March 01, 2016
Paul Krugman, who certainly knows better, referred to the “risk of deflation” receding in the euro zone in his blog today. The point is that it doesn’t matter if the inflation rate crosses zero and turns negative, the problem is that the inflation rate is too low. It’s more too low if we have -0.5 percent inflation rather than 0.5 percent inflation, but this is no worse than having the inflation rate fall from 1.5 percent to 0.5 percent.
As I pointed in my prior post: “The inflation rate is an aggregate of millions of different price changes (quality adjusted). If it is near zero then a very large number of the changes will already be negative. When it falls below zero it simply means that the negative share is somewhat higher. How can that be a qualitatively different economic universe?”
The reason why this matters is that we can get a false complacency over the fact that prices are not falling, just rising very slowly. We should want a higher rate of inflation. And we should not be congratulating the central bankers just because the aggregate measure of inflation is greater than zero.
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