Economics, Pethokoukis, U.S. Economy

Why Amity Shlaes is dead wrong about inflation

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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.

Follow James Pethokoukis on Twitter at @JimPethokoukisand AEIdeas at @AEIdeas.

106 thoughts on “Why Amity Shlaes is dead wrong about inflation

  1. I am a big fan of Mr. Pethokoukis commentary. I do have a problem with this article. From a macro standpoint maybe there is not a great deal of inflation. From a personal consumer standpoint it does not seem accurate. Many grocery items, particularly meats, seem high, gasoline is high, health insurance continues to rise. Six years ago my premium with a $500 deductible was about $500 per month. Today the premium with a $5,000 deductible is about the same.

    Since 2008 our overall household expenses are about $5,000 more for a family of two.

    • Meat prices have increased, but the CPI has captured that. Food prices have actually not gone up as much as they might have, given the many factors that were supposed to add to them this year (drought, trouble in Ukraine, pig virus, etc.). Gasoline has rebounded considerably since the depths of the recession, but that’s due to better global economic conditions and returning demand.

      • Your grocery bill should not be up much if you purchase the same way the government compiles the stats. The CPI changes the mix in the basket as peoples buying habits change, if you switch from Beef to Chicken they count more chicken, in reality its a way to adjust the statistic to make it look better. Inflation is hard to measure but I think everyone would agree that if the raw materials cost more the product will cost more. The commodities index is up about 30% over the last 5 years. My favorite measure is the Big Mac Index. They are sold all over the world and include the cost of labor, materials, transportation, real estate, etc and the price in the US has gone up 5% a year since 2009. Taxes are up and so is healthcare. No one can deny that we have more costly regulations being added, whose burden is transferred to customers. So while I agree that we are not likely to see rapid inflation, most people have lower disposable income. Less money to spend equals slow growth.

        • Dear John, the Sunday/Wednesday hamburger has gone from .39 to.49 and the Sunday/Wednesday cheeseburger has gone from .59 to .69. The McDouble has gone from 1.00 to 1.19. All within the last year. In addition, senior coffee has gone from .69 to .89. And as the price goes up, the 7% you pay in sales tax also goes up. The Big Mac is generally considered overpriced by people who regularly eat at McDs, so you might be more accurate if you monitor the price of burgers, cheeseburgers, McDoubles and drinks.

    • Well who are you going to believe. Paul Krugman and Jimmy or your own lying eyes. Only a weak kinded idiot would believe these government statistics. What in your life is not going up in price at a very aggressive pace. Healthcare, gas, utilities, food, insurance, education, automobiles are all rising. The only thing that is not totally out of control are flat screens and Chinese electronic junk.

      Wait until we print enough money to cause the world to get totally fed up with us. Once the dollar collapses you won’t even be able to afford the Chinese electronic junk.

      In all of economic history and over 6,000 fiat currencies that have failed due to over printing, why is there any debate to this insanity.

      I guess the Fed, with its wonderful track record, now has it all figured out as it makes these monetary policy decisions flying by the seat of its pants.

      A blind man can see that this is going to end very badly.

      • All currencies–fiat, gold-standard, bimetallic standard–have failed. Including all the ‘private’ currencies of the 19th century US. Fact. Nothing lasts forever. Well, except for the misconceptions of Austrian economics.

    • Dear Mr. Damon: you are spot on. From grocery store today: 1.75 for a quart of skim milk; 3.29 for a bunch of broccoli; 6.99 for a 5 lbs. bag of grapefruit; and the list goes on. This was not at a fancy and expensive “organic” grocery, but rather at Publix, which is a supermarket used by millions of people in Florida. Affluent people with six figure salaries don’t notice and don’t even look at prices. Regular people notice and see how much prices have gone up. As for substitution, why should someone be forced to switch from broccoli or spinach or skim milk, for example, and, in fact, they don’t. If you eat an orange at breakfast, you generally will continue to do so, regardless of what the economic experts and BLS bureaucrats claim. Bottom line: the common people who spend a higher percentage of their income on weekly groceries are getting the short end of current economic conditions and the apologists for the rich and the government establishment, like Mr. Pethokoukis, continue to provide rationalizations to obfuscate the obvious.

