Research Highlights Slowest Price Increases Since 1981

Simple Ways to Forecast Inflation: What Works Best? – There are many ways to forecast the future rate of inflation, ranging from sophisticated statistical models involving hundreds of variables to hunches based on past experience. We generate a number of forecasts using a simple statistical model and an even simpler estimating rule, adding in various measures thought to be helpful in predicting the course of inflation. Then we compare their forecast accuracy. We find that no single specification outperforms all others over all time periods. For example, the median and 16 percent trimmed-mean measures outperform all other specifications during the 1990s, and survey-based inflation expectations seem to do better during volatile periods.

Whose Side is the White House On?I want to raise a hard question — a question on which Americans are divided. It seems to me, though, we will get nowhere unless we realize where we are, what has actually happened, and what the future most likely holds. Recovery begins with realism and there is nothing to be gained by kidding ourselves. On the topics that I know most about, the administration is beyond being a disappointment. It’s beyond inept, unprepared, weak, and ineffective. Four and again two years ago, the people demanded change. As a candidate, the President promised change. In foreign policy and the core economic policies, he delivered continuity instead. That was true on Afghanistan and it was and is true in economic policy, especially in respect to the banks. What we got was George W. Bush’s policies without Bush’s toughness, without his in-your-face refusal to compromise prematurely. Without what he himself calls his understanding that you do not negotiate with yourself. It’s a measure of where we are, I think, that at a meeting of Americans for Democratic Action, you find me comparing President Obama unfavorably to President George W. Bush.

SWFs set their sights on Brazil – Like everyone else, sovereign wealth funds are turning their eyes – and their considerable capital – to emerging markets. Today brought news that a consortium of funds is investing $1.8bn in fresh capital into BTG Pactual, the independent Brazilian investment bank. The deal is “a sign of a new financial order”, according to Pactual chief Andre Esteves, and is the funds’ first big move into Brazil in particular and Latin America in general. The FT’s Patrick Jenkins and Jonathan Wheatley report: The investment – by nine funds, including Singapore’s GIC, China’s CIC and the Abu Dhabi Investment Council – marks the biggest ever sovereign wealth fund commitment in Brazil and underlines the shift in the funds’ focus away from western economies and towards emerging markets.

Obama’s quiet $49 billion gift to America’s Health Insurance Plans – America’s Health Insurance Plans (AHIP) is a trade association representing private health insurance companies including those that operate most Medicare Advantage plans.  AHIP opposed the Affordable Care Act (ACA), spending heavily on ads that criticized the President and Democrats for supporting cuts in Medicare Advantage payments.  These cuts, which Austin and I have shown would fall mostly on plans, not on beneficiaries, were scored by the CBO as worth $136 Billion over 10 years.  They are the backbone of the financing for expanding coverage to the uninsured and one of the few real cost control measures in the law.  On Veterans’ Day, just 8 days after the election, the Obama Administration quietly released a new regulation expanding quality bonuses to Medicare Advantage plans that receive only average quality ratings.  Julie Appleby of Kaiser Health News reported a few days later that some analysts interpreted this as a gift to the plans worth about $1.3 billion over 3 years ($5.3 billion over 10 years).  Austin and Brad Delong both expressed concern that this could be the beginning of the political unraveling of one of the few cost controls in the ACA.

A Plea to Howard Gleckman: Please Don’t Give More Free Gasoline to the Budget Arsonists! — Howard Gleckman is perplexed. He says that he does not know which budget baseline to use. Is it best to use the "current law" baseline–what would happen if congress went home right now, or at least stuck to PAYGO by not passing things that increase the deficit–in evaluating the budget impact of laws and policies? Or is it best to use the current "policy baseline," according to which congress passes laws to keep tax rates what they are and spending programs on their current growth trajectories? Should extending the Bush tax cuts be thought of as something that increases the deficit because it changes current law in a way that makes the deficit bigger? Or should extending the Bush tax cuts be thought of as a nothingburger for the deficit because it would, after all, only continue current policy? Here is what I believe is the best way to think about it:

The Breadth of Disinflation – FRBSF Economic Letter – In recent months, inflation as measured by the personal consumption expenditures price index has been trending lower. This slowdown, known as disinflation, has raised concerns that inflation might actually drop below zero and enter a period of deflation. An examination of the distribution of inflation rates across the range of goods and services that compose the index suggests that downward pressures on inflation are relatively high by historical standards.

