Monday, August 2, 2010

What's Been Keeping us out of Deflation?

With the inflation/unemployment circles posted recently on Krugman's blog and others, one thing has been clear -- the disinflation this time around was actually not that severe given the dramatic rise in unemployment.

One reason this might be the case, and this is pure speculation, is that health care is a larger fraction of the economy today, especially compared to oil, than it was in the 1970s. From the BLS, the past three months "benefits" inflation has been three times the wage inflation. And then see this -- health care costs are expected to rise 9% again next year (after being forecast to rise 9.5% this year), are basically on autopilot, and just not that responsive to anything. This is unlikely to be the whole story, but it certainly seems plausible... Any thoughts?

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