Nonsequitur: Is There Or Isn’t There Inflation?

July 18, 2014

The Fed chair, Janet Yellen, says inflation is below their target rate. Some economists and economic pundits (we’ll call them the “Stimulites”) believe there is no inflation problem. Officially, the Consumer Price Index (the measure for inflation) was at 2.1% for the past year.

Of course, there is inflation. It is 2.1%. But you can’t tell from the CPI number alone if it is a problem or not. IF the CPI measure is accurate and IF the economy is growing at a comparable rate, then it isn’t a problem. (This was Yellen’s point.) But the economy (GDP) contracted (got smaller) in the first quarter of the year by 2.9%. This means, in real terms, consumers had smaller earnings while prices continued to increase during the first quarter. It cost consumers more of their earnings to purchase the same goods and services. That’s a problem.

Also, the CPI does not measure all prices equally in relation to consumers. For example, the price index for household food increased by 2.5% in the last year, with a 0.7 increase last month. Other large increases included energy with a 3.3% increase and medical care with a 3.0% increase. Commodities like computers and cars saw only a slight increase in cost. But food, energy and medical costs have the broadest impact on the most consumers. These are the areas that had the largest increase in prices. That’s a problem.

Higher prices for things like milk, or dental care, or gasoline probably don’t matter much to Fed chair Janet Yellen or economist/pundit Paul Krugman. Their salaries are high enough to absorb a 2.1% or 2.9% or more increase in costs of goods and services without much notice. But most Americans do care how much a gallon of milk or a gallon of gasoline costs. With decreasing earnings, it affects how consumers spend their hard earned money. And that may be a very big problem for our stagnant economy.

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