Eurozone is at 3.4. But as inflation is the result of pandemic related production halts, the BCE is asking too wait for the shock to pass before taking measures that may weak the economy.
This has to be one of the most clear cases of this phenomenon I've seen. Inflation is rising prices [1]. There is no requirement in the definition of inflation that it just be ambiently "happening" for no reason. Inflation always has some reason or other. That doesn't mean it's not happening. If the prices are going up because of government insolvency, it's inflation. If prices are going up because aliens are ordering all stores at raygunpoint to raise prices, it's inflation. If there's a global pandemic and everyone response with massive economic interventions and the result is rising prices, it's inflation. If prices rise this month, but we think that the reasons are probably transitory and they'll go back down next month, that's still inflation, simply followed by deflation next month. If prices rise because of second-order effects of interest rates being dropped to zero by the central bank, that's inflation. If the prices rise because the moon is in the seventh house and Jupiter has aligned with Mars, that's inflation.
It's fine and valuable to ask about the reasons why inflation is occurring, but the answer does not add or diminish it in the slightest.
They're not waiting for the "shock to pass", they're trying to make sure you don't find out something that you are going to use to decide they're not doing a good job. This is purely political, not economic.
[1]: And whatever other details you like. I'm not too worried about exactly which definition you plug into this post, it holds regardless for any sensible definition.
>if you explain why something is happening, that means it is somehow not happening.
from this:
>the BCE is asking too wait for the shock to pass before taking measures that may weak the economy.
is unclear.
Generally, inflation is a rather noisy signal to respond to, and the tools at your disposal (as a central banker) are powerful, but have a significant time lag. So you really don't want to be reacting to every transient uptick. You should be watching for long- and medium-term trends, such as structural inflation because of fundamental constraints your economy is coming up against, things like demographics, long-term infrastructure deficits, etc.
Can this COVID-related logistics crunch be long-lasting enough to warrant a response from a central bank? Maybe, but it's not at all clear.
"inflation is a rather noisy signal to respond to"
The measure exists, whether or not it is "noisy".
Besides, we're past "transient uptick" here anyhow. That was an argument for three months ago.
"Can this COVID-related logistics crunch be long-lasting enough to warrant a response from a central bank?"
Inflation exists and can be measured. Whether a central bank wants to respond to it is always a separate question. COVID has not suddenly made it a separate question.
Don't let people get away with this. You must not let them conflate in your head a measure with its cause. You must keep them separate or you're going to get snowed.
"Well, yes, the web page takes 28 seconds to load, but it's because we do several hundred database queries that are really slow, we do it in a slow language, we pull in dozens of unnecessary third party libraries and also our server is underprovisioned." How much faster does the web page load because you've explained why the web page takes a long time to load?
Moreover, let me explicitly state I'm not trying to ascribe any particular cause to the inflation measure myself. I'm just advocating for, don't let them somehow "explain away" the measure with the very cause of the measure. It's a very cute trick, but don't let them do it. It isn't being done for your benefit.
The time constants of the underlying effect matter, even if you have high variance in shorter time scales.
The measure exists. Hiding it does not make the measure stop existing. The fact that it's cold today "because of a polar vortex" does not make my house any warmer.
This is really basic stuff. You must be able to keep these things separate if you want to be able to think rationally. You must be able to accept that there is data that does not seem to agree with the final conclusion. You are all asserting that it is good and proper to let the conclusions mix back into the source data, and advocating that it is good to do so. This is not rational, and it is not good and proper. Any conclusion you've drawn via such a methodology ought to be re-examined.
Seeing such vigorous, spirited, and numerous defenses of systematically muddied thinking on HN is a bit odd.
My entire comment was: Don't miss the forest for the trees. It's the same as driving a car: Instantaneous velocity matters, but so do averages. The economy operates at timescales that are both micro (e.g. high-frequency trading) and macro (e.g. 5-year & 10-year plans).
Inflation has an instantaneous measurement aspect (i.e. CPI) and a longer-trend macro component. Only time will tell if today's inflation is transitory (as the Fed would like us to believe) or part of a bigger shift. But it's impossible to suss out the bigger underlying trend right now, given that we're in the middle of a giant, covid-induced supply-chain bullwhip:
As I understand this issue, your metaphor would be different. Something like "Yes, the web page takes 28 seconds to load, but right now our provider is having allocation issues and we aren't getting the resources we have allocated. Let's wait to see if that gets fixed soon before spending time on researching and over-optimizing things, we might end up losing more than we gain if the latency is indeed due to the provider".
