Is inflation meaningful? Is it useful?
In several recent posts, Tyler Cowen has stressed the need for better models of inflation. In one case, he expressed exasperation at my claim that (price) inflation is an almost meaningless concept:
4b. More seriously, Scott seems to dismiss the price level concept altogether. For instance he once wrote: “In the past, I’ve frequently argued that inflation is an almost meaningless and useless concept. I’m not even aware of any coherent definitions of the concept.” I don’t think this is a defensible point of view, and you have to compare Scott’s criticisms of the o1 model to his own approach, which is fairly nihilistic. And I think wrong. If inflation were higher and someone offered Scott an inflation-indexed contract to sign, would he be unable to evaluate such a transaction? Obviously not.
Yes, there’s some hyperbole in the phrase “almost meaningless”. But I suspect there’s much less exaggeration than most economists would assume. I’ll present my case with an example and then discuss Keynes’s view on the subject, which I believe is more accurate than either my previously expressed view or Tyler’s view. Then I’ll discuss China’s economy, an area where I seem to view the price level as important, but most other economists “dismiss the price level concept altogether”. No one will come out looking very good (except Keynes.)
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