Posts Tagged purchasing power

Marketplace MegaFail Inflation Edition

Frankly, these statements are incredibly stupid. Inflation means prices and incomes are rising at about the same rate. Any increase in salaries will just keep pace with inflation, leaving the consumer with unchanged purchasing power. The only way people who borrow can pay back with cheaper dollars is if the inflation is a complete surprise. If the inflation is expected, it will be part of the interest rate on the loan. Finally, higher housing prices? Give me a break. Even if housing prices rose, the real net wealth in your house wouldn’t change much because the higher price level would eat up the price increase.

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Use Market Data to Measure Expected Inflation

Introduction Economists take it for granted that everyone knows the definition of the real interest rate: r = i – p where i is the nominal interest rate and p is the inflation rate.  The real interest rate measures the net transfer of purchasing power from borrowers to lenders.  Lenders will be repaid i dollars […]

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Prof. Blanchard Gets It Wrong — Again

Blanchard’s argument is that by raising the inflation target, nominal interest rates would be higher. This, he proposes, would give central banks more room to reduce interest rates to stimulate the economy. Unfortunately, Prof. Blanchard has made an error that should make him blush.

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