Monday, 28 January 2013

A new broom

Shortly there will be a new governor at the Bank of England and he is reportedly looking at how we measure inflation.

Economists often discuss whether the CPI measures inflation accurately.  But how can that discussion mean anything when economists have never even explained what the term ‘inflation’ means in an economy where product quality changes rapidly, and where new products are constantly introduced.  Is it the amount of extra income one needs to maintain constant utility?  If so, then we need to define utility.

If you have an adverse supply shock, then inflation should rise.  If inflation falls despite an adverse supply shock, then you have both an adverse supply shock and an adverse demand shock.  Both would be contributing to higher unemployment. But they keep telling us unemployment is falling, really? What happens when all those temporary, part time Olympic posts end, there is going to be a shock to the system.

The country with the least inflation is Japan, a country still in the throes of deflation, I wonder how they would measure inflation now?

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