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Discussion: (106 comments)

  1. Once nominal interest rates go back up, I’ll believe we have some inflation.

    1. With the government “printing” so much money, it’s hard to see how we could avoid inflation, and imho, Amity Schlaes is a very valid author.

      1. Both statements are valid; it IS hard to see how we’re avoiding inflation, and Amity Schlaes is a great author. Neither of those addresses any of the data points in the article.

        It’s not like it’s IMPOSSIBLE to print a huge amount of money and not get inflation for an indefinitely long time. Japan did it and continues to do it. It’s not like it’s IMPOSSIBLE Schlaes has been taken in by a fraudster. Smart and honest people get taken in by fraudsters every day.

        And this is exactly what the actual evidence suggests.

      2. “With the government “printing” so much money, it’s hard to see how we could avoid inflation, and imho, Amity Schlaes is a very valid author.”

        She was too cranky for Bloomberg, and Megan McArdle works there.

    2. EM Toohy

      Interest rates? Seriously?

      You are going to watch interest rates while the fed is still buying bonds and manipulating the market?

      Buddy, you really need to stop smoking that stuff. Even if it is mostly legal, it still not good for you. (Or your investment decisions!)

  2. Matthew Grubesic

    Greenspan changed the CPI calculation in the 80s. The “let them eat hamburger” theory has created an economy based on the accumulation of debt. This kept interest rates low inflating everything the consumer purchased. As long as housing prices inflated the great experiment continued, until 07-08. That change in CPI has led to the destruction of main street while creating wealth for the corrupt small groups that control Washington, Wall Street and the to big to fail banks. The great experiment did not work if it did America and the rest of the world would not be engulfed in this sclerotic economy.

  3. Mike R.

    Isn’t there some degree of selection bias in using only online prices? Why should we necessarily think that prices of goods that people tend to buy online will be subject to inflation at the same rates as goods that people tend not to buy online?

  4. If she is worried about vacation with no tenderloin, maybe what she really needs to do is take up rain dancing!

  5. Your first premise about the 1979s is wrong. The period of the 1970s was hit by STAGFLATION. This is a word that is rarely used these days, but back in the 1970s student economists were aware of its meaning.

    The issue back then was complex because there were a variety of factors that were in play:

    1. the oils shocks of the late 1960s and 1970s drove up fuel prices.
    2. there was an increase in the demand for higher wages
    3. at the same time there was an increase in interest rates.
    4. All of the above fuelled the increase in prices.

    The factors involved in this particular scenario varied from country to country. What we had was a world-wide stagflation that hit not just in the USA, and included countries such as Australia.

    This STAGFLATION actually showed that the measures recommended by Keynes had a use by date, and that some of his premises were wrong.

    Price inflation is fuelled by many things, including of course an increase in the costs of production. In what I have outlined above the all important cost of production is related to the fuel inputs i.e. the cost of transporting goods and services at a stage where the final product has not been completed, and then again when the product is on-sold to another enterprise. The other input is wages. In the 1970s the cost of wages was spiralling out of control and it was reined in through the application of a wages freeze (at least in my country that is what happened).

    The issues today have some similarity especially with the costs of oil production as well as the cost of other fuel. This is a matter of how the means of production of these fuels is being controlled. A new component is the increasing cost of electricity generation through the use of inefficient means such as wind and solar power. The cost of such inefficient methods of generating electricity is far greater than the income that is gained from the use of electricity. The losses cause the price hikes, and in turn the price hikes cause an eventual shift in the demand curve.

    The other thing to note is that the basket of goods that was used to measure inflation up to the 1970s has been changed so that a meaningful comparison cannot be made between the two periods.

    Another issue that I would have relates to online goods vs. store purchased goods, and there is another variant because there is also a country bias when it comes to the purchase of goods. The best way that I can explain this bias is to use one example that shows the effect of price discrimination on world-wide basis. The product is the CPAP machine. This item and its components were made in Australia by RESMED. (Baulkham Hills to be precise). It is cheaper for an Australian resident to purchase parts from the USA online including paying for the cost of freight than it is to purchase the spare parts in Australia. This is only one example of price discrimination that keeps prices artificially high. However, these items are not covered in the calculation of inflation.

    There are many other items that are no longer considered in that basket of goods, and all of them have risen rather than fallen.

    However, there are many examples where the price of goods have significantly fallen (Apple products are an exception to the rule). A lot of electrical goods manufactured in Asia usually start out at a high price when they first hit the market place. What normally happens is that as demand increases the price of those goods drop because the supply has continued to be greater than demand, and the larger number of units produced plus the exchange rate has led to a reduction in the price on a domestic market. This, of course has an impact on the measure for inflation.

  6. There is inflation. The proof is in my grocery bill, gas bill, clothing bill etc. I do not need to look at third party data, my own experience proves it.

    1. Sepiano

      Hi Bond – I don’t know your particular situation, but could it be that your wages have not risen, or your investment/interest income has not risen or has declined over the last few years, while prices continue their slow, steady increase? The phenomena known as “the rich get richer, the poor get poorer” often LOOKS LIKE inflation to the folks on the poor end of that stick. But that isn’t the same thing as the technical definition of inflation, where the exchange value of money changes (and affects BOTH wages and expenses). Does that make sense?
      I would not dispute that your cost of living has gone up, just the word used to describe this and the cause that the word “inflation” implies. There are more than a few politicians demagoguing the use of the word “inflation” and this inaccuracy opens them up to legitimate criticism, as noted by the author of this post. I could see where the distinction might be too fine or technical for many, though, which presents a delimma in the practical world of campaigning.

      1. JMWinPR

        I’ll bite. When does ordinary run of the mill annual COLA’s resulting from Federal Reserve printing presses running non stop for 20 yrs, become inflation? Or is it like the placing a frog in a pot of water and then turning on the heat?

        1. Sepiano

          I’ll bite back.

          COLA’s are determined from official computations of the inflation rate, not from Fed policy. So I think you are making a bit of a leap there. Fed expansion of the money supply may or may not result in inflation. There are a lot more factors involved, such as whether we are experiencing a Japanese style “liquidity trap”, in which monetary injections are like “pushing on a string” (I quote from wikipedia article on Inflation).

