Saturday, July 16, 2011

Krugman's Error of Being Stuck on Sticky

NYT columnist and blogger Paul Krugman is beside himself. He has finally found a price indicator that shows a slowing of price inflation, mind you, not an indicator showing no inflation but just a slowing. He has a second post out on it.

What is this indicator?

It's the sticky price indicator. The sticky price indicator is the indicator of prices that react slowly in an economy. Duh. This means that if prices are climbing, the sticky index is the last place you are going to see it.

As I have been detailing at the EPJ Daily Alert, earlier this year there was a slowdown in money supply growth, which means that it shouldn't come as a surprise that finally in the sticky numbers there is a slowdown in price inflation. That said, that slowdown in money growth is a thing of the past, money is flowing in the way a fire hydrant spews water after being hit by a truck.

So where should one look for impact from the new money growth? Not from numbers that are slow to react, but from numbers that are quick to react.

The core flexible cut CPI is one of the fastest price inflation reactors. What did it do in June? It climbed on an annual basis by 15.5%.

Admittedly, this is cherry picking a number, but isn't that what Krugman is doing with his blathering about sticky numbers.

Here's the real deal. As I stated above, there was a slowdown in money supply earlier this year, which has ended.  Thus, it is no surprise that the sticky number index inflation rate has slowed somewhat, but that is rear view mirror watching.  If you want a predictor of price inflation, it's best to keep an eye not on the last indicator to change, but on Fed money printing which is likely to have the greatest future impact on prices, and right now money is gushing out. That's one of the reasons the gold price are hitting record highs. If Krugman keeps watching sticky prices as his barometer of price inflation, he might figure out there is an inflation problem sometime in 2012.

Gold is the most flexible price around and it isn't saying a damn thing about any current slowdown in price inflation, when Krugman's sticky prices finally indicate a warning about price inflation, gold could very well be over $2,000 per ounce.

It may be news to Krugman, but gold doesn't read The New York Times.


  1. One of the best critiques of Krugman I have read.

    I think another sign of the future things to come... I work in the auto industry. From July 2007- 09 we received no raise. In the last year most received a 20% salary increase.

  2. When anyone cites The Krug as a source I immediately discount their argument. He has no center, simply saying whatever will make TPTB happy.

    I wonder how long he and his ilk will survive once hyperinflation hits? Will the sheeple still trust anything they say after reality intrudes on their bullshit theories?