David R. Henderson  

If There's No Inflation, Why are Prices Up So Much?

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Rand Paul's Filibuster... Inescapable Intuition...

That is the title of an article by Michael Sivy sent to me by a frequent reader of Econlog. I have heard other people ask the same thing, so I'll answer.

First, let me point out that authors of popular articles rarely get to choose their own titles. Why is that relevant here? Because, as Sivy points out in the article, there is inflation. He writes:

And the CPI has recorded minimal increases over the past four years. Since the recession ended, the 12-month change in consumer prices has averaged 2% and has never been as high as 4%.

But the main thing he does in the rest of the article is look selectively at relative prices that have increased a lot. That doesn't contradict the idea of low inflation. It just contradicts the idea, which many people seem to have, that if inflation is low, relative prices of various things shouldn't increase much.

Sivy seems to understand that you can have price increases for some things and still not have inflation. He writes:

Price hikes for a particular item here or there don't qualify as inflation. If one thing gets more expensive but something else gets cheaper, that's what economists call a relative price change.

But then he betrays his understanding with his very next sentence:
Inflation is a simultaneous increase in prices across the board.

No, it's not. Inflation refers to a wide index of prices, weighted by their importance in a "typical consumer's basket," rising. There's no need for prices to rise across the board.

And I'm not sure what to make of this section:

There are lots of other ways to gauge inflation, however, that give very different signals. Gold was $930 an ounce when the recession ended, and today it's $1,583. So if you believe in the gold standard, prices have increased 70% in four years - or an annualized rate of 14.2%.

But the price of gold is a relative price. Even economists who believe in the gold standard understand that.

NOTE: For a piece I wrote on these issues in Fortune, "Fun and Games With Inflation," go here.


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CATEGORIES: Macroeconomics



COMMENTS (27 to date)
Ken B writes:

As I grew through grade school I noticed my classmates mostly getting shorter, all except Donnie, who got taller (drat him). Yet when I look at the class pictures, and I am always next to Donnie in the back row, I see we all grew taller. Puzzling.

Hazel Meade writes:

One thing I'd like to see is an analysis of the price hikes in fast food restaurants over the past few years, because they seem to have increased significantly since the recent minimum wage hikes.

Wendy's, for example, has given up on the "dollar menu" and has jacked some of those prices to $1.99.

It's also very hard to find any "meal deals" for less than $5.00. Maybe impossible.

JLV writes:

@Hazel Confounding that, of course, is that these price hikes have coincided with price spikes in the commodity inputs used by fast food companies (corn to feed the cows, and hence beef, wheat to make buns, etc.)

Jack Davis writes:

@Hazel, your anecdote isn't true for me. I eat @ Wendys and they do have dollar deals. Other fast food restaurants have dropped their prices.; e.g. Burger King just dropped their $2 whopper jr to $1.29; according to the WSJ it was due to the repeal of the payroll tax cut.

Jack Davis writes:

David,
I was wondering what your opinion was of the proposed "chained CPI" adjustment to SS benefits.

BigEd writes:

" . . . . . . the price hikes in fast food restaurants over the past few years, because they seem to have increased significantly since the recent minimum wage hikes."

The recent minimum wage hikes haven't even taken place yet.

David R. Henderson writes:

Fast food aficionados: the best deal is still Costco's high-quality hot dog: at my Costco in Seaside, California, it's $1.62 or $1.63 (I've forgotten which) for a large hot dog plus drink with unlimited refills.
@Jack Davis,
My short answer is that I think it's a very good idea. This might merit a future blog post.

Hazel Meade writes:

@ Big Ed, I'm talking about the "Fair Minimum Wage Act" of 2007, which raised the minimum wage from $5.15 to $7.25 in 2009.
http://en.wikipedia.org/wiki/Fair_Minimum_Wage_Act_of_2007

At least for me, 2009 is "recent". Maybe I'm getting old or something.


@Jack Davis:
http://www.usatoday.com/story/money/business/2013/01/02/wendys-value-menu/1805749/


Matt C writes:

> Inflation refers to a wide index of prices, weighted by their importance in a "typical consumer's basket," rising.

Yup, only the things I actually buy, like food, gasoline, and health insurance, are getting more expensive. But the house in Florida that I don't actually want is much cheaper than it used to be, so no inflation.

I admit that I am not tracking this carefully. Some things, like spending noticeably more on groceries, are partly us changing our consumption. But my wife and I both think prices are also rising, and quality is getting cut.

MingoV writes:

Prices I've seen go up in the past few years:

College
Almost all groceries (inflation + corn to ethanol)
Almost all fast foods (see above)
Gasoline
Repairs (cars, small engines, refrigerators, furnaces, air conditioners, etc.)
Shipping (related to fuel costs)
Hard drives
Printed books
Apartment rents
Houses like the one I live in

Prices I've seen go down:
Electricity and natural gas
Realtor charges to sellers
Houses like the one I'm trying to sell

Unless you're buying a house in an area with reduced house prices, the net affect of these changes is increased household spending. Thus, I do not believe the indicators that claim no inflation.

