Friday, March 8, 2013
JP Irving and Lars Christensen have replied to Sumner and Rowe regarding Canada. They argue that the Canadian inflation rate fell, which is a sign of a typical aggregate demand shock. They had a variety of diagrams showing the slower inflation rate.
To me, the core inflation rate has been running a bit low since 2008. Of course, Nick Rowe's initial posts didn't say that there had been no disinflation, it is just that it has been much less than he would expected given the apparent size of the output gap. Sumner's post (and diagram) did imply a much stronger statement--no change in inflation. But his point would remain that the reason why a slowdown in aggregate demand would not result in disinflation would be due to a simultaneous aggregate supply shock. The need to reallocate resources due to a change in trade can be characterized as a type of aggregate supply shock. When productivity capacity is the capacity to produce the wrong things, it is like there is less productive capacity.
Looking at Iriving's diagram and the diagram here, I am not seeing a large distinction between the GDP deflator and the core CPI. Perhaps the prices of imported consumer goods is not quite the problem I had assumed.