Nice graph to show why inflation is low
Watching the videos of Anwar Shaikh, He presented an idea relating inflation to the net profit rate.
Net profit rate = Corporate profit rate – effective Fed rate
His view is that inflation will occur when the profit rate is squeezed by the base Fed rate. When net profit rate is low or even negative, inflation tends to occur because low net profit rates hinder investment and economic growth, and an attempt to stimulate the economy would show up as inflation of prices instead of an increase in GDP. He used this reasoning to explain the stagflation of the 70’s.
So I went to FRED and made a quick graph… (link to data) (Annual data from 1958 to 2015)
The pattern is clear. When net profit rates are high, inflation must be low. In 2015, the annual data showed a high net profit rate of 8% with a low core inflation rate of 1.8%. When net profit rate reached -10% in the 1970s, inflation went high.
Let’s put the current core inflation rate into the trendline equation to estimate how the current net profit rate might be changing.
Core inflation = 2.2% = 3.534*e(-11.16*x)
Estimated net profit rate = x = 4.2%
So the net profit rate may have dropped from 8% to 5% in the last year. The rise in core inflation may be showing that net profit rates are falling. That would not be a good sign, because lower net profit rates slow down growth and investment which leads to an economic contraction.
Why was inflation low in the late 90’s? That means nothing dude. Another fail post.
Rage, What are you talking about?
The core inflation of the 90s is in line with the trendline in the graph. From 1997 to 1999 core inflation was a bit below the trendline, but not much. All of the points were well below the standard deviation of 1.4% core inflation.
Ed it looks like projected inflation will be at 2% with profits at 4.2 %. This does not warrant anther rate increase from the Fed unless you have the ability to see that the Fed has been wrong about the ZBD rate for the past 10 years. According to WSOP.com the Fed has become a branch-partner of the big banks rather than regulator for the peoples interest. Perhaps the Fed should do a stress test on itself? Also the Brexit vote and the rise of Trump are a few of the “powerful unforeseables” that cannot be factored into economic formulas like other economic assumptions…This is where we go wrong with the current TPP deal. It assumes and makes many false assumptions and why I’m in support of the currency reform for fair trade H.R.820 to be passed and made law in 2017…