NationStates Jolt Archive

http://www.bangkokpost.com/breaking_news/breakingnews.php?id=55508
The damage may only be temporary, but by God is it great. Last month, inflation in the US increased by 1.2%, the fastest in 25 years! So far, the core inflation rate is unchanged, but even if it doesn't (as optimists like myself think), that's beside the point. Households will spend more on fuel and less on everything else.
It's having a ripple effect everywhere. Industrial output actually fell, the first time it has that I can remember. I'm optimistic that this is a soft spot caused by the damage Katrina did, but there is always a danger that this can be the start of a recession.

http://www.bangkokpost.com/breaking_news/breakingnews.php?id=55508
The damage may only be temporary, but by God is it great. Last month, inflation in the US increased by 1.2%, the fastest in 25 years! So far, the core inflation rate is unchanged, but even if it doesn't (as optimists like myself think), that's beside the point. Households will spend more on fuel and less on everything else.
It's having a ripple effect everywhere. Industrial output actually fell, the first time it has that I can remember. I'm optimistic that this is a soft spot caused by the damage Katrina did, but there is always a danger that this can be the start of a recession.
"Core inflation" is a busyword created by politically motivated economists to hide the hard facts of reality from the public. It's sickening. The Economist had a nice article on how "core inflation" has become a meaninggless political football...

It's having a ripple effect everywhere. Industrial output actually fell, the first time it has that I can remember. I'm optimistic that this is a soft spot caused by the damage Katrina did, but there is always a danger that this can be the start of a recession.
Too true. here in Vancouver B.C., The Raquet Club Pro Shop where I work was unable to get Squash balls shipped for three weeks! apparently, a whole boatload of them was blown away, and North America's supply of doubles balls is now floating somewhere in the Gulf. *sigh*

I wouldn't care so much about inflation, moreso about the sheer number of jobs that have been destroyed down there.
How many people worked in New Orleans? And how many of those businesses are closed down for some time?

I dont think that the cost of fuel can be entirely blamed on Katrina. It seems to me that in regards to fuel costs, Katrina simply exasperated an existing trend. If that is the case, then it's likely that fuel costs will remain elevated (relative to the 'pre-trend' costs).

As for recovery, only time will tell, although so far as I understand (and I certainly dont claim to be especially clued up on US economic status/structure), the US economy was in a vulnerable state.

Tell me about the economic damage, ply wood prices have gone up 67% and there are sortages (although for personal reasons I am rather happy about that).

Maybe I'm mercenary but I'm seeing a lot of jobs created by Katrina. But I'm in the building trades. Somebody's got to rebuild all those houses and I don't think there are enough carpenters in the job pool threre....

I wouldn't care so much about inflation, moreso about the sheer number of jobs that have been destroyed down there.
How many people worked in New Orleans? And how many of those businesses are closed down for some time?

And how many of those people found jobs someplace else and will not go back to NO? How many businesses will not reopen in NO but may open somewhere else? I wonder how many will stay settled where they were relocated to and not go back to NO?

And how many of those people found jobs someplace else and will not go back to NO? How many businesses will not reopen in NO but may open somewhere else? I wonder how many will stay settled where they were relocated to and not go back to NO?
Yes, but how soon will that happen?
Relocating the employment of an entire city is not a thing quickly done.

"Core inflation" is a busyword created by politically motivated economists to hide the hard facts of reality from the public. It's sickening. The Economist had a nice article on how "core inflation" has become a meaninggless political football...
You don't mind if you show me it, do you? I'd like to see what they mean, because I have a bit of trouble believing that right now.

I wouldn't care so much about inflation, moreso about the sheer number of jobs that have been destroyed down there.
How many people worked in New Orleans? And how many of those businesses are closed down for some time?
I don't know how many jobs were lost down there, but I have reason to believe that they are coming back. About 1/3 of the city is repopulated already.

