Inflation has already returned

Sir, I refer to your editorial “The economy is too weak for inflation to return” August 14, 2020.

No! The inflation has already returned, it is just not being measured yet. 

The Consumer Price Index (CPI) market basket is developed from detailed expenditure information provided by families and individuals on what they actually bought, and there is a time lag between the expenditure survey and its use in the CPI.

The consumption basket in a weak economy differs considerably from that of a strong economy. Ask anyone who on a tight budget has recently gone to the grocery store, and you can be sure he will complain about rampant inflation. 

PS. TIPS (Treasury Inflation-Protected Securities) are based on CPI while the Fed targets PCE. Does this have any implications?

PS. In these in real time information times, I am amazed there’s still a long time lag between the expenditure survey and its use in the CPI.

PS. What if the CPI market basket was developed from detailed information provided by families and individuals about what they would have wanted to be able to buy if its prices had not gone up?

Not the first time I have questioned CPI/Inflation

PS. The truth, in theory and in practice, is that everybody's inflation, might be nobody's inflation.

@PerKurowski

If the inflation-measured basket used house prices instead of rental costs, the story would be different.

Sir, Rana Foroohar points to “The latest Consumer Price Index figures show that almost all core inflation… was in rent or the owner’s equivalent of rent (up 0.3 per cent) [while] Core goods inflation, meanwhile, was down 0.2 per cent” and argues “that the housing market is once again completely out of sync with the rest of the economy.” “America’s new housing bubble” March 18.

Yes and no! No! “Rent” in much is a laggard response to the price of houses, and so it would be more precise for the arguments made by Foroohar to compare core goods inflation to what is happening to those prices.

Yes! “Hyman Minsky would have had a field day [more precisely many field years] with his Financial Instability Hypothesis that [argues] two kinds of prices — prices for goods and services, and asset prices.”

And yes, Daniel Alpert is correct: “What we have now is a form of inflation that’s never been seen before — it’s all concentrated in housing.”

To explain that with as “something the US Federal Reserve has actually exacerbated (albeit unintentionally) via low interest rates and quantitative easing that boosted housing prices in the very cities where the best paying jobs are located”, is correct but quite incomplete.

If banks needed to hold as much capital against residential mortgages as against for instance loans to entrepreneurs, something that was the case before the Basel Committee got creative, that would be happening much less.

As is, the resulting abundant easy financing when purchasing a house has helped morph houses from being homes into being investment assets. 

PS. In a letter I wrote and that FT published in 2006 (before it stopped doing so) titled “The information Mr Market receives could also be neurotic” I argued:

“Inflation as they, our monetary authorities, know it, is just obtained by looking at a basket of limited consumer goods chosen by bureaucrats and that although they might be highly relevant to the many have-nots, are highly irrelevant to measure the real loss of value of money. 

For instance, who on earth has decided for that the increase in the price of houses is not inflation? And so what should perhaps be argued is that really our monetary authorities have not been so successful fighting inflation as they claim they have been.”

@PerKurowski

What extraordinary things since the crisis have central banks achieved? Having kicked the can down the road?

Sir, Alan Beattie writes: “By being prepared to embrace the radical in the face of ill-informed criticism… — central banks have achieved extraordinary things since the global financial crisis. It would be most peculiar if now, when the pressure on them has abated, they mistakenly returned to a model of monetary policy rooted in the pre-crisis era.” “Central banks have a duty to come clean about inflation” September 23.

Sir, since the global financial crisis have really central banks achieved extraordinary things for most? I am not so sure. In many ways it seems they have only dangerously kicked the crisis can forward, while leaving in place the regulatory distortions that caused the crisis

But indeed let’s come clean about inflation. What would the inflation be if:

Most stimuli had not gone to increase the value of what is not on the Consumer Price Index

If there had not been so much credit overhang resulting from anticipating demand for such a long time.

If there had not been an ongoing reduction in the costs of retailing much of what is recorded on CPI.

If non-taxed robots and other automations had not put a squeeze on costs

Then the inflation could have been huge… so what are central bankers so fixated on the CPI?

PS. What would the inflation be, if the I-phone was in the CPI? J

@PerKurowski

The death of the hydra of inflation is also a myth.

Sir, Kenneth Rogoff’’s “The myth of how central banks slew the hydra of inflation”, August 30, correctly concludes after analyzing the effects of globalization that “there is some urgency in the need for central bankers to take greater pains to avoid taking too much credit for upside performance”.

I myself, in my book Voice and Noise, wrote a while ago that “to put some check on their egos, every time I see a central banker I urge him to take a shopping trip to the closest IKEA so as to see who really should get the credit of controlling inflation as we currently know it.” 

That said the issue is not really about who should get the credit for the death of the hydra of inflation, that is of secondary importance, as its demise might also have been a big myth. The way inflation is measurd by looking only at a cost of living basket while mostly ignoring the price of assets, might have in fact lulled us all into a very false sense of security. 

When Rogoff mentions “The advent of modern independent and anti-inflation oriented central banks is one of the great success stories of modern economic science” I also beg to differ. We should all know by now that placing your full trust into a non-accountable club of mutual admirers will, more sooner than later, induce incestuous thought processes that guarantee disasters.

When I also read in FT that “inflation-linked municipal bonds, a small and relatively unknown part of the US municipal bond market, have had a surge of issuance this year”, I start shivering at the pure thought of the consequences of having to restate inflation figures.