  2. There are many forms of inflation. CPI only measures goods inflation in present time.

    When the Fed expands the money supply, the extra liquidity has to end up somewhere in time and space. With goods inflation held relatively steady by globalization and the increased world wide supply / competition among suppliers of commodities and consumer goods, CPI is held in check. Supply elasticity has increased through global competition.

    But assets are less affected by supply elasticity. There has been a lot of asset inflation of various forms (stocks/bonds, housing, art, etc) since the 1990s.

    Also in time, asset inflation increases the wealth of already wealthy property owners. But it reduces ability of non-property owners to start accumulating property, leaving them poorer long term.

    Thus Schlaes has a point in that monetary expansion is perversely inhospitable to the “forgotten man” of the middle class, who is left a wage slave less able to join the American dream.

    • Exactly. When are pundits going to wake up and realize that the expansionist monetary policy is a crock and is the cause of our boom/bust cycle? How can people not realize that just creating money out of thin air does not lead to prosperity?

      The same pundits and talking heads who are pushing the expansionist agenda are the same people who were caught off guard by the financial crisis. They should have lost all credibility, but instead their view is pushed as orthodoxy.

        • You’ll have to spell that out for me. Soros makes his money via arbitrage, not by selling products and services that contribute greatly to climate change, not by pushing policies that weaken unions and otherwise put downward pressure on wages. How does Soros financially profit when he contributes to Medical Marijuana or Gay Marriage propositions? Koch’s want people to worry about the “inflation” bogeyman, not about how they are vacuuming up record profits at the expense of the Middle Class, the economy and the environment.

          • Mr. Soros is a remarkably gifted, complicated and implicated man, as are many who hold a life-long passion of radically changing the world for the better (even if that means crashing and destroying legacy systems that are not sustainable). However to say he just profits from arbitrage and to disregard his immense investments in petrochemicals and other anti-green energy sector entities is simply wrong and profoundly uninformed.

            Let’s stop drawing figures like Soros and the Koch brothers out as if they were cartoon characters. If anything, both are remarkably similar in their capacity to profit from capitalist acceleration and political instability.

          • Wow Sepiano, you sound like you might want to do a bit of research on the Koch brothers and look up who they give money to. Since your reading this article I have to assume your an intelligent person. I think you would do yourself a huge favor and read Milton Friedmans ” Free to Choose”. It will give you a better perspective on where the other side agrees with you and where they differ in terms of policy. I do think the book will enlighten anyone as to why the US economy is still in a funk.

          • John The Kochs have made some nice donations here and there, such as to KQED and the Opera. But the bulk of there giving has been to front a huge campaign to undermine or obfuscate the science of climate change, in an effort to protect their coal burning operations’ profits. They also give a huge amount, via various conservative front groups to candidates that support policies that help protect their wealth and exacerbate the current income disparity. They are big “dark money” donors, as has been coming to light by some of their contributions in California campaigns. Many “moderate” Republicans are very fearful of being primaried by folks receiving Koch bucks, and taking up kooky “I’m not a scientist” stands on Climate change and other issues in order not to raise their ire. I’ll see if my local library has the Friedman book you recommend. I get the impression the Hayek loving Austrians don’t think overly much of Friedman, though. I’ve read a criticism that he overestimates the power of the Fed to prevent recessions via controlling the money supply.

  3. this article is a bunch of baloney, every time I go to the grocery store or gas station or pay my bills I know for a fact that inflation is bad, real bad… and no one’s wages are rising.

    the author of this piece is either an idiot or a propagandist.

    • Shoey — Inflation is a great bogeyman. But I ask you, if inflation is so rampant, why isn’t your income also inflating? Inflation is the increase in the cost of BOTH goods and services, and services include money paid for services rendered (aka wages).

      Clearly something else is going on, and I think the inflation hawks are deflecting attention away from the true causes of our current economic problems. Ever notice how all their policy recommendations favor billionaires and millionaires (the rentier class in particular) at the expense of the Middle class?

