The great inflation debate

The argument over whether inflation is a big problem, whose extent has been concealed by government agencies and the media, has been growing more vigorous over the past few weeks.  Not everyone who thinks inflation fears are exaggerated is a big-government leftist or Obama defender.  James Pethokoukis of the American Enterprise Institute, writing at The Week, goes so far as to dismiss inflation fears as “doomsday prepper economics” and a “weird obsession that’s ruining the GOP.”

Riffing off former Rep. Ron Paul’s warnings of impending inflation apocalypse in 2009, Pethokoukis argues that “the Next Great Inflation never happened”:

The Consumer Price Index, including food and energy, has risen by an annual average of just 1.6 percent since 2008, below the Fed’s 2 percent inflation target. During the Great Inflation of the 1970s and early 1980s, by contrast, prices rose five times faster.

This information isn’t a secret. The Labor Department releases inflation data monthly on its website. Yet inflation fears still rage on the right. Those concerns are a big reason why Republicans continue to push for a balanced budget ASAP. They’re why the GOP wants to saddle the Fed with restrictive new rules.

Regardless of the potential merits of those policy ideas, the inflation alarmism driving them is taking a weird turn. Some Republicans and conservatives now argue that Washington is figuring inflation all wrong, maybe even intentionally. Better, they say, to trust independent outside sources such as the website ShadowStats, which “exposes and analyzes flaws” in government economic data. According to one set of ShadowStats calculations, the true inflation rate is nearly 10 percent today. The inflation truth is out there.

He goes on to discuss the problems with ShadowStats and other alternative methodologies, offering some arguments well worth reading by anyone seriously interested in the subject.  I would interject to note that it’s possible to make the case that inflation is either measured incorrectly, or even deliberately concealed to some extent, without necessarily buying into the more aggressive “truth is out there” studies.  The truth might still be Out There, even if it’s lurking in the part of Out There which lies closer to the official stats than to ShadowStats.

A strong rebuttal to the “inflation is no problem” argument comes from Sean Davis at The Federalist, who searches the near reaches of Out There and finds quite a bit of price inflation going on, in areas of direct relevance to middle-class families.  It’s gotten bad enough to where even people who don’t follow economic and political arguments have noticed it.  They also notice that their experience at the grocery checkout lines and gas pumps does not jibe with serene messages of non-inflation from the government and “inflation dove” analysts:

No joke: compared to less than a year ago, egg prices are up 13 percent. Beef is up 10 percent. Pork is up more than 9 percent. Fresh fruits are up over 7 percent. Overall, the prices of food at home are up 2.3 percent, while average hourly wages are up only 1.4 percent. In other words, food prices are growing 64 percent faster than wages.

[…] Prices are rising, they’re rising faster than wages, and they’re rising for items that comprise a large chunk of the budgets of working American families. Those are facts. The question is what to do about those facts. The subtext to all of the inflation critiques from the likes of Perry, Pethokoukis, and Ponnuru is that we should leave the Federal Reserve alone. Stop blaming the Fed for inflation, you guys. Please ignore that QE, QE2, QE3, and a multi-year zero interest rate policy, etc. were all intentionally designed to increase inflation, you guys. Just ignore all the different goods for which prices are rising really rapidly, you guys. Ignore the fact that higher prices and middling wages are eroding standards of living, you guys.

Unfortunately, the constant Federal Reserve apologetics are seriously clouding these pundits’ collective judgment about an increasingly important political issue: whether America’s current political class has what it takes to make rising standards of living — rather than just rising prices — the norm for American families again. That is why families are so anxious today. They’re worried that the American dream is slipping away, and that only thing people in Washington and New York care about is protecting people in Washington and New York.

Davis makes the case that when important commodities are growing more expensive, at a rate well above wage growth, it’s not much comfort to assure harried workers that inflation graphs look relatively flat.  He has some theories about why spending on food might remain a relatively constant percentage of income, even as income remains flat and food gets more expensive – for example, that could mean people are buying less food, which would not exactly be a triumph of prosperity.  

I would also note that until now, a great deal of food inflation has been hidden from consumers, by putting less product into packages that cost the same.  The relatively rapid surge of certain food prices in recent months might be a result of that game reaching its end.  The effect of subsidies and welfare, such as the titanic food stamp program, should not be discounted either.  If nothing else, we have good reason to be nervous about trends that might suddenly increase the already mind-blowing cost of those programs even further, without any great effort to ask permission from the taxpayers who support them.

Inflation is a complicated topic.  Pethokoukis does some great work explaining how over-reacting to inflationary pressures can lead to disaster, and he’s persuasive in arguing that some of the more strident alarms may have been sounded in error.  But I ultimately lean more toward Davis’ take on what’s happening right now, and how the direct experience of the American consumer should not be brushed aside by over-reliance upon macro-economic theories, and statistics that even inflation doves must admit look a little fishy.  Certainly some remedies for perceived inflation can be worse than the disease.  But I also wonder if some of the Federal Reserve’s policies to fine-tune the economy might go bad really fast, in the manner of a pressure cooker that looks like it’s under control thirty seconds before it blows.


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