Friday, July 15, 2011

Krugman Tries to Explain His Way Out of the Spike in Core Price Inflation

This is a hoot. The latest price inflation numbers are out, and "headline inflation", which includes food and energy, is down a bit, not in anyway signalling the end of inflation. These numbers can fluctuate a bit, especially at the start of a major price inflation run.

But, what is climbing is that laggard, core inflation, which deflationistas around the world cling to as proof that there is no inflation. Because of its spike, Krugman has to do some pretty fast dancing:
OK, so the new report is out. Headline prices actually down, as predicted, but core inflation running above the Fed target on a monthly basis.
So what should we conclude?
First, no hyperinflation here.
Huh. When you are defending the deflation position, and your first defense is that there is no hyperinflation, you are in serious trouble.

But, then when you have to also split the core, you should probably just give up. Krugman now wants to measure prices by looking only at prices that don't move up much. Yup:
it’s important to make a distinction between core-as-concept and core-as-usually-measured. The concept is that of inertial prices, which are set for extended periods and can get into a leapfrogging pattern of sustained inflation that’s hard to undo. The usual measure is just consumer prices less food and energy. This is clearly closer to the concept than the headline number, but not at all a perfect proxy.
In particular, it’s clear that core-as-measured prices are “adulterated” by commodity prices. Higher fuel prices, for example, get reflected in the price of airline tickets, which are in the core-as-measured. So are used car prices, which rose at an annual rate of around 20 percent in June; is this really inertial inflation?
Got that? Krugman not only wants to move food and energy out of the index, but also airline tickets, other commodity prices, used car prices and I guess anything else that is climbing in price.

But, hey, if you don't buy that, Krugman now tells us that a little price inflation may not be all that bad of a thing. You see it gyps savers for the advantage of the government:

Oh, and a modest rise in inflation would, of course, actually be a good thing, because it would help resolve our debt overhang.


  1. He must have been an ass-pain back in Little League.
    "Mr. Umpire, curve balls actually do not count as strikes. They spend a good deal of time out of the strike zone, you see."

  2. And Mr Wenzel still expects us to believe that inflation is accelerating when the last four months has been nothing but the opposite.

    March: 0.5, April: 0.4, May: 0.2, June: -0.2

  3. If you can no longer afford red meat, but you can huy Ho Hos, and thus you buy Ho Hos, that's DEFLATION! Remember? ;)

    The answer to inflation is to let them eat cake! /sarc

  4. Anonymous, go pull up a chart of real commodity prices and quote that alongside those gimmicky CPI metrics

  5. CPI primer by John Williams:

  6. Looks like Krugman is again bringing out his "super-core inflation" idea. I swear, this guy is really something else. Why would you take any goods out of inflation? Of course not all goods increase in price at the same rate as a result of an increase in money supply, that is kind of how prices work. Inflation measures already don't account for many goods, taking even more out only further distorts the phony numbers.

  7. @Jaffi

    My price for the London Bridge hasn't changed in 20 years. There is no inflation.

  8. How much more daffy can he get? He's starting to challenge my imagination.

  9. Anonymous @ 7:21 PM said... "And Mr Wenzel still expects us to believe that inflation is accelerating when the last four months has been nothing but the opposite."

    You obviously Don't shop at the same grocery store my wife does.

    I told her food prices have gone down this month but all she could provide were examples of rising prices of everything she wanted to buy... she's been doing that for more than four months. Don't EVen get her started on clothing & shoe prices.

    Nothing I want to buy has dropped in price either, funny that.

  10. Have Krugman come talk to my contractors who are putting on my room addition onto my 50 year old home. Their mouths were salivating when they saw the old copper piping in my walls.

  11. Let them eat iPads...

  12. I find it ironic that by making a case for removing certain items from the CPI, Krugman is in fact implicitly proving that CPI cannot be measured and therefore refuting Keynesian aggregates.

    Rather than criticizing Krugman for his cherry-picking I think it should be celebrated and used to prove the fallacy of index numbers and aggregates.

