Nice explanation, but in a way irrelevant.

[Pedantry warning!!]

Presumably what each central bank is doing in response to supply shocks (or even demand shocks if they are sector specific) is to allow the average price level to rise by enough (and no more) so that relative prices (some of which adjust more slowly than others and some scarcely fall at all in absolute terms) can smoothly adjust to keep resources fully and efficiently employed. This omniscient central bank understand the quirks of the price indices it has to work with and has set its flexible average inflation target accordingly AND perfectly make the appropriate allowances for any idiosyncratic shocks that come along in allowing the needed flexibility.

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A very reasonable argument Thomas. Love the pedantry!

I think this is a reasonable take on the economic views of many sophisticated thinkers on the role of monetary policy in dealing with inflation.

Just note that I'm not claiming central banks don't understand the quirks of inflation measurement. I'm claiming a lot of financial commentators don't understand them, and that measurement issues are important if you are trying to forecast what measured inflation will do next.

I also think that your more sophisticated view of the economics of monetary policy going on behind these imperfect measurements leads to even more questions. For example, by what mechanism exactly do higher interest rates smooth out these price changes that are arising in certain areas (like used cars, rents, energy etc). Why don't high interest rates make it harder for the price system to adjust?

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"I'm claiming a lot of financial commentators don't understand them"

_I'm_ claiming a lot of financial commentators don't understand _anything!_ :)

You are presuming that _interest rates_ are the CB instrument, but it is a good question whatever the CB instrument. In my terms the question is, how does the CB estimate the model in terms of policy instruments it has available that produce the "just enough ad not too much" inflation to permit relative price adjustment, the reduced form of which might not include "inflation" at all.

Thanks. Pedantry is one of my specialties :) in addition to oversimplification.

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Oct 9, 2022Liked by Cameron Murray

Thanks for the pointer to that Firebug podcast. There's a few interesting episodes there.

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There was a time there when banks were charging huge and rising amounts for bank account fees. I can see that might have led to bank fees being put in the cpi. the other omissions are kind of fascinating!

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The stockbroking fees is kind of a weird one. I can understand the banking fees.

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This is a good and useful post

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In the podcast you point out that the proportion of oldies on age care pension has remained the same, and conclude this means super ain’t working to eradicate pensions

I would conclude it means super is working, as old people live longer and are retired for longer, they need more savings. I would have expected proportion on pensions to grow. Super probably prevented that growth

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Maybe... but super costs as much as the whole age pension program anyways. The pension seems like the most cost effective way to maintain retiree incomes.

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