          Regardless, inflation affects the prices of goods AND services, and that by definition includes the payments for services commonly known as “wages”.

          I’m going to stick with my assertion, people here are confusing the rise in prices relative to their incomes (very real) with price changes that result from inflation. Middle class wages have been quite stagnant for the last 30 years. This has more to do with middle class workers in the USA losing bargaining power than with inflation or globalization. (For example, German workers seem to be doing okay in the face of global wage pressures.) But conservative billionaire donors like to use inflation as a scapegoat as it deflects attention away from their self-serving contributions to middle class wage stagnation.

          1. JMWinPR

            OK, may we look at it from another point of view. Can the Fed increase production, in fact build more presses and run them harder with no ill effect?

            This is the most informative thread in a long time, thanks to all

          2. Sepiano

            JMWinPR “Can the Fed increase production, in fact build more presses and run them harder with no ill effect?”

            The Fed has already quintupled the size of its balance sheet since 2009. http://www.clevelandfed.org/research/data/credit_easing/index.cfm and the sky hasn’t fallen as predicted by some. Instead inflation has stayed pretty low and bond yields are staying low, as predicted by Bernake, Yellin,Krugman and others. You’d have to know more than I do about this so-called “liquidity trap” status to fully understand why Krugman’s model works and various others have been so wrong.

            But maybe your question is also somewhat moot? At this point, the Fed is in the process of slowing down the “money printing” it is doing, not accellerating. And if things do heat up dangerously, it can always go back to traditional use of the interest rate throttle. No reason to do so until it’s shown to be actively needed, unless one favors helping rentiers profit over stimulating the economy and helping the unemployed, all other things being equal.

          3. JMWinPR

            We’ll find out eventually.

  7. Joe Bannister

    Simple nuttiness.

    If inflation is really 10 percent, then our entire capital markets system is run by Men from Pluto.

    So, sophisticated investors are tricked, and lending out trillions of dollars for 2 percent interest, duped, and not aware they are really losing 8 percent a year to inflation?

    Ms. Shlaes is an example of the IQ-deficit on the right-wing when it comes to inflation and monetary policy.

    1. JMWinPR

      Another measure is the quantity of a product.
      At one time you would buy 1/2 gallon 64 oz. Then it went to 1 3/4 liters, 59 oz; now the container is 1 1/2 liters 51 oz. The price remains constant. As for your comment about investments at 2%, methinks you should read up a bit more. Sophisticated investors deserted interest bearing accounts when the housing market collapsed. They are currently driving the stock market to unprecedented levels.
      While inflation hasn’t hit as it did in the ’70′s it is still very noticeable for those on a fixed income. The breadbasket has been manipulated so that Congressional Staffers get X COLA, but Social Security and Military pensions are substantially below X.

      1. jehrler

        Supply and demand in liquid and competitive markets would indicate that if investors were running from interest bearing securities then rates would be rising to pull some back.

        That is not happening and hasn’t been happening.

      2. David Margolies

        The BLS takes quantity into account in its calculation of price changes. Were you under the impression they did not? See http://stats.bls.gov/cpi/cpifaq.htm#Question_8.

        1. JMWinPR

          BLS, Bureau of Labor Statistics? You mean the group of folks who massaged the unemployment statistics prior to the 2012 election? Once someone lies, gets caught, and then make no changes to prevent lying in the future, there ensuing data is suspect. Find another source, maybe the IPCC?

    2. jehrler

      Exactly. It is funny that Conservatives have such belief in markets yet they believe that the highly liquid credit markets could get this wrong for, seemingly, decades.

      So which is it…is inflation out of control and markets are totally incompetent or is it inflation is under control and, over time, the markets get it right?

  8. Michael Smith

    I see no way to escape the law of supply and demand. If government is massively expanding the supply of dollars way above any possible increase in demand, then ceteris paribus the value of each individual dollar will fall. However, ceteris paribus is not the current situation. In earth’s global, multi-billion participant division-of-labor economy, there are huge competitive pressures (at least in the less government regulated markets) to reduce costs and, consequently, there is an ongoing stream of technological innovations being implemented to achieve precisely that.

    Thus, two competing pressures regarding prices. I think the current situation is that absent the Fed’s inflation, we’d see more markets like consumer electronics, where prices are falling steadily even as products become of ever-higher quality with ever-more features. In other words, you are being robbed blind by the Fed — just not of what you have now, but of what you could have in a truly laissez-faire capitalist economy.

    1. I’m sorry but this is just insane or incompetence… you’re arguing that if only the fed raised interest rates then all products everywhere would fall in price drastically. It’s called the zero lower bound. Look it up. Please. There’s no inflation because there’s a savings glut because real interset rates are negative. Thank you for playing….

      1. Guys:

        If I remember correctly, Henry Hazlitt wrote that the “law of supply and demand” is an illusion or a misnomer, because the only reason that “suppliers” supply is that they themselves want to consume.
        His “Economics In One Lesson” is a book that everyone should read.

  9. Henry Hazlitt wrote: “Inflation is an increase in the quantity of money and credit. Its chief consequence is soaring prices. Therefore inflation—if we misuse the term to mean the rising prices themselves—is caused solely by printing more money. For this the government’s monetary policies are entirely responsible.”

    1. Did he mention anything about the velocity of money?

      1. Yes, Hazlitt did write about the velocity of money.

        Here is the summary to a rather long essay:

        To sum up:

        1. Velocity of circulation is a result, not a cause. It is commonly a passive resultant of changes in people’s relative valuations of money and goods.
        2. Velocity of circulation cannot fluctuate for long beyond a comparatively narrow range, because it is closely tied (except for speculation) to the rate of consumption and production.
        3. V does vary with the volume of speculation, but an increased volume of speculation may accompany either rising or falling prices.
        4. V is never an independent factor on the side of money, because the transfer of goods must speed up, other things being equal, to an equal amount. It is just as valid to think of the velocity of circulation of money being caused by what happens on the side of goods as by what happens on the side of money.
        5. Actually it is psychological factors — desire to buy and sell, produce and consume — that determine V.
        6. Monetary theory would gain immensely if the concept of an independent or causal velocity of circulation were completely abandoned. The valuation approach, and the cash holdings approach, are sufficient to explain the problems involved.

