The degree to which the Consumer Price Index accurately captures inflation's impact is a topic of considerable heated discussion and debate.
One reason economist John Williams began producing his Shadowstats series of alternate metrics for things like inflation is because of the degree to which the CPI has been manipulated politically to…
The degree to which the Consumer Price Index accurately captures inflation's impact is a topic of considerable heated discussion and debate.
One reason economist John Williams began producing his Shadowstats series of alternate metrics for things like inflation is because of the degree to which the CPI has been manipulated politically to understate the effects of rising prices, and he has a point.
I use the CPI and its companion index, the Personal Consumption Expenditures (PCE) index, for the simple reason that these are the data sets the Fed claims to use in its decision-making. These are the "official" numbers, and in order to interrogate government policies on matters like inflation, one has to work with the same data.
We should also keep in mind that inflation, while lower than it has been recently, has been a consistent phenomenon from even before the Volcker Recession. Sub 2% inflation year on year, extended over ten and twenty years, produces a considerable degradation in purchasing power by that 20th year. Which means you are correct about food and energy prices--they have risen steadily over the years. Even within the CPI that reality is indisputable.
Yet perhaps the greatest challenge in examining inflation is grappling with the complex nature of price dynamics and price discovery within the marketplace. Not all price rises are due to expansion of the money supply or changes in money velocity--which means that we must either consider various external economic shocks to be a phenomenon other than inflation or we must realize that the monetarist mantra, Milton Friedman's oft-repeated aphorism that inflation is everywhere and always a monetary phenomenon, is fundamentally incorrect.
The economic reality for everyone is that we respond to price rises in largely the same way regardless of the reason for the price hike. If the price of gasoline jumps overnight by a dollar it does not matter that the reason for the hike was the sudden scarcity of gasoline or the sudden increase in dollars in people's wallets available for gasoline purchase. To the consumer looking to fill his gas tank both price hikes look the same, but one is directly caused by money supply fluctuations and one is not.
I take the view that price changes == inflation/disinflation/deflation. I am not a doctrinal monetarist, simply because the extravagant money supply increases of recent years do not have corresponding price hikes--which monetary theory states they must have. Even Shadowstats publicly available inflation metrics do not show changes in inflation that correspond to the Fed's magic money printing since 2008, which is immediately proof that Friedman's view of inflation cannot be correct; inflation cannot be a purely monetary phenomenon when the doubling and tripling of the money supply fails to produce a doubling and tripling of the rate of inflation.
In fact, much of my criticism of the Fed's recent interest rate hikes to choke off the inflation the CPI does report stems from the lack of observable impacts on inflation. Inflation has gotten worse even as the Fed has raised interest rates from near zero to 2.5% over the past few months. We must either conclude that the Fed has not raised rates nearly enough, that there should have been multi-percentage point increases rather than mere fractions of a percentage point, or that inflation is not responding to the interest rate hikes at all. Currently, I subscribe to the latter interpretation.
In my estimation, the corporate media and the government focuses far too much on the headline inflation number and not nearly enough attention on the disparities in inflation rates within the components that make up the CPI. Inflation does not hit all products equally, and the volatility we see in food and energy prices is a prime example of this. It is my contention that these distortion of prices due to inflation are where the real economic damage arises. It is these distortions that result in consumers paying more and buying less--not just of the goods with the extreme price increases but all goods.
Is the government treating inflation honestly and intelligently? No. The CPI and PCE indices are politically manipulated to understate inflation. Yet even as manipulated as these indices are, they can still illuminate much about ongoing price dynamics. Even if the overall inflation rate is understated, we can still see and examine the distortions presented by the CPI. We can still equate the current 11% food price inflation rate with increases in food insecurity and even hunger. We can still assess the economic impacts of so-called "stimulus" measures by the government to goose the economy.
The degree to which the Consumer Price Index accurately captures inflation's impact is a topic of considerable heated discussion and debate.
One reason economist John Williams began producing his Shadowstats series of alternate metrics for things like inflation is because of the degree to which the CPI has been manipulated politically to understate the effects of rising prices, and he has a point.
I use the CPI and its companion index, the Personal Consumption Expenditures (PCE) index, for the simple reason that these are the data sets the Fed claims to use in its decision-making. These are the "official" numbers, and in order to interrogate government policies on matters like inflation, one has to work with the same data.
We should also keep in mind that inflation, while lower than it has been recently, has been a consistent phenomenon from even before the Volcker Recession. Sub 2% inflation year on year, extended over ten and twenty years, produces a considerable degradation in purchasing power by that 20th year. Which means you are correct about food and energy prices--they have risen steadily over the years. Even within the CPI that reality is indisputable.
Yet perhaps the greatest challenge in examining inflation is grappling with the complex nature of price dynamics and price discovery within the marketplace. Not all price rises are due to expansion of the money supply or changes in money velocity--which means that we must either consider various external economic shocks to be a phenomenon other than inflation or we must realize that the monetarist mantra, Milton Friedman's oft-repeated aphorism that inflation is everywhere and always a monetary phenomenon, is fundamentally incorrect.
The economic reality for everyone is that we respond to price rises in largely the same way regardless of the reason for the price hike. If the price of gasoline jumps overnight by a dollar it does not matter that the reason for the hike was the sudden scarcity of gasoline or the sudden increase in dollars in people's wallets available for gasoline purchase. To the consumer looking to fill his gas tank both price hikes look the same, but one is directly caused by money supply fluctuations and one is not.
I take the view that price changes == inflation/disinflation/deflation. I am not a doctrinal monetarist, simply because the extravagant money supply increases of recent years do not have corresponding price hikes--which monetary theory states they must have. Even Shadowstats publicly available inflation metrics do not show changes in inflation that correspond to the Fed's magic money printing since 2008, which is immediately proof that Friedman's view of inflation cannot be correct; inflation cannot be a purely monetary phenomenon when the doubling and tripling of the money supply fails to produce a doubling and tripling of the rate of inflation.
In fact, much of my criticism of the Fed's recent interest rate hikes to choke off the inflation the CPI does report stems from the lack of observable impacts on inflation. Inflation has gotten worse even as the Fed has raised interest rates from near zero to 2.5% over the past few months. We must either conclude that the Fed has not raised rates nearly enough, that there should have been multi-percentage point increases rather than mere fractions of a percentage point, or that inflation is not responding to the interest rate hikes at all. Currently, I subscribe to the latter interpretation.
In my estimation, the corporate media and the government focuses far too much on the headline inflation number and not nearly enough attention on the disparities in inflation rates within the components that make up the CPI. Inflation does not hit all products equally, and the volatility we see in food and energy prices is a prime example of this. It is my contention that these distortion of prices due to inflation are where the real economic damage arises. It is these distortions that result in consumers paying more and buying less--not just of the goods with the extreme price increases but all goods.
Is the government treating inflation honestly and intelligently? No. The CPI and PCE indices are politically manipulated to understate inflation. Yet even as manipulated as these indices are, they can still illuminate much about ongoing price dynamics. Even if the overall inflation rate is understated, we can still see and examine the distortions presented by the CPI. We can still equate the current 11% food price inflation rate with increases in food insecurity and even hunger. We can still assess the economic impacts of so-called "stimulus" measures by the government to goose the economy.
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Well stated and spot on! Thanks for the detailed insightful reply! Have a great weekend!