Two questions about inflation:
1. What would the European Central Bank be doing if it were the Federal Reserve?
2. Why have some measures of core inflation in the United States ticked up slightly recently?
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On the first question, Eurostat offers a consumer price index online sans energy, food and tobacco (which is more or less U.S.-style core). If you look at the 12-month change, the euro zone looks like the United States — there is no good reason to raise rates. To be fair, on the labor side things look a bit different: there are actual labor shortages in some parts of Europe, reflecting both low labor mobility and the extreme asymmetry of the European shock. But raising rates for all of Europe because parts of Germany are doing well is, as I’ve written before, worse than the one-size-fits-all policy euroskeptics warned about. It’s one size fits one. And the case for a somewhat higher inflation target is even stronger for the euro zone than it is for the United States.
Meanwhile, back in the new country: Core inflation in the United States has ticked up slightly recently. What’s that about?
I’ve suspected that what we’re really seeing is the inadequacy of even core inflation as a way to purge transitory effects of volatile prices: the measure takes out purchases of food and energy, but it doesn’t take out indirect effects of raw material prices on costs.
New research from Goldman Sachs seems to support that view: It finds that core inflation is getting a temporary bump from the prices of imported raw materials, and will probably subside if the commodity surge is, in fact, over.
This suggests that policy should really be based on some kind of “supercore” inflation.
Should this simply be wage growth? Economist Adam Posen at the Bank of England has certainly gone down this route, arguing that the relatively high rate of even core inflation in Britain reflects one-off factors and that stagnant wages show that there are few risks.
And I totally agree with Mr. Posen about Britain’s policy issues.
Yet there are problems with a wage target — mainly, you don’t want to base policy on the notion that wage gains are always a bad thing. Maybe adding a trend productivity adjustment would do the trick.
Anyway, the bottom line for now is that neither the Fed nor the E.C.B. should be at all concerned about inflation. Unfortunately, the E.C.B. is not interested in having its orthodoxy challenged.
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Paul Krugman joined The New York Times in 1999 as a columnist on the Op-Ed page and continues as a professor of economics and international affairs at Princeton University. He was awarded the Nobel in economic science in 2008.
Mr Krugman is the author or editor of 20 books and more than 200 papers in professional journals and edited volumes, including “The Return of Depression Economics” (2008) and “The Conscience of a Liberal” (2007). Copyright 2011 The New York Times.