Mixflation is the deflation or rapid disinflation of one large and important block of prices, occurring simultaneously with the rapid inflation of another similarly large block. The collapse of manufactured good prices and surge in commodity prices over much of the last 10 years is a key example. This has now reversed rapidly, suggesting that monetary policy is a crucial driver of mixflation, and not just structural forces (urbanization, industrialization).
We take a stylized description of global monetary policy (inflation targets, plus output for the Fed, in developed countries and exchange rate targets in emerging countries). We argue this encouraged excess investment in manufacturing etc., and insufficient consumption, in emerging countries. This exaggerated the divergence between manufactured and commodity prices, and created a savings glut, depressing long-term interest rates, and leading to excess risk-taking and asset price bubbles globally, which have now burst.
A new global monetary regime is needed, with developed countries explicitly targeting asset price volatility alongside inflation, and emerging countries accepting a flexible system for adjusting exchange rates to avoid growing imbalances.
Previous eras—viewed through the simplifying lens of history—seem often to fall into periods of inflation and deflation: the great falling-price boom of the 1880s; The deflationary slump of the 1930s; the inflationary 1970s. But modern times are more mixed. Over much of the last 10 years, manufactured goods prices have fallen while commodity prices soared. During 2008, this bifurcation seemed to briefly give way to a more generalized inflation, until the intensifying credit crisis suddenly instead suggested the risk of deflation. Meanwhile, for the second time within a decade, asset prices have moved in wild gyrations between boom and slump. We could describe this modern era as a phase of mixflation.
A few key figures will help to illustrate the recent experience of mixflation. Over the 10 years to December 2008, US manufactured consumer import prices (excluding autos) fell by a compound rate of 0.1% per annum, while prices of traded commodities (CCI index) rose by 6.6% annually. During the same period, US core consumer prices increased at a rate of 2.2% (and the headline rate by 2.8%) annually.
There were also very wide gyrations in share prices. Over the 10 years to the end of 2008, the US S&P 500 index changed relatively little (its annual return was –3%). However, there were two calendar years when it fell more than a fifth (2002 and 2008 with 23% and 38% falls, respectively) and one year when it rose more than a fifth (2003 with a 26% rise).
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