      • Inflation is not really the increase in the cost of stuff. It is the loss of value of fiat currency (a.k.a. money). An ounce of gold will buy you the same amount of pork bellies today as it would 100 years ago. The problem with gold is that it doesn’t directly reflect the aggregate increase of wealth, if any.

      • You mistakingly believe that ALL goods and services have to increase when there is inflation. During any given period of time, prices for goods and services move in both directions.

      • Wages do increase but slower as the money takes time to wash through the system. The last people to get it are the little people who get screwed while the more connected are able to buy products with cheaper money which bids the prices up.

        • Don’t cry for me Argentina,err, america…salaries don’t keep up with inflation…middle class can’t pay bills…food stamps don’t keep up with inflation…poor riot in the streets…middle class lock and load weapons behind locked doors…evita,err Hillary is elected by illegal immigrants while we all cry: why didn’t we listen to rick sateli and amity schlaes.

      • But I ask you, if inflation is so rampant, why isn’t your income also inflating?“…

        Wow! What an incredibly silly reply sepiano, what employer (this even applies to the self employed) guages an employee’s pay via the inflation rate?

        ersonally I think shoey might be onto something with the comment he made…

        I know for a fact that John Williams’ inflation numbers more closely match my own than the fairy tales spilling forthing from the BLS and Census…

        • juandos Employers that don’t want their employees to quit and take better paying jobs elsewhere DO keep an eye on inflation rates. Or if not that, they at least keep tabs on going rates for the employees they hire. Certainly my part-time “day job” boss has been regularly giving us raises. (I have two small C-form businesses that I created and work, in addition to the salaried work I do on Saturdays.)

          I don’t care if all you got is the insult “silly.” I don’t dispute that your expenses are going up and may be doing so at a trajectory closer to Williams. Could very well be true. But if your income is not also going up, I’m afraid you are just getting reamed, plain and simple, and apparently taking it like a dog (laying down), convincing yourself this rip-off is only natural or something like that.

          And that is the point. “Inflation” is about the value of the dollar, not the value of the work you perform. With true inflation, more of our weaker dollars would be needed to compensate the work you do to match its value. But that is not happening. Employers are in effect giving you pay cuts by not matching inflation, and they are getting away with it.

          And THAT is a huge problem in this economy, because if the poor and middle class don’t have as much to spend, continue to be squeezed like this, they buy less and fewer man-hours are required to make the reduced number of goods being bought which means employment stays weak.

    • Amity’s perspective reflects the disconnect between pragmatics and progressive academic idealists. In Amity’s world (shared with millions of lower and middle class moms, for instance), a box of Velveeta has gone from a suggested retail price of $4.99 with a retailer shelf discount bringing it down to between $3.29 and $3.49 back in 2008, to a shelf price of $6.99 with few discounts ever at the local Wal-Mart in 2014.

      Amity’s pragmatism extends across the grocery market to the basket of products purchased and accounts for the shrinkage in packages, while the academic economists (who are invariably identified by their allegiance to an economic ideology society and political philosophy) advance the theoretical idealism of models fraught with framings that reify the materiality of actual consumer costs with the explanatory reinterpretation of the respective economic model. In a sense, Amity is an ally to theorist Slavoj Zizek in pointing out the effectuality of the real inflation vs. the overcoding Ideology that precludes the doxological programming of the Trained Economist from understanding what is truly felt by America’s non-elite classes.

      If one is unable to “take off the glasses of ideology” to see the real price inflation of lower and middle class goods, that dilemma merely serves to confirm one’s participation in the narrative of the economic elite that curiously seems compelled to wish away the accelerating structural collapse of the American economic model.

      • There’s a lot of stupid in these comments, but the idea that Amity Shlaes “shares” or knows anything about the world of “lower-class moms” is nonsense on stilts.

        Amity Shlaes write a good history of Coolidge, then blew a bunch of coke and decided to say stupid nonsense about economics, about which she apparently knows nothing at all.

  4. Even low rates of inflation have deleterious effects… they accumulate. Try selling income property or other investment that you’ve owned for a long time… and realize the capital gains tax you owe… much of which is a tax on inflation. Thomas Edison said: “The most powerful force in the universe is compounded interest.”

