What I Am Wondering About Inflation
Tyler Cowen asks, "Why isn’t inflation higher?" I have wondered that for a while, but monetary policy and related topics in macro are one of the areas I admit that I simply do not understand so I don't write about it. So rather than offering any hypotheses to Cowen's question, I will ask my own:
- Is it possible that inflation exists but it shows up mainly in financial assets (stocks, bonds, perhaps real estate) that don't really factor into standard inflation metrics? Every step the Fed has taken, as well as other western central banks, appears to me to be crafted to pump money into securities markets rather than into main street. Certainly we have seen a huge inflation in the value of financial assets and real estate over the past several years.
- Expansion of the economy above the rate of productivity improvement should drive inflation, unless there was a lot of excess capacity to soak up. That may have been partly the case in the US since 2008, but surely that is gone. Does the still greatly underutilized Chinese and Indian labor force act as excess capacity that prevents inflation from heating up here? If so, might Trump's trade restrictions interfere with this going forward?
