Newsweek knows inflation

And has a very entertaining way of talking about it. Even down to the illustration!

There’s No Inflation (If You Ignore Facts)

newsweek inflation

Catch that bit about “core inflation”? That’s Fedspeak for: inflation is under control, unless you look at the costs of things that are going up. The core rate excludes the prices of food and energy, which can be volatile from month to month. Factor them in, and inflation is about as moderate as Newt Gingrich. In the first eight months of 2007, the consumer price index—the main gauge of inflation—rose at a 3.7 percent annual rate. That’s more than 50 percent higher than the mild 2.3 percent core rate. The prices of energy and food are soaring, at 12.7 percent and 5.6 percent annual rates, respectively, and have been doing so for years. As a result, the CPI—including food and energy—has risen 12.6 percent since July 2003, for a compound rate of about 3 percent.

Signs of inflation are evident throughout the economy. When investors fear a rising inflationary tide, they latch onto the driftwood of gold. The day Bernanke cut rates, the price of the precious metal soared to heights not seen since 1980, when inflation ran at nearly 12 percent! I read about this in The Wall Street Journal (whose newsstand price rose 50 percent in July), which I picked up in the lobby of a New York hotel (where the average nightly rate soared 12.5 percent in the first seven months of 2007 from 2006, according to PKF Consulting) while sipping on a Starbucks Frappuccino (whose price has risen twice since last October).

In the United States, companies are passing along high-er commodity and fuel costs by boosting prices, slashing portions and tacking fuel surcharges onto things ranging from deliveries to lawn service. And because food and energy prices are so visible—the prices are posted in public, and consumers buy these goods frequently—price increases have a disproportionate impact on perceptions of inflation. Each month the Conference Board asks consumers what they expect the rate of inflation will be for the next 12 months. The figure has been above 5 percent since April.

Told you. The article also contains an interesting tie to China, and a wonderful pat on the nose with a fist for Alan Greenspan (I just withheld about a thousand hyphened-in insults, all deserved):

There are sound macro-economic reasons to believe higher inflation may be a fact of economic life, according to former Federal Reserve chairman Alan Greenspan, who discusses the topic in his new memoir, “The Age of Turbulence.” (Apparently, the editors killed the original title: “The Dotcom Bubble Wasn’t My Fault. Nor Was the Housing Bubble.”) Greenspan notes that vast anti-inflationary forces in the 1990s—especially China’s emergence as a low-cost producer of goods—helped tamp down prices. But China’s rampant growth and rising living standards could encourage inflation. “China’s wage-rate growth should mount, as should its rate of inflation,” he writes.

Indeed. China’s CPI leapt forward 6.5 percent between August 2006 and August 2007, the highest rate in 11 years. One of the main culprits? An 18.2 percent year-over-year increase in the price of food. In still-poor China, food expenditures account for 37 percent of the CPI, compared with 14 percent in the United States.

China is bound to export its inflation—it exports everything else, after all—either in the form of higher prices for toys, or in the form of higher global prices for the commodities it consumes in increasingly huge gulps. The Wall Street Journal noted that iron-ore producers are about to ask for a 50 percent price increase for 2008, thanks to rising demand from Chinese steelmakers. Chinese car sales are up 25 percent through August, which helps support oil prices.

The punchline? That we delight in China’s ham-fisted macro-economic management (seriously, export tariffs?), but the Fed’s response to inflation – abject denial – is more like China’s response to SARS (“Problem, what problem? We just lock all our hospitals from the outside ’til they die or improve. No problem”).

The article is well worth reading in its entirety.

I sure am looking forward to teaching macroeconomics later this semester…

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