Thursday, February 25, 2010

"The overall level of prices is rising, as long as you don’t count the goods whose prices are falling."

Paul Krugman directed me to this MarketWatch article, which was interesting to me firstly just because it's the sort of media I'm almost never exposed to.

The key part of the article appears to be:

The so-called "core" rate of inflation, which excludes food and energy, is misleading. You know why? Because we all consume these items -- they are part of everyone's cost of living.

In the real world, these and other prices are going up, some quite sharply... I am referring to items that you and I purchase just about every day. Besides energy, these include food, health care, transit fares, local taxes and tolls.

His advice is that it's time for the Federal Reserve to raise the interest rate. However, most of the product categories he mentions are items with a high natural resource component. The rising cost of energy, food and transit are mostly reflected by the demand for the land, oil and coal that goes into these products. The fact that he includes local taxes and health care here is nearly comical, since the reasons for the rise in these prices is generally well documented to be non-inflationary*. Raising the Fed's interest rate would not slow any of these costs.

By any other measure, the interest rate should stay low. By the most important measure, the slow growth of jobs, the interest rate should stay low. If Irwin Kellner's concern is for his local tax rate, I'd advise him to support a lower interest rate to raise employment and increase the tax base for his community.

* - After posting, I dwelled on this phrasing and found it confusing. Isn't all price increase inflation? Fortunately, Krugman dealt with the same issue. What I meant by "inflationary" is what Krugman refers to as "inflation inertia" here. His terminology is far more accurate.

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