Is Inflation Hiding?

There’s an old saying, which I’ve seen attributed to every from Daniel Patrick Moynihan, to the effect that while a man is entitled to his own opinion he is not entitled to his own facts. This saying would seem to be particularly relevant to current arguments about the Federal Reserve and monetary stimulus. As I noted in my last post, some commentators have been warning for years that the Fed’s actions would cause a return to the high inflation of the 1970s, if not to 1920s Germany. Yet more than two years on, this inflation has failed to materialize.

This fact should be embarrassing to those who made the warnings. Instead of dealing with the implications of their failed predictions, however, some have chosen to simply deny reality and claim not only that high inflation is inevitable but that it is already here, and that it’s invisibility is due to manipulation or inadequacies in the inflation figures.

Food and Energy

For example, I’ve lost count of how many times I’ve heard someone make the argument that you can’t trust the CPI inflation numbers because they don’t include food and energy prices. Whenever I cite the below target CPI numbers as evidence that we need more monetary stimulus, someone is certain to respond that the CPI is bogus because it doesn’t include food or fuel in its calculations.

This, however, is completely false. The CPI includes food and energy prices. At the risk of repeating myself, allow me to repeat myself. The CPI includes food and energy prices. Look at the blue line in the above chart. That’s the CPI with food and energy prices included. It shows deflation in 2009, and an inflation rate of about 1.2% today.

The government does also calculate a separate “core” inflation number, which excludes food and energy prices (on the grounds that such prices tend to be pretty volatile, and so can skew the overall number). That is represented in the above chart by the red line. Notice that the red line is higher than the blue line throughout most of 2009. Indeed, the regular CPI shows deflation for most of 2009, whereas the core inflation number is small but still positive. What that means is that food and fuel prices (taken in the aggregate) were actually going not up but down.

It takes a certain amount of chutzpah to say that the CPI is hiding inflation because it doesn’t include food and fuel prices when 1) the CPI does include food and fuel prices, and 2) taking out food and fuel would actually make the inflation rate seem higher.

Alternate Indexes

Because the CPI numbers are so unhelpful to proving the existence of inflation, it is perhaps not surprising that some inflation hawks reject the CPI altogether in favor of their own inflation calculations which, again no big surprise, show much higher inflation. Now of course it is always good to take government figures with a grain of salt. But when a group dedicated to proving X comes up with its own alternate figures which show X, this also calls for a salting.

Generally speaking, the inflation numbers provided by places like ShadowSats or the National Inflation Association (which uses ShadowSats numbers) do not stand up to scrutiny. According to the NIA, for example, “the median household income in 1975 of $11,800 actually equals $154,000 in today’s dollars.” That’s not even close to being plausible.

There are a number of private groups working on their own price indexes who do not seem to have much of an agenda in making the numbers come out a certain way. Google, for example, is working on a price index which would be comprehensive of all prices listed on the internet. While Google isn’t publishing its index yet, officials at Google have said that “the GPI shows a ‘very clear deflationary trend’ for web-traded goods in the US since Christmas.”


Some commentators have also tried to prove the existence of high inflation by cherry-picking data on commodity prices. As I alluded to before, commodity prices tend to be relatively volatile, with big price swings up and down.

As you can see from this chart, commodity prices took a big plunge in 2009, declining almost 60%. In 2010 prices bounced back somewhat, though the level of increase is not atypical and has not offset the decrease from 2009. If you only look at the period since commodity prices hit bottom, however, you can make it look as if we are undergoing some unprecedented price spike, which is no doubt merely the first sign of a soon to be general hyperinflation.


And then there is gold. Gold prices have increased substantially over the last three years, and some see this as a sign of either impending inflation or of inflation that is already here. As Scott Sumner notes, however, using gold as a forecast of U.S. inflation, however, is problematic for two reasons.

1. Gold prices are set on a world market, so an increase in the price of gold could be due to inflation expectations in other parts of the world, rather than in the United States.

2. Gold prices are not simply a reflection of inflation expectations, as gold is used for lots of other things besides a store of value. An increase in demand for gold jewelry, for example, or in the use of gold for industrial purposes, would tend to raise the price of gold just as well as concerns about possible inflation.

