« From ISLM to NK Macro | Main | How to make mine operators pay for the mess they make »

Comments

Feed You can follow this conversation by subscribing to the comment feed for this post.

unless by "A falling inflation rate" you mean a negative rate shouldn't the last sentence read "It means you car is accelerating more slowly and the speedometer is rising more slowly"?

Bryan: No, it's right as I wrote it. The odometer is rising more slowly.

We certainly think differently.

To me, the odometer is like GDP. Both measure the distance traveled. Both are a snapshot taken at a point in time.

The speedometer is measuring how much distance is traveled during a predefined time period. (A rate, distance per period). This would be equivalent to the quantity (difference) between two GDP measurements.

So what is inflation? Inflation is a change in the scale itself. With inflation, we begin measuring distance in miles, then we move to a new scale where each mile is longer than 5280 feet.

Am I wrong? :-(

Roger: You are talking about the level of output (GDP) and the growth rate of output. I am talking about the level of prices (CPI) and the growth rate of prices (inflation rate).

Since we measure prices in terms of money, there is no difference between saying "The price of the CPI basket of goods is rising in terms of money" and "The price of money is falling in terms of the CPI basket of goods."

The trouble is, as soon as you say "the price of money" a lot of terribly wrong people assume you are talking about the rate of interest, and start talking about "the money market".

This seems like a good analogy to me, though I suppose I am not in a position to judge.

There is one other thing I think worth mentioning to a general audience: if one takes "literally" the quote that "the Consumer Price Index (CPI) rose by 0.1% in November", it likely means that the measured CPI rose by something like 0.18%, because the quoted single-month rate (or CPI level) is seasonally adjusted, and a ballpark adjustment for November in the US or UK is around -0.8%. Many people do not appreciate how large monthly variations can be in comparison to absolute monthly rates. The reason for quoting year-on-year inflation (November 2015 to November 2016) is that washes out possible errors in the estimates for seasonal adjustment.

Phil: good point. I've added a short bit saying they do year over year so they don't have to worry about seasonal adjustment.

Yep, you are probably not the best person to judge whether the odometer/speedometer analogy works! You will get it of course, but will my intended audience?

Cars that go fast are generally considered better than cars that don't go as fast. I'm not sure that translates into a desirable normative statement about an economy :-). Other than that, I think your post is very clear.

I remember Ferris Bueller!

Finally a post I feel comfortable with (Bueller and CPI). Thanks, Nick! ;-)

The odometer/speedometer analogy works quite well, although I'm not sure if it adds much. Most people probably understand that a price can rise or fall, and that it can rise or fall fast or slowly. What might be harded to understand is the basket and the year-on-year comparison (instead of month-on-month), and there the odometer/speedometer analogy offers no help?

But it's always useful to try to put things a bit differently, and just trying to think in terms of odometer/speedometer is most likely helpful -- due to the ensuing discussion, both in this thread and in the reader's mind.

The comments to this entry are closed.

Search this site

  • Google

    WWW
    worthwhile.typepad.com
Blog powered by Typepad