Inflation Still Not A Problem

Inflation is notoriously difficult to measure.  Economists attempt to measure using the change in various price indices such as Consumer Price Index or GDP Deflator. But that’s flawed since it depends on the basket of goods chosen and the various adjustments made to the index to reflect quality changes, etc.  It’s even more flawed when there are highly volatile items in the index (the prices are volatile, not the items themselves, although gasoline is both). Bankers and conservative politicians like to measure inflation by the change in money supply on the assumption that increased money must translate into inflation soon (although it really doesn’t). The average person in the street tends to measure inflation by whatever it was they last purchased, which is usually food or gasoline.  This is a horrendous way to measure inflation.

Nonetheless it’s necessary to look at a variety of price indices and look particularly at the trend of all prices.  I really do not see any significant inflation in the U.S. for a long time yet. It appears Ben Bernanke and the Federal Reserve agree with me.  From Ben’s Congressional Testimony today (via Calculated Risk):

On the inflation front, we have recently seen significant increases in some highly visible prices, notably for gasoline. Indeed, prices of many commodities have risen lately, largely as a result of the very strong demand from fast-growing emerging market economies, coupled, in some cases, with constraints on supply. Nevertheless, overall inflation remains quite low: Over the 12 months ending in December, prices for all the goods and services purchased by households increased by only 1.2 percent, down from 2.4 percent over the prior 12 months. To assess underlying trends in inflation, economists also follow several alternative measures of inflation; one such measure is so-called core inflation, which excludes the more volatile food and energy components and therefore can be a better predictor of where overall inflation is headed. Core inflation was only 0.7 percent in 2010, compared with around 2-1/2 percent in 2007, the year before the recession began. Wage growth has slowed as well, with average hourly earnings increasing only 1.8 percent last year. These downward trends in wage and price inflation are not surprising, given the substantial slack in the economy.