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April 27, 2012
Inflation Can't Create Jobs
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Click to enlarge.
I pointed out there was no correlation between the rate of inflation and the unemployment rate. I stand by that claim. That's what the math shows.
I figured out a way to create some correlation though. Let's go back to that first chart and annotate it.
Click to enlarge.
Here's my claim. First the inflation hits, then the unemployment comes as the Fed is forced to fight it. I have circled the relevant pairs that would support this theory. As a side note, it would seem that the Fed didn't realize its own strength in the most recent fight. In hindsight, they whacked the @#$% out of it.
Here's what the chart looks like when we offset unemployment by 41 months. In other words, the inflation you see in the chart is paired with the unemployment rate that comes 41 months later.
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Why 41 months? That's the time frame that gave the strongest correlation in the following chart.
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So what does this mean? It is my opinion that inflation is not a free lunch. If you want extra inflation now then you will pay for it roughly 41 months later (give or take), lest we run the risk of a currency crisis and/or hyperinflation.
September 2003
NBER WORKING PAPER SERIES: INFLATION TARGETING IN THE UNITED STATES?
The Volcker disinflation made particularly clear why it is so costly to restore credibility
for low inflation once it has been compromised.
It was apparently not clear to Gregory Mankiw. He was perfectly willing to have the Fed destroy the credibility of US legal tender by drawing a number randomly from a hat.
Source Data:
St. Louis Fed: Unemployment Rate
St. Louis Fed: CPI
3 comments:
Mark,
Solid work in these charts.
Here's my claim. First the inflation hits, then the unemployment comes as the Fed is forced to fight it. I have circled the relevant pairs that would support this theory.
I think all of the pairs you highlight support you theory except the most recent one in 2008. Inflation was mild, and instead of big rate hike to fight inflation, the set rates near zero to fight deflation.
You might argue that the Fed raising rates in 2005 caused the unemployment in 2008, but the reason they raised rates was not to fight inflation (at least not headline CPI). They were trying to cool off the housing bubble without causing a crash IMO. Fail!
For the most part, the Fed doesn't acknowledge asset inflation as real inflation. I don't think there is a stock price component in the CPI.
Anyway, my point is that the last recession is unlike all of the others in the chart as far as the dynamic between inflation, Fed action, and unemployment.
Mr Slippery,
You might argue that the Fed raising rates in 2005 caused the unemployment in 2008, but the reason they raised rates was not to fight inflation (at least not headline CPI). They were trying to cool off the housing bubble without causing a crash IMO. Fail!
I would!
This chart supports your theory.
It would not surprise me if they weren't also a bit panicked over oil too though. Spectres of the 1970s were certainly filling my head (pun intended).
Bonus thought.
Your comment is playing into something I was planning for my next post.
I'm going to use hindsight to rate the Fed's performance on its dual mandate. Should be a hoot! Sigh.
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