Wednesday, March 31, 2010
The coming inflation wave
This is an interesting article about the "coming inflation" debate. Some believe we are not seeing inflation, while others say its here and going to be a huge problem. The article points out many indicators that would cause us to believe inflation is here. I think most people agree with this, but what I found interesting was the part in the article saying the US government has changed the way it calculates CPI 9 times since 1996, presumably to reduce the expenditures on entitlement programs.
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This article is clearly stating that the conventional measures of inflation are flawed, especially since calculating CPI has changed so much since 1996. The exclusion of food and energy prices to calculate CPI is disputed too since government data shows that it makes up 36% of the average consumer budget. Because of these prominently stated issues, many economists are disagreeing on the current inflationary environment according to this article.
ReplyDeleteThe reason why economists exclude food and energy prices in their calculation of the CPI is that these goods' prices fluctuate enormously in the short run, possibly causing the calculated CPI to be a misleading indicator. It is also often argued that inflation is a 'sustained' increase in the price level in the economy, so including food and energy in the CPI's basket of goods may not be reasonable.
ReplyDeleteCore CPI is limited in its ability to indicate how people are feeling. So the Feds method might not be the best indicator for consumers, and the BLS measure of all item CPI is best for measuring how people are feeling. This article is saying that there is more than one measure of inflation. The Federal Reserve uses core inflation (as well as PCE price index) to conduct monetary policy. I was simply noting that core inflation would not tell the whole story and this is seen by the Fed’s switch to the PCE index as a guide for economic policy. But overall this article is taking different indicators of inflation to consider if inflation is a problem or could be a future problem. I think it is important to have an indicator that can help predict future inflation. This article seems to be in favor of comparing a range of price level indicators to get a definitive view of what is happening.
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