How globalization may explain consistently low inflation rates – Kristin Forbes

Kristin Forbes, Jerome and Dorothy Lemelson Professor of Management and Global Economics, MIT Sloan School of Management.

From The Hill

Weak inflation is one of the “major challenges” of our time, according to Federal Reserve Chairman Jerome Powell. Not only does persistently low inflation limit the scope of monetary policy, it may also have a damaging impact on the financial system. But the inflation forecasts used by the Federal Reserve to set monetary policy have not been performing very well lately. When the global financial crisis erupted in 2008 and growth collapsed around the world, why did inflation not fall further? As growth has picked up in the United States and unemployment has gone down, why has the inflation rate in this country remained so stubbornly low?

One key to the puzzle may be the forecasts themselves. The frameworks that macroeconomists have relied on to predict inflation primarily use domestic variables dating back to the “Phillips Curve” of the late 1960s which showed that inflation increases when unemployment falls. But the forces that drive our economy are not only confined within our national borders. The models miss what is happening across the rest of the world.

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The democracy of data: how Venezuelans can stand up to government lies – Alberto Cavallo

MIT Sloan Assoc. Prof. Alberto Cavallo

From infobae

Venezuela, once one of Latin America’s wealthiest countries, appears to be teetering on the brink of collapse. Its economy is shrinking. Food is in short supply. Its currency—the bolivar—is virtually worthless, and inflation appears to be out of control. But, in light of the fact that the country’s Central Bank stopped publishing inflation data in December 2015, no one has an accurate picture of just how dire the situation is.

This dearth of inflation data may seem like an academic problem, but in actual fact, economic indicators are no small things. Without official statistics, it’s impossible to draw accurate conclusions about the wellbeing of the Venezuelan people. The lack of data has consequences on a micro level, too. The inflation rate, for instance, is a vital number for anyone who wants to negotiate a wage, decide on an affordable rent, or make any savings or financial plans for the future.

With a government intent on suppressing important information, many Venezuelans are angry. As a native from Argentina —another Latin American country that lied about inflation in the past—I feel their pain. As an economist, I urge them to fuel their frustration into action.

Earlier this year, my colleagues and I started a project to measure inflation in Venezuela using a new and highly effective technique: crowdsourcing with mobile phones. My team developed a special app for android phones that allows people in the country to report the prices of everyday products and services. We then aggregate the data to estimate the level of inflation. Over the past five months, we have collected more than 3,000 observations from 1,000 products in 10 cities around the country.

Our data indicates that Venezuela’s inflation rate is about 25% on a monthly basis, which represents one of highest rates in the world.

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Watch this global market for clues about inflation and interest rates — Kristin Forbes

MIT Sloan Prof. Kristin Forbes

MIT Sloan Prof. Kristin Forbes

From MarketWatch

Trying to predict currency movements is — as they say here in the U.K. — a mug’s game. Any economist, myself included, will tell you it’s virtually impossible to do.

And yet, movements in exchange rates are incredibly important. They affect a country’s competitiveness — influencing everything from export competitiveness to GDP growth. They affect the prices of items coming from abroad, from oil to oranges to iPhones. They make it harder, or easier, to repay foreign debt and they affect earnings on foreign investments.

Currency movements also have big implications for the outlook for inflation. This relationship is known as “pass-through,” because it captures how changes in the exchange rate “pass-through” to import prices and then inflation.

So even if we can’t predict exchange rate movements, we need to understand how exchange rates will affect the economy. And for those of us tasked with setting monetary policy, understanding how currency movements pass-through into inflation is critical to our decision on when to adjust interest rates.

The problem is, much of what we thought we knew about pass-through has not been holding up well.

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Another reason not to fear inflation — Roberto Rigobon

MIT Sloan Professor Roberto Rigobon

From Bloomberg View

U.S. inflation has been accelerating in recent months, presenting the Federal Reserve with a tricky question as it decides how quickly to remove stimulus from the U.S. economy: Is the rise in prices a precursor of things to come or simply a “catching up” phase as people begin to spend again after a brutal winter?

Recent data from the U.S. Labor Department have led some to suggest that the long run of very low U.S. inflation could be ending. From Dec. 31 through May 31, the consumer price index — not seasonally adjusted — rose a cumulative 2.1 percent. That’s equivalent to an annualized inflation rate of more than 5 percent, far exceeding the Fed’s target of about 2 percent.

If this is more than a temporary phenomenon, the Fed might have to respond by raising interest rates sooner than expected — a move that would restrain economic growth and could trigger sharp declines in stock and bond markets.

Some officials at the Fed, though, reportedly do not believe that the surge in consumer prices represents the beginning of a new inflationary trend. After all, in the period just before the winter, from Sept. 30 to Dec. 31, prices actually fell by a cumulative 0.5 percent. Combine the two periods, one with an increase and one with a small drop, and you get an annualized inflation rate since September of about 2.4 percent.

Read the full post at Bloomberg View

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Argentina’s inflation deception — Alberto Cavallo

MIT Sloan Asst. Prof. Alberto Cavallo

For years Argentina has lied to the world about its inflation rate. INDEC, the official statistics institute, claims the country’s inflation rate stands at around 10%. But estimates by economists—myself included—show that figure is two to three times less than the real rate. According to MIT’s Billion Prices Project, which runs an index that aggregates online price information from the largest supermarkets all over the world and provides real-time inflation estimates, Argentina’s inflation rate is currently about 25%.

This vast discrepancy between reality and what the government claims has been observed since 2007. At that time the government began putting pressure on INDEC, traditionally an independent body, to change its statistical methodologies. It eventually fired workers responsible for creating the price index, and replaced them with employees who had close ties to the government. Since then the official inflation rate has been surprisingly stable—hovering around10%. Read More »