patrick.net

You think federal policy will bias towards inflation? I thought this was fairly obvious. Your current Fed Chairman wrote tons of papers, has given several speeches, and even wrote a book on how he believed any price deflation will lead to a depression and he is hell bent on creating inflation through a process he calls "inflation targeting". He has followed every single hypothetical action he laid out in those papers. He targets the inflation rate to be something like 3 to 4%. Now, given that the BLS understates inflation typically by 4-6%, Bernanke, may end up automatically targeting a 10% annual inflation rate. This is absent the negative pressure felt by the dollar from foreign central banks diversifying their reserves, in such a case inflation can climb into the double digits near 20%.

theoakman says

Now, given that the BLS understates inflation typically by 4-6%

That's a given? Could you give any supporting evidence for that statement?

The government wants inflation - I want an affordable house.

which one of us will get what we want first?

tatupu70 says

theoakman says

Now, given that the BLS understates inflation typically by 4-6%

That’s a given? Could you give any supporting evidence for that statement?

Sure, go to any sight that still calculates inflation using the metric we used prior to Bill Clinton's presidency and you find that the metric they use today is consistently below the traditional measure of inflation by a range of 4-6%. The inflation metric used today simply excludes the goods/services that go up in price to bias reported inflation to the downside. And that doesn't even take into account how the metric previously used circa 1980 was biased slightly downward to force middle class Americans into higher tax brackets.

Do you really believe that we averaged ~6-7% inflation in 2000s? That doesn't pass the smell test as far as I'm concerned.

tatupu70 says

Do you really believe that we averaged ~6-7% inflation in 2000s? That doesn’t pass the smell test as far as I’m concerned.

Go smell some gasoline. Or some food. Or health care. Or college tuition. Even home prices are still well above their 1990s prices.
The only things that got cheaper this decade were cell phones and televisions. Or did you really believe inflation was close to 1% at the end of 2006?

OK--

Of course you cherry picked things that are increasing faster than inflation to make your point. Fair enough. But, do you really think that overall CPI has been 6-7% for the decade? That would mean prices of everything roughly doubled in 10 years. Does that sound right to you?

tatupu70 says

OK–
Of course you cherry picked things that are increasing faster than inflation to make your point. Fair enough. But, do you really think that overall CPI has been 6-7% for the decade? That would mean prices of everything roughly doubled in 10 years. Does that sound right to you?

I cherry picked? These are the things they exclude from the CPI. They cherry picked for me.
Like I said, take a look at food, energy, insurance, college tuition. They have all more than doubled. Gasoline is up 200%. Food is up 150%. It's not unreasonable to make the assumption that the cost of living has roughly doubled in the past 10 years when those two things alone which we all consume on a daily basis have gone up well beyond 100%. So yes, the cost of living has increased substantially. Your inherent focus on the Pre-Clinton CPI is distracting you from the fact that the numbers reported by the BLS are complete nonsense. You asked me for proof the numbers are biased, now you simply want to argue the numbers. This is the way our government calculated it in 1980 before they decided to stop counting certain goods and services we just happen to consume every day of our lives.

And no, the prices of everything didn't double. But, the prices of some things went up 200%. The prices of other things went up 100%. The prices of other things went up 50%. The prices of somethings went up 0%. Add them all up and you roughly get, in my rough estimation, somewhere between an 80%-100% rise in prices. The main thing keeping a lid on inflation has been cheap labor from China. It won't last much longer.

Here's an explanation of CPI from the government website:

The CPI represents all goods and services purchased for consumption by the reference population (U or W) BLS has classified all expenditure items into more than 200 categories, arranged into eight major groups. Major groups and examples of categories in each are as follows:

FOOD AND BEVERAGES (breakfast cereal, milk, coffee, chicken, wine, full service meals, snacks)
HOUSING (rent of primary residence, owners' equivalent rent, fuel oil, bedroom furniture)
APPAREL (men's shirts and sweaters, women's dresses, jewelry)
TRANSPORTATION (new vehicles, airline fares, gasoline, motor vehicle insurance)
MEDICAL CARE (prescription drugs and medical supplies, physicians' services, eyeglasses and eye care, hospital services)
RECREATION (televisions, toys, pets and pet products, sports equipment, admissions);
EDUCATION AND COMMUNICATION (college tuition, postage, telephone services, computer software and accessories);
OTHER GOODS AND SERVICES (tobacco and smoking products, haircuts and other personal services, funeral expenses).
Also included within these major groups are various government-charged user fees, such as water and sewerage charges, auto registration fees, and vehicle tolls. In addition, the CPI includes taxes (such as sales and excise taxes) that are directly associated with the prices of specific goods and services. However, the CPI excludes taxes (such as income and Social Security taxes) not directly associated with the purchase of consumer goods and services.

