Have you bought any food lately? How about gas? Have you filled up your tank? Of course you have. And, it’s getting a bit more expensive, isn’t
it?
Take a look at this chart of inflation over the last 70
years.
So, why do we keep hearing that inflation is under
control?
Listen carefully the next time you hear it. They’ll say, “Core inflation excluding
volatile food and fuel prices” is under control or something like that.
If you can’t score a touchdown, move the goal post.
There’s more. The
chart above shows the Consumer Price Index (CPI) which is the measure of inflation we have all grown up with. However, the boys and girls over at
the Federal Reserve have decided to use Personal Consumption Expenditures (PCE)as a measure of inflation (starting in 2000). Here’s how
the two compare.
So, what’s the difference?
In simple terms, the CPI measures the change in prices of a fixed set of
goods and services – bread, clothing, gasoline, etc. The PCE fiddles with that calculation a
bit. For example, if you bought a new
computer a few years ago for $800, you got a certain amount of processing
power, memory, ports to plug stuff into and so on. If you spend $800 today for a new computer,
you would get more of all that stuff. Or,
to put it another way, buying the same processing power etc. today as you did a
few years ago costs less. PCE averages
that lower cost of the same features into its index holding down this
particular measure of inflation.
The Full
Employment and Balanced Growth Act of 1978 established two goals for the
Federal Reserve: reducing unemployment
and reducing inflation.
If your goals included holding down inflation like the Fed
Chairman, wouldn’t you prefer to use PCE?
If you can’t score a touchdown, move the goal post.
In fairness, a lot of economists think PCE is a better
measure inflation. But, out here in the
real world where the cost of gasoline and food has been moving up steadily over
the past five years or so, I don’t really care what they think.
So, what should we make of all this?
Perhaps the best perspective is provided Dylan Grice, author
of the Edelweiss Journal. He tells us
“inflation is not measurable”. He tells
policy makers that “trying to control a variable you can’t measure (inflation)
with a tool you don’t fully understand (money) in a complex system with hidden,
unobservable and non-linear interrelationships (the economy) is a guaranteed
way to ensure that most things which happen weren’t supposed to happen”.
And, when was the last time the government’s forecast for
economic growth came true?
WHO WILL LEAD?
