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Inflation is real but uneven

I really enjoy your writing, but I am not sure your examples were the best in the inflation piece.

Everyone's experience of inflation is different and depends on the goods and services consumed. The college tuition for my daughter has gone up 5% per year for each of the last three years for a net inflation rate of 15.7625%. That is a hard truth.

Regarding pricing of bonds, give me $4 trillion (the amount the Fed created to purchase bonds and mortgages) and I can move a market, too! It's hard to argue that the combined resources of the Fed, ECB, and BoJ have not created a massive distortion in the bond market. Does the free market really think negative rate Swiss bonds are a deal?

I am not arguing for ShadowStats or that the BLS is intentionally lying, but inflation is real and lumpy and the BLS methodology does a poor job of representing it IMO.

Hi Keith,

Thanks for the comment. I don't think anyone is saying that inflation isn't real or that there isn't any. But as you noted, I think we tend to emphasize that which exposes us to sticker shock. So, for instance, you notice that college tuition goes up every year, but you don't notice that your $500 phone is now a camcorder, voice recorder, walkman, boombox, flashlight, computer, phone, GPS device, watch, etc. All of those devices would have cost you $10,000 just 15 years ago.

Regarding the bond market - the Fed doesn't control the long bond or corporate bond markets so when people say that interest rates have been "manipulated" or distorted I think they're overstating how much control the Fed really has here. The Fed sets a short-term benchmark rate by trying to guess what future inflation will look like. The rest of us set long-term rates by also guessing what inflation and credit risk look like. So, when bond traders buy a 30 year T-Bond at 3% they're not just blindly accepting a huge amount of duration risk because the Fed set the short-term rate. They are explicitly saying that they don't see much inflation risk. Could they be wrong? Sure, but I've been listening to people tell me that bond traders were wrong for the last two decades non-stop.

Anyhow, I know there's inflation out there in things like healthcare and education and I don't mean to downplay those areas. But there's also a good deal of deflation that has offset that. The thing is, the BLS doesn't measure things that only hurt a some people. CPI is designed to be a measure of BROAD goods and services. So, while the elderly are hurt by rising healthcare costs the young are not. While you are hurt by rising education costs there millions of people who aren't. And while it's an imperfect measure I think it's much closer to reality than the conspiracy theorists would have us believe....

"Pragmatic Capitalism is the best website on the Internet. Just trust me. Please?" - Cullen Roche


Thanks for the quick reply.

Re: conspiracy theorists, I totally agree and I think that was the main point of your post.

Inflation is a very hard thing to measure. Maybe the basket should consist of "needs" like housing, food, clothing, and transportation. I thought the BLS already took things like phone and computer advances into account using hedonic adjustments, but maybe they don't do that with everything.




Hi Keith,

Yes, I am totally with you there. Not sure if you’ve seen this old post of mine, but I spoke about “needs” once before. The point being, “living standards” are very hard to define. In monetary terms, I would argue that living standards can be best defined by needs. The BLS defines needs as clothing, shelter and food. The interesting thing is, by that definition, our living standards, even with stagnant real median wages, have RISEN.

So, where I think things breakdown for more people is that we’re so much better off now that the definition of “needs” is starting to change. We now think of college and good health care as “needs” because we’re that much better off. And it’s true, these things are a need now. The world has changed. And it’s fair to say these things are needs. But I also think it’s fair to keep things in perspective and remember that we are so much better off than we were 100 years ago when access to a good doctor or even a good teacher were the ultimate luxuries.

Said differently, we are better off despite the inflation we’ve seen in the economy. And that’s a very good thing. Now, if we could combat this inequality problem we’d be able to spread even more good to even more people!

Thanks for the great comment!

"Pragmatic Capitalism is the best website on the Internet. Just trust me. Please?" - Cullen Roche

Responding to Cullen here, about your comment on the phone example. Your example is something real that happened. But I do not link it to inflation. For one, these things are luxuries, they would be things that most households would not have were they still as expensive. So we could say that prices for luxury has deflated drastically. But for necessities and important things (like education), it is difficult for me to see a case where 2% inflation is even remotely close. Health care is a perfect example. The median income is 56,000 roughly. 2.53 person per household. So health care wise, to have a decent insurance plan, you need to dish out about 2.53 times 400 per month, plus in average 7000 per year in deductibles of some kind. So that's $19,144 annually. About a third of the household's income. In the last 10 years, average increase has been 5% per year. So the rest of the necessities would have to be way lower than 2% for the inflation numbers published (https://www.healthsystemtracker.org/chart-collection/u-s-spending-healthcare-changed-time/#item-health-services-spending-growth-slowed-a-bit-in-recent-quarters_2018).

Hi Pete,

That's kind of my point though above. 100 years ago no one would have said that a college education and healthcare is a "necessity". So, our wants are now needs to some degree.

I don't think it's surprising to see that some of these new "needs" are surging in value because the more they're viewed as needs the more pricing power the issuers of these services have. And so what we're seeing is the landscape shift in a way that hospitals and colleges now have huge pricing power because everyone views these things as an essential part of modern society.

The thing is, while many needs have increased in value many have not. As noted above, the cost of food and clothing has become a much smaller piece of our incomes. And this is precisely why we're shifting other things into the "needs" column - because more and more people can afford to shift more of their spending there. So, 100 years ago the "needs" column was shelter, food and clothing. Today it's expanded beyond that because we're that much better off. Ie, we can afford to spend MORE on other stuff thereby making those things an essential part of how we live.

Now, I am not saying that it's good that the cost of college and healthcare are soaring. But what I am saying is that the expanding pool of needs is evidence that our living standards are rising DESPITE rising inflation in some of those needs. This isn't a bad thing. It's a good thing!

"Pragmatic Capitalism is the best website on the Internet. Just trust me. Please?" - Cullen Roche

Inflation is everywhere, but we should always keep in mind that one purpose of  measuring inflation (price level change) is to calculate the quantity of  final produced goods/services from real GDP.  Thus, inflation does not count products if they are  nonfinalfinancial or non-produced stuffs such as lands, houses (GDP only counts house structure part as infrastructure investment without land price), commodities, etc.

Real GDP(blue line) and Quantity Index(red line) are shown below.  The growth rates of  Real GDP and Quantity index are same.


I  pretty much agree with everything you say, and did not realize that inflation is defined like that. So I guess what I would like to know, is what has been the price change of basic necessities for a minimum quality of life, and that for me includes food, a car, health care, education until you are 20 years old, a home. My "feeling" is that this has increased faster than the inflation rate, but more importantly, faster than wage gains. And the people most hit by this are the sub-50k income a year, which is the majority of the population. You and I don't even notice the difference. That to me is a big key to economic sustainability, this segment of the population. But right now, we win, the system is on our side.