Looks to me like gasoline, health care and college tuition and included.

theoakman says

Food is up 150%

No it's not.theoakman says

You asked me for proof the numbers are biased, now you simply want to argue the numbers.

I asked for proof and you gave me a graph from a random blog. That is not proof.

Schultzie, good one!

Oakman, right on. It is well known that CPI stats have been cooked for a long time. The shadowstats website may have more data on this.

Some of the basics are here:

http://en.wikipedia.org/wiki/United_States_Consumer_Price_Index

By the way, C-CPI-U is another scam where instead of measuring price increases (beef went up) they measure how people spent (they bought cheaper chicken instead). Very hokey, and not a "constant quality" measure (to invoke Case-Shiller imagery :)). Note how C-CPI-U (Chained CPI Urban) comes in below plain CPI-U. It does this because it was DESIGNED to do so.

Paul Krugman also explained the reason for the "core-CPI" which excludes food and energy, because those two measures are very volatile and hence do not capture "underlying" inflation well, for some purposes,

The name "core" is very badly chosen, because a regular person can hardly think of anything more "core" to their daily expenses than food and energy. But don't shoot the messenger on that one (him or I). I'm just telling you what the reasoning is. Instead, shoot at the people who misuse core-CPI to claim that inflation is low. I sure as hell do not defend misusing core-CPI.

Oakman,

>>Gasoline is up 200%. Food is up 150%.

Did you rather mean to say that Gasoline price is 200% (up 100%) of what it was in year 2000, food price is 150% (up 50%) of what it was?

In typical usage, "up 200%" means the new price is 100+200=300% of the old one.

I think tatapu70 *might* be more inclined to agree with you if it was the case that the original sentence was just not quite phrased correctly.

The idea that inflation is a solution to anything is Sarah Palin stupid.

1) The most obvious flaw in this genius plan is that most government spending is inflation indexed! Think every entitlement program in existence, TIPS bonds etc.

2) You cannot "recover" by raising prices and lowering wages.

3) Inflation is never secret for long and then we ALWAYS get a wage/price spiral. People notice that they can't afford stuff they used to. Even the dumb ones.

4) China gets hysterical whenever the dollar drops too low and starts threatening us in public. China finances our lifestyle so what they think matters.

5) The US has almost no exports so a boost to this sector would mean nothing for most Americans.

6) We import almost everything we use. Lower dollar equals much lower standard of living.

7) Interest rates would sky rocket. Try paying an interest rate of 18%. How do you think this would affect both the banking sector and the housing sector?

8) "I know everytime inflation comes up, Japan will come in mind." This sentence isn't even in English so I have to guess what it means. Japan has been in DEFLATION for twenty years now. For twenty years the Japanese authorities have been trying to inflate without success.

Anyone that believes that inflation is a cure for anything needs to know that I have a great investment opportunity available in Nigeria. It is only valid for today because you are most trustworthy person - so hurry please!

m1ckey6 says

The US has almost no exports so a boost to this sector would mean nothing for most Americans.

I'm tired of this bullshit. Lower dollar will be a big boost to manufacturing. US exports a LOT.

m1ckey6:

>>The idea that inflation is a solution to anything is Sarah Palin stupid.

>>The most obvious flaw in this genius plan is that most government spending is inflation indexed!

Well, yeah, but you have to realize that the plan of inflation (especially housing inflation) does not exist to benefit the public or their government. It exists to benefit the bankers, so that extend-and-pretend can continue until the losses have been covered up by yet-again rising house prices.

You just need to think about THIS way, and then it suddenly makes sense (if you're an investment/banker). (sarcasm alert).

@justme

Inflation of 3% a year for 10 years is 34%, Inflation of 4% a year is roughly 48%. Food going up 50% doesn't sound too far off.

If gas goes to $10 / gallon, but we decrease our usage and increase mileage, we haven't effected our quality of life. I think it's reasonable to assume if we're switching from beef to chicken, our current life style is changing, but we still have the essentially the same buying power, and we can still afford good food.

In some arguments, it would be misleading, in other arguments it wouldn't be. It really depends on how you want to look at inflation. I would also say our quality of life has increased over the years, offsetting the beef vs chicken issue. Our TV's are better, our computers are better, our cars are better, our chances of surviving major medical issues are better. If we switch from beef to chicken, we have made a change in our behavior, but our cost of living is essentially the same.

