Interesting chart

Got a copy of this from Greg Mankiw's Blog. I went to his blog after reading another one of Krugman's opinions, which, in this case, relates to the lack of inflation pressure in wages. The chart below shows what Krugman is pointing to:

The chart has a aura of plausibility about it. But I am not convinced. The reason I'm not is that I concluded that during the Bush administration, the admininstration was taking a weak dollar policy. This is what Krugman referred to in an earlier article I discussed yesterday. In that article, Krugman appears to advocate a weak dollar because it will make US goods more competitive overseas. But the other side of that would make imported goods more expensive here. Now the thing is this, a great deal of our trade deficit is with China, who pegs their currency to the dollar. A weak dollar will not have any effect on that. It is fair to conclude that a weak dollar policy is now in effect, simply because this administration is doing the same thing the Bush administration was doing and what Krugman himself has advocated.

Not only will China protect its export markets, so will the rest of our trading partners. There will be a "race to the bottom" in the currency wars. All of this has transpired before and appears to be repeating itself.

The inflation did not appear in the Bush administration until the end of his second term.  A sharp and deep downturn occurred at the same time.  In order to extricate the country from this, the current administration is simply copycatting the Bush strategy.  Guess who is advocating that, but Krugman himself.

While it may well be true that wages are not increasing very fast at the present, I am not convinced that inflation won't show up.  It did during the Bush term, mainly in the form of high energy prices. The chart above does not reflect the higher inflation rate in 2008, when wages weren't increasing all that fast then either.   I don't think Krugman's model takes that into consideration.  Energy counts for an awful lot in our economy.  In fact in any advanced economy.  It is not wise to allow energy prices to get out of hand, like what is happening now.

Update:
Historical inflation data here:  month by month numbers below (2008) :

Update:

The Blogger editor won't cooperate. The numbers keep moving around every time I do an edit. There's a solution, but I'm not working on the right machine for that at the moment.  (Fixed!)

A scan through those charts from prior years is interesting in itself. When Krugman talks about a weaker dollar in the Reagan years, it came after a stringent policy of tight monetary policy which whipped inflation of the seventies. Most likely at the time, the dollar was a lot stronger than what it is now. I could check it, but why bother? The dollar is already at all time lows today. If you go much lower, you will be going into uncharted waters. But Krugman isn't worried about that.