Consumer Price Index (CPI)

This is not as interesting as railing about bank bailouts … but I should pass on the inflation figures released today. Here is the government report, hot from the press: Consumer Price Index (CPI)

The major news here is, of course, the incredibly low inflation rate for the year. At 0.1% it is the lowest for 54 years. Many of us recall the days of mid-teen digits on inflation reports and Federal Funds rates of 20%. Squeezing inflation out of the American economy was the triumph of Paul Volcker. The cost was the nasty recession of 1981/82.

The current lack of price growth is not the intended consequence of policy, as it was in in 1981, but the unintended consequence of bad policy. We have low inflation today only because business and policy leaders totally mismanaged the two great bubbles of the past twenty years. Asset prices went through the roof, but those prices were never captured in the official inflation statistics, and so no policies were instituted to damp them down. The result was a ridiculously bloated set of asset prices that had only one way to go. Their collapse brought everything else with it and so, perversely, the official statistics now reflect the deflating of assets!

This is just my convoluted way of noting that the current quiessence of prices is a chimera. Since asset prices are still not well reflected in the official price indices, I think that inflation as represented in those indices is misstated. Right now we are undergoing a deflation. That is not the same as a disinflation. The latter is simply the stopping and reduction of inflation. That is what the official statistics show. A deflation is far more dangerous: it is the general decline in prices. A deflation can do untold damage since it undermines the incentive to invest and undertake business because a dollar invested today produces returns at lower prices than today’s. No one wants to invest in such a circumstance.

So today’s announcement should be cause for little regard. Inflation is beaten down for the wrong reasons, and the figure is wrong anyway.

We should be trying to boost inflation to stave off deflation, not noting its temporary passing. A healthy dose of inflation would be a strong tonic for all of us right now. And, yes, you read that correctly.

Note:

Quite a radical day this. So far I have advocated nationalization and inflation.

Strange times!