Why? I am no real economist, but my common sense based armchair economics would think that post-covid-mess inflation peak would take at least a year or two, maybe even more, not a couple of months? There are, after all, real supply (chain) issues to be sorted, which takes time, and which cause increasing prices.
No, but if they are just using the supply crunch as cover to ignore the consequences of prolonged ultra low interest rates along with direct stimulus payments, there could be a huge problem down the line.
We really should have raised rates when times were good.
> It's fine and valuable to ask about the reasons why inflation is occurring, but the answer does not add or diminish it in the slightest.
The issue isn't if it's happening or not, it's what to do about it. If you act before the "why" is determined, you might do more harm than good.
IIRC, the last set of actions used to get inflation under control was to engineer a multi-year recession. If this is a self-limited blip, we probably don't want to do that.
> They're not waiting for the "shock to pass", they're trying to make sure you don't find out something that you are going to use to decide they're not doing a good job. This is purely political, not economic.
What evidence do you have for that? That kind of baseless speculation (that's assumed to be true) is the root of conspiracy theories.
It's that the reason matters.
If I ask "Why is my finger hurting?" and the answer is "because I got a paper cut this morning", I don't really have to take action. It'll resolve on its own.
If the answer is "because a badger is gnawing on it", immediate action to resolve the issue is necessary.
Mens biology predisposes them to anxious rage and we avoid it to avoid making daddy mad.
We won’t do anything to avoid the cost impact to the poor because it will cost the rich.
The biology of our politics is really well understood.
But I get it; it’s more fun to pretend you live in your own multiverse conjuring ad hoc explanations for everything.
This has nothing to do with abstract constructs you can’t name. That’s just a byproduct of you not having embedded muscle memory to announce one.
This forum really enjoys thinking it’s onto something millions of humans that came before have never considered while conjuring ideas within very similar social constraints as the last generation (especially in typical office life). Same old biology + new words != new insights.
I’m not one for tradition, and believing there’s something more to it all is a human tradition going back to our beginning.
In a political context, it’s always humans doing human stuff and that should be constrained to protect the freedom of humans being human.
It’s only in the abstract sciences are new ideas being created. I’m really tired of these articles about economics when “political capture by aristocrats” is enough to explain most of the issues.
Of course it does. Prices going up by 5% rather than the usual 2% over a particular time period is a fluctuation in variables, not a catastrophe. The "why" and "what next" is where the catastrophe might exist. If the central bank doesn't have a clue why it's happening that might be a cause for concern. If the reason why it's happening is because the government's only revenue stream is the printing press, that's a massive problem: the present inflation rate is the tip of the iceberg. If the reason why it's happening is because the central bank which normally keeps inflation at a consistent level has decided to hold off on interest rate rises to prioritise the economy recovering from a pandemic (perhaps also believing the factors driving the inflation are short term), above-usual inflation is a detail, and not even a surprising one.
It's like if you have a tumor, but it's not cancerous, then there is no reason to prescribe anti-cancer medication. Of course it's still a tumor, but understanding why that tumor exists determines whether and how you deal with it.
So sure, a month where CPI starts to increase faster could mean that inflation is speeding up, but it could also just be a result of changes to the real economy that influence the prices of things in the CPI basket. In that sense, something that might look like an increase in the price level might end up being just an adjustment of relative prices (that might readjust after supply issues have been fixed).
Really simplified: Core inflation happens when most market participants think inflation is here to stay and act accordingly. Transient inflation is caused for different reasons, a current example was the supply shock that led to the rise and subsequent fall in lumber prices.
The distinction is important because in the current case there is a simple, one-time cause for the transient inflation: The disruption caused by Covid and is rippling through the layers of the economy. Most participants know this and therefore won't fear perpetual price rises, thus core inflation is pretty unlikely to occur.
The answer is key because that's what informs central banks and policy makers about what to do about it. That's why it's so important to try to understand why something is happening: So that you may do something about it.
For instance here in the UK petrol (for cars) and gas (for heating) prices have shot up which will feed in inflation numbers. Does that mean interest rates should go up to calm things down? No, because the reasons for this inflation are unrelated and most likely short term.
If, for example, inflation was caused by the alignment of the planets then it'd be foolish to try to curb it by hiking rates and cutting social welfare.
Is it? It's way more probably that having 40% of our Dollars being created in the last 12 months is the actual root cause.
It would be nice if that was true, but it is unclear if it is. It looks like it accounts for some of the inflation, but whether it is 20% is 80% of it is unknown.