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There is no inflation

P1-AT878_ECONOM_NS_20100219194423.gifNext time you hear people warning that we need to cut the deficit or pull back the Federal Reserve's spending in order to avoid inflation, remember this: Right now, there is no inflation:

Because of a spurt in energy prices, the consumer-price index rose 0.2% in January and has climbed 2.6% over the past 12 months, the Labor Department said Friday.

But stripping out volatile food and energy prices, as policy makers do to gauge underlying trends, consumer prices actually fell by 0.1% in January, the first time that has happened since 1982. That so-called core-inflation measure was up a meager 1.6% in the past 12 months.

"There is just no inflation pressure in the U.S., so our focus has to be on growth and jobs," said William Dudley, president of the Federal Reserve Bank of New York, at an event Friday in San Juan, Puerto Rico.

Chart credit: Wall Street Journal

By Ezra Klein  |  February 23, 2010; 11:35 AM ET
Categories:  Economy  
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Comments

Unfortunately, for people making less that $50000 a year, food and energy are two major expenditures that hurt, and then there is inflation. BUT! would Fed policy help these people? Hell, no. So yes, our emphasis should be on jobs, not controlling inflation.

Posted by: carolcarre | February 23, 2010 11:55 AM | Report abuse

So overall inflation, 2.6%, is very low over the last 12 months (historically 3.2%). And the core inflation measure is showing a slowing in inflation. More federal spending to promote job growth seems perfectly appropriate.

Posted by: Dan_B | February 23, 2010 12:23 PM | Report abuse

Poor Klein. The CPI doesn't measure inflation.

Also, trusting the government in this day and age for accurate assessments of its own performance is a fool's dream.

Welcome ShadowStats:

http://www.shadowstats.com/

Posted by: msoja | February 23, 2010 12:25 PM | Report abuse

More precisely, it appears that we have low inflation, not zero inflation.

Also, prices appear lower today than they were 18 months ago, during the summer of 2008. We don't need sustained higher inflation - we might well benefit from reflation to offset the deflation shock of 2008. The problem is that the Fed is targeting an inflation rate, rather than a price level, and Ben's hesitant to raise the inflation target. With a price level target that problem doesn't exist - the reflation isn't perceived as a permanent rise in the inflation rate, and inflation expectations remain contained.

About Shadowstats - there's no way this guy is correct. See this link: http://www.shadowstats.com/alternate_data/inflation-charts. He basically suggests that inflation averaged close to 10% over the past decade. That would imply that the price level was about ~2.5x higher in 2010 than it was in 2000. Gas prices were what, around $1.40 in 2000? Growing by 2.5x would put gas prices at $3.50 in 2010 - gas where I live is around $2.50. So not even gas prices are up as much as he suggests the average price level rose - let alone things which tend to deflate (tech) or which grow close to the BLS CPI values each year (such as rent). My experience is far closer to the BLS's statistics than what John William's numbers suggest. I should be feeling like a pauper if he was correct, and I don't.

Then I found this claim on another page http://www.shadowstats.com/article/consumer_price_index.

"Social Security payments should be double current levels." Woah. Double? Our seniors must really be getting hosed. They're only making half in real terms what the elderly were getting in 1979?

I took the liberty of calculating the benefit for a 2010 retiree who's average monthly indexed earnings were $4,586 - or $55k/yr. The benefit I got was $22,907 in payments over a year. A decent chunk of change. But remember - social security payments should be double current levels - or 45,814. I don't care how much that guy paid into the system, there is no way he should be making more on Social Security than I made my first year out of college.

AIME PIA PIA Replace Shadow Stat
761 90% 685
3,825 32% 1,224
4,586 1,909
55,032 22,907 45,814

Posted by: justin84 | February 23, 2010 1:15 PM | Report abuse

It's true that the simplistic assumption that increasing deficit spending immediately increases the CPI is wrong. I do think you are missing the deeper argument here. We can't pay off the debts we are accumulating, so at some point in the future, our insanity will result in stagflation, high interest rates, default or major spending cuts.

The more we over-spend now to make today better, the worse that tomorrow becomes. It's not easy to draw a line on how much deficit spending we can do safely, but we are clearly over that line and acting like Lehman brothers in the leverage department.

