Niall Ferguson on Inflation

by Josh Barro

I second all the critiques offered by Ramesh and by Matt Yglesias: Niall Ferguson’s Newsweek op-ed, alleging that we are experiencing secret double-digit inflation, is pretty bizarre. Prices for certain highly visible goods are rising rapidly; that does not mean that BLS’s overall inflation statistics, indicating modest inflation, are wrong. And Ferguson’s suggestion that the basket underlying CPI calculations should not ever be adjusted for changes in consumer behavior is a real headscratcher.

But there is a nugget of a reasonable idea buried within Ferguson’s piece that I would like to flag. CPI is a measure of aggregate price changes based on purchases by a typical household. But of course, consumers vary in what they consume. Households that have consumption baskets that are heavily weighted toward food and fuel are experiencing faster price rises (and slower growth in real income) than households whose consumption is weighted toward items that are flat or falling in price, like housing and electronics.

This doesn’t mean that inflation isn’t “really” 2.7 percent. It doesn’t necessarily mean that the overall makeup of current inflation is regressive—falling house prices are a boon to renter households, which tend to be lower income households. But it is true that some households are experiencing effective inflation that is higher than 2.7 percent, perhaps substantially higher, while others are experiencing less inflation.

There are surely some policy implications from this phenomenon—for example, rising food prices and falling house prices might mean that we should increase food stamp allotments and shrink housing assistance. Farm subsidy programs that inflate prices (like the ethanol mandate and sugar tariffs) look less justifiable than ever. But the correct policy responses to unevenly-distributed inflation do not look at all like the correct policy responses to generalized runaway inflation.