Mark M writes:

Wouldn't decreases in the cost of housing balance out the bubble affect of housing prices on inflation in the previous two decades?

Sy writes:

I believe you may be conflating inflation as a concept with how it’s measured. Conceptually, inflation is the general rise in prices over time. CPI is measured using “typical” consumer basket, which is not necessarily the same thing. It's clearly not a perfect measure of inflation for a number of reasons, including, I suspect, the reason/s you agree with the change in use of the CPI for Social Security.

david writes:

Real estate forms a huge chunk of the US CPI basket.

Insight writes:

"Prices I've seen go up: Hard drives"

I don't see this at all. Are you measuring per byte or per drive?

Steve Sailer writes:

What's gotten much more expensive is having a middle class family: e.g., a house with a yard in a decent public school district, plus college tuition.

8 writes:

Inflation leads to a general rise in prices in the end. If there are only relative price changes, there would be net deflation or no inflation over time (a long cycle of about 20 years) due to rising productivity and a constant money supply. If oil prices jumped to $200 a barrel, the economy should contract and other prices should collapse as energy consumes a greater portion of incomes. Energy producing states would boom at the expense of energy consuming states, but the net effect on inflation would be zero once the subsequent investment boom-bust cycle wore off. It is the government response—printing money to overcome the drag of high energy prices—that leads to the eventual general rise in prices.

Keith Eubanks writes:

An inflation driven by the change in the value of money will likely drive changes in relative prices, at least for a time. A change in the value of money may ultimately force all prices to change but they will not all change at the same time or speed. Some prices, commodities with future's markets say, may change in weeks or months, other prices may take years to adjust, wages perhaps.

It takes time for the market sort through an inflation. It is not like a grocer can say: "oh, another trillion in QE, that's another 20% in prices". No one knows how much prices will change for a given change in the money supply. It has to emerge over time.

libfree writes:

Dr. Henderson,

I had always understood all prices rising to be ceteris paribus.

David R. Henderson writes:

@libfree,
Please explain.

Ted Levy writes:

http://reason.com/24-7/2013/03/15/big-surge-in-consumer-prices

Ted Levy writes:

http://reason.com/24-7/2013/03/15/big-surge-in-consumer-prices

MingoV writes:

@Insight writes:

"Prices I've seen go up: Hard drives"

I don't see this at all. Are you measuring per byte or per drive?

I bought a 2 TB external hard drive last year for $60. A similar drive (same speed, same form factor, same user rating, same warranty) cost $76 last week.

Anthony Cloutier writes:

> Inflation refers to a wide index of prices, weighted by their importance in a "typical consumer's basket," rising.

What about the non-typical consumer? I'd love to see a study that breaks out age and socio-economic classes. For example, how is inflation effecting seniors, vs. the poor, vs. recent college graduates, vs. households with a greater than $100,000 annual income. That's the study that would lend understanding of the "real reason" so many people are struggling.

Gkm writes:

[Comment removed pending confirmation of email address. Email the webmaster@econlib.org to request restoring this comment. A valid email address is required to post comments on EconLog and EconTalk.--Econlib Ed.]

Inflation refers to a wide index of prices, weighted by their importance in a "typical consumer's basket," rising.

This is an ambiguous definition of 'inflation'. Which 'a wide index'? What basket exactly? Who decides what is 'typical'?

If 'inflation' is to be at all meaningful as an economics concept, then (1) its definition needs to be more fundamental - e.g., as an increase in the money supply, or something similar - and then (2) all of these 'typical baskets' and 'indices' need to be understood as (necessarily imperfect) attempts to *measure* the (underlying, more theoretical) phenomenon.

That, then, opens up the possibility of a more productive discussion re: whether these baskets really are so 'typical' and whether the measurement errors are small or large. But defining 'inflation' as *the measurement itself* begs the question. If the definition of 'inflation' is just 'the price of the chained-CPI basket', then (a) there is never anything to discuss and (b) it's not at all obvious why any given person should care whether *that* definition of 'inflation' is rising or falling. See e.g. Steve Sailer's comment regarding the cost of middle-classness.

Kevin writes:

That article is pretty weak. Even using his logic about a gold standard, a dollar-denominated increase in gold price is more representative of a lowering of price level, not an increase (because an ounce of gold buys much more now than it used to). What he calls a 70% increase is totally inapt. Another inapt, but less inapt than his, characterization would be that prices DECREASED by 41%.

Troy Camplin writes:

What makes anyone think money is going to enter the economy in any way that is evenly distributed? The new money is going to enter the economy in particular sectors. And when it does, it will create considerable inflation in that sector and also create a bubble. Further, how scared are banks to lend, still?

New money enters the economy through the banks, which lend to particular individuals in particular sectors. Those sectors get the money first, and the inflation is seen there. From there, the money slowly dissipates through the economy.

Too many think that printing new money will immediately result in inflation across the board. I know of no theory by any economist or school of economics that believes this. Those who say or have said otherwise have merely demonstrated their ignorance of even the most basic monetary economics.

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