Fear not hyperinflation

by on November 17, 2010 at 10:02 am in Current Affairs, Data Source, Economics | Permalink

Labour department figures showed on Wednesday that the “core” consumer price index, measuring prices for US goods and services excluding food and energy, rose just 0.6 per cent year on year in October. That was weaker than economists had expected and marked the smallest such increase since records began in 1957.

The full story is here.

1 Robbie Clark November 17, 2010 at 6:37 am

Seriously? What good is an inflation measure that doesn't account for food and energy? The things people need most.

2 fods November 17, 2010 at 6:45 am

Becasue food and energy are the most volitile.

3 Noah Yetter November 17, 2010 at 6:51 am

1. "core" CPI is a sham
2. consumer prices are not the thing to measure anyway

4 Pete November 17, 2010 at 7:04 am

It's basically telling you the price level for manufactured goods and services, the value-added industries. Food and energy industries are basically digging value out of the ground rather than "adding" it.

5 DA November 17, 2010 at 7:18 am

It's weird how much faith people have that inflation simply must be out of control, or imminently out of control. If the normal methods of accounting for inflation won't show it, then by God we'll cherry-pick prices from Wal-Mart or something to prove that it is.

6 JohnP November 17, 2010 at 7:26 am

I'm not comforted.

7 Andrew Edwards November 17, 2010 at 8:00 am

Given that commodoties prices are massively down since the 2008 peak, and up just 3% in 2010 (after a decent growth rate in 2009 due to some recovery off the crash), blind faith that hyperinflation MUST be coming will need to focus elsewhere than on the "don't look at core CPI" issue.


8 DK November 17, 2010 at 8:18 am

@Raja_r: In other words, not only did your economics course take the antecedent clause "too few dollars chasing too few goods and services", and imply that therefore that must lead to inflation (which is false, because velocity could fall), but it actually tried to REDEFINE the term "inflation" as the cause and not the effect?


9 dirk November 17, 2010 at 9:15 am

"How could anyone not be afraid of a major increase in the price level in the next few years given the recent behavior of the Fed?"

Um, dude, the Fed is trying to raise inflation back to around the 2% level. Quit listening to your AM radio or your CNBC or gold ads or whatever cartoon it is you are getting your ideas from.

10 IVV November 17, 2010 at 9:47 am

I certainly don't fear hyperinflation. Also, when I compare the price of, say, brand-name clothing and electronics to where they were last year or two years ago, I definitely see an overall drop in prices. The more discretionary income you have, the cheaper the world looks.

Now only if we could sustain ourselves off brand-name clothing and electronics instead of food and energy.

11 To November 17, 2010 at 10:24 am

@Troy: QEI is still sitting in banks because those banks are afraid to lend.

Isn't that the main reason why we need some core inflation right now ? As in: prospects for increase of the value of manufactured goods and services, to spur investment in the real economy ?

Private cash balance in the US is at a record high, either "invested" in T-bonds or used to trade commodities (just wait for that bubble to burst…). The problem is trend deflation in the high VA sector, hence stalled investment and hiring.

12 Ed November 17, 2010 at 11:00 am

"If food and oil really are trending up in the medium term, they should increase the prices of value-added goods too because expensive food and oil make production of all other goods more expensive."

In addition to Constant's response, if oil prices trend up a producer of value added goods may not be able to raise his prices due to collapsing demand. In fact, since consumers have to allocated more of their income to gasoline they may cut back spending in other areas. The producer could of course raise prices in ways not very noticeable or captured by the indices, such as by cutting back on services provided or shrinking the size of the product or packaging, or using cheaper ingredients in the case of restaurants. Or he could try to cut other costs, such as by cutting down his labor force.

Now as it happens, oil prices have been trending up, and produces have responded by cutting their workforce. The Federal Reserve has responded with loose monetary policy. In the 1970s, we had a similar crisis caused by oil supply shocks (though not a long term trend like what we have at present). And the Federal Reserve also responded by loosening monetary policy. And look at how that worked!

I'm not sure how rising food prices makes producing value added goods more expensive, its an input for the workers but companies don't feed their workers, and have been successful in keeping wages down despite, well, the increased cost of living.

13 dirk November 17, 2010 at 11:04 am

Trying to understand the meme here. Seems to be:

– CPI is a sham because it doesn't include energy and food prices

Is the assumption then that QE will cause higher energy and food prices but not higher CPI measured prices? If so, by what logic?

The increase in energy and food prices has to do with global demand growth not domestic monetary policy. The main point in getting "inflation" back up to its 2% trend is to lower real labor costs at the margin. Unless the CPI is going up it is unlikely real labor costs are falling.

Basically what we have now is the equivalent of a very, very high minimum wage because it is universally difficult to cut people's salaries to match the drop in the inflation trend.

14 Chris November 17, 2010 at 1:25 pm

I suppose that all housing should be removed from inflation calculations as well, it hasn't had very static prices the last few years, no?

15 David November 17, 2010 at 2:15 pm

I'm not too worried about hyperinflation, but I'm definitely worried about inflation in general. QE2 has just started and banks are still holding massive amounts of extra reserves. Once the economy picks up steam and banks find better returns by lending money rather than hoarding it, we'll see what happens with inflation. I think this is why economic progress is so often seen as something that causes inflation. The foundation is being laid now. The house will be built tomorrow.

16 jorod November 17, 2010 at 4:27 pm

You don't raise prices.. just put less in the package.

17 spencer November 18, 2010 at 6:04 am

OK, the total CPI is up 1.2% over the past year. Except when the CPI actually fell in 2009 that is the lowest since the 1950s.

For food the CPI registers a 1.4% year over year gain and for the last three months food prices rose 0.6%, exactly the same as the overall CPI.

18 Troy Camplin November 18, 2010 at 2:40 pm

False signals will only create a bubble, resulting in another bust. That is what QE gives us. If there weren't regime uncertainty, people wouldn't be afraid to loan — or borrow. People just don't know what the government is going to throw at us next that will cost huge amounts of money for companies. Throwing monetary inflation, which lies about demand (and makes it harder for those without money to buy things) isn't going to help any.

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