        The Velocity of Circulation
        http://mises.org/daily/2916

        1. From the article linked: “It is assumed that, other things being equal, prices must change in proportion to the changes occurring in the total supply of money available. This is not true.” I agree with this.

  10. Hank Hazlitt didn’t know what he was talking about. Inflation is across-the-board price increases. A jump in meat prices because of drought and reduced meat production is not inflation. A decline in computer prices because of mass production and technical improvements is not deflation. A growth in money supply to support business in a larger population is not inflation.

    1. John according to your definition, “Inflation is across-the-board price increases.” we never have inflation since prices never rise at a uniform rate across the board.

      Re-read Hazlitt’s “Inflation in One Page”

      Also take a look at the growth rate of the money supply. (Hint: it is growing far faster than a growing economy and/or a growing population would warrant.)

      1. He meant increase in the sum (or average) of across-the-board (i.e. in-aggregate) prices. Read for understanding, not nit-pickery.

        1. Not intending to nit-pick. (Maybe John could write for clarity?)

          I was responding to someone who is clearly confused by some variation of Keynesianism to the point that they do not understand that a rise in prices is a result of (monetary) inflation.

          The Keynesian love affair with aggregate statistics has distorted people’s understanding of economics.

          “Inflation is always and everywhere a monetary phenomenon.” Milton Friedman

          1. Fred Fnord

            “Not intending to nit-pick. (Maybe John could write for clarity?)”

            Funny, everyone else seems to have understood it. Perhaps instead you should read for ‘maybe he has a point’ rather than for ‘how can I misinterpret this into something I can refute?’

          2. The initial point that I was attempting to make and nobody seems to have noticed or understood is that rising prices is a result of inflation (money printing). Inflation is not rising prices. Inflation is excessive money printing which leads to rising prices. The cause (money printing) leads to the effect (rising prices).

            This used to be something that conservative types generally understood.

            “Economics in One Lesson” is classic.

      2. Read a little more carefully the two sentences you posted: “Inflation is across-the-board price increases”; “prices never rise at a uniform rate across the board”.

        Notice how only one of those sentences, the one you made up, includes the phrase “uniform rate”?

  11. John Glover

    It is pretty amazing to read the comments here. These people are all up in arms about the deadly inflation around the corner. But they can’t even agree on a definition of what inflation is!

    1. JMWinPR

      We all know what inflation is, “too few goods being chased by dollars that are worth less.”
      The issue is the metric used to measure. I may be wrong, but the folks in charge seem to keep changing the measuring tape. This makes it difficult to determine how bad the situation is. However there are a couple of things, I bought my first new car in 1970, Ford Maverick 1995 3 speed on the column and some sort of 6 cylinder engine. 2 years later I bought a Celica 4 spd 2 ltre, I think it was 2700 paying cash both times. In 75 I could buy a sack of groceries for about $7. Today the bag is much smaller and the price is about $15. The bag however is reusable.

      1. drwerewolf

        So by your guesstimate based on the $7 bag of groceries that is now smaller but costs $15, let’s do a guesstimate that food prices have tripled over the past 39 years (1975-2014). Annualize that and you get an average inflation rate of 2.8 percent.

        If inflation had really been running between 5 and 10 percent all that time, let’s say 7.5 percent on average, then you $7 bag of groceries in 1975 would now cost … let’s see, 1.075 ^ 39 = 16.8, so $7 x 16.8 = $117.60.

        Are you paying $117.60 per bag for your groceries these days? No? Then inflation hasn’t averaged 7.5 percent since 1979.

        1. JMWinPR

          You seem to have a penchant for cherry picking the data, and even then using only part of the information. Remember the paper bags from days of yore, they were 1 1/2 to 2 cubic feet, today’s reusable bags are smaller. Maybe a cubic ft at most. In addition you failed to ask if there were any differences in buying choices. I no longer drink milk at 5.60 a gallon (P.R.) prices but use a substitute. Steak is once a month and chicken or veggies are the norm. Dinners out have gone from once or twice a week to once of twice a month. The income has remained constant.

          1. Robert Weiler

            Pick any consumer item you want and plug it into the formula for compounding and see what you get. Williams’ inflation rates are simply impossible to reconcile with actual real world prices.

          2. Fred Fnord

            Uh… no. He didn’t ‘cherry pick’ data. How about we take some exact numbers?

            A standard paper grocery bag is 12″ by 7″ by 17″. If you multiply these out, that’s 1 foot * 7/12 foot * 17/12 foot, which is 0.83 of a cubic foot. A standard cloth tote bag (the ones people use for grocery shopping, unless you are a masochist who uses 40 tiny little ones) to be around 0.51 of a cubic foot.

            So. Your bag used to cost $7/0.83 or $8.40 per cubic foot. Your new bag costs $15/0.51 or $29 per cubic foot.

            His estimate was that food prices had tripled in that time. Now, let’s see what $8.40 times 3 is. Why, it is $25.20! Not EXACTLY right, I admit, but then, I did pick an arbitrary cloth bag that I thought was reasonably representative. If I’d picked a slightly larger one, I could have made it come out EXACTLY right. But in any case, if you think that the difference between 2.8% average inflation and 2.87% average inflation makes his argument completely invalid, and you’re accusing HIM of cherry-picking, I mean just good lord.

            As for the rest, it’s a clear attempt to cover your ass. You intentionally picked beef because it is one of the few food commodities that HAS increased significantly in price, even adjusted for inflation, over the last 20 years. Speaking of cherry-picking.

  12. Shaun P

    Price of Shadowstats subscription in 2006: $175.

    Price of Shadowstats subscription in 2014: $175.

    Can’t you just feel all that inflation!

  13. Shaun P

    Price of Shadowstats subscription in 2006: $175.

