The media is full of reports these days about low inflation or no inflation, in fact some refer to this period as another installment of the great moderation, or a protracted period of low inflation amid moderate, but positive economic growth.
Is this really true?
Let’s leave growth out of this for the moment; several times I’ve questioned the relationship between US economic growth and Quantitative Easing, and I’ll revisit the topic soon enough. So how about low inflation then? Is inflation really low?
Well, depends upon where you look. If one accepts The Consumer Prices Index (CPI), or a measure of inflation as defined by The U.S. Bureau of Labor Statistics, the answer is yes. How about we switch our focus away from CPI to other measures, my answer is a resounding NO. But I’ll let you make up your own mind by looking at some data.
There are three charts below, each showing CPI compared to another metric. Each chart originates at January 1st, 2005 and baselines the time series to this date at 100. The first chart shows CPI (red) against a metric known as The Personal Consumption Expenditure: Services (black) — how much we pay for a mixed basket of services. Over the horizon CPI ends up at 108.0, while The Personal Consumption Expenditure metric ends at 121.0 — in other words,
CPI under measures the cost of purchasing services.
The second chart shows CPI (red) against a metric known as The Personal Consumption Expenditure: Services: Health Care (black) — how much we pay for a basket of Health Cares services. Not broad, but focused on Health Care only. Again, over the horizon CPI ends up at 108.0, while The Personal Consumption Expenditure metric ends at 121.6.
CPI under measures the cost of purchasing health care.
The third and final chart again shows CPI (red) against a metric known as The Harmonised Index of Consumer Prices: Education (black) — this captures how much we may for higher education in The United States. While CPI ends at 108 as before, Education ends at 119.9.
CPI under measures the cost of education.
So does CPI really measure the cost of living? Sure, if you don’t need health care or a higher education, or have to pay for people who might need these services. Otherwise no, CPI is deficient.
But there is more. Looking at the art markets we see records being broken at auction in many world cities even as the property market in many countries enters new bubble phases driven by negative interest rates.
Conclusion: there is plenty of inflation about. But CPI doesn’t measure it. CPI is deficient by design.