Appreciating inflation

Get it? Get it? Sigh.

Inflation continues to be discussed. Particularly the fact that the Fed continues to use this ‘core’ deal – smooth at around 2.8% – while the rest of us wonder why everything we buy is so much more than only 2.8% more expensive. In the case of our retirees, they will also have to ponder what to do with incomes increasing by only 2.3%. Remember Newsweek’s article?

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.

There are no end of reasons for this nonsense – such as not having to shell for big increases in social security! Well, in a country whose median incomes just haven’t budged, we can at least say GDP – overall wealth – is advancing.


Two things: first, if GDP is advancing but median incomes aren’t, the government has still done a bad job – by anybody’s measures. Second, you’ll notice I’m using 1992 as the base year, rather than things like 1990 or 2000. Let’s just say I find analysis that covers two Presidential tenures amusing.

Now, suppose I wandered over to something like and pulled out gasoline prices and corn prices – i.e. the fuel and food that core inflation ignores.

Using a price index based upon gasoline:


Using a price index based upon corn (caveat: I’m not all that happy about this series, but I couldn’t secure – without paying – good commodities market prices. Anyone have them?):


We can immediately see the benefit of using core inflation – fuel and food prices are volatile, and including them (or, in this extreme case, using them exclusively) makes real GDP (i.e. increases in wealth after taking away increases in the cost of living) equally volatile.

One thing they do exhibit, though, clearly, is appreciation. They go up and down, cyclically or seasonally, but they clearly trend upwards. Moreover, they leave real GDP in a very bad way by the end of the series.

In fact, return to what I’ve helpfully labelled (for a change) Figure 1: nominal GDP (that is, GDP in the dollar terms for each year) is increasing, on average, by 5.16% over the 15-year period. Ergo inflation needs to be under that 5.16% p.a. in order for real GDP to be increasing. Since the early 00’s at least, the achievement of this has been through the use of core inflation rather than, say actual inflation (the Big Picture has handily taken to calling core inflation inflation ex-inflation).

If we added in those fuel (12.7% inflation) and food (5.6% inflation) factors, real GDP – wealth – would not have increased at all in quite a few years. Just like median incomes. Given the sliding dollar and the ever-more-rapidly appreciating such costs of living. Based on Figures 2 and 3, I would say that, in real terms (I mean, real real terms) the wealth of the United States has actually fallen since 2000. Blame the tech-stock-burst, blame 9/11, blame whatever or whomever you like – but it’s this government (and I mean government – both parties, their aides, all the way down to staff writers at newspapers, still trying to figure out why they feel so confused) that’s trying to keep that fact from being known.


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