You don't mind if you show me it, do you? I'd like to see what they mean, because I have a bit of trouble believing that right now.
DIETERS, desperate to convince themselves that they have lost weight, sometimes “adjust” the dial on their scales, magically shedding a few pounds. Prudent central bankers, charged with keeping inflation rather than waistlines under control, would surely never cheat like that. Yet some critics claim that America’s Federal Reserve has been tampering with its inflation gauge.

The accuracy of inflation measures matters, because they largely determine when central banks raise or cut interest rates. At its meeting on October 3rd, the Fed left rates unchanged, as had been widely expected. The Fed believes that inflation remains under control, and that somewhat slower economic growth will continue to keep prices in check. In contrast, at its meeting two days later, the European Central Bank (ECB) increased its interest rate by a quarter point to 4.75%. This is because inflation in the euro area is likely to top 2.5% in September, well over the 2% ceiling of the ECB’s medium-term target.

Curiously, despite the popular view that America’s inflation remains subdued, its consumer prices are actually rising faster than in the euro area—up by 3.4% in the year to August. Indeed, the core rate of inflation, excluding food and energy, was 2.6% in August, up from 1.9% at the end of 1999. Over the same period, core inflation in the euro area edged up more modestly, from 1.1% to 1.3%. So how can Alan Greenspan, the Fed chairman, sleep soundly at night? One reason is that he sees the consumer-price index (CPI) as badly flawed. He prefers the personal consumption expenditure (PCE) deflator, which just happens to be rising more slowly.

Could this be a nasty case of “inflation trim”: changing to a friendlier measure of inflation when the previous one starts to flash red? CPI inflation has been trimmed in recent years through statistical adjustments recommended by the Boskin commission in 1996. On the old basis American inflation would now be almost 4%, the highest since 1991. But not content with this improved yardstick, until recently the Fed was increasingly stressing in its comments the superiority of core CPI inflation, which, unlike the headline rate, fell during 1999. This year, as core inflation has risen, it turned to the PCE deflator — which helpfully suggests that core inflation has risen only slightly, to a mere 1.8% (see chart).

To be fair to Mr Greenspan, every measure of inflation has flaws, so he is not necessarily cheating. Consider the differences between the headline CPI and the PCE deflator. The CPI seeks broadly to measure how much more it costs to buy the same basket of goods now compared with a year earlier. In the PCE deflator, on the other hand, the weights of items in the basket change each year, to reflect how people shift their spending towards cheaper goods. If the price of apples rises, people buy more pears. The CPI thus tends to overstate inflation. But the PCE may understate it, because it assumes that shifts in spending in response to the higher prices of some goods do not lower consumers’ standard of living. The CPI also gives twice as much weight (20%) to changes in the price of owner-occupied housing. But in both measures this price is based on the cost of renting a similar property, using a method that many economists reckon is distinctly dodgy.

Not everybody within America’s Federal Reserve System loves the PCE as much as Mr Greenspan. A study by Todd Clark, at the Kansas Fed, suggests that the PCE is flawed because it uses less reliable price data than the CPI. For instance, its inflation rate for private education is based on the wages paid by schools, not the prices paid by consumers. After weighing up the various pros and cons, Mr Todd concludes that the CPI is a better guide to inflation.

Above all, the Fed’s critics emphasise one big difference between America’s CPI and that in most other countries: the increasing use of “hedonic” pricing methods to strip out the effects of improvements in the quality of home computers, cars, clothes, televisions and so on. Hedonic pricing breaks down a product into its key features—say, the memory and speed of a computer—and then assigns prices to those features rather than to the product as a whole. This allows price rises due only to higher quality to be knocked out of the index. Critics worry that, however sensible this is, it misleadingly lowers American inflation compared with countries that do not use such methods.

The ECB’s chosen measure of inflation is the harmonised index of consumer prices (HICP). This was an imperfect measure from the start, devised as a politically acceptable way in which to compare inflation on a consistent basis across Europe’s economies. This was made necessary by the Maastricht convergence criteria, which required countries joining Europe’s single currency to have similar, low rates of inflation. It excludes entirely the cost of owner-occupied housing.

