Is the US Government deliberately underestimating inflation?

The US third quarter GDP report told us that inflation was at .8% — a multi decade low. Very good news, if a bit odd given rising prices for things like energy and food. This reignited the debate about the government’s calculation of CPI. Here are a few thoughts.

  1. Many years ago I called the Bureau of Labor Statistics to complain about the calculation of CPI. The answer stopped me cold. “You get what you pay for. If you want better stats, give us our 1980 staff back.” When Congress wants to cut, they pick departments with no supporting interest groups. Like those compiling the data by which our public policy is steered.
  2. CPI is a very conceptual thing. It’s not possible for any one number to capture this. Whatever choices they make in the formula, esp in calculating the biggest factor — home costs, it will look unrepresentative at some point in the cycle. There is no “right” way to calculate CPI.
  3. The US has a severe debt problem. Esp households. Oddly, this problem has grown worse during the 25 year long economic expansion since the severe 1980-82 downturn. At current levels there are probably only two solutions. Defaults, perhaps resulting in deflation and/or a depression. Or inflation, which reduces the real value of fixed-rate debt. Unfortunately inflation is not good medicine, as we learned during the “great inflation” of the 1970’s.

But there is a way out. It’s only “anticipated inflation” that causes severe problems, as everyone takes steps to protect their wealth and income. Unanticipated inflation, that we don’t see, is different. Quiet, mild, relentless. If we also have wage growth slightly above inflation, then our crushing debts go away. Painlessly.

Bernanke literally wrote the book on this, “Inflation Targeting.” That’s good, as the Fed is in a tough spot right now, trapped between the forces of contraction (the Minsky cycle, too much debt) and a weak US dollar. A nice long period of hidden inflation offers a risky but potentially smooth solution.

But it must remain hidden. If you learn that the government is deliberately underestimating inflation, don’t tell anyone.

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