  13. " In particular, it’s clear that core-as-measured prices are “adulterated” by commodity prices. Higher fuel prices, for example, get reflected in the price of airline tickets, which are in the core-as-measured." - Paul Krugman

    He seems here to be implying the cost of production theory of prices. The cost of airline tickets does not have anything to do with the cost of oil. As a matter of fact the case is exactly the opposite. The increased demand for travel puts upward pressure on oil prices.

    The increased demand for travel, or any good or service, results from multitude of reasons. It is impossible to quantify if they are result of increased money supply, natural disaster, or a shift in preference.

    I am not comfortable with Austrians who argue with Keynesians and Monetarists over CPI data to prove the existence or non-existence of inflation because it is implicitly agreeing that inflation is an increase in prices. But this would make definition of inflation meaningless. Inflation is an increase in the money supply. Period. We do know, however, that the purchasing power of the money will fall and prices, other things being equal, will be higher than they would have been. It is impossible to know how this new money will affect the value scales of each recipient, therefore it cannot be determined how much of the price increase was due to inflation or would have happened anyway.

    Indeed there could be other factors that drive the price down, thus to someone believing inflation is an increase in prices, inflation must not have occurred. But inflation did occur, when the money supply was increased.

    The only thing we know is that the Fed has engaged in money creation, therefore prices have been distorted and wealth redistributed. Fortunately most of this new money has ended up as excess reserves. The release of these reserves, combined with fractional reserve banking, will signal the beginning of what will be the most destructive boom-bust cycle in history.

  14. " First, no hyperinflation here." - Paul Krugman

    Again this is meaningless because Krugman does not know what hyperinflation is. He apparently thinks it means a rapid increase in prices. At least he is being consistent here as he thinks inflation is an increase in prices. It only proves that if you start from the wrong premise you are bound to end with the wrong conclusion.

    Inflation is an incease is the money supply which leads to a loss of purchasing power of the money unit (supply and demand). It follows then that hyperinflation is a rapid increase in the money supply followed by a complete loss of purchasing power, also known as a flight from the money unit.

    If, like Krugman, you look at CPI data for signs of hyperinflation there is a good chance you will not see it coming. To search for hyperinflation one must look elsewhere, specifically at the currency markets and gold and silver prices (historically the free-market monies).

    I believe that hyperinflation, or at least hyperinflationary expectations, have aleady begun. Since TARP, QE1, QE2, etc the USD has fallen and gold and silver prices have soared. Recently some countries have proposed replacing the USD as the world reserve currency. Others, like bitcoin, have gone so far as to create new currencies to compete with national fiat currencies (whether or not bitcoin is an actual money is a hot topic of debate).

    If the above facts do not represent a flight from the USD they are at the very least serious warning signs and should not be taken lightly.

    Mises identified 3 Phases on the road to hyperinflation. I believe Phase 1 was 2007-10. The Fed increased the money supply and people saved. The result was a mild increase in prices due to inflation. Phase 2 started recently as people have begun spending again while the Fed is still pumping money. Prices are starting to creep up.

    I think we (btw I really hate using "we") are about to enter what Mises called the Danger Zone (not the Top Gun theme song) between Phases 2&3. This is the point at which prices are high and cash balances are low. If the Fed stops inflating then people will be forced to save and prices will adjust downward until the market clears. If the Fed continues to inflate then Phase 3 will begin. The new money will be spent quickly as the purchasing power of the USD tends toward zero. This is crack-up boom followed by the mother of all busts.

    At this point I do not think it matters what the Fed does because all the money Bernanke created is piling up as excess reverves. The next election will be the deciding factor. Faced with an awful economy the Obama admin will begin to put strong pressure on banks to loan out the reserves. The approx $1T reserves coupled with a 10% reserve requirement will result in nearly $10T in new money.

    At that point not even the CPI will be able to hide the hyperinflation.

  15. It's not like he hasn't been warned. When he crashes and burns, it'll be: "Relax, folks, it's all part of the show!"

  16. Zach, you are my favorite commenter here. Great stuff!

  17. Zach is right, of course.

    Just like the Austrian Business Cycle, where mal-investment of fiat currency causes the boom which leads to the inevitable corrective bust, inflation (an increase in the money supply) leads to inevitable higher prices (more money chasing the same amount of goods).

    Why is it so hard for Krugman to understand this?