Monday, May 4, 2009

Inflation Would be Efficient, and is Therefore Imminent

Professor Meltzer today predicts that inflation is coming. In explaining his prediction, he takes a negative tone.

I do not agree with his tone. Some inflation would be efficient right now, because it would raise housing prices without raising housing relative prices. Raising housing prices would alleviate some of the serious problems with settling old mortgages. But leaving housing relative prices to market forces would help avoid over-building going forward.

Inflation would also help banks that own lots of mortgages. Because banks have a huge influence on the Fed, and because now inflation would help more than it hurts, I agree with Professor Meltzer's prediction that inflation is coming. My disagreement with him regards his evaluation of the inflationary outcome.


Milton Recht said...

Inflation as measured by CPI, PPI, GDP deflator, etc., is an average. Within these inflation numbers are goods' prices that exceed the average rate of inflation and goods with price changes lower than the average rate. Even with inflation, some goods will have a negative nominal price change over time.

What evidence is there that in an inflationary environment, housing stock prices will increase at least at the rate of inflation?

Could not nominal house prices continue their decline even in an inflationary period?

João Marcus said...

In an (truly)inflationary environment (not to be confused with periods when there are some significant relative price changes like we experienced with energy and commodity prices not long ago)it is hard to find specific prices falling. So no, I don´t think nominal house prices could decline in such an environment.