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August 1, 2008

Which is More Worrisome: Inflation or Deflation?

A guest post from trader, surfer and semi-pro poker player, Jeff Norman.
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Should the fed be more worried about inflation or deflation?  There are compelling arguments to worry about both and your answer may depend more on where you are from. Europeans and the ECB, mindful of Germany's hyperinflation, are more apt to worry about inflation whereas Americans and the Fed, remembering the depression, focus on possible deflation.

Louis Uchitelle's article in today's New York Times rehashes this discussion, and includes the fascinating chart below.  For the correlation between inflation and wages to change from nearly 1 to nearly 0 is astounding both from a mathematical and an economic point of view.

Correlation is of course not causation, but the low recent correlation shows that some of the old inflation causes will not be a factor this time around.

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