This week brings another round of bad takes on inflation. The drama this week is less about the relief bill and more about treasury yields, however. Some say a new taper tantrum is coming. Some say supply issues will cause inflation to rise. Some people are misinterpreting MV =PY (which upsets me the most). So here we go.
Tweets That Upset Me
I witnessed terrible arguments on both sides in this brief thread:
How many times must it be reiterated that “inflation is always and everywhere a monetary phenomenon” denotes persistent inflation (and a lack of central bank action to curb such) only? A simple rise in price of certain goods (which pushes CPI upward) is not persistent or general. Friedman was speaking of money supply inflation. Furthermore, the idea that the oil shock caused the persistent inflation of the 1970s is ridiculous. Markets adjust to oil shocks and stabilize, but money supply increases are opposite. Raising rates can’t fix oil, but such can fix money supply inflation, and such did!
In terms of relevancy, it may be true that single product inflation may rise soon due to supply issues. However, long term inflation is really up to the way the Fed responds to market conditions.
I soon saw this tweet:
This is reasoning from a price change. As Sumner notes, rising yields could also reflect greater market demand for bonds rather than expectations of failure from the Fed.
And whaddya know…
Rates are staying low as the Fed took care of them. The taper may be back eventually, but the Fed has significant leeway.
A Quantity Of Pain
This IEA report caught my eye, as it is full of fallacy:
By mid- or late 2021 the pandemic should be under control, and a big bounce-back in financial markets, and in aggregate demand and output, is to be envisaged. The extremely high growth rates of money now being seen – often into the double digits at an annual percentage rate - will instigate an inflationary boom. The scale of the boom will be conditioned by the speed of money growth in the rest of 2020 and in early 2021. Money growth in the USA has reached the highest-ever levels in peacetime, suggesting that consumer inflation may move into double digits at some point in the next two or three years.
Now, even though I believe quantity targets are superior transmission mechanism targets than interest rates, this is poor economics. The pure QToM hasn’t really applied to the US in many years, and probably would only apply in the long term. Additionally, as money demand rises in response to the crises, the money supply is less of an issue. I don’t see monetary disequilibrum on the way, which is really what quantity theory is meant to measure. Money is being destroyed which isn’t being used!