In Newsweek the pundit claims that “double-digit inflation is back”: “The way inflation is calculated by the Bureau of Labor Statistics has been ‘improved’ 24 times since 1978. If the old methods were still used, the CPI would actually be 10 percent.” If Ferguson is right about inflation, it leaves two possibilities. Either our statistics on the size of the economy in current-dollar terms–which ought to be easier to compile than any numbers on inflation–are hopelessly flawed. Or the real (that is, inflation-adjusted) size of the economy is shrinking rapidly. Instead of 1.8 percent real growth, in the last few months we’ve been going through something more like 7 percent real shrinkage. (Nominal growth, remember, has to equal inflation plus real growth.) Is that even remotely plausible? Does Ferguson believe this rate of shrinkage is compatible with even the modest job increases we’ve seen? Or does he doubt the unemployment stats too?
You are comparing inflation as it was calculated 30 years ago, with the economy as it is calculated today.
To be fair, you would have to recalculate the growth of the economy using the methods in use 30 years ago as well. I suspect that those older methods would show the economy growing at more than 1.8%. So that when you then subtract out the old method 10% inflation, the numbers would not show a 7% shrinkage.
Do I know this for a fact, no. I do know that you have to compare apples to apples.
Reply to this commentLinkReport AbuseComparing inflation as it was calculated 30 years ago, the the GDP as it is calculated today, is not a valid comparison.
If you recalculate the unemployment rate to factor the real labor pool, the jobless rate has changed little in the last 18 months. If you doubt it, just go to the BLS site and get the data.
According to the government, millions of Americans have mysteriously decided to "retire." If you take the number employed and the peak labor force number back in the Bush years, the unemployment rate is ~10%.
So, part of his argument is plausible.
Reply to this commentLinkReport AbuseThis is disgusting. The Japaneese went through a real estate bubble just like ours back in the 90's, and I remain furious at our business and government leaders for getting us into the exact same, extremely predictible situation. Now you are saying that these same people are fudging economic data in such a way that our economic policies are certain to be wrong???
Reply to this commentLinkReport AbuseNote that the CPI-U and the GDP price deflator don't have to move together perfectly, though one would expect them to be similar (and the GDP deflator is not showing anything near double-digit inflation).
Reply to this commentLinkReport AbuseI should add that I'm not sure what he's talking about with changing how the calculation of the CPI has changed. Does he simply mean that the basket of included goods has changed? Does he think we should care more about the prices of what people used to buy than about the prices of what people buy now?
Reply to this commentLinkReport AbuseSee de Rugy's Hayek quote a few posts below….
I would be curious to know more about the metrics and instruments used to gather our knowledge of such things. Is there a "most reliable source" for understanding the roots of our process for measuring the economy? What, if anything, is left out of the measurements that might be relevant but not quantifiable--this being the phenomenon Hayek criticizes in the quote a few posts below….
Reply to this commentLinkReport AbuseInflation is real and it's high. I don't use stats, I use my grocery bill, my gas bill, my energy bill. Personally I don't trust any of your "numbers" or "calculations". I'll know when the economy is good and right now it's being manipulated by invented dollars and phony stats. But raise the debt ceiling, borrow some more and pretend.
Reply to this commentLinkReport AbuseYes, @S Jens, since 1978 the CPI has been changed to exclude food, commodities, and energy (including gasoline), among other things. Somehow I think that the average person bought food and gas back in 1978, and they still do today. So inflation is indeed upon us again.
Reply to this commentLinkReport AbuseRamesh, inflation for those of us who actually buy food at the grocery store and buy gas for our cars is way the heck up. Gasoline is double the price now that it was when Obama was inaugurated. DOUBLE! My husband bought a loaf of Italian bread from the grocery store for $6.99. Granted, it is an in-store bakery loaf, but $6.99???? And meat, let me tell you, here in the part of the country were beef is raised, it's a hard thing to see rib-eye steaks (choice, not prime) for $12.99 a pound - a year ago, it was $6.99 a pound.
From what I understand, the CPI no longer includes the price of energy and food, but does include the price of housing, which if you are in the market to buy a house, is way down from 5 years ago. However, most of us are living in our homes and are not buying homes, and our mortgage payments don't go down just because the value of our homes go down.
Also, the unemployment rate. There are so many people out of work who are not even counted anymore that I hesitate to guess what the real unemployment rate is.
I don't know if those of you who live on the East Coast in DC or NYC really understand what has happened out here. Come out to Kansas City to visit and check out the prices at Price Chopper, Henhouse, and HiVee. Then tell me you believe the government's inflation index.
Oh, and don't even talk about clothing!!!!
Reply to this commentLinkReport Abuse@ PubliusNV: why on earth were those items excluded from the CPI calculation? Seems they would be appropriate.
Reply to this commentLinkReport AbusePubliusNV : in other words they "rigged the numbers". So Ramesh can do Kevin Bacon in 'Animal House' and yell "All is well" while the crowd stampedes.