We're really trying to compare apples to apples, but in any method we use, we're getting a few oranges in there. How do you compare buying a CRT tv with LCD? How do you compare traveling with the internet today vs traveling 10 years ago? How easily could you find a 4 star hotel 10 years ago for $80-100, vs today? I have no trouble these days, 10 years ago it was brutal. Before 2000 it was next to impossible, unless your trip coincided with some crazy special.

We can't smooth out everything, but we can try. Trading beef for chicken isn't a major difference. If you asked a texan, they might disagree, but ask anyone if you trade beef for rice and beans and they would probably agree you've downgraded massively.

Gas is up, but I think people are starting to factor gas into their daily requirements these days. In fact, if they HAVE, likely they've increased their standard of living over all. Renting a smaller place, closer to work probably has more net benefits for a person than renting a picket fence house 1 hour away from your job. It's your prerogative, but now the decision is more complex. The cost difference is less, so it's more about wanting to live with the picket fence than a smaller place, than picket fence + cheap gas is still cheaper than small apartment. The one factor that many people forget, is that we generally have about 5 hours of time to ourselves every day, including commute time. If you spend 60-90 minutes commuting each way, that is 2-3 hours a day. I take 10 minutes, I get roughly 4:40 minutes for myself every day. Someone with the fence has 2-2.5 hours a day. Thats a 50% decrease. While losing the picket fence might be major, gaining 2 hours is pretty nice for most. In the end most of these changes have good and bad associated with them.

Pkennedy, those are all some good points. "substitution" is a very difficult concept to correctly account for in an inflation index.

By the way, my normal commute time is 1 hour each way to work. I ride my bicycle. If I drive, its 15 minutes. Its all about choices and the lifestyle you want!

Mine is 10 minutes and I bicycle to work!

1 hour of exercise commuting is pretty relaxing, and I've done it as well. I substitute it for other forms of exercise. I would prefer to do something useful while exercising (commuting) than running in circles, or stationary for that same amount of time!

justme says

Oakman,
>>Gasoline is up 200%. Food is up 150%.
Did you rather mean to say that Gasoline price is 200% (up 100%) of what it was in year 2000, food price is 150% (up 50%) of what it was?
In typical usage, “up 200%” means the new price is 100+200=300% of the old one.
I think tatapu70 *might* be more inclined to agree with you if it was the case that the original sentence was just not quite phrased correctly.

Honestly, I don't remember what the price of gasoline at the pump was in 2001. I remember it being 90 cents in 1999. That's where I was counting from. I'm just throwing around loose numbers but it really doesn't matter IMO. The price increases have been massive.

justme says

Schultzie, good one!

Paul Krugman also explained the reason for the “core-CPI” which excludes food and energy, because those two measures are very volatile and hence do not capture “underlying” inflation well, for some purposes,

This is no reason to not include them. You can simply smooth out the volatility by computing it through moving averages. They take them out because they went up. And of course, they never hesitate to heavily weight the effect of something that goes down in price.

tatupu70 says

m1ckey6 says

The US has almost no exports so a boost to this sector would mean nothing for most Americans.

I’m tired of this bullshit. Lower dollar will be a big boost to manufacturing. US exports a LOT.

Care to explain how the dollar index dropped from 120 to 80 and the trade deficit ballooned the past decade?

@theoakman

Do some research on US exports. You'll find the US exports a LOT of goods. The US is also the largest manufacturer in the world.

Low cost Yuan + raising cost of importing gas/energy probably accounts for almost all of the deficit. Although the "true" value of the Yuan is in dispute.

Ever consider the US dollar was WAY over valued prior?

theoakman says

This is no reason to not include them. You can simply smooth out the volatility by computing it through moving averages. They take them out because they went up. And of course, they never hesitate to heavily weight the effect of something that goes down in price.

CPI does include them. Core does not because you usually don't want to make decisions about raising or lowering interest rates based on very volatile goods.

pkennedy says

@theoakman
Do some research on US exports. You’ll find the US exports a LOT of goods. The US is also the largest manufacturer in the world.
Low cost Yuan + raising cost of importing gas/energy probably accounts for almost all of the deficit. Although the “true” value of the Yuan is in dispute.
Ever consider the US dollar was WAY over valued prior?

I know what the US exports. Obviously, it's not nearly enough to stop us from running a trillion dollar trade gap each year.

The US dollar wasn't overvalued so much to the point that a 30% drop in USD Index leads to an expanding trade deficit. The real story is that the average Chinese worker was just that poor. The only way to balance the trade is to make the US worker equally poor which is an insane policy decision from the point of view of the average American worker. Export oriented growth is overrated. The US did much better when it focused on growing an economy internally.

tatupu70 says

theoakman says

This is no reason to not include them. You can simply smooth out the volatility by computing it through moving averages. They take them out because they went up. And of course, they never hesitate to heavily weight the effect of something that goes down in price.

