Paul Krugman asks "Why don't we have deflation?" His answer is: downward nominal wage rigidity. And he shows that graph of frequency distribution of nominal wage changes with a big spike at zero.
I don't think that's quite the right question. So I don't think that's quite the right answer. (Even though, sure, that graph is almost certainly telling us something important.)
"Deflation" means falling prices (a negative inflation rate). "Disinflation" means a falling rate of inflation, so prices rise less quickly than they did before. My question is: why don't we have disinflation (until now)?
I used to think I understood the Phillips Curve at a shallow descriptive level, even though I knew I didn't understand it at a deeper explanatory level. Now I think I don't even understand it at a shallow level.
I'm going to talk about Canada, because: I'm Canadian; and because Canada is simpler, because everyone knows what the Bank of Canada is doing and because Canada had a recession but didn't really have a financial crisis. But I think that what I say about Canada still applies, more or less, to other countries.
During the recession, total CPI jiggled around a bit, so it was sometimes above and sometimes below the 2% target, but core CPI kept on rolling. There was no disinflation. Until very recently, when there finally does seem to be disinflation. (And January's CPI data that came in after those posts confirm my suspicions.)
If you had magically shown me those graphs in 2007, I would have predicted no recession for Canada. Unless you had told me there was a bad supply shock, but I don't think there was. But there was a recession.
Or, if in 2007 you had magically told me about the coming Canadian recession, I would not have predicted that CPI would follow those graphs. I would have predicted disinflation. But there wasn't any disinflation. Until very recently.
Sure, absolute downward nominal wage rigidity can prevent deflation. (OK that's not exactly true, because real wages could be rising, but set that minor caveat aside.) But it can't prevent disinflation. That 0% floor isn't always a binding constraint on all wages. Paul's graphs themselves show that.
Something is happening here. Or not happening. Or not happening until much later than I would have expected it to happen. And what it is ain't exactly clear. At least not to me.Gotta go.