    Price of Shadowstats subscription in 2014: $175.

    Can’t you just feel the inflation!

    1. JMWinPR

      “What I do disagree with is bad statistical methodology. Shadowstats is built on the belief that the Bureau of Labor Statistics changed their methodology in the 1980s and 1990s, and that if we were using their original methodology the level of inflation would be much higher. Shadowstats presents what they claim to be the original methodology. But Shadowstats is not calculating inflation any differently.They are not using the 1980s or 1990s methodology that they believe would be higher. All Shadowstats is doing is taking the CPI data and adding on an arbitrary constant to make it look like inflation is higher!’ Just because they overcharged for bogus information in 2006, and have not raised the prices for additional bogus information, does not mean there is no inflation. Maybe enough folks have determined their product is worth less and demand for their product has declined.

  14. eddie-g

    The big tell in the article is this line – “The Consumer Price Index used to be simple: The government measured the same basket of goods every year.”

    You know, if you want to argue that a 1979 basket of goods is as representative of a consumer’s spending then as it is today… there’s really no hope. And further, if you actually think markets themselves are a good thing, that the price-discovery process and the supply-demand dynamics are at all meaningful, then substitution effects must surely be factored in to inflation calculations.

    But yes, the true implications of Shadowstats – that if accurate, we’ve been in a continuous 30+ year depression – should be enough to strike down their credibility. Quite amazing that Amity Shlaes hasn’t figured this out.

  15. brummagem joe

    Wow Pethokoukis stating reality. I can’t believe it. His penultimate para about the long Reagan recession implied by the Williams numbers is both accurate and very funny. The problem of course is that the fruit cakes like Shlaes are the ones calling the shots in today’s GOP. It’s not a great prognosis for a serious national party.

  16. Robert Weiler

    It’s hard to know what people are using their brains for when evaluating Williams’ claims as it is pretty easy find examples that show he has absolutely no idea what he is talking about. For example, I bought a 1991 Honda Accord EX for $13000. If Williams were correct and the ‘real’ inflation rate since than was been 5%, that car would cost $40000 today. If you take his extreme claim of 10%, it would be $116,000. It actually costs $25,000. Pick any consumer item you want and plug it into the formula and using Williams rates and you will get prices far, far higher than what they actually are. Why do people persist on believing something that can be shown to be completely wrong with simple math?

  17. Shlaes either misunderstands or willfully misrepresents the substitution principle. It’s not about replacing a better thing with a poorer-quality thing because you can’t afford the former — “if steak is expensive, you buy chicken.” Instead, it’s about *relative* prices: if steak is currently twice as expensive as chicken, and tomorrow it’s only half again as expensive as chicken (whether because steak has gotten cheaper or chicken more expensive), you’re going to shift consumption from chicken towards steak. And vice versa.

    “The result of their fiddle is that inflation looks lower than it would otherwise.” True. One could equally well say “the result of using a fixed basket, ignoring substitution, is that inflation looks higher than it would otherwise.” But which is a more realistic, informative picture of inflation?

  18. Andrew Baldwin

    This is a good rebuttal to Amity Shlaes and to the arguments of John Williams on which she draws. I do have a few caveats with this article though. First, it doesn’t indicate that as far as index formula goes, the CPI-U doesn’t show too little inflation, it shows too much. This is detailed in the BLS report that the article links to. Second, while consumer price inflation and the inflation shown by the GDP deflator are not going to be far apart, it is an error to treat them as being identical as Mr. Pethokoukis does. If he realized that they were different and that the GDP deflator is a far inferior measure of inflation, he might get over his unfortunate infatuation with nominal GDP targeting. Third, while John Williams is definitely a crank, his argument that the BLS made a mistake in abandoning the net acquisitions approach to owner-occupied housing (OOH) used in the CPI in the early 1980s does have merit at least insofar as we are discussing an inflation indicator to be used by the US Fed. The OOH component used in the CPI-U prior to 1982 had a dysfunctional mortgage interest component that should have been excised, and a house price index in need of reform. It should have been modified, not discontinued. Both the PCE deflator and the CPI-U exclude housing prices. They are both quite unsuitable for use by the US Fed in targeting inflation.

  19. Andrew Baldwin

    This is a good rebuttal to Amity Shlaes and to the arguments of John Williams on which she draws. I do have a few caveats with this article though. First, it doesn’t indicate that as far as index formula goes, the CPI-U doesn’t show too little inflation, it shows too much. This is detailed in the BLS report that the article links to. Second, while consumer price inflation and the inflation shown by the GDP deflator are not going to be far apart, it is an error to treat them as being identical as Mr. Pethokoukis does. If he realized that they were different and that the GDP deflator is a far inferior measure of inflation, he might get over his unfortunate infatuation with nominal GDP targeting. Third, while John Williams is definitely a crank, his argument that the BLS made a mistake in abandoning the net acquisitions approach to owner-occupied housing (OOH) used in the CPI in the early 1980s does have merit at least insofar as we are discussing an inflation indicator to be used by the US Fed. The OOH component used in the CPI-U prior to 1982 had a dysfunctional mortgage interest component that should have been excised, and a house price index in need of reform. It should have been modified, not discontinued. Both the PCE deflator and the CPI-U exclude housing prices. They are both quite unsuitable for use by the US Fed in targeting inflation.

  20. | July 17, 2014 at 8:12 pm

    JMWinPR “Can the Fed increase production, in fact build more presses and run them harder with no ill effect?”

    Sepiano: “The Fed has already quintupled the size of its balance sheet since 2009. http://www.clevelandfed.org/research/data/credit_easing/index.cfm and the sky hasn’t fallen as predicted by some. Instead inflation has stayed pretty low and bond yields are staying low, as predicted by Bernake, Yellin,Krugman and others. You’d have to know more than I do about this so-called “liquidity trap” status to fully understand why Krugman’s model works and various others have been so wrong.”

    Please note that (a) the Fed *quintupled*, not just increased a bit, and that (b) the current inflation hawks were unanimous in predicting not only increased inflation, but radically increased inflation/hyperinflation.
    They were not just wrong, but hugely wrong.

