Sometimes it seems that we are examining inflation and its components with the same intensity and in the same absurd, uncomprehending way that Greek and Roman Oracles examined the innards of a chicken to discern the future. “Include this item, exclude gasoline, assign more weight to IPADs, give zero weight to food.” The numbers get massaged so that the in the final analysis it is difficult to find any meaning in what is reported.
To really get a handle on inflation, it is important to remember the distinction between inflation and relative price movements. Inflation refers to the rate of increase of prices in general. And inflation occurs or accelerates when governments or central banks are issuing worthless currency (fiat money) faster than their real economies are growing. Hence, it is ironic for the government to wring its hands about inflation, its unfortunate impacts, or the nuances of its measurement. The government and the central bank are responsible for creating the very inflation whose measurement is so carefully and selectively being fine tuned.
As was mentioned in last week’s blog, when measuring core CPI inflation the government tosses out food and energy, and last month energy prices shot up. But since energy was removed from consideration, the reported core inflation number was unremarkable.
When reporting inflation, the government’s ignoring of those items whose price went up by the largest amount is absurd. It is analogous to a guest coming into your home and bringing with them an un-housebroken dog. After the guest’s dog fouls several of your rooms, the visitor commiserates with you on which rooms were fouled worst. One can only imagine the conversation as the guest attempts to play down the damage. “The dog had issues in both the kitchen and in the dining room, but it made an unusually bad disaster out the living room, so I am eliminating that one from our list..…”
In any economy, even an economy with stable prices on average, some individual prices go up and other prices go down. Relative price movements are always part of economic life—and would continue to be even in an economy that used a private real money such as capital. Relative price changes occur because of supply and demand for various goods and services and all the things that affect them—wars, droughts, new resource discoveries, fads, trade embargoes, etc. Overall inflation happens only when fiat currency is rapidly created out of thin air. And, the government should be reminded that the problem doesn’t disappear by reporting “core” inflation while closing its eyes to those prices that have gone up by the largest amount.