects the typical supply-side economist attempt to deny price inflation at all costs in order to justify more monetary inflation, as was discussed by me in the above linked "core inflation"-article.


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