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Home > Macroeconomic Issues Best Practice > Mixflation

Macroeconomic Issues Best Practice


by Giles Keating

Executive Summary

  • Mixflation is the deflation or rapid disinflation of one large and important block of prices, occurring simultaneously with the rapid inflation of another similarly large block. The collapse of manufactured good prices and surge in commodity prices over much of the last 10 years is a key example. This has now reversed rapidly, suggesting that monetary policy is a crucial driver of mixflation, and not just structural forces (urbanization, industrialization).

  • We take a stylized description of global monetary policy (inflation targets, plus output for the Fed, in developed countries and exchange rate targets in emerging countries). We argue this encouraged excess investment in manufacturing etc., and insufficient consumption, in emerging countries. This exaggerated the divergence between manufactured and commodity prices, and created a savings glut, depressing long-term interest rates, and leading to excess risk-taking and asset price bubbles globally, which have now burst.

  • A new global monetary regime is needed, with developed countries explicitly targeting asset price volatility alongside inflation, and emerging countries accepting a flexible system for adjusting exchange rates to avoid growing imbalances.


Previous eras—viewed through the simplifying lens of history—seem often to fall into periods of inflation and deflation: the great falling-price boom of the 1880s; The deflationary slump of the 1930s; the inflationary 1970s. But modern times are more mixed. Over much of the last 10 years, manufactured goods prices have fallen while commodity prices soared. During 2008, this bifurcation seemed to briefly give way to a more generalized inflation, until the intensifying credit crisis suddenly instead suggested the risk of deflation. Meanwhile, for the second time within a decade, asset prices have moved in wild gyrations between boom and slump. We could describe this modern era as a phase of mixflation.

Case Study

A few key figures will help to illustrate the recent experience of mixflation. Over the 10 years to December 2008, US manufactured consumer import prices (excluding autos) fell by a compound rate of 0.1% per annum, while prices of traded commodities (CCI index) rose by 6.6% annually. During the same period, US core consumer prices increased at a rate of 2.2% (and the headline rate by 2.8%) annually.

There were also very wide gyrations in share prices. Over the 10 years to the end of 2008, the US S&P 500 index changed relatively little (its annual return was –3%). However, there were two calendar years when it fell more than a fifth (2002 and 2008 with 23% and 38% falls, respectively) and one year when it rose more than a fifth (2003 with a 26% rise).

A Longer-Term Perspective

There is considerable evidence to suggest that the experience of the last 10 years in relative price movements has been markedly greater than the preceding decades. Figure 1 shows the Reuters CRB commodity index, deflated by the US CPI and covering the period since the First World War. This shows a far larger percentage rise from the start of the current decade until the peak in July 2008 than recorded at any earlier point. This has been followed by a percentage decline that is also the largest on this data set.

Figure 2 provides evidence of increased volatility in real US house prices. It shows median US house prices (Census Bureau data, one family homes), deflated by core CPI. Following a sharp surge in the 10 years to the late 1970s, there was a period of some two decades of relative stability. Then, in the decade to 2008, there was a major surge. This took the peak growth to its highest peak in this data set. Moreover, it was followed by a sharp reversal down.

Looking at equity markets, Figure 3 shows the total real return (calculated using headline US CPI) on the US S&P 500 index and its predecessors, back to the middle of the 19th Century, and expressed as a deviation from trend. This illustrates that movements in real equity returns over the last 10 years have been more extreme than the past in certain respects. During the dotcom bubble, the index showed its highest ever deviation to the upside, in early 2000. The crash, partial recovery, and then renewed crash since then have taken the index close to the most extreme downside deviations previously recorded. The peak to trough movement is also the largest recorded apart from one event during the Great Depression.

Note: green square represents latest available low-point (March 9, 2009)

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Further reading


  • Frankel, J. “The effect of monetary policy on real commodity prices.” In J. Campbell (ed). Asset Prices and Monetary Policy. Chicago, IL: University of Chicago Press, 2008.
  • Greenspan, A. The Age of Turbulence, Adventures in a New World. New York: Penguin Press, 2007.


  • Bernanke, B., and M. Gertler. “Monetary policy and asset price volatility.” National Bureau of Economic Research, Working paper 7559, 2000.
  • Borio, C. “Monetary and financial stability: So close and yet so far?” National Institute Economic Review 192:1 (2005): 84–101.
  • Fisher, I. “The debt-deflation theory of great depressions.” Econometrica 1 (1993): 337–357.
  • Ingves, S. “Housing and monetary policy: A view from an inflation-targeting central bank.” Remarks at the Federal Reserve Bank of Kansas City’s Economic Symposium, Jackson Hole, Wyoming, 2007: 433–443.
  • Keating, G. “A two-good model with capital accumulation and a real balance effect.” Oxford Economic Papers 39 (1987): 481–499.
  • Saxena, S. “Capital flows, exchange rate regime and monetary policy.” In Transmission Mechanisms for Monetary Policy in Emerging Market Economies, BIS Papers No 35, January (2008): 81–102.
  • Warnock, F., and V. Warnock. “International capital flows and U.S. interest rates.” National Bureau of Economic Research, Working Paper 12560, 2006.

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