  21. I keep seeing people bring up the Billion Prices Project as ostensible proof that the CPI isn’t that inaccurate. But here’s the trouble: In a growing economy, prices should be falling, not holding steady or growing slightly. As new technology and innovation offer new efficiencies, prices become cheaper. TVs are becoming cheaper, even as the quality becomes better. So if the BPP shows 2 percent inflation, that could mean we would actually be experiencing decreasing prices were it not for QE1/2/3/eternal 0 percent interest rates. No one knows because it’s impossible to measure.

    This is why inflation historically referred to an actual increase in the money supply — not prices.

    Further, as today’s economy sucks, a lot of industries are basically folding. That means retailers are pushing products at market-clearing prices (the lowest priced needed to hit before consumers start buying — even if the retailer loses money). So when you have that happening in the same index as goods experiencing double digit annual inflation, the overall headline rate is tempered.

    It used to be possible for a man working a blue collar job to buy a home, car, raise a family, have a stay at home wife, put kids through college, take vacations to Europe, and retire with plenty of money to spare. Today, this is obviously impossible not only for blue-collar workers, but also very difficult even for upper-middle class families with two working parents. Americans know just from their own life experiences that the value of their paycheck buys less every year.

  22. Cornelius C. Cornelius

    To determine what side one might be on in this econonerd fight you only need an answer to the following question: who in your household does the shopping for food, clothing, etc. It would seem the Pauly Walnuts and Jimmy AEI have the luxury of catching up on Honey Boo Boo re-runs while their better halves visit the local Costco. Otherwise they might be more equipped to comment on such matters, and would know off-hand that any economic measure reported by the government isn’t worth it’s weight in beans and rice. Which incidentally is about the only thing a working family can afford to eat these days.

  23. David Brown

    I read her article and felt that it focused on the “adjustments” made to CPI. I interpreted it as an argument for “offical” CPI versus “cash” CPI. A car that used to cost $20,000 now costs $22,000 but is 10% better. “Offical” CPI is zero but, as a consumer, my “cash” CPI is $2,000. I can quickly go broke on a cash basis even though CPI is zero!

  24. Tad Porter

    Her books on economic history are no better.

  25. Anyone who does their own grocery shopping knows inflation is real and rising.

  26. Doug Damon

    I am a big fan of Mr. Pethokoukis commentary. I do have a problem with this article. From a macro standpoint maybe there is not a great deal of inflation. From a personal consumer standpoint it does not seem accurate. Many grocery items, particularly meats, seem high, gasoline is high, health insurance continues to rise. Six years ago my premium with a $500 deductible was about $500 per month. Today the premium with a $5,000 deductible is about the same.

    Since 2008 our overall household expenses are about $5,000 more for a family of two.

    1. Meat prices have increased, but the CPI has captured that. Food prices have actually not gone up as much as they might have, given the many factors that were supposed to add to them this year (drought, trouble in Ukraine, pig virus, etc.). Gasoline has rebounded considerably since the depths of the recession, but that’s due to better global economic conditions and returning demand.

      1. Your grocery bill should not be up much if you purchase the same way the government compiles the stats. The CPI changes the mix in the basket as peoples buying habits change, if you switch from Beef to Chicken they count more chicken, in reality its a way to adjust the statistic to make it look better. Inflation is hard to measure but I think everyone would agree that if the raw materials cost more the product will cost more. The commodities index is up about 30% over the last 5 years. My favorite measure is the Big Mac Index. They are sold all over the world and include the cost of labor, materials, transportation, real estate, etc and the price in the US has gone up 5% a year since 2009. Taxes are up and so is healthcare. No one can deny that we have more costly regulations being added, whose burden is transferred to customers. So while I agree that we are not likely to see rapid inflation, most people have lower disposable income. Less money to spend equals slow growth.

        1. Joel Lumer

          Dear John, the Sunday/Wednesday hamburger has gone from .39 to.49 and the Sunday/Wednesday cheeseburger has gone from .59 to .69. The McDouble has gone from 1.00 to 1.19. All within the last year. In addition, senior coffee has gone from .69 to .89. And as the price goes up, the 7% you pay in sales tax also goes up. The Big Mac is generally considered overpriced by people who regularly eat at McDs, so you might be more accurate if you monitor the price of burgers, cheeseburgers, McDoubles and drinks.

    2. David M

      Well who are you going to believe. Paul Krugman and Jimmy or your own lying eyes. Only a weak kinded idiot would believe these government statistics. What in your life is not going up in price at a very aggressive pace. Healthcare, gas, utilities, food, insurance, education, automobiles are all rising. The only thing that is not totally out of control are flat screens and Chinese electronic junk.

      Wait until we print enough money to cause the world to get totally fed up with us. Once the dollar collapses you won’t even be able to afford the Chinese electronic junk.

      In all of economic history and over 6,000 fiat currencies that have failed due to over printing, why is there any debate to this insanity.

      I guess the Fed, with its wonderful track record, now has it all figured out as it makes these monetary policy decisions flying by the seat of its pants.

      A blind man can see that this is going to end very badly.

      1. All currencies–fiat, gold-standard, bimetallic standard–have failed. Including all the ‘private’ currencies of the 19th century US. Fact. Nothing lasts forever. Well, except for the misconceptions of Austrian economics.

    3. Joel Lumer

      Dear Mr. Damon: you are spot on. From grocery store today: 1.75 for a quart of skim milk; 3.29 for a bunch of broccoli; 6.99 for a 5 lbs. bag of grapefruit; and the list goes on. This was not at a fancy and expensive “organic” grocery, but rather at Publix, which is a supermarket used by millions of people in Florida. Affluent people with six figure salaries don’t notice and don’t even look at prices. Regular people notice and see how much prices have gone up. As for substitution, why should someone be forced to switch from broccoli or spinach or skim milk, for example, and, in fact, they don’t. If you eat an orange at breakfast, you generally will continue to do so, regardless of what the economic experts and BLS bureaucrats claim. Bottom line: the common people who spend a higher percentage of their income on weekly groceries are getting the short end of current economic conditions and the apologists for the rich and the government establishment, like Mr. Pethokoukis, continue to provide rationalizations to obfuscate the obvious.