Reply to this commentLinkReport AbuseOne thing to keep in mind is energy is in the core number. Increases in energy prices are reflected in all goods and services. Excluding gas prices (at the pump) is useful when looking at long term inflation trends.
An interesting comparison is the MIT Billion Price Project. They look at a huge basket of goods available on-line and calculate a price index. Their number has been twice the official number for over a year.
The useful thing about the MIT approach is the slope of inflation. Unless something changes, we will be seeing 1970's style inflation by next year.
One thing that no one has every considered, it seems, is we can have deflation and inflation at the same time. Housing assets, for example, can experience real deflation while wholesale goods see real inflation. The official numbers are not designed to show that phenomenon.
Reply to this commentLinkReport AbuseGee, who to trust on economics... the Harvard economic history professor fresh off of stints at the London School of Economics and Oxford, or the guy with the B.A. from Princeton?
Decisions, decisions...
(P.S. No, I don't buy appeals to authority-- see Krugman, Paul-- but Ferguson is one of the few economists I trust. Perhaps he's wrong, but I'll give him the benefit of the doubt.)
Reply to this commentLinkReport AbuseIt might not be a completely fair comparision to look at how inflation was calculated 30 years ago with how it is calculated now. Nevertheless, government figures of low inflation, falling unemployment and a growing economy are given the lie by the widespread anecdotal evidence of falling standards of living as people are forced to make do with less to get by.
Frankly, government unemployment figures are semi fictional, ignoring huge numbers of people who do not work but are still not counted as unemployed and government inflation figures have less and less relationship to the actual costs of living.
Reply to this commentLinkReport Abuse"Or the real (that is, inflation-adjusted) size of the economy is shrinking rapidly. Instead of 1.8 percent real growth, in the last few months we’ve been going through something more like 7 percent real shrinkage."
Uh, *real* shrinkage could easily be associated with a combination of job growth and high inflation. In fact that's what the famous Philips Curve suggests. Or, in supply and demand terms, inflation shrinks real wages (labor costs less), and since the demand curve is downward sloping, more labor is hired.
Reply to this commentLinkReport AbuseIf the government rigs the CPI to understate the real inflation rate, it undermines the indexing of tax rates, resulting in more taxes paid. In addition, it undermines the indexing of Social Security payments. If I recall correctly (and I might not), part of the last SS "fix" was to change the CPI, since it was then claimed that the CPI overstated the actual inflation rate.
Reply to this commentLinkReport AbuseRamesh, what did you think the impact of sustained "quantitative easing" would be if not inflation? Didn't Bernanke et al say they were most concerned with deflation---the counter to which by definition is inflation?
When did NRO join the "free lunch" economic policy crowd anyway? I don't recall that being part of the latest fundraising pitch.....
Reply to this commentLinkReport AbuseWell, Ramesh, the last economic wisdom I recall from you is your full-throated approval of QE II as a solid win.
Reply to this commentLinkReport AbuseFerguson is hopelessly wrong and Ramesh is correct to call him on it.
The posters pretending that official CPI excludes food or energy are also hopelessly wrong and don't have the slightest idea what they are talking about. It includes all goods and services in the proportion people actually spend money on each type of good or service.
The change from the old way CPI was calculated was and is an improvement, because the old way demonstrably led to large errors that grew with time. The technical point is easily explained.
Modern CPI is chain weighted. That means in any given year it weights the prices for items in that year by the amount actually spent on that category of item in that year. You might think "duh", but the old and incorrect way of weighting expenditures was to use *fixed* weights for what was spent on various categories of items in some arbitrarily chosen base year or period - in 1980, or the averages over 1980 through 1982, say.
Since expenditure on 8 track tapes aren't as high as they were then, the fixed basket method as it is called leaves something to be desired in long term calculations.
The economic reality is that people spend more on items falling in relative price and spend less on items rising in relative prices. They seek bang for their buck. Expenditure thus migrates over time towards categories not rising as rapidly in price - though naturally, with limits set by necessities and feasible substitutions.
If oil rises in price and natural gas does not, utilities use more natural gas. In a fixed basket weight system, this adaptation in ignored. In a chain weighted system, the weight given to natural gas prices will increase because more is actually being spent on it, while the weight given to oil will decline somewhat, as less is actually being spent on it.
Chain weights are clearly superior for tracking what people actually pay for the goods they actually consume.
Those looking to allege higher inflation than chain weighted CPI detects, however, want to remove all the effects of such adaptation.
What Ferguson is saying isn't even that prices would have risen 10% in 2010 meaured in unchanged weights from 2010. He is alleging that they rose that much in the basket of goods actually consumed in 1979 or so. Which is about as important and the rising price of buggy whips.
The reality is, commodity prices are collapsing hard as we speak, and those who have been predicting hyperinflation for a decade solid without taking a breath are grasping at straws. They have about as much credibility at this moment as the guy on the corner in the washboard pointing at the sky.
Reply to this commentLinkReport AbuseI recommend reading this Corner post from a year ago:
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