Measuring Inflation

"Amid Wall Street's recession panic, the latest official inflation news has received less attention than usual. The 'headline' consumer price index (CPI) for the year ending in January was up 4.3%, the third consecutive monthly reading above 4%. ... But as I've argued on this page in the past, the real problem is the sick dollar. ... The 'core' CPI that excludes energy and food shows a 12-month rise of 2.5%. ... Reinforced by intense pressure from Congress, the banking panic has compelled the Fed to take its eye off inflation. ... The root of the confusion is the fact that the prices consumers actually pay change far more quickly than the CPI. ... The most timely figures come from the commodity markets, where prices are transparent and reflect market conditions in the immediate present. ... A little 'indicator analysis' shows that commodity prices, far from reverting quickly back to the mean, are early-warning indicators of the future CPI. ... But worse may be yet to come. While commodities like energy and food are leading indicators of the CPI, precious metals like gold are, in turn, leading indicators of energy and food. ... Historically, CPI inflation is more closely related to prior changes in the price of gold than most people realize. ... Historical CPI data in the U.S. are complicated by occasional changes in the methodology the government uses to calculate the index", David Ranson (DR) at the WSJ, 27 February 2008.

"For readers under age 30 who are wondering why they are suddenly paying $3.15 for gasoline and $2 for milk, the answer is that this is what an inflation looks like. Those of us of a certain age remember it well, if painfully, and judging by the noises coming from the [Fed] of late we had all better get used to it again. ... [O]n Wednesday ... Bernanke told Congress that the Fed will do whatever it takes to stop the credit squeeze from becoming a recession. That's about as close as a central banker will get to saying that he's thrown price stability to the wind. ... Gold is nearly $975 an ounce, and the $1,000 threshold seems inevitable. The euro has broken $1.50 for the first time, while commodity prices in general are hitting record highs. ... In its new version, argued by Fed Governor Frederic Mishkin, the Phillips Curve doesn't exist in the long term but does in the short term. Thus the Fed can afford to open the monetary flood gates now because the slower economy could lead to lower prices later this year. ... Mishkin may be seen as a monetary wizard at the Fed, but to investors around the world he is beginning to look more like a high-class inflationist", Editorial at the WSJ, 29 February 2008.

Way to go DR. I've been saying things like you for years. I go further: the "confusion" is Uncle Sam's policy to try to convince people to hold dollars against their own best interests.

What does a low-class inflationist look like? I wonder if Stephen Cecccehi and Christina Romer read this editorial. I wonder if either believes in money illusion and the Phillips Curve. Stay tuned for more inflation. Got gold? Get more.