Krugman’s Blog, 4/30/13

There were two posts yesterday.  The first was “The Beatings Must Continue:”

Sometimes economists in official positions give bad advice; sometimes they give very, very bad advice; and sometimes they work at the OECD.

It’s almost exactly three years since the Paris-based OECD gave what may have been the worst advice of any major international organization — worse than the European Commission, worse than the ECB. Not only did it join in the demand for fiscal austerity, it also demanded that the US start raising interest rates rapidly, so as to head off the threat of inflation — even though its own models showed no such threat.

So here we are three years later. No inflation takeoff in America (and the Fed trying to find ways to boost demand at a zero rate); austerity economics has crashed and burned; the latest numbers from Eurostat look like this:

And what is the OECD’s chief economist (still the same person) saying?

The euro zone is at risk of snatching defeat from the jaws of victory by abandoning efforts to cut budget deficits and fix long-standing economic problems, the Organization for Economic Cooperation and Development‘s chief economist warned Monday.

Mr. Padoan said the growing perception that austerity has been futile is incorrect.

“Fiscal consolidation is producing results, the pain is producing results,” he said.

He added that euro-zone policy makers need to do a better job of communicating their successes to a weary population.

I believe that’s eurospeak for “the beatings will continue until morale improves.”

The second post of the day was “Still Coring After All These Years:”

Blogging is a bit like teaching the same class year after year; inevitably there are moments when you feel exasperated at the class’s failure to grasp some point you know you explained at length — then you realize that this was last year or the year before, and it was to a different group of people.

So, I gather that the old core inflation bugaboo is rearing its head again — the complaint that it’s somehow stupid, dishonest, or worse to measure inflation without food and energy prices, often coupled with the claim that the statistics are being manipulated anyway. So, time for a refresher.

As I explained long ago, the idea behind core inflation is that not all prices behave the same. (In that post, I worried about deflation, which hasn’t happened; I’ve written a lot since about why). There are many “sticky” prices that are revised only occasionally; these prices cause inflation to have a lot of inertia, and are why disinflation can be so costly. But there are other prices that fluctuate a lot in the short run, and can cause overall inflation to jump around.

The idea of core inflation is to strip out the volatile prices to get a better measure of underlying trends. Core inflation is NOT used for things like cost of living adjustments, and it’s not the headline number in the news; so anyone who claims, with a knowing sneer, that the inflation number you hear is ignoring food and energy is just ignorant. Core is, however, what the Fed uses to assess monetary policy, because it believes that the headline number is too volatile, and it doesn’t want to overreact either to short-run inflation or short-run deflation.

Now, this could be all wrong. A surge in commodity prices could be the harbinger of sustained higher inflation; and that’s what a lot of people were claiming in early 2011, back when Paul Ryan was accusing Ben Bernanke of debasing the dollar, even as BB was basically saying don’t worry, look at the core.


OK, what about the claim that the feds are faking the numbers? I could explain to you what they’re doing, and what’s wrong with the various critiques. But there’s an even easier route: we have independent measures. The Billion Prices Project uses prices off the web to construct its own index; it looks remarkably similar to the official CPI:

Two measures of inflation over the past year. Two measures of inflation over the past year.

No, the core isn’t rotten — and inflation really is low.



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