Wednesday, June 24, 2009

inflation dispersion (os)

long time no see.... anyway: are we facing a deflation or an inflation? To both you find more or less reasonable arguments. Paul Krugman fears defaltion, whereas Allan Meltzer fears infaltion. So who is right? As said two sentence before, you find reasonable arguments that speak in favor of the first or the latter, whether relying on real data such as output or (un) employment or the huge amount of fresh money. fg and me put some time into that issue and plotted inflation expectations of the survey of professional forecasters of the Philadelphia Fed and the ECB. What you can take from this is a steep upward trend of the standard deviation, both in the US as well as in the euro zone. This is of course the effect of a rise in the spread of forecasts. Hence, we also plotted the maximum and minimum forecasts and found that whilst the maximum forecasts do not outperform the upper ceiling of previous projections, the minimum forecasts are on a historical low never been observed during the last decade. Some observers even forecast negative inflation rates. You find the picture below.