  27. Michael

    There are many forms of inflation. CPI only measures goods inflation in present time.

    When the Fed expands the money supply, the extra liquidity has to end up somewhere in time and space. With goods inflation held relatively steady by globalization and the increased world wide supply / competition among suppliers of commodities and consumer goods, CPI is held in check. Supply elasticity has increased through global competition.

    But assets are less affected by supply elasticity. There has been a lot of asset inflation of various forms (stocks/bonds, housing, art, etc) since the 1990s.

    Also in time, asset inflation increases the wealth of already wealthy property owners. But it reduces ability of non-property owners to start accumulating property, leaving them poorer long term.

    Thus Schlaes has a point in that monetary expansion is perversely inhospitable to the “forgotten man” of the middle class, who is left a wage slave less able to join the American dream.

    1. Exactly. When are pundits going to wake up and realize that the expansionist monetary policy is a crock and is the cause of our boom/bust cycle? How can people not realize that just creating money out of thin air does not lead to prosperity?

      The same pundits and talking heads who are pushing the expansionist agenda are the same people who were caught off guard by the financial crisis. They should have lost all credibility, but instead their view is pushed as orthodoxy.

  28. Jerome Barry

    Jim P. I’ll take my SOB economist (Williams) over your SOB Economist (Krugman) any day.

    1. Sepiano

      My guy, right or wrong! You are a loyal follower, which is worth something….to the Koch brothers.

      1. Aggas,Trent

        Or in your case George sorros

        1. Sepiano

          You’ll have to spell that out for me. Soros makes his money via arbitrage, not by selling products and services that contribute greatly to climate change, not by pushing policies that weaken unions and otherwise put downward pressure on wages. How does Soros financially profit when he contributes to Medical Marijuana or Gay Marriage propositions? Koch’s want people to worry about the “inflation” bogeyman, not about how they are vacuuming up record profits at the expense of the Middle Class, the economy and the environment.

          1. Chaosmos

            Mr. Soros is a remarkably gifted, complicated and implicated man, as are many who hold a life-long passion of radically changing the world for the better (even if that means crashing and destroying legacy systems that are not sustainable). However to say he just profits from arbitrage and to disregard his immense investments in petrochemicals and other anti-green energy sector entities is simply wrong and profoundly uninformed.

            Let’s stop drawing figures like Soros and the Koch brothers out as if they were cartoon characters. If anything, both are remarkably similar in their capacity to profit from capitalist acceleration and political instability.

          2. Wow Sepiano, you sound like you might want to do a bit of research on the Koch brothers and look up who they give money to. Since your reading this article I have to assume your an intelligent person. I think you would do yourself a huge favor and read Milton Friedmans ” Free to Choose”. It will give you a better perspective on where the other side agrees with you and where they differ in terms of policy. I do think the book will enlighten anyone as to why the US economy is still in a funk.

          3. Sepiano

            John The Kochs have made some nice donations here and there, such as to KQED and the Opera. But the bulk of there giving has been to front a huge campaign to undermine or obfuscate the science of climate change, in an effort to protect their coal burning operations’ profits. They also give a huge amount, via various conservative front groups to candidates that support policies that help protect their wealth and exacerbate the current income disparity. They are big “dark money” donors, as has been coming to light by some of their contributions in California campaigns. Many “moderate” Republicans are very fearful of being primaried by folks receiving Koch bucks, and taking up kooky “I’m not a scientist” stands on Climate change and other issues in order not to raise their ire. I’ll see if my local library has the Friedman book you recommend. I get the impression the Hayek loving Austrians don’t think overly much of Friedman, though. I’ve read a criticism that he overestimates the power of the Fed to prevent recessions via controlling the money supply.

  29. this article is a bunch of baloney, every time I go to the grocery store or gas station or pay my bills I know for a fact that inflation is bad, real bad… and no one’s wages are rising.

    the author of this piece is either an idiot or a propagandist.

    1. Sepiano

      Shoey — Inflation is a great bogeyman. But I ask you, if inflation is so rampant, why isn’t your income also inflating? Inflation is the increase in the cost of BOTH goods and services, and services include money paid for services rendered (aka wages).

      Clearly something else is going on, and I think the inflation hawks are deflecting attention away from the true causes of our current economic problems. Ever notice how all their policy recommendations favor billionaires and millionaires (the rentier class in particular) at the expense of the Middle class?

      1. Mark Ross

        Inflation is not really the increase in the cost of stuff. It is the loss of value of fiat currency (a.k.a. money). An ounce of gold will buy you the same amount of pork bellies today as it would 100 years ago. The problem with gold is that it doesn’t directly reflect the aggregate increase of wealth, if any.

      2. You mistakingly believe that ALL goods and services have to increase when there is inflation. During any given period of time, prices for goods and services move in both directions.

      3. Servius

        Wages do increase but slower as the money takes time to wash through the system. The last people to get it are the little people who get screwed while the more connected are able to buy products with cheaper money which bids the prices up.

        1. Peter kondos

          Don’t cry for me Argentina,err, america…salaries don’t keep up with inflation…middle class can’t pay bills…food stamps don’t keep up with inflation…poor riot in the streets…middle class lock and load weapons behind locked doors…evita,err Hillary is elected by illegal immigrants while we all cry: why didn’t we listen to rick sateli and amity schlaes.

      4. juandos

        But I ask you, if inflation is so rampant, why isn’t your income also inflating?“…

        Wow! What an incredibly silly reply sepiano, what employer (this even applies to the self employed) guages an employee’s pay via the inflation rate?

        ersonally I think shoey might be onto something with the comment he made…

        I know for a fact that John Williams’ inflation numbers more closely match my own than the fairy tales spilling forthing from the BLS and Census…

        1. Sepiano

          juandos Employers that don’t want their employees to quit and take better paying jobs elsewhere DO keep an eye on inflation rates. Or if not that, they at least keep tabs on going rates for the employees they hire. Certainly my part-time “day job” boss has been regularly giving us raises. (I have two small C-form businesses that I created and work, in addition to the salaried work I do on Saturdays.)

