That FRED graph from yesterday caught my eye as I reviewed the post. When I see a graph showing two lines and there is presumed to be some relation between the two lines, often I want to see the relation rather than the lines.
So I got the data from FRED again, this time quarterly data for both series. And I looked at the numbers in a spreadsheet to get normalizing values. I'm sticking with third quarter 1953, which is what I used to normalize both graphs yesterday. For this graph, I divided each series by its normalizing value, then subtracted the output number from the price number.
Basically, I took Graph #2 from yesterday and subtracted the blue line from the red line. Here is the result:
|Graph #1: Normalized Prices less Normalized Output (Normalized at 1953)|
The graph shows a downtrend to the mid-60s, as real output grew faster than prices went up. Then, perhaps, there is a brief flat spot (suggesting that prices and output increased at about the same rate). Then up and up it goes, showing that prices have increased faster than output since the early 1970s.
There seems to be a kink at the 1982 recession. The line goes up faster before the kink, and not quite so faster after. Still, the trend for 40 years has been that prices increase faster than real output.
There is no reason that I can see, to expect this 40-year trend to suddenly change if we switch from "Inflation Targeting" to "NGDP Targeting". Rather, I expect the line to go up faster again, if we take our eye off prices.
Two more views of the same comparison of prices and real output:
|Graph #2: Normalized at 1980|
|Graph #3: Normalized at 2012|
And one more view, not normalized at all:
|Graph #4: A Simple Ratio|
Graph #4 tells this story: The level of prices, as compared to the level of real output, begins at a middling value. Over the next 15 years or so it falls, as real output increases faster than prices.
Then it seems to hit bottom, bounce once, and skyrocket -- climbing twice as far as it fell. This was the Great Inflation.
Since the end of the 1982 recession, the ratio has remained high, as if bumping up against a ceiling. The level of prices, relative to output, has changed little. Real output increases no faster than prices.