A surprising number of people on Wall Street will tell you not to worry too much about inflation.Read the rest here.
After all, they'll say, just look at the numbers. The inflation picture is incredibly benign. In the past 12 months the Consumer Price Index has risen just 1.5%—a remarkably low rate. And when you strip out volatile food and energy costs, they'll say, it's even lower—a meager 0.8%.
It doesn't stop there. Many economists will point out that wages are also rising by less than 2% a year. With so many people still out of work, goes the line, labor costs are going to stay low for a long time too. So what's the worry?
Clearly, a lot of investors agree. Inflation-protected government bonds, which people would buy to protect themselves if they were worried, have fallen in price in the past couple of months. Gold, another inflation hedge, is down. Ten-year Treasury bonds yield less—3.3%—than they did when President Eisenhower left office.
It's crazy. There is plenty to worry about. As you battle to manage your family's finances, be aware that there are three reasons why inflation needs to be on your radar screen.
• First, the official inflation numbers should be taken with a fistful of salt.
Over the past 30 years, the federal government has made a lot of changes to the way it calculates inflation. It's taken place under presidents of both parties. Each change in methodology has come with plausible-sounding justifications. But, as if by magic, each change has had the effect of flattering the numbers. Funny, that.
And yes, The Queen gets it.
I was interested until I saw that you were quoting Arends. His misses so far outweigh his hits that I've stopped reading him. The current piece misses. Calculating a general price level is impossible, and all attempts to do so will incur justified criticism. Does a particular market basket measure my personal inflation rate? Only if it exactly replicates my spending.
ReplyDeleteHow important is calculating an inflation rate? Very important to a government that indexes payments to inflation. This is something to keep in mind for the Friedmanites who think that indexing is superior to a gold standard.
John, I'll try to hunt it down when I have more time but I think Theodore Dalrymple offers a really good essay on inflation and how it kills mores of the working and middle class. Namely, as mentioned in your video, the idea that savings and thrift are actually detrimental.
ReplyDeleteWell, time for me to break a few windows to stimulate the economy!
I think Theodore Dalrymple offers a really good essay on inflation and how it kills mores of the working and middle class
ReplyDeleteCorrect. Inflation is an extremely corrosive social force because it heightens time-preference.
Japan has had no inflation to speak of for decades, while Egypt has had double-digit inflation for four of the last eight years (they do well if they are running "only" 4%). Does one find that the working classes of Japan are particularly more moral than those of Egypt?
ReplyDeleteJapan has "stagflation." Their money is so watered down the government's debt is in the quadrillions. Same effect.
ReplyDelete