So you can’t just assume that an increase in the price of gold means lots of inflation for America. From the little I’ve looked into it, it appears that the rise in gold is due mainly to increased demand in China, rather than to Fed policy. And given that all the other indicators show very low inflation in the U.S., I see no reason not to accept this as an explanation.

What about the future?

Okay, you might say, I’ll concede that the U.S. isn’t experiencing high inflation right now. But how do we know that hyperinflation isn’t just around the corner? And the truth is that, as Yogi Bera once said, you have to be careful about making predictions, especially about the future. However, all of the indicators that we have suggest that high inflation is not likely to occur any time soon.

There are a number of ways of forecasting what the future inflation rate is likely to be that go beyond simply relying on one’s gut. For example, for the past few years the government has offered inflation protected securities in addition to its regular bonds. Whereas normal treasury bonds pay a set nominal interest rate, these bonds (called TIPS for treasury inflation protected securities), pay a set nominal rate plus inflation. By looking at the difference in interest rate between TIPS and regular treasuries (called the TIPS spread) we can get a market forecast of what the expected inflation rate will be over the given time period.

You can also buy CPI futures contracts directly. Just as oil or pork futures involve a bet on what the price of oil or pork will be at a given future date, so you can buy a CPI futures contract based on what inflation will be some time in the future. The CPI futures market thus can be used to see how much inflation the market is forecasting.

Both the TIPS spread and the CPI futures market show low expected inflation for the foreseeable future. If you believe that markets are good at setting prices correctly, then you should believe that these forecasts are a fairly good indication that high inflation is not just around the corner. And if markets don’t do a good job of setting prices, then I would submit the Austrian school of economics (which is behind a lot of the inflationary fears) has bigger problems.

More to explorer


  1. Don’t believe the federal stats. Prices have gone up sharply on virtually all commodities as any grocery store or retail shopper knows. Inflation is in high gear and it’s a missed story in the lamestream media.

  2. Now of course it is always good to take government figures with a grain of salt.

    No, it is good to know how to read the government’s statistical reports. Unless you have reason to believe they cook the books or that some private agency has a methodologically superior process, you should take the government’s reports as the gold standard.

    As for Messrs. Green, Jones, Medaille, ShadowStats: some people are bound and determined.

  3. I’m no economist, but I find Steve Keen’s deflationary forecast the most convincing of all the predictions I’ve read.

    Of course, the government can cause inflation if it prints enough money, by definition. And they’d probably like to inflate away some of the massive debt they’ve taken on. But Keen suggests (as I understand his calculations) that serious inflation would require upwards of 20 trillion extra dollars printed and dumped on the streets, and I don’t see how they can do that without causing panic and problems with China.

    It’s also occurred to me that it might be possible to have simultaneous inflation — in the sense of people losing faith in the fiat money and fleeing it for gold or other tangibles — and deflation — in the general economic sense of individuals and companies tightening their budgets and producing less. So sometimes I think the inflation and deflation forecasters are talking about two different things. After all, if it were as simple as having the right volume of money supply, then that would mean there’s a sweet spot where if they print juuuuust enough dollars, everything will be peachy. It seems more likely to me that we could have inflation at any particular “healthy” level we choose, and still see the economy and incomes shrinking.

  4. You may well be correct.

    The inflation-adjusted $13 trillion 2010 GDP would be $3 trillion in 1969 dollars.

    In the past two years, 314 banks and savings banks have failed with $650 billion in aggregate total assets. The FDI insurance losses were about $75 billion. Recently, FDIC reduced its estimate of projected aggregate losses (for this banking crisis) from $100 billion to $92 billion based on lower aggregate total assets in problem banks. “The Sun will come out tomorrow . . . ” la la la la la

    For the two years, unemployement rate has been a tad below 10%, but really it is about one-in-six. About 2 millions homes eventually will be lost to foreclosure.

    What caused the recession? Maybe someone should identify that and make sure it doesn’t happen again. That is above my pay garde. But, I will say, it was not high interest rates or declining money supplies. The FRB kept rates too low too long and HUD/FNM/FRE interference in housing markets provided excess liquidity and caused bubble housing prices . . .