          I don’t care if all you got is the insult “silly.” I don’t dispute that your expenses are going up and may be doing so at a trajectory closer to Williams. Could very well be true. But if your income is not also going up, I’m afraid you are just getting reamed, plain and simple, and apparently taking it like a dog (laying down), convincing yourself this rip-off is only natural or something like that.

          And that is the point. “Inflation” is about the value of the dollar, not the value of the work you perform. With true inflation, more of our weaker dollars would be needed to compensate the work you do to match its value. But that is not happening. Employers are in effect giving you pay cuts by not matching inflation, and they are getting away with it.

          And THAT is a huge problem in this economy, because if the poor and middle class don’t have as much to spend, continue to be squeezed like this, they buy less and fewer man-hours are required to make the reduced number of goods being bought which means employment stays weak.

    2. Chaosmos

      Amity’s perspective reflects the disconnect between pragmatics and progressive academic idealists. In Amity’s world (shared with millions of lower and middle class moms, for instance), a box of Velveeta has gone from a suggested retail price of $4.99 with a retailer shelf discount bringing it down to between $3.29 and $3.49 back in 2008, to a shelf price of $6.99 with few discounts ever at the local Wal-Mart in 2014.

      Amity’s pragmatism extends across the grocery market to the basket of products purchased and accounts for the shrinkage in packages, while the academic economists (who are invariably identified by their allegiance to an economic ideology society and political philosophy) advance the theoretical idealism of models fraught with framings that reify the materiality of actual consumer costs with the explanatory reinterpretation of the respective economic model. In a sense, Amity is an ally to theorist Slavoj Zizek in pointing out the effectuality of the real inflation vs. the overcoding Ideology that precludes the doxological programming of the Trained Economist from understanding what is truly felt by America’s non-elite classes.

      If one is unable to “take off the glasses of ideology” to see the real price inflation of lower and middle class goods, that dilemma merely serves to confirm one’s participation in the narrative of the economic elite that curiously seems compelled to wish away the accelerating structural collapse of the American economic model.

      1. There’s a lot of stupid in these comments, but the idea that Amity Shlaes “shares” or knows anything about the world of “lower-class moms” is nonsense on stilts.

        Amity Shlaes write a good history of Coolidge, then blew a bunch of coke and decided to say stupid nonsense about economics, about which she apparently knows nothing at all.

  30. Mark Ross

    Even low rates of inflation have deleterious effects… they accumulate. Try selling income property or other investment that you’ve owned for a long time… and realize the capital gains tax you owe… much of which is a tax on inflation. Thomas Edison said: “The most powerful force in the universe is compounded interest.”

    1. Actually Einstein said that, and that was back when you could earn interest on things. (You can’t anymore, largely because we don’t have inflation).

      Anyway, this article isn’t about whether something called “inflation” exists but about whether it’s 5% or 2%. So sure, let’s stipulate that “inflation” exists and that, as a result, you may be taxed on capital gains that are largely the result of inflation. Thanks for that enormous insight that is unrelated to this discussion.

  31. James Hedman

    “If inflation was really 5% — and often, according to Williams, it was much, much higher — then there has been no real economic growth in America all that time.”

    Given the stagnation in real wages then yes, there in fact has been no real economic growth for the vast majority.

  32. Balderdash…..the AEI used to provide rigorous analysis, not just cheerleader for the status quo. Any simpleton even paying modest attention to real-world experience knows the notion that inflation is “quiescent” is silly beyond belief.

  33. I’m with Amity & Williams – steak is not the same as chicken.

  34. I don’t have the numbers at hand, but based on personal experience and that of those I know, everyone is feeling squeezed. The overwhelming majority of expenses for an average middle class household are food and energy. Meanwhile incomes have become stagnant, or have fallen (sometimes dramatically) for many since 2008. The fact that prices for things like consumer electronics may be falling is irrelevant to most people’s economic well being. The continued dramatic rise of college tuition, and associated student debt is another major factor.

    I don’t know the exact macroeconomic answer, and I’m not going to pretend I do. What I do know, and what every American knows, is that the financial sector and the public sector, which were bailed out in 2008 and 2009 by the TARP and “stimulus” bills, have been moving right along like nothing happened. Washington DC is the biggest boom town in the country, and Wall Street is at record highs.

    Meanwhile everyone else is struggling. Those who whistle along denying that anything’s wrong are dangerously out of touch with reality.

    1. Mary Wilbur

      I agree with you entirely. Crony capitalism is also a huge problem. The Import Export Bank’s biggest customers were Boeing and GE. Unbelievable. And the IE Bank is only the smallest tip of the iceberg of government support of favored companies (those that contribute the most in campaign contributions and spend the most on lobbying).

  35. JMWinPR

    Still and interesting discussion. The main issue I see is using BLS numbers. They lied prior to the 08 election concerning employment. In addition they have a vested interest in keeping the posted inflation low. That being they don’t have to increase pension benefits or SS benefits. I would venture a measure of inflation might be the bi-annual pay raises of Congress or Congressional Staff.

  36. Chris Vaughn

    This is pure BS, apparently James doesn’t do his own shopping. Everything is costing more and wages are not keeping up. If we computed CPI in the same manner as during the Carter years, inflation would be up. ShadowStats has it at 6%:

    http://www.shadowstats.com/alternate_data/inflation-charts

    1. “Shadowstats is built on the belief that the Bureau of Labor Statistics changed their methodology in the 1980s and 1990s, and that if we were using their original methodology the level of inflation would be much higher. Shadowstats presents what they claim to be the original methodology. But Shadowstats is not calculating inflation any differently.They are not using the 1980s or 1990s methodology that they believe would be higher. All Shadowstats is doing is taking the CPI data and adding on an arbitrary constant to make it look like inflation is higher!”
      http://azizonomics.com/2013/06/01/the-trouble-with-shadowstats/

  37. Why collect taxes? Why not just print money?

  38. I do think that if things were ” normal” we would have high inflation rates. The QE , or money printing, was initially sold as a way to get banks to lend again. Now if the money multiplier ( econ 102) were at historic norms the banks would have loaned out the same dollar multiple times. Given the size of QE we would certainly have massive inflation. However we do not because the banks are still not lending ( due to Frank Dodd). Instead they are buying stocks or investments with the free money. I would think that without Frank Dodd banks would have lent more freely, and the Fed would have ended QE long ago as the money supply would have increased and greased the wheels of commerce.

