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Great diary. Your footnote one is exactly the kind of signal analysis that I've often asked economists about - and they usually say - "there's some literature on that" but don't follow up. So I don't really know what has been done and further what is done on a regular basis.

I realise Drew may have access to some of the work on this stuff? So I guess I shouldn't be too rude about the state of the art in the field, maybe more exists than I know...

I really like the idea of spectrum analysis because there's clearly different kinds of inertia - and they should give clues to different issues.

I'll throw in my usual complaint about "core inflation" which is that "inflation" has very specific meanings... which always need considering before you go from the "inflation" or "core inflation" figure to a policy judgement.

The most obvious case is that core inflation was low throughout the finance and housing boom that preceded/caused the current financial crisis. So - there are important things (asset inflation?) that the core inflation (and indeed various other inflation measures) just don't measure...

So, in this case, core inflation shows we are heading towards deflation - which does indeed match some other potential measures of the "real economy" - but at the same time the financial economy appears to be inflating again, and with it some commodities that are pretty vital to the real economy (energy? food?)

What does all that mean? I don't know... but I'd be a lot happier if anyone out there can point me to a non-recursive/tautologous definition of inflation that explains what it should mean...

by Metatone (metatone [a|t] gmail (dot) com) on Fri May 21st, 2010 at 03:49:40 PM EST
I really like the idea of spectrum analysis because there's clearly different kinds of inertia - and they should give clues to different issues.

You would need to have a clear idea of how you'd expect a frequency spectrum to look like for different kinds of pricing mechanisms before you start mining the data. Ideally, you'd want to calibrate your a priori expectations against several industries that you know to be competitive/monopolistic/oligopolistic.

What you'd want to emphatically not do is chug a lot of data through a frequency decomposition and then mix and match the patterns you get out. That would probably give you turtles all the way down.

This is no minor task, and the calibration in particular will probably involve digging into historical price/volume data that is less complete than we might have wished. Although it is, of course, preferable to using a nonsense index to make serious policy decisions...

The most obvious case is that core inflation was low throughout the finance and housing boom that preceded/caused the current financial crisis. So - there are important things (asset inflation?) that the core inflation (and indeed various other inflation measures) just don't measure...

Yes. The ordinary inflation indices don't touch the balance sheet at all - they only care about the cash flow. What's worse is that it is less than obvious how to construct an inflation index for assets, or that it is even an appropriate thing to try to do.

As a practical matter, that's not a very big problem, because we have a number of other indicators that can tell us whether asset prices are out of line. The problem is the political will to use them (or rather the lack thereof).

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri May 21st, 2010 at 04:18:25 PM EST
[ Parent ]
Why can we not just use what the normal everyday expenses of the average household are?
  1. Housing. All costs. Homeless without it. Don't exclude it.
  2. Food. Starve without it. Groceries and restaurants.
  3. Health care. Total monthly cost of insurance, doctors and pharmaceuticals, both prescription and non prescription. Simpler in countries other than the US.
  4. Transportation. Vehicle ownership and operation costs.
  5. Personal services. From barbers & beauticians, to childcare, personal shoppers and chauffeurs.
  6. Entertainment.

This should be broken out by income deciles and tracked over time. Instead of excluding things that vary widely, such as housing costs, accommodate them. For each decile determine the proportion of households that own and rent, track the expenses for each and average the sums for each decile. Same with transportation. Break it down into automotive expenses, public transit expenses and other, track by decile and average.

We need some analysis as to what really is happening, rather than the cooked numbers prevalent in the USA.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri May 21st, 2010 at 11:38:45 PM EST
[ Parent ]
That's pretty much what the consumer price index is already supposed to do. Now, whether the consumer price index does what it is supposed to do is certainly debatable, but that's a slightly different kind of story.

The point here is that there may well be other interesting information in the price/quantity data than the consumer price index.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat May 22nd, 2010 at 05:55:48 AM EST
[ Parent ]
The point here is that there may well be other interesting information in the price/quantity data than the consumer price index.

Yeah, the lower deciles are probably just too dumb to use available personal services such as chauffeurs and personal shopping assistants, foolishly forgo tax benefits from home ownership, spend most of their transportation budget on public transit, wasting all that time walking from home to the bus stop, etc.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sat May 22nd, 2010 at 11:20:23 AM EST
[ Parent ]
Hey, I didn't say that the consumer price index isn't a useful measure.

But, just like GDP (which is also a useful measure) isn't the be-all-end-all measure of economic development, the CPI isn't the be-all-end-all of price indexing.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat May 22nd, 2010 at 07:39:22 PM EST
[ Parent ]
My comment was not intended as criticism, but more as commiseration. When we deal with economics we enter the land of the retarded, or perhaps of the autistic. But I am not sure. Do the autistic tend to be religious? I have trouble so imagining.

Were we to classify disciplines by the intellectual approaches employed, economics does not belong in the social sciences. What science starts off with axiomatic assumptions that are presented as self evident and are beyond questioning? Example: "Inflation is everywhere and always a monetary phenomenon." Then consider a situation where simultaneously the creation of all money tokens is stopped and foodstuffs along with energy products become exceedingly scarce, such as after a nuclear exchange or the impact of a large asteroid. One can see that the price of food and energy will go up, but it is not because of the money. Nor can the problem be solved by applying any monetary manipulation that does not produce more food or energy. So obviously the axiom on which monetarists base their analysis is falsifiable. Economics, as currently practiced, should be in the religion departments.

 

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sat May 22nd, 2010 at 10:28:53 PM EST
[ Parent ]
What about stopping analysing "deciles" when the real inequality happens at the top centile ?

Un roi sans divertissement est un homme plein de misères
by linca (antonin POINT lucas AROBASE gmail.com) on Mon May 24th, 2010 at 09:39:41 AM EST
[ Parent ]
So cut the data into tranches of AAA+ reliable indicators through to Z- pump and dump stocks, then sell people the AAA+ indicator as a measure of the economy...
by njh on Tue May 25th, 2010 at 03:52:13 AM EST
[ Parent ]
Just follow the Dow...

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan
by Migeru (migeru at eurotrib dot com) on Tue May 25th, 2010 at 04:14:47 AM EST
[ Parent ]
they usually say - "there's some literature on that" but don't follow up

That's because they don't get it.

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan

by Migeru (migeru at eurotrib dot com) on Sat May 22nd, 2010 at 02:03:53 AM EST
[ Parent ]

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