    See: WSJ 12/3/2010: “Why Do We Have a Central Bank?” by Gerald P. O’Driscoll Jr. “There is no liquidity crisis now, however, and no justification for continued lender-of-last-resort activity. There are quite possibly still large unrecognized losses on banks’ balance sheets associated with the housing collapse and other unwise lending. These losses mean such institutions are in reality undercapitalized, not short of liquidity.”

    There is NO DEFLATION. There is disinflation in housing. Potential buyers will not bid because they think prices have (who knows how much) farther to fall. Trial lawyers abuse of the judicial foreclosure process (“if the glove don’t fit you must acquit.”) is adding uncertainty that will further hamper housing prices return to equilibrium and construction industry recovery. The 2009 housing market was artificially buoyed by fed tax credits and gummanament loan modification programs.

    One in six of we the people cannot afford to buy car and other big ticket items. No inflation there.

    In the wildest examples of the unprecedented housing bubble (you have amnesia from the S&L crisis of the late 1980’s and early 1990’s) in Merced, CA housing prices at the peak in early 2006 (Merced Case-Shiller data) were 311% of the January 2000 index of 100. That is six years. Let’s say inflation was 5% on average (compounded) over those six years. In that scenario, the housing prices would be on average 134% of the 2000 index NOT 311%.

    God willing, we’ll live to see who is correct. I bet no inflation. Obama will have his way. The economy will be in the “hurt locker” for about 10 more years.

  5. Art Deco: Surely, you can’t be serious. Predicted response: “I am serious and don’t call me Shirley.”

    Believe the government stats?! Like we should believe the fabrications read by TelePrompTer from Our Beloved Leader? Or would you rather believe the facts being spread by Wikileaks?

  6. Dear Sir:

    Can you explain why the Euro trades higher than the US Dollar. The EU seems to be in worse shape than we are. Also, I read all kinds of stories as to why gold is so high but I can’t seem to discern the truth. Could you shed some light on this as well? Thanks!

  7. Joe Green, the statistics are generated by several agencies, most prominently the Bureau of Economic Analysis, the Bureau of Labor Statistics, and the Bureau of the Census. These are, in turn, staffed with the permanent civil service. The Department of Commerce began generating and publishing statistics on economic activity since 1921 and has done so now for 90 years under administrations of both parties. Unless you have evidence they have been cooking the books, your complaint is of no account. Mr. ShadowStats fancies he produces better statistics at his desk than these three bureaux do with their large collection and analytical staff. I suppose that gets him through the day.

  8. It seems to me that the main reason we had “deflation” in 2009 was due to gasoline/fuel prices coming down from the artificially inflated peak they reached in 2008 (when gas went over $4 a gallon).

  9. Elaine,

    It wasn’t just the price of gas that fell in 2008/2009. This chart, for example, shows the inflation rate for the price of groceries as compared to core inflation for the past ten years (2010 is marked 1, 2009 is 2, and so on). The blue bars are for groceries, the red is core inflation. You’ll note that we had deflation for grocery prices in 2009.

    Now what you’re saying has an element of truth, in that if you look at the core inflation rate (which excludes food and energy prices but includes everything else), that number was positive in 2009. But it was just barely positive. And core inflation has been trending downward towards zero.

  10. Art Deco, et al. Statistics, schmatistics. A million deaths are a statistics, one death a tragedy. Wasn’t that Stalin? Anyway, all I know is that when I fill up it’s $3.05 a gallon now, not $1.75 like it was a couple of years ago. Crude was around the same price per barrel. So who is pocketing the profits? OPEC? Exxon/Mobil. The state and the feds?

    The price of butter, eggs, milk, meat — all up substantially. Let the bureaucrats churn out all the numbers they want. Meaningless in a real world where paychecks don’t stretch as far and mac and cheese is becoming the staple at the dinner table. Anecdotes win the argument, not dry stats. Still, I’m not here to fight, merely weigh in with a couple of cents, which may be taken with grains of salt…Too many mixed metaphors; I’ll quit while I’m either even or even behind.

    Thanks for stimulating a discussion.

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