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How Close Are We to the Edge of Deflation?: Paul Krugman Rebuts Greg Mankiw

Paul writes:

Deflation risks, again: I worry about deflation in a couple of years, Greg [Mankiw] responds by saying that we’re not there yet [actually, haven't been there over the past year]. Huh? It’s like all the people who said that we couldn’t have a recession because profits were high....

But there’s also a technical issue. Greg uses the average hourly wage data; there’s good reason to think that right now those data are biased upwards because the lowest-wage workers are being laid off first. Below I show the Employment Cost Index, which is supposed to correct for this. If the ECI is right, we’re down to a roughly 2 percent rate of labor cost increases already, which with 2 percent productivity means zero inflation. And the trajectory is down...

Deflation risks, again - Paul Krugman Blog - NYTimes.com

Looks like the bias in the hourly wage series is about 1.5% per year.

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