  39. Robert Lukitsch

    I suppose Mr. Pethokoukis is unaware of the stagnating (if not declining) trend in median real income (as well as standard of living) and the steady erosion in the Labor Force Participation rate that the US economy has endured for the better part of the past 40 years. These statistical trends would not seem consistent with a growing economy. And more recently we have added a reversal in the birth/death rate of businesses (more dying than being born now) to the mix. It is pretty clear to anyone without a political agenda that the economic conditions in the US have been steadily deteriorating since the 70′s (with brief respite under the strong dollar policies of the Reagan and Clinton administrations), which would in fact be consistent with an economy enduring a permanent recession since the day it adopted a fiat monetary regime.

  40. scotta59

    This article is bs. I work for a large food distribution company-we sell to restaurants, schools, healthcare.
    For the average middle American, food and energy are the biggest items in the budget.
    Back in 2007 the restaurant business was very good; the economy was humming, gas was under $3 and people had disposable income and they spent it.
    Now since then I have seen wholesale costs skyrocket-basics such as canned applesauce are $10-$15 a case higher; sugar prices have doubled, flour to make your pizza have doubled. These all affect the costs that each of us pay.
    Companies also factor in wages, benefits, and costs of services-in my company, the cost of fuel to run the trucks to deliver the goods has gone up substantially.
    The only people who care that the cost of flat screens has gone down are those who buy one.
    Food is up at least 30% to my customers over the last five years-they just aren’t able to raise their menu prices where they need to be because people will just stop eating out.
    Independent restaurants are just barely getting by and if the democrats succeed in raising the minimum wage to
    $15, you will see a large majority of mom and pops close.

    1. If we had 2% inflation and gas at $3 seven years ago, then gas would be about $3.45 now. If we had 5% inflation and gas at $3 seven years ago, then gas would be over $6.

      The article is only bs to those who can’t do math.

  41. Dan Hickey

    40% of the CPI is “owners equivalent rent” which is a function of mortgage rates which the Fed has been manipulating downward for almost 5 years. What would mortgage rates be if the Fed was not buying all the mortgage bonds and then what would the CPI be? The answer may not be quantifiable but it is undoubtedly higher. And yes, with higher inflation, it means the meager GDP growth we have enjoyed is more likely not growth at all. Amity Shlaes knows about the Great Depression and unfortunately the rest of us know about the Great Depression II.

    1. JMWinPR

      Thank you

  42. Darrell Judd

    Mr. P. comes right up to the precipice of an epiphany and steps away because he is afraid of what he sees. In fact GDP growth is exaggerated for exactly the reason John Williams points out. The American economy hasn’t increase the median wage in 40 years. There has been no net new job creation since 2000. And the new jobs that are created are low level service jobs given to mostly immigrants.

    The biggest economic story since the failure of socialism has been the failure of capitalism.

  43. MoreFreedom

    It’s interesting that Shadow Stats uses the methodology to calculate inflation, that the Bureau Of Labor Statistcs used in 1990. If this is “unsound” then why did the government use it before? And what’s wrong with using a government statistic that we used before to compare with periods when that metric was used? A link is provided to a 2008 BLS document supporting their changes to how inflation is calculated, that has a total of 1 table and 1 chart, neither of which shows what the two metrics show for inflation and how different they are. For that we have to go to shadow stats. You’d think an article comparing two methods of measuring inflation would compare the two approaches and show the difference, but it doesn’t. Leading me to believe it’s a political document, more akin to the IPCC propaganda on Global Warming. Even the MIT billion prices project doesn’t explain how it calculates inflation, but it gets its data from a private firm Price Stats which says they measure “key economic sectors such as food, clothing, electronics, furniture and energy. ” Note the lack of housing and services costs. Rents have been rising, which isn’t included.

    I think the price of gold is a better measure of inflation, but more volitile.

    1. Shadowstats did not in fact use the BLS method from 1990. They simply took the current BLS numbers and multiplied them by an arbitrary factor across the board. There was no “methodology” involved. John Williams admitted this, according to the article linked above. He did not go back and re-calculate the current numbers with the old methodology as he had claimed. http://azizonomics.com/2013/06/01/the-trouble-with-shadowstats/

  44. Michael

    Is the result from the MIT Billion Prices Project based on a weighted basket of goods? If not, then this article was not persuasive for me.

  45. Michael

    Inflation. We should have such problems. What is clear in the present time is that people are going to believe what they want to believe regardless of the evidence. More power to them. If you believe that our inflationary doom is just around the corner because of whatever reason you want to believe in, then go buy gold or whatever other asset class you think will hedge you in. We all have the opportunity to put our money where our big mouths are and make a “bet”. Those who have bet on the big inflation boom over the past several years have lost their collective axxes. Just like the bears on wall street. I guess the “washing out” of all that money is showing up only in the stock market, right boys? And in corporate earnings? We have seen inflation in corporate earnings during the Obama recover. The stock market loves Obama!!

  46. Andrew Lazarus

    I wonder if AEI has considered the implications of a comment thread 80% full of conspiracy theorists. Steak costs more! Government conspiracy! Cherry-picking, or apple-sauce picking, but ignoring all the goods that are cheaper… it’s a conspiracy.

    Note that Shadowstats charges the same as it did 8 years ago, while, if their methods were correct (they aren’t) the 2006 dollar is worth about 25 cents today.

    This thread is the equivalent of Eric Cantor’s surprise defeat. Much like the German Industrialists of the Weimar era, AEI’s corporate patrons have unleashed a destructive, willfully ignorant movement which isn’t stopping at a few tax cuts and environment regulation repeals.

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