CPI does include them. Core does not because you usually don’t want to make decisions about raising or lowering interest rates based on very volatile goods.

So you completely ignore a price change over a decade long period because it shows short term volatility? Do you know what a moving average is?

@theoakman

Actually if you look at the deficit in terms of energy + under valued yaun, they almost balance out. The yuan is supposed to be upto 25% under valued. Fuel importing was massive, I dont have the time to get you an exact figure right now, but it's massive.

@seaside

I agree that some changes are forced, some are forced worse, some are probable forced better in the end.

Biking is probably better for most, but not always practical.
chicken instead of beef is better health wise
mcdonalds instead of beef would be horrendously bad!
white rice instead of beef would be eaqually bad.

Really it comes down to changes. Many people don't like to change, and will bitch about it. But it really requires carefully balancing everything out.

Gas has been cheap for a LONG time. So saying 90cents a gallon back in 1999 isn't exactly fair either. It was way under valued back then. It had been artificially kept low by the US and saudi arabia. Saudi Arabia learned back in the 70's embargo that a sharp spike changes people habits, and that lower priced gas is better than higher priced gas. They never fully recovered from that embargo, if you looked at our usage growth in the 70's compared to the 80's/90's that line changed drastically. We introduced more fuel efficient cars, and what not. Gas from like 90-99 should have gone up, but really didn't. So general inflation from 1990-2010 is probably pretty realistic in terms of where we are with gas currently.

No one really knows how much the yuan is undervalued. Regardless of the value of their currency, the trade deficit was not as much a function of the dollars value as it was the level of wages in China. Even if the yuan was allowed to float, their wages were still far too small for trade to be balanced. Was the dollar overvalued? Definitely. Does that explain our trade deficit? No. The dollar index dropped from 120 to 80 and the trade deficit got larger. If a 30% drop in the dollar against other foreign currencies (which also lost purchasing power) didn't reverse trend, what will? Do we need to drop the dollar index down to 40?

30% drop in the dollar and a major spike in energy costs. Those pretty much offset each other.

You're comparing something else now. Cost of wages in China vs our deficit. Those are two different things. If the Yuan is allowed to float + we somehow got rid of foreign energy (not happening, I know), we would be level in terms of deficit or near to it.

Wages are a different beast altogether. We don't need their wages to go up to support our deficit, we just need a more fair yuan.

But don't forget, Canada is the US's largest trading partner.

Here's an interesting chart with some personal consumption items. Check out disinflation in luggage, hotels and transportation -- time for a Deflation Nation Vacation.

The strange thing is I read an article yesterday saying banks don't want to do principal reductions becuase it's not viewed as 'fair' to the people who pay their mortgage. I am probably totally wrong but if you inflate the dollar enough, wouldn't they be made whole? People would pay their now much "cheaper" debt?

theoakman says

o you completely ignore a price change over a decade long period because it shows short term volatility? Do you know what a moving average is?

No, of course you don't ignore CPI. It's used more than the core rate, probably... But the core has value too.

-Inflation would also act as a stealthy fiscal reform. Though tax revenues are affected only slightly by inflation, two-thirds of government expenditures are affected more. That’s why the real cost of government spending would wilt away in a high-inflation environment

I don't think so. Most of the debt is short term, and costs of rolling over that debt will go right up with inflation expectations. Not to mention the tens of trillions of unfunded liabilities (which are mostly medical costs) go right up with inflation too.

Listen to David Walker, the former comptroller of the currency on this issue. He says inflation is no solution to structural deficit issues.

Also, you and the author of that article seem to be making this implicit assumption that the government is capable of creating some inflation in the current debt load and economic environment. That's is not necessarily true, though I agree it would probably be best for the country as a whole at this point.

pkennedy, you live in this site, aren't you? :)
Thanks for reply, and sorry that I deleted my post that was written in hurry.

The point was this.

Inflation has been, and still is there. The inflation on everyday items made ordinary people suffer. 6 figure people or people already got plenty are doing ok and have a choice to substitute things with another for various reasons though, poor to mid level people got no such choice but to adjust themselves into the situation. It's more like crying for help, rather than bitching for everything. We just cannot tell them, "shut up and eat vegies if you can't afford beef" So, let's admit that first, then start to talk about what's fair or not, what they can do or not.

