- Just because prices are going up doesn’t mean that inflation is. Inflation, after all, is the rate at which prices are advancing, not the fact that prices are rising in themselves.
- It makes no sense to claim that transitory includes all versions of the world in which inflation does not stay at, or make, new cyclical highs on a sequential basis.
- In this sense, recent curve flattening and sustained rise in short-term rate expectations could also be bond markets discounting a world in which inflation stays high enough to prompt policymakers to withdraw policy stimulus quickly enough to dent growth and tighten financial conditions.
The finance and economics commentariat has been busy in the past few months educating each other about what inflation is and what isn’t. To recap, just because prices are going up doesn’t mean that inflation is. Inflation, after all, is the rate at which prices are advancing, not the fact that prices are rising in themselves. More specifically, just because prices go up a lot in period 1, inflation can’t really be said to be accelerating, unless the rate at which prices go up is higher in period 2, 3 and so on. To complete the circle; if prices were falling, we’d call it deflation, and the same argument on the rate of decline would apply, with an inverse sign. The amount of time spent by economists pointing out this trivial point is mostly an attempt to assure each other, and policymakers, that the spectacular CPI and PPI headlines we presently see on the screens are nothing to worry about. It follows that slowing the pace of asset purchases, not to mention raising interest rates, would be a grave and unforgivable error.
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