If There's No Inflation, Why are Prices Up So Much?
By David Henderson
That is the title of an article by Michael Sivy sent to me by a frequent reader of Econlog. I have heard other people ask the same thing, so I’ll answer.
First, let me point out that authors of popular articles rarely get to choose their own titles. Why is that relevant here? Because, as Sivy points out in the article, there is inflation. He writes:
And the CPI has recorded minimal increases over the past four years. Since the recession ended, the 12-month change in consumer prices has averaged 2% and has never been as high as 4%.
But the main thing he does in the rest of the article is look selectively at relative prices that have increased a lot. That doesn’t contradict the idea of low inflation. It just contradicts the idea, which many people seem to have, that if inflation is low, relative prices of various things shouldn’t increase much.
Sivy seems to understand that you can have price increases for some things and still not have inflation. He writes:
Price hikes for a particular item here or there don’t qualify as inflation. If one thing gets more expensive but something else gets cheaper, that’s what economists call a relative price change.
But then he betrays his understanding with his very next sentence:
Inflation is a simultaneous increase in prices across the board.
No, it’s not. Inflation refers to a wide index of prices, weighted by their importance in a “typical consumer’s basket,” rising. There’s no need for prices to rise across the board.
And I’m not sure what to make of this section:
There are lots of other ways to gauge inflation, however, that give very different signals. Gold was $930 an ounce when the recession ended, and today it’s $1,583. So if you believe in the gold standard, prices have increased 70% in four years – or an annualized rate of 14.2%.
But the price of gold is a relative price. Even economists who believe in the gold standard understand that.
NOTE: For a piece I wrote on these issues in Fortune, “Fun and Games With Inflation,” go here.