October 19, 2007

Inflation schmation

Oh, I agree with ELLN and Bonddad...

So -- why am I focusing on these two paragraphs rather than the headline number? I am personally having a really difficult time believing the "headline" inflation number largely because my personal experience just isn't jibing with an "inflation is benign" scenario. Here's why. I go shopping every 4-5 days. Over the last year or so I have seen chicken increase from about $4-$5 to $7-$8. Milk is now almost $4/gallon when it use to be $2.99/gallon. Simply put, the numbers just aren't adding up. While I don't know what is wrong exactly with the BLS' calculations and/or methodology, it simply isn't tracking what I am seeing at the retail level. Now I realize that the prices above are for food which isn't part of "core" inflation. This also illustrates how incredibly stupid the Fed's reliance on "core" inflation is. Core inflation is a great measure if you don't consume food or energy. For that small minority of the population that actually does consume food and energy, total inflation is a hell of a lot more relevant to daily life.

The CPI ex food and energy has never made much sense to me since inflationary pressure in those two sectors tend to hold down inflation in core prices because, simply, there is less money to purchase core items. This gives a false impression of the strength or weakness of the economy.

Of course, if the Fed started taking total CPI into account along with money supply, short rates would be in the 8-9% range. That would break inflation in energy costs rapidly.

Finally, the most irritating thing about all this is that wage growth is still non-existent. The reality is that when you take into account total CPI, more than 95% of the people in this country have seen their purchasing power erode since the Supply-side/Trickle-down Revolution began. How's that for a successful economic policy?

Posted by mcblogger at October 19, 2007 12:16 PM

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