Feeling Better About Inflation

History of inflation in the US from Jan 1914 -...

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Everyone who drives past a gas station or shops at a grocery must see the signs of inflation. Yet the Federal Reserve is adamant in insisting that there is no inflation – how can that be?

There are several reasons that the Fed takes the view. One big contributor is the way inflation is calculated using the Consumer Price Index. Housing is a big expense for everyone, but it poses a problem for inflation calculators. The calculations are complicated, but since housing is a big percentage of household spending, home prices have a big effect on inflation calculation. Guess what? Home prices have been falling for a few years. The increases in cost for energy and food are offset by the declining prices of homes.

Another reason is that wages haven’t been rising. In case you hadn’t noticed, unemployment is pretty high and employers can find all the people they need without increasing pay. Guess what? Wage levels count for a lot when calculating inflation.

So, if you’re Joe or Jane Average American, your wages have been stagnant (assuming you haven’t lost your job), your expenses are rising, and your house has lost much of it’s value. But happily, there’s no inflation! Don’t you feel better now?

I’m not complaining about the Fed. The boys and girls there don’t need to read Central Banking For Dummies. The problems are complicated. There is little hope for a technocratic solution. All the Fed can do is to keep bailing to keep the boat from sinking. We are suffering the aftershocks of a huge global misallocation of capital. The Austrians are fond of pointing out that such misallocations always happen with central banking, but the ugly fact is that it happens without central banking too. Throughout history, the only remedy has been the passage of time, allowing the situation to be fixed by countless small economic decisions, largely made by trial and error. The big technocratic fixes (lowering taxes on the rich and decreased regulation) are controversial and unlikely to happen on a sufficient scale or in an adequate timeframe.

Only time is on our side. Don’t you feel better now?

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