26 January 2011

Why you shouldn't believe low inflation numbers

From an article in the Wall Street Journal:
... the official inflation numbers should be taken with a fistful of salt. Over the past 30 years, the federal government has made a lot of changes to the way it calculates inflation. It's taken place under presidents of both parties...

... if we still calculated inflation the way we did when Jimmy Carter was president, the official inflation figures would look about as bad as they did when ... Jimmy Carter was president. According to Mr. Williams's calculations, if we counted inflation under the old system the official rate wouldn't be 1.5%. It would be closer to 10%...

Under the official calculations, if steak prices boom, the government just assumes you buy cheaper hamburger instead. Presto—no inflation!

Or consider the case of Apple computers... The cheapest Mac laptop today costs $999. A few years ago, it also cost $999. So the price is the same, right?  Ha. Not according Uncle Sam. Using a piece of chicanery called "hedonics," Uncle Sam calls this a price cut. His reasoning? You're getting more for the money. Today's $999 Mac is lighter, fancier and faster than last year's $999 Mac. So the government calculates that the "real" price has actually fallen..

... look at raw materials. Around the world prices are skyrocketing, from copper to cocoa. The United Nations Food Price Index has just hit a new record high. Oil's back near $90 a barrel. Wheat prices have nearly doubled since last summer... Sooner or later this is going to show up in your supermarket, or at the mall, in higher prices...

We are flooding the world with extra dollars. The Fed simply invents as many as it likes. In the past couple of years, to try to keep the economy out of a tailspin, it has more than doubled the size of the so-called monetary base...
The first argument - about unreliable inflation data - was explained at more length in an article in Harper's, which I highlighted at this link.  Highly recommended reading for those interested in this subject matter.


  1. Likewise the way we measure unemployment has been changed over the years to disguise the number of people truly our of work.

  2. I'll take Paul Krugman's word before that of the WSJ. He doesn't think anybody needs to be concerned about inflation at this point and, in fact, that measures designed to prevent inflation will do vastly more harm than good.

    --Swift Loris

  3. Ah. Paul Krugman; court historian. Swift, if you haven't figured out that Krugman is just another wrongheaded Keyensian by now, then nothing I can say will change you. I hope we both survive the hyperinflation and the destruction of the dollar.

    - 032125

  4. This is not hard to figure out. If inflation were 10% then the least that a loan rate would be would be 14%. But loans are as low as 5% now.

  5. @032125--Let's just say I'll take the word of a Nobel Prize-winning wrongheaded Keynesian over the WSJ any day.

  6. @Anonymous

    Very well, I accept your argumentum ad verecundiam fallacy and raise you Milton Friedman.

    Inflation, when correctly defined as an increase in the money supply (Austrian School), cannot be easily manipulated or papered over the way it is with aggregates and selective baskets such as CPI.

    The simple fact that the items selected in CPI can vary wildly to suit political needs renders it invalid as a rational indicator.

    The Fed injected TRILLIONS of dollars into the monetary system in a very short span of time. No Keyensian shell games can cover the effects of such action.

    - 032125

  7. the author is ignorant.

    simple example. google search for a compound interest calculator. plug in the cost of a barrl of oil in 1980. about $37.42, 10% a year, for 30 years. that would mean it should be $652.96 now. but if we plug in 2.5% we get $78.49. Pretty close to where we are.

    I can buy bread for 88 cents a loaf. Milk is about $2.50 a gallon. things are a little higher, but not 10+% a year.


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