Wednesday, July 16, 2008

U.S. Consumer Price Inflation Rise To 5%

Sometimes, strange things happen. It seems that I was actually too bullish on inflation. I wrote yesterday that I didn't think that U.S. consumer price inflation would rise above 5% until July. But it actually rose to, or actually marginally above, 5% (5.02% to be more precise) already during June.

According to Bloomberg News, this was the highest yearly increase since 1991. Actually, though, inflation is probably worse now than it was then because that was before the Boskin commission recommended and got implemented various manipulations of the CPI in order to make the increases smaller than the raw numbers suggest. While this new methodology is applied on current data, it has not been used to retroactively adjust old numbers, meaning that comparisons of 1991 data and 2008 data is a case of comparing apples and oranges. Note that this fact does not rest on the view that the Boskin changes were illegitimate. If you think they weren't legitimate then current inflation is really higher than the numbers suggest. If you on the other hand think they were legitimate then inflation in 1991 was really lower than the inflation numbers suggested. Regardless of what you think on this matter, however, current inflation is in a relative sense underestimated compared to 1991 inflation. This in turn means that inflation now is probably higher than at any time in 1990 or 1991, and that you would have to back to the early 1980s or the 1970s for worse levels of price inflation.

Yearly inflation will likely continue to rise during July and August. What happens then is less certain, but even if it falls back from the high in August, it is likely to stay above 5% for the rest of the year.


Blogger Sophist said...

Today's number was a slap on Fed's face. Now, they must raise rates otherwise they risk runaway inflation. I'm surprised they did not hike the rate at least 75 bp today. Actually, this (not raising rates) is the primary reason behind the huge rally in the stock market.

I think if the FED waits they risk repeating Vocker's mistake in 1987 and another market crash. Inflation always lags commodity price movements and then rises fast at the point that prices flatten out.

Haven't they learned anything from the past? Those who are ignorant of the past are doomed to face it again.

12:16 AM  
Anonymous Ralph said...

I would be interested on your view of the legitimacy of the Boskin changes to CPI methodology.

12:41 AM  
Blogger stefankarlsson said...

Ralph, some of the changes were good, most notably the faster inclusion of new goods. Other changes such as their assumption that all changed spending patterns should count as improvement (correcting for the so-called "substitution bias") are on the other hand alot more dubious.

4:31 PM  

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