Krugman's Upside Down Use Of Inflation Indicators
Paul Krugman, as usual, misses the point about commodity prices: it is not that overall consumer prices, particularly not the hedonically and otherwise thoroughly "adjusted" official consumer price index will in the short term rise as much or even close to as much as commodity price indexes. It won't, for reasons thatI explained last week.
No, the point is that they are the first symptom of more inflationary conditions (usually caused by you know which institution) and that they are leading indicators of higher consumer price inflation. When they drop, they are similarly leading indicators of deflation or at least disinflation.
Krugman's example of the big commodity price drop in the second half of 2008 is in fact a good example of this as consumer price indexes then turned negative in the United States.
Needless to say, this leading indicator isn't perfect, but what leading indicator is?
Normally, people value leading indicators a lot higher than lagging indicators. That's why people care about the Conference Board's leading indicator index, while very few if any cares about its lagging indicator index. Something which is perfectly rational, since we know what has happened, while we don't know what will happen, and therefore wants indicators of what is likely to happen.
Yet in Krugman's, and many other leading economist's upside down "logic", the lagging indicator known as "core inflation" is all important, while the leading indicator of commodity prices should be ignored.
No, the point is that they are the first symptom of more inflationary conditions (usually caused by you know which institution) and that they are leading indicators of higher consumer price inflation. When they drop, they are similarly leading indicators of deflation or at least disinflation.
Krugman's example of the big commodity price drop in the second half of 2008 is in fact a good example of this as consumer price indexes then turned negative in the United States.
Needless to say, this leading indicator isn't perfect, but what leading indicator is?
Normally, people value leading indicators a lot higher than lagging indicators. That's why people care about the Conference Board's leading indicator index, while very few if any cares about its lagging indicator index. Something which is perfectly rational, since we know what has happened, while we don't know what will happen, and therefore wants indicators of what is likely to happen.
Yet in Krugman's, and many other leading economist's upside down "logic", the lagging indicator known as "core inflation" is all important, while the leading indicator of commodity prices should be ignored.
posted by stefankarlsson at 9:07 PM
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