Home > Macro/Monetary Theory > Misconception #3: We are Experiencing Hidden Inflation

Misconception #3: We are Experiencing Hidden Inflation

The last one is the big one that should have blown your mind but nobody is commenting on it so if you missed it make sure you see Misconception #2.  This one is less profound but it is still important.  The hyper-inflation crowd is always pointing to food prices to argue that there is high inflation.  But this is dreadfully poor economics.  It’s true food prices are high but this is because there is a drought.  Similarly, gas prices are high because of turmoil in the middle east, government regulations which make it difficult/impossible to drill for oil or build a refinery (my oil-refining-friend insists that there will never be another refinery built in this country), and indirectly because of the same drought thanks to asinine ethanol standards.  But these are both increases in relative prices.  This is a distinctly different phenomenon from an increase in the price level (commonly referred to as “inflation”).

Furthermore, the use of core inflation (excluding food and energy prices) is not a plot to disguise high inflation.  And let me point out that I’m totally a believer in plots by “the establishment” to subtly misguide us, but this is not the case here.  How do I know this?  Because it doesn’t actually hide anything.  It turns out that if you want, you can just look up the headline inflation numbers.  Here is a post with some helpful graphs.  Notice how the only real difference between core and headline inflation is that headline is more volatile.  And most recently, it has been below core inflation.

There is a legitimate intellectual debate over whether core or headline inflation should be used by policy-makers but as far as I’m aware, “just going to the grocery store” has not received any serious consideration among stuffy academics like myself.  This is not a conspiracy.  There just isn’t high inflation.  If you understand Misconception #2, (or Thomas Jefferson) this shouldn’t surprise you because central banks cause first controlled inflation and then uncontrollable deflation.

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