Central banks, and in particular the US Federal Reserve, are pumping liquidity in the market like there is no tomorrow. These money injections are only going to have a real impact if prices are rigid, that is, the additional money is not going to be inflated away immediately. The trouble is, prices are not rigid.
The best study tackling price rigidity in the data is the one by Bils and Klenow, 4th most cited recent article in Economics. They use the monthly data the BLS compiles for the consumer price index. They show that on average, prices last only 4.3 months. If you take away promotions, they last 5.5 months. The article actually gives the results for 350 different types of goods, with the most volatile prices being gasoline, tomatoes, airfare, natural gas, lettuce, eggs, car rentals, girls' dresses, oranges and chuck roast, the last changing on average every 1.3 months. The most rigid? Coin-operated laundry, vehicle inspection, driver's license, mass transit, car registrations, legal fees, vehicle tolls, safe rentals and newspapers, which change prices every 30 months or so.
This study is based on data from 1995-97, when inflation was in the 2-3% range. Since then, price flexibility can only have increased, as scanners are now commonplace in retail, price changes are distributed electronically, and inflation expectations are higher. What do I take from this? If there is a real impact of monetary injections, it will be limited to a couple on months. Then inflation hits. Is it worth the effort? I say no.
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