Department of "Huh?!" (Unemployment Insurance Edition) » Greg Mankiw writes: I should note, by the way, that economists who strongly favor the extension of UI benefits, such as those who signed this letter, also tend to favor more income redistribution in general.  I suspect, therefore, that the foundation of their support comes not from having weighed the specific pros and cons of UI per se, but rather from a more general desire to "spread the wealth around."  That issue is, as I tell my students, more a matter of political philosophy than it is of economics. This does surprise me. I would have thought he would have said that continuing our current extension of unemployment insurance benefits to 99 weeks is a good idea: Continuing the current extension is an expansionary short-run fiscal policy, the economy badly needs more expansionary short-run fiscal policy, and it is one of the few expansionary short-run fiscal policies that might get enacted in the current political climate.Down the hall at Harvard he has Raj Chetty, who has thought as carefully as anybody about the pros and cons of unemployment benefits and about the optimal structure unemployment insurance. Cf. Chetty (2004), "Optimal Unemployment Insurance When Income Effects are Large" http://www.economics.harvard.edu/files/faculty/1238_ui_income.pdf.

Research Highlights Slowest Price Increases Since 1981 – Price increases are decelerating at the greatest pace in nearly 30 years, a paper from the Federal Reserve Bank of San Francisco said. The research, published Monday, offers additional evidence that ebbing levels of already-low inflation are moving ever closer to outright deflation. Last month, the Fed restarted a massive asset-buying program largely because officials feared tepid growth levels wouldn’t bring down high levels of unemployment and push inflation back up toward levels policy makers considered acceptable. The San Francisco Fed paper divided up the economy by sector to reach its conclusion. “Both deflationary and disinflationary pressures are relatively large by historical standards,”“The relatively high level of disinflationary pressure is concentrated in the goods and services that make up core inflation,” the economists wrote. “Over a sixth of consumer spending is on goods and services for which prices are declining, while three-fourths is on goods and services for which inflation has slowed,”

Euro Trouble – Another sign the euro is in trouble: this week’s Economist has an article on how a member country might leave the currency union.  It concludes: The cost of breaking up the single currency would be enormous. In the ensuing chaos and recrimination, the survival of the EU and its single market would be in jeopardy. But by believing that a break-up cannot happen, the euro zone’s authorities will always tend to stop short of the radical measures needed to hold the project together. Germany may be the country that walks – the Guardian reports: At the Brussels dinner on 28 October, witnesses said Papandreou accused Merkel of tabling proposals that were "undemocratic". "If this is the sort of club the euro is becoming, perhaps Germany should leave," Merkel replied, according to non-German government figures at the dinner. Much of the difficulty in Europe stems from German attitudes on monetary policy (though their deeply ingrained aversion to inflation is understandable) and their influence on the ECB.  Ryan Avent put it well last week:A demonstration of commitment to Europe requires a little bit from everyone, and what it requires from the ECB is that it act like the European Central Bank, rather than just a Bundesbank that gets to impose unreasonably hard money on everyone in the single currency.

The deficit hawks’ scare stories – Hollywood used to be the place where creative people went to cook up outlandish horror plots. Now, people go to Washington to spin their wild tales of looming disaster. The national agenda has been dominated by such tales over the last two years. Most recently, we have had the story of the bond market vigilantes doing to the United States what they have already done to Greece, Ireland and Portugal. This story requires suspending disbelief, but people who report on economic and political issues for major news outlets are good at ignoring reality. The plot is that, at some date in the not-distant future, if we don’t mend our free-spending ways, no one will buy US government bonds. The United States will be forced to stand before the international community as a helpless beggar and agree to whatever humiliating terms bad guys from China to Saudi Arabia, and even France, choose to impose.

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