Friday, December 16, 2011

EXPOSED Why Krugman "Smoothed" Price Inflation Over Four Years

Yesterday, Paul Krugman ran this chart of headline price inflation:

He argued for such this way:
One thing that becomes obvious when you look at inflation data is that the numbers bounce around a lot, not just from month to month but from year to year. One way to try to get past the noise is to use one or another definition of core inflation, which I think is necessary if you want to catch underlying inflation trends early. But to get a historical picture, it’s good enough just to use longish averages.
Since Fed policy can change from day to day, or at least from policy meeting to policy meeting, a three year or four year average is an odd choice. If Fed policy has been relatively stable over a part of that period and only has become more erratic in recent years, you would have to look at a shorter period, say year-over-year inflation rate changes to get a sense as to what is going on . Let's see what has gone on with a Krugman favorite CPI "core inflation" and also CPI "all items" (headline) over recent years:

When you look at the year-over-year change in CPI, it's pretty obvious why Krugman had to reach out to four year smoothing, as you would expect according to Austrian economic theory, when the Fed slowed monetary growth in 2008, (which I warned about: See hereherehereherehereherehere and here.) it was followed by the expected dip in prices in 2009 that you would expect with a tight money policy. Bernanke has since then opened up the monetary floodgates in erratic fashion from time to time, and you can see the expected, according to Austrian theory, climb in price inflation.

What is also instructive is that in early 2008,  CPI (all items) was soaring well above 4%, could that be why Bernanke slammed the breaks on money printing in mid-2008?

Bottom line: The Fed is not able to keep price inflation in check the way Krugman suggests via his misleading "smoothed" four year chart . Further, all items CPI is flirting with 4% annualized rate again. What's Bernanke going to do from here? Print more and skyrocket price inflation or slow the money printing and crash the economy again? Money manipulation always gets you in this bind. Right now, Bernanke has chosen the printing money route, if he continues on this route, those green and red lines are going to continue to climb and Krugman won't even be able to hide the climb in inflation with his trickster 4 year "smoothed" charts. What is he going to tell the Krugmanites then?


  1. Krugman will probably just reach back and uses a longer-term moving average to try to hide the truth....These are obvious signs of desperation.

  2. "What is he going to tell the Krugmanites then?"

    The same thing he always tells them: "There’s really nothing here to shake my view that deflation, not inflation, is the threat."

  3. Ow!

    Keep up the great work RW.

  4. Excellent work Bob! Keep it up! Keep defending the Austrian tradition!

  5. "when the Fed slowed monetary growth in 2008, (which I warned about: See here, here, here, here, here, here, here and here.) it was followed by the expected dip in prices in 2009 that you would expect with a tight money policy"

    Can you explain this statement a little bit more.
    (a) Did you warn of the expected "dip in prices" prior to it happening, based on your warnings of a "slowed monetary growth". I can see the links, where you warn of an impending recession, but I don't see anywhere that you warn of an impending "dip in prices"

    (b) If the dip in prices is so expected, why does it only show up in the "all items" and not in the "core" index. I can see where you have separately claimed that inflation is first felt in commodities, and then in the consumer price index (and I have a separate question on that as well), but why does money supply affect the "all items" and not the "core"

    (3) Can you explain the rationale, wherein a slowdown in monetary growth from 10% to 5% should flip the "all items" index from +ve to -ve. A 5% monetary growth is still growth, and (I thought) Austrian economics predicts that any monetary growth will result in inflation.

    (4) going back to your claim that monetary growth affects the commodities first, and then the consumer index….Do you have any evidence to support this claim (I understand that it is consistent with your model; but that is not what I am looking for).

    Thank you… any responses would be interesting.

  6. Krugman is clueless as usual! 2007 all over again!

  7. This hyperinflation of 1-2% that the REAL graph shows is telling - no wonder Krugman is hiding it from us!