    • Actually Einstein said that, and that was back when you could earn interest on things. (You can’t anymore, largely because we don’t have inflation).

      Anyway, this article isn’t about whether something called “inflation” exists but about whether it’s 5% or 2%. So sure, let’s stipulate that “inflation” exists and that, as a result, you may be taxed on capital gains that are largely the result of inflation. Thanks for that enormous insight that is unrelated to this discussion.

  5. “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.”

    Given the stagnation in real wages then yes, there in fact has been no real economic growth for the vast majority.

  6. Balderdash…..the AEI used to provide rigorous analysis, not just cheerleader for the status quo. Any simpleton even paying modest attention to real-world experience knows the notion that inflation is “quiescent” is silly beyond belief.

  7. I don’t have the numbers at hand, but based on personal experience and that of those I know, everyone is feeling squeezed. The overwhelming majority of expenses for an average middle class household are food and energy. Meanwhile incomes have become stagnant, or have fallen (sometimes dramatically) for many since 2008. The fact that prices for things like consumer electronics may be falling is irrelevant to most people’s economic well being. The continued dramatic rise of college tuition, and associated student debt is another major factor.

    I don’t know the exact macroeconomic answer, and I’m not going to pretend I do. What I do know, and what every American knows, is that the financial sector and the public sector, which were bailed out in 2008 and 2009 by the TARP and “stimulus” bills, have been moving right along like nothing happened. Washington DC is the biggest boom town in the country, and Wall Street is at record highs.

    Meanwhile everyone else is struggling. Those who whistle along denying that anything’s wrong are dangerously out of touch with reality.

    • I agree with you entirely. Crony capitalism is also a huge problem. The Import Export Bank’s biggest customers were Boeing and GE. Unbelievable. And the IE Bank is only the smallest tip of the iceberg of government support of favored companies (those that contribute the most in campaign contributions and spend the most on lobbying).

  8. Still and interesting discussion. The main issue I see is using BLS numbers. They lied prior to the 08 election concerning employment. In addition they have a vested interest in keeping the posted inflation low. That being they don’t have to increase pension benefits or SS benefits. I would venture a measure of inflation might be the bi-annual pay raises of Congress or Congressional Staff.

    • “Shadowstats is built on the belief that the Bureau of Labor Statistics changed their methodology in the 1980s and 1990s, and that if we were using their original methodology the level of inflation would be much higher. Shadowstats presents what they claim to be the original methodology. But Shadowstats is not calculating inflation any differently.They are not using the 1980s or 1990s methodology that they believe would be higher. All Shadowstats is doing is taking the CPI data and adding on an arbitrary constant to make it look like inflation is higher!”
      http://azizonomics.com/2013/06/01/the-trouble-with-shadowstats/

  9. I do think that if things were ” normal” we would have high inflation rates. The QE , or money printing, was initially sold as a way to get banks to lend again. Now if the money multiplier ( econ 102) were at historic norms the banks would have loaned out the same dollar multiple times. Given the size of QE we would certainly have massive inflation. However we do not because the banks are still not lending ( due to Frank Dodd). Instead they are buying stocks or investments with the free money. I would think that without Frank Dodd banks would have lent more freely, and the Fed would have ended QE long ago as the money supply would have increased and greased the wheels of commerce.

  10. I suppose Mr. Pethokoukis is unaware of the stagnating (if not declining) trend in median real income (as well as standard of living) and the steady erosion in the Labor Force Participation rate that the US economy has endured for the better part of the past 40 years. These statistical trends would not seem consistent with a growing economy. And more recently we have added a reversal in the birth/death rate of businesses (more dying than being born now) to the mix. It is pretty clear to anyone without a political agenda that the economic conditions in the US have been steadily deteriorating since the 70′s (with brief respite under the strong dollar policies of the Reagan and Clinton administrations), which would in fact be consistent with an economy enduring a permanent recession since the day it adopted a fiat monetary regime.