Ok, that's sentimental part of me.
My arse-holy-e-ness part somewhat tells me otherwise. You peons lived like novels, spent like there's no tommorow, and now crying like 9 year old girl. So, put the junk food off your mouth, loose your fat first.

But I think what SF-ace asked was "Will government pull off inflate-away policy, since it looks like a magic?"

Now that's difficult question. I had some idea on that point though, I got grumpy in the evening, all messed up in my head. I somewhat agree on your point especially on chinese yuan and I will talk about it later.

Sorry for the rant.

I can agree with you that we can't really just "force" inflation ideas onto the middle/lower class. Lower class is just forced to go along with whatever they can afford. I feel for them, because even small changes can be terrible for them. Middleclass has options, not as many, but they can change things up. I'm not saying this isn't an issue, I'm saying there are a lot of washes here. Switch this for that. Switch that for this. Overall, I'm not really sure how much food has gone up. I changed my eating habbits over the last few years, and I know I spend a lot more on food these days, but I'm also buying a lot more fresh foods and doing a lot of buying at whole foods, which is far more expensive than lucky and making sandwiches :)

I know pop is the same price. I know a lot of general foods are roughly the same, but I don't have empirical data on that. I know gas / corn have gone up, and are pretty noticeable. Apples, and strawberries seem to be the same price.

What we eat changes even from season to season! I don't buy strawberries in winter because they're expensive. In summer they're like $7 for a huge box! At the start of the season a little container is like $5. If New Zealand has a bumper crop of apples and their currency is hurting and oil is down, I expect to pay little for apples. If they go through the roof, I simply don't buy them. I switch to oranges, or bananas, etc. This isn't inflation, but just the market place of food changing.

In the end, the way they are calculating things seems fairly reasonable. Inflation might be forcing some changes, but changes happen. How would you incorporate our spending of cell phones into a 1970's inflation calculation (no cell phones back then)? The way we live changes over time, even what we eat, it's about how we live and the cost of living this way that is pretty important. That seems to be a realistic version of inflation to me.

pkennedy says

I feel for them, because even small changes can be terrible for them. Middleclass has options, not as many, but they can change things up. I’m not saying this isn’t an issue, I’m saying there are a lot of washes here. Switch this for that. Switch that for this. Overall, I’m not really sure how much food has gone up.

The "inflation" happening in commodities, especially food an fuel, is mostly not a monetary phenomena. It's a function of booming world demand, and flat supplies. It is beyond the control of the fed or any monetary authority.

That's why gas and basic foodstuffs have gone up much more than anything else in the US. It's also true for everywhere else in the world. So different people experience the cost of the things they buy changing at different rates. No doubt poorer people in the US have felt inflation more in the last 10 years than those more well off.

You think it's bad in the US? Try counties where food was typically half your income. Malnourishment is booming around the world, the flip-side of the world economic boom.

Yes, I heard that poor Mexicans suffered directly when Americans decided to start converting corn to ethanol. Drove up the cost of corn, and that's mostly what those guys eat.

Funny (or not) but it's about feeding poor people vs feeding your car. Or SUV.

Corn is a useless crop for producing fuel. Not only did it drive up corn prices, but it drove up all prices for things like wheat, because people converted wheat crops and others to corn!

I'm all for bio fuels, but corn is useless! It's something like 4 units in, 5 units out.

The only thing that aggravates me more is the tar sands in Canada. They have enormous amounts of oil, there is a good chance the most oil in the world. But it requires heat to free it from the sands, and they burn an astronomical amount of natural gas to free the tar! A clean burning fuel to get at the oil! That is why natural gas prices took off down here, because Canada supplies so much to the US, and they started using up all the supplies to free up the oil in the tar sands. I'm all for that oil, but not doing it that way. If it's heat, they should be using solar at the very least! Argh.

I agree with you Mark, what the poor felt here was very minor. In fact, I'm guessing that it might have helped the poor in America eat better. That is just a guess, but I'm betting that beans, rice, and other staples are far better than corn based cereals and high fructose syrup based foods which did go up in price. Prepared food are hugely expensive and almost completely non nutritional, so stopping people from eating those doesn't bother me :)

I feel bad for the people in other countries who rely on the basic foods like corn itself, wheat and rice. Those people really hurt.

Bankers want inflation to get out of the sink hole. Ordinary people want deflation to live affordably. With the current levels of unemployment, I am not sure why there will be inflation. It is about time to short the stock market since the artificial bubble is reaching its limits. Any good news or bad news now moves the market for few points up.

johnroberts says

Ordinary people want deflation to live affordably

Noone should want deflation...

Commodity prices go up because of speculators, lobbies and manias - rarely from any real shortages.