Here is a tale of two cities. In Queens (where my grandpa lived), the Head of the Federal Reserve Bank of New York made a correct point but his audience didn’t care. In a diverse world, perhaps a single consumer price index reflects nobody’s true cost of a market bundle of goods? This case study highlights why macroeconomics is a tough subject to study.
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This case study highlights why macroeconomics is a tough subject to study.
Not if you reduce it to a handful of shibboleths and repeat them endlessly regardless of exigent circumstances.
The market for right answers is far smaller than the market for simple answers.
Inflation is what changes on a day to day basis for me. I don’t buy a new computer every year, but I buy gas a couple of times a week - I go to the grocery store nearly as often. The business of stripping out the volatile areas is a bizarre violation of an attempt to portray reality. Clearly, food and gas prices can double or triple, but as long as Ipads and cars don’t increase, we have no inflation, so the Fed has been successful in keeping the economy on an even keel. People are going to starve while the Fed gives us the good news of how well they are doing their job.
Stupidity reigns in our government and it is led by economists.
As is so often the case here, people in the hard sciences have found very good ways to deal with analogous problems, but the economists refuse to follow their lead — you can view this as an example of Davis X. Machina’s point if you like.
The engineering analogy would be to the characterization of wireless digital communication.
This is characterized by a situation of extremely volatility in the quality of the signal, so that a channel whose mean would indicate that it can transmit a lot of data is in fact close to useless because we’re so often in the terrain well below the mean.
This is handled by no longer talking about the mean of the channel, since that doesn’t represent what we care about. Rather, we switch to discussing things like the outage time — what fraction of the time will the channel not be able to perform the task we require of it?
The equivalent for economics would be not to focus only on the mean (the CPI), but to accept that there are a range of outcomes for different “usage models” and to also discuss those. So, for example, define the basket of goods for 50 or so representative families, making sure that the collection of families includes an appropriate number making aggressive use of medical services, paying higher ed fees, driving a lot, whatever.
And then display the “inflation rate” as a histogram, showing how bad the rate can be for some fraction of society.
Now the economists will immediately complain that this presents too bleak a picture — that the family that does badly this period (high medical increases) may not do badly next period (because they don’t care about the higher ed increases that occur).
At which point we see the exact nature of the problem. The economists want to play in the pool of politics when it suits their needs, but not otherwise. What this exercise would show is the POLITICAL issue, which is that there will be certain groups for whom the inflation rate is currently high, and those groups will hear everything the Fed says as a lie. When circumstances change, they will not notice that their inflation rate is lower — but they will remember the Fed lied to them. And this is a one-way ratchet.
You only deal with it by accepting the nature of the problem and making some concessions to the fact that when some people say their rate is higher, they may be telling the truth. If you have histograms that can show how wide-spread the problem is, there is a hope of treating it rationally, otherwise we’re all stuck in “my anecdote can beat up your anecdote”.
It’s obviously true that when prices of gas and food go up that’s a hardship we all feel. But when they go down again, as volatile prices do — that’s what “volatile” means — do we get euphoric about that? When gas went over $4/gal in the summer of 2008, there was panic in the streets. When it went back down to $2.50 a year or so later, should we have rejoiced about that? Or should we have panicked at such horrendous “deflation”?
I think there’s a lot of sense in worrying about the price volatility of consumables. Food and gas are not practical for ordinary people to stockpile; people have to buy them steadily, out of non-volatile income. Maybe it should be a policy goal to keep volatility low. But what would an anti-volatility policy, fiscal or monetary, actually look like?
-TP
Maynard H.
Why not just include a lagged component to the food & gas segments? Add a measure of variability if needed. Then there are numerous ways to model the potential for inflation that don’t ignore a strong component of a families budget. The problem of the communication example above, is that there is no “unavailable time,” one needs food and gas independent of cost ( I know, it isn’t totally inelastic, but nearly so for many folks). All the data ate relevant, even if volatile (that’s just “variable” if not food or energy).
Kristina Cooke of Net Age said it best: “Best not to cite the price of the new iPad as an example of why inflation isn’t a problem when you head into a working-class neighborhood”. Which was my point over at EconoSpeak. If I don’t own gadgets like iPads but I buy a lot of food, my cost of living rises when food prices go up even if iPad prices dramatically fall. I realize that food prices are only 15% of the average consumption basket but then I would suspect iPads are a very tiny portion of most budgets even for the typical household. But here’s a puzzle looking over the CPI v. PPI data. CPI claims food prices have risen by only 1.8% over the last 12 months whereas the PPI for foodstuffs have risen by 20%. I realize these are picking up two different things but I would suspect these resident’s of Queens would be shocked if someone tried to tell them their grocery bills have risen by less than 2% in the last year.