Posted by: staticvars | February 23, 2010 1:28 PM | Report abuse

--"there's no way this guy is correct."--

Perhaps not so unbelievable. I found that link at Mises. The comments may be enlightening:

http://blog.mises.org/archives/011704.asp#comments

There is some disagreement, mostly highlighting how difficult a thing inflation is to measure.

And this, from a long piece at the American Spectator, today:

//begin cite
For more than 40 years successive U.S. administrations, Republican and Democrat, have failed to rein in a feckless Congress, which has run a giant Ponzi scheme that would make Bernie Madoff blush. Our lawgivers have routinely spent more than they take in, jiggling the tax rates to help constituents, and sucking in imports from abroad by paying off in a currency that has steadily declined in purchasing power to the point that dependent customers like China and Brazil are reduced to barter-style trade transactions with each other because the dollar is of no further use to them as a monetary intermediary. The real sucker is the American wage earner, who by the government’s own accounting has lost one-third of his purchasing power since the 1970s (probably closer to two-thirds if we are honest, and if he still has a job).
//end cite
http://spectator.org/archives/2010/02/23/the-great-recession-of-2011-20

Posted by: msoja | February 23, 2010 3:45 PM | Report abuse

Msoja,

I'll agree that inflation is tough to measure. It's probably an impossible task to get the measure precisely right. However, I think that the government's numbers are closer to reality than the Shadow Stats numbers. If the way the government used to calculate inflation back in 1980 really does get us to a 10% inflation rate in 2009 - and ~10% over the course of the decade - then old the calculation process was wrong.

Think of someone who got out of college and started a job in 2000, getting paid $40,000/yr. If we believe inflation has been running around 3%/yr, that person would need to be making around $53,750/yr to keep his living standard constant. Conversely, a person starting out now and getting paid $40,000/yr would have the purchasing power of someone who made $29,760 in 2000.

If inflation has really be running about 10%/yr, as ShadowStats reports, then that person would need to be making nearly $103,750/yr to be maintaining his standard of living. Also, if the typical college student was making $40,000 upon graduation in the year 2000, then the fact that many college students still get their first jobs making $40,000 in 2010 means that their actual purchasing power would be equivalent to someone getting out of school in 2000 and making $15,420.

Also, applying that much inflation to GDP suggests that the 2000s saw a larger and longer economic contraction than the Great Depression - this too doesn't seem to jive with reality.

Posted by: justin84 | February 23, 2010 6:40 PM | Report abuse

Another thing to consider is how much the prices of various products have increased over time, products which are important to the household budget.

The top base price for the 2002 Honda Accord was ~$25,300. http://autos.msn.com/research/vip/review.aspx?year=2000&make=Honda&model=Accord&cp-documentid=434807

Today, the top base price for a 2010 Accord is $31,300.
http://autos.msn.com/research/vip/default.aspx?state=new&make=Honda&model=Accord

That's a compounded 2.7% increase in the price of that car annually - and the 2010 Accord is a much nicer model than the 2002 version (it has an mp3 player, its larger, probably more airbags, probably navi, etc).

What about rent? Well my rent has never gone up more than 3.2% in a year (750/mo to 775/mo in '07). For those who buy, house prices got frothy mid-decade, but have since fallen rapidly. The Case Shiller house price index is down to 136, and with 100 as a base (base year 2000) that suggests about 3% annual house price inflation over the past decade.
http://www.standardandpoors.com/indices/sp-case-shiller-home-price-indices/en/us/?indexId=spusa-cashpidff--p-us----

These are two examples of large household budget items which have been very close to the 3% inflation that the government reported most years during the 2000s. They don't include items which tend to fall - such as electronics (I bought a flat panel TV in '07 and an equivalent model is about 40% what I paid for it). Of course, some items rise faster or are more volatile - education, healthcare, energy. On net, I think that the rapid price growth in these areas are offset by other categories such as electronics and products sold by discount retailers.

This doesn't mean that I'm a huge fan of inflation - I think the Fed should eventually target a growth path for nominal GDP which doesn't tend to produce any inflation. I just don't believe that inflation is several times higher than what the government reports.

Posted by: justin84 | February 23, 2010 6:44 PM | Report abuse

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