Inflation Games

Inflation is a political lightning rod. As a result, there is a good deal of misconception around it. The Consumer Price Index (CPI) is up 7.9% from a year ago and will likely peak in the 8.5 - 9.0% range sometime in the next couple of months, the highest since 1981. Politicians blame war, or COVID, but the simple explanation is just too much money creation.

Others think inflation will be temporary and point to "core" inflation, which looks tamer. Core prices, which exclude the normally volatile food and energy sectors, are up 6.4% versus a year ago and will likely peak near 6.5%.

There is a reason to exclude some prices when there are very special factors at play...but food and energy prices have been going up for over a year. And just because more of the inflationary impact of the surging M2 measure of money (up more than 40% since the start of COVID) shows up in food and energy prices, or even used car prices, isn't a reason not to count them.

Others argue that the government is grossly under-estimating inflation and is hiding the scope of the problem. One on-line analyst says that if we used the pre-1980 methodology to measure inflation it's already running north of 15%.

But there are serious problems with this analysis, as well.

First, the same method suggests inflation has been running close to 10% per year on average since 2000. This is bonkers. If inflation really had been running close to 10% per year, a true measure of real GDP growth would show the US to have been in recession since 2000. Seriously?!?