Thursday, January 10, 2013


On Tuesday in econ101b we looked at inflation alongside unemployment for the first time. We're going to return to these later in term in more detail, but for now we thought a little about the different types of inflation (CPI, GDP deflator, producer price inflation and wage inflation), and also the theoretical concepts of demand-pull and cost-push inflation.

Simon Wren-Lewis, who I've mentioned previously, blogs today on inflation, and in particular the idea that we're about to see a 1970s style explosion in inflation.  As Simon points out, it isn't fools that are warning about this - he links up to Andrew Sentance, who until recently was on the Monetary Policymaking Committee (more later in term on what this does - suffice to say for now it does what it says on the tin).

A regularly aired concern is that because of quantitative easing (again, more later in term), which can be described in a simplification as printing money, inflation is just around the corner - once people spend all that money that's out there.

Wren-Lewis though makes an astute observation - wage inflation has been lower than price inflation, something I pointed out in the lecture yesterday - which means that people simply don't have the extra money to spend, which may then lead to inflation - what happened in the 1970s, as Wren-Lewis's graphs show.

Wages are increasing at a slower rate than the general price level, which means that we are all getting poorer in terms of what we can actually afford with our wages - which means we are unlikely to start spending more, a precursor to higher inflation (aggregate demand increasing).

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