Are conservatives forever and always doomed to be obsessed by fear that inflation is perpetually just around the corner? Perhaps, since it was the Great Inflation of the 1970s that helped give rise to Reagan and Thatcher and the conservative revival. Even worse, this inflation obsession spawns conspiracy theories that government is manipulating the data to hide skyrocketing prices.
To be sure, the prices of some things have gone up a lot and continue to rise, such as college tuition. But overall inflation has been quiescent. The Consumer Price Index, including food and energy, has risen by an annual average of just 1.6% since 2008, including 1.5% last year. Is Washington phonying up the numbers? Well, MIT’s Billion Price Project, which “uses prices collected from hundreds of online retailers around the world on a daily basis” puts US inflation at just over 2% the past year. In other words, the CPI is roughly correct, though your personal mileage will vary a bit. Looking forward, a Cleveland Fed model based on both economic surveys and financial derivatives reports that its “latest estimate of 10-year expected inflation is 1.83%. In other words, the public currently expects the inflation rate to be less than 2 percent on average over the next decade.” Not surprisingly, then, I strongly disagree with the inflation fretting of Amity Shlaes in her new NRO piece, “Inflation Vacation: Things are more expensive than government statistics say they should be.” Here is Shlaes;
All the official numbers, especially the Consumer Price Index, say that inflation is reasonable. Economists you respect tell you the wages are low because of “misallocation of resources.” Janet Yellen, the new Fed chairman, says she’s not worried. Maybe she will have a good vacation.
But other numbers suggest that inflation is higher than what the official data suggest. One set, from which some of the price bites above were taken, is here. For a more thorough review of why official numbers err, have a look at the work of John Williams, a consultant who has tracked data over the years.
Boiled down, Williams’s contention is that several alterations in the way we measure inflation have caused distortion. The Consumer Price Index used to be simple: The government measured the same basket of goods every year. If the price went up, the index captured that. Decades ago, authorities pointed out that people substitute a cheaper item when what they originally bought was too expensive. They altered the index to capture substitution. If steak is expensive, you buy chicken. The result of their fiddle is that inflation looks lower than it would otherwise. That’s disappointing. No vacation is a true vacation without a really good tenderloin.
Conservatives like Shlaes — she is hardly the only one — should really stop using John Williams and his ShadowStats site as source for their inflation arguments. Many economists, not to mention the BLS itself, have given reason to think his approach methodologically unsound. According to one Williams’s calculation, annual inflation has never been below 5% since the mid-1980s and is nearly 10% today.
Think for a moment what that means for real GDP growth the past three decades. Nominal GDP averaged about 5% from 1986 through 2013. Of that 5%, 2% was inflation and 3% was real GDP growth. If inflation was really 5% — and often, according to Williams, it was much, much higher — then there has been no real economic growth in America all that time. Actually, we have probably been in a long depression from the Reagan years forward.
Is that what folks on the right really want to argue? Conservatives should not be so desperate to make the “Obama is Carter” argument or push for a return to the gold standard or to “end the Fed” that they will use any source to back their inflation claims, including sources about which even a quick Google search would raise numerous red flags. Such sloppiness render arguments unpersuasive to anyone but true believers. It also feeds a conspiratorial mindset unhelpful for anything other that creating customers for the numerous gold hawkers on talk radio.