The HICP also takes less account than America’s CPI of improvements in product quality, but it may be less flawed in other ways. The ECB has said that its inflation target of 0-2% explicitly allows for measurement bias, but it has not said how big it thinks the statistical error is. Johannes Hoffmann, an economist at the Bundesbank, estimates that Germany’s CPI overstates the annual inflation rate by three-quarters of a percentage point. France’s error is probably smaller. America’s Boskin report concluded that America’s inflation rate was overstated by an annual 1.1 percentage points, but roughly half of that has since been “corrected”. Thus, the CPI in America and in the euro area may now overstate inflation by similar amounts.
Deeper deflation

Japan’s CPI is a lot worse. It excludes many popular goods such as mobile phones and personal computers, which have fallen sharply in price. A study by Shigenori Shiratsuka, an economist at the Bank of Japan, estimates that the inflation rate may be overstated by as much as two percentage points. So Japanese consumer prices may be falling by even more than the 0.8% decline reported by the official figures. Next month the Bank of Japan is expected to publish a report examining how much Japan’s CPI overstates inflation and considering whether to publish inflation forecasts, as a first step towards adopting a formal inflation target.

What does all this mean for monetary policy? If the gap between different measures of inflation never changed, it would not matter much. But the gap does vary over time. So it is crucial that central banks strive to find and use the most correct measure (and not the most convenient one). If that is what Mr Greenspan is up to, he deserves credit, not criticism.

Still, Mr Greenspan’s eagerness to redefine inflation gives Stephen Roach, the chief economist at Morgan Stanley Dean Witter, a horrible sense of déjà vu. In the 1970s, Mr Roach worked in the Fed, under the then chairman Arthur Burns. When oil prices surged in 1973-74, Mr Burns asked the Fed’s economists to strip out energy from the CPI to get a “less distorted” measure. As food prices then rose sharply, they also stripped out food, followed by jewellery, mobile homes and so on, until over half of the contents of the CPI were excluded. Yet the core measure continued to rise. Eventually, but much too late, the Fed slammed on the brakes. With hindsight the Fed’s fixation on core inflation was a serious blunder which kept it in denial, says Mr Roach. Naturally, this time things are completely different.

<snip>
Thanks. And just outta curiosity, what's the date?

Thanks. And just outta curiosity, what's the date?
Two weeks ago, I believe.

For reference, the PCE Deflator in the last quarter was 2.6%, as opposed to a CPI rate of 4.7%.

Furthermore, the rate of inflation in energy prices was 42.5%, followed by transportation at 17.1% (no surprise, given the inlfation in energy).

This year, as core inflation has risen, it turned to the PCE deflator — which helpfully suggests that core inflation has risen only slightly, to a mere 1.8% (see chart).What chart? I don't see any chart. Did you originally intend to have this post that you wrote all by yourself have a link to a chart you made showing the economic data that you collected in the experiment that you prepared, funded, and completed all on your own?

Major disaster --> Economic inflation

Supply Down --> Demand Up/Stagnant --> Prices Up --> Consumer Spending Down --> Production Down --> Umemployment Up

This is news how?

However, I am enjoying the debate on economics being used for political purposes and whatnot. Please continue, I would contribute, but I've only had on course in macro, and feel somewhat uninitiated.

And then: Cost of Living Up --> Always

Major disaster --> Economic inflation

Supply Down --> Demand Up/Stagnant --> Prices Up --> Consumer Spending Down --> Production Down --> Umemployment Up

This is news how?

However, I am enjoying the debate on economics being used for political purposes and whatnot. Please continue, I would contribute, but I've only had on course in macro, and feel somewhat uninitiated.

And then: Cost of Living Up --> Always
I try my best not to construe economic data. To me, numbers don't lie. The global economy was doing well, but had weaknesses we've never seen before. Katrina has an undoubtedly negative impact on the economy, but rather it is enough to expose these vulnerabilities is uncertain.

What chart? I don't see any chart. Did you originally intend to have this post that you wrote all by yourself have a link to a chart you made showing the economic data that you collected in the experiment that you prepared, funded, and completed all on your own?
It's from the economist. I've stated as such.