You Read Things Here First

The Economist this week published an editorial that criticized the blind focus on so-called "core" inflation. First, they point out that food and energy prices are less "sticky" than so-called "core" prices and so will better and faster reveal shifts in inflationary pressures. Second, they point out that autonomous increases in core prices due to supply factors will depress other prices and so "core" prices will underestimate inflationary pressures. Third, it is asymmetric to reject the price increases in energy on account of the fact that they are in part caused by factors unrelated to monetary policy (such as increased demand from China), while not taking into account of how factors unrelated to monetary policy have depressed "core prices" (such as the inflow of cheap goods from China).

All of these arguments were raised by me in my classic LRC article attacking "core" inflation from 2005 in slightly different formulations.

I also see that the Swedish statistical central bureau has published a reply (in Swedish) to an article in Swedish business news paper Dagens Industri written by a certain Gunnar Örn on June 8th. The article is not online so unfortunately I cannot link to it, but as my readers fluent in Swedish probably understand from the reply (and can verify if they can access Dagens Industri from June 8th from their local library), the argument in the article was that the column measure of GDP was misleading because it did not take into account terms of trade changes. The article argued that it was more relevant to deflate nominal GDP changes with the prices of the things the inhabitants of a country buy, rather than the things they sell as this is the price index relevant for the development of their real income. The article also pointed out that if you deflate nominal GDP growth with the price index for domestic purchases rather that the GDP price index, the real GDP for 2006 is lower than the headline volume number, while real GDP for the first quarter of 2007 is significantly higher.

These arguments and the numbers presented were nearly identical with the analysis I presented in this blog May 30th. The only difference being that Gunnar Örn wrote that terms of trade adjusted 2006 growth was 3.8% instead of the 3.9% number I presented. The similarities between my post and Örn's article are so great that it seems likely that he read my post and based his article on it without acknowledging from where he got the arguments.

But whether he (and The Economist) had actually read what I wrote or not, one thing is clear. You read things first here, sooner than in the official financial press.

BTW: The reply from the Swedish statistical central bureau to the arguments from me and Gunnar Örn was rather nonsensical. They merely said that there are many kinds of measurements and that both volume GDP and terms of trade adjusted real GDP contained information about the economy. That is true, sort of. Volume GDP could in some situations in some aspects be of some interest (for example in analyzing the causes of changes in standard of living). But that doesn't change the fact that the terms of trade adjusted number is the most relevant. This is perhaps not so much a critique of the statistics bureau, but of the journalists (almost all except Gunnar Örn) and politicians who choose to focus on the volume number.