Yes, inflation will fall
Yesterday, rising inflation (pdf) has led to several people who say that our problem is inflation, not deflation. I disagree. The extent to which we can be sure of anything in the economic forecast, inflation has been reduced. I say this for three reasons.
1) A large part of inflation is the legacy of the spring to the rise of public services. The price of electricity and gas increased by 22.6% over the past 12 months, contributing 1.05 points to 3.2% inflation in the CPI. However, these price increases are in the annual inflation rate in the coming months. This only lower inflation near its 2% target.
2) Some of the stubbornness of inflation reflects the increase in import prices resulting from the collapse of the pound sterling in the autumn. But unless the pound falls again – and anyone who is true that only the mentally ill – a fact that will leave the annual inflation rate of the coming winter.
3) As I always said for some time in my daily work, the first effect of the recession, inflation in May to raise the reduction in the willingness of companies to reduce prices. The reason is detailed in a paper (pdf) by Julio Rotemberg and Garth rooms in 1986. In other words, if there are few potential customers who won, there is no price threshold. Companies are more likely to engage in price wars in the arms than in the depressions. Why do you think the prices of new cars were held at the request has collapsed?
It’s just that the recession creates additional capacity – forcing companies to win the struggle to maintain order in society – which leads to lower prices. But it will take time. As Mervyn King wrote (pdf):
The outlook for the overall prospects for the application is limited to the UK and therefore the capacity margin is not likely to create in the coming quarters, pulling down inflation in the CPI.
The key phrase is “coming quarters.” The thing on the macro level – and I learned this the hard way – is that things are slow. Booms continue longer than expected, inflation is slow growing and slow fall, and so on. And above all, monetary policy – whether conventional or unconventional – that is slow to affect inflation. Life is lived through the time it is – a semi-economists who, obsessed only with comparative statics, they tend to forget.
So yes, lower inflation and the Bank is empowered to act now to take steps to increase inflation. Why something as insipid as this need to say?
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