It’s tough to measure inflation
June 11th, 2009 | Published in Economics idea | 2 Comments
I’m going to doing a series of posts over the next several days on inflation. Much of my thinking about economics is linked to the problem of controlling inflation.
At the beginning, I want to point out that while we all know what inflation is, it’s a hard thing to measure. Inflation is an economy-wide rise in prices. The problem is deciding what counts as a rise in prices.
One problem is that what is being produced changes over time. A computer today isn’t the same as a computer made 10 years ago. Some things didn’t even exist in the past. 20 years ago, there was no Internet. it doesn’t make sense to ask how much the cost of developing websites has changed in 20 years.
Another problem is that some prices are more important than others. If the price of wheat goes up, it affects lots of people. If the price of skateboards goes up, a much smaller segment of the population is affected.
Economists address these problems by developing price indices, the most commonly reported one is the Consumer Price Index. There are others that focus on specific industries. I’m not going to go into the technical details of how price indices are developed. What’s important is that there are subjective decisions that need to be made to build them. There is no ironclad objective measure for inflation.
For my purposes, I’m not overly worried about this lack of precision. The real danger is run-away inflation. When prices start spiraling out of control, it doesn’t really matter how you measure inflation. The problem is obvious. It is run-away inflation that I am interested in.
June 11th, 2009 at 10:53 am (#)
I believe that price inflation comes long after money supply inflation starts. The absolute best definition of inflation I’ve ever come across is ” Inflation is too much money chasing too few goods”.
It follows, therefore, that money supply management is the key. If that is true, just look at what we are creating in the US with the outrageous behavior of the administration.
June 11th, 2009 at 11:30 am (#)
ClydeB
I agree that there are likely to be problems with inflation in the US unless drastic steps are taken to reduce the money supply when the economy picks up steam.