  11. This article is bs. I work for a large food distribution company-we sell to restaurants, schools, healthcare.
    For the average middle American, food and energy are the biggest items in the budget.
    Back in 2007 the restaurant business was very good; the economy was humming, gas was under $3 and people had disposable income and they spent it.
    Now since then I have seen wholesale costs skyrocket-basics such as canned applesauce are $10-$15 a case higher; sugar prices have doubled, flour to make your pizza have doubled. These all affect the costs that each of us pay.
    Companies also factor in wages, benefits, and costs of services-in my company, the cost of fuel to run the trucks to deliver the goods has gone up substantially.
    The only people who care that the cost of flat screens has gone down are those who buy one.
    Food is up at least 30% to my customers over the last five years-they just aren’t able to raise their menu prices where they need to be because people will just stop eating out.
    Independent restaurants are just barely getting by and if the democrats succeed in raising the minimum wage to
    $15, you will see a large majority of mom and pops close.

    • If we had 2% inflation and gas at $3 seven years ago, then gas would be about $3.45 now. If we had 5% inflation and gas at $3 seven years ago, then gas would be over $6.

      The article is only bs to those who can’t do math.

  12. 40% of the CPI is “owners equivalent rent” which is a function of mortgage rates which the Fed has been manipulating downward for almost 5 years. What would mortgage rates be if the Fed was not buying all the mortgage bonds and then what would the CPI be? The answer may not be quantifiable but it is undoubtedly higher. And yes, with higher inflation, it means the meager GDP growth we have enjoyed is more likely not growth at all. Amity Shlaes knows about the Great Depression and unfortunately the rest of us know about the Great Depression II.

  13. Mr. P. comes right up to the precipice of an epiphany and steps away because he is afraid of what he sees. In fact GDP growth is exaggerated for exactly the reason John Williams points out. The American economy hasn’t increase the median wage in 40 years. There has been no net new job creation since 2000. And the new jobs that are created are low level service jobs given to mostly immigrants.

    The biggest economic story since the failure of socialism has been the failure of capitalism.

  14. It’s interesting that Shadow Stats uses the methodology to calculate inflation, that the Bureau Of Labor Statistcs used in 1990. If this is “unsound” then why did the government use it before? And what’s wrong with using a government statistic that we used before to compare with periods when that metric was used? A link is provided to a 2008 BLS document supporting their changes to how inflation is calculated, that has a total of 1 table and 1 chart, neither of which shows what the two metrics show for inflation and how different they are. For that we have to go to shadow stats. You’d think an article comparing two methods of measuring inflation would compare the two approaches and show the difference, but it doesn’t. Leading me to believe it’s a political document, more akin to the IPCC propaganda on Global Warming. Even the MIT billion prices project doesn’t explain how it calculates inflation, but it gets its data from a private firm Price Stats which says they measure “key economic sectors such as food, clothing, electronics, furniture and energy. ” Note the lack of housing and services costs. Rents have been rising, which isn’t included.

    I think the price of gold is a better measure of inflation, but more volitile.

  15. Is the result from the MIT Billion Prices Project based on a weighted basket of goods? If not, then this article was not persuasive for me.

  16. Inflation. We should have such problems. What is clear in the present time is that people are going to believe what they want to believe regardless of the evidence. More power to them. If you believe that our inflationary doom is just around the corner because of whatever reason you want to believe in, then go buy gold or whatever other asset class you think will hedge you in. We all have the opportunity to put our money where our big mouths are and make a “bet”. Those who have bet on the big inflation boom over the past several years have lost their collective axxes. Just like the bears on wall street. I guess the “washing out” of all that money is showing up only in the stock market, right boys? And in corporate earnings? We have seen inflation in corporate earnings during the Obama recover. The stock market loves Obama!!

  17. I wonder if AEI has considered the implications of a comment thread 80% full of conspiracy theorists. Steak costs more! Government conspiracy! Cherry-picking, or apple-sauce picking, but ignoring all the goods that are cheaper… it’s a conspiracy.

    Note that Shadowstats charges the same as it did 8 years ago, while, if their methods were correct (they aren’t) the 2006 dollar is worth about 25 cents today.

    This thread is the equivalent of Eric Cantor’s surprise defeat. Much like the German Industrialists of the Weimar era, AEI’s corporate patrons have unleashed a destructive, willfully ignorant movement which isn’t stopping at a few tax cuts and environment regulation repeals.

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