The media is awash with stories about how the huge amount of money being printed by the US fed will result in hyperinflation in US. Credit Suisse’s Bob Parler talks to Bloomberg on this topic and offers ome interesting insights
- The commodity inflation is definitely increasing
- The wage inflation component is actually negative due to massive unemployment
- The monetary inflation increases when there is no output gap. In the current scenario there appears to be a lot of output gap which would limit inflation pressures (according to Keynesian theory, when potential GDP is greater than actual GDP — when, for example, the unemployment rate is high and industries are operating well below capacity — the output gap provides a buffer against inflationary pressures.)
Overall, he expects 4-5% inflation by 2nd half of 2010.
However, it is timely to remember Milton Friedman’s quote “inflation is always and everywhere a monetary phenomenon.” If the central bank creates more money than the public wants to hold, the public will spend it, bidding up the prices of goods and services. When too much money chases too few goods and services, the result is a rise in the price level, or inflation.
It’s easy to lose sight of Friedman’s axiom nowadays. Central bankers often talk about higher oil prices and rising wages as if these price increases cause inflation rather than reflect it.
The other theory of inflation, popular among Keynesian economists and Phillips Curve advocates, is something called the output gap, or the difference between the economy’s actual and potential output.
More information on the problem with the output gap theory here.
