Leontief

Back when I was a young whippersnapper in grad school Leontief was still au courant, and a signifcant factor in macro analysis. Alas in due time, Volker, Laffer, and other knuckleheads turned policy into nothing but worrying about currency.

Inflation drops to zero in July due to falling gas prices.
-- Axios/10 August 2022

Consumer prices were unchanged in July, as plunging prices for gasoline dragged the Consumer Price Index down to zero.

And, the secret sauce? The CPI only figures the direct prices of the commodities. What that means is what Leontief figured out: any advanced economy is a massive input-output engine. Changes in such a wide-ranging sector, energy, finds its way into most other sectors.

As many of us Left Wingnut analysts said as Covid waned (or most folks deluded themselves into believing it has), there would a supply shortage driven period of inflation, until producers were convinced that the new, higher level of demand would sustain. (See: post WWII.) And that's what happened. What the Krugman Klan didn't figure on was the reluctance of producers to resume production. Well, and Putin with a hard on for Ukraine (at least).

If the input-output model is correct, we should see a continuing fall in CPI measured inflation as falling energy prices make their way through the rest of the economy. Stay tuned.

After two straight months of extremely hot inflation readings, this report will be welcome news.

Two months? Now you know how stupid the monetarists are. While Covid-ο came and went in 3 months without any real action being taken, any blip in inflation without even a shred of evidence of fundamental change in the economy is just dumb. But, that's the way of Monetarist Policy.