There are constant debates over whether we are in an inflationary or a deflationary environment in the United States.
I argue, and I have been arguing for a decade, that we are in a mildly inflationary environment with respect to consumer prices. Obviously, with respect to the monetary base, we have been in a wildly inflationary environment. But because the Federal Reserve, in October 2008, began paying interest on the excess reserves deposited with it by commercial banks, the fivefold expansion of the monetary base has not converted into a comparable increase in M1. Also, there’s been a sharp decline in M1 velocity.
For over a decade, I have used the Median CPI rather than the CPI as the best measure of price inflation. It is published monthly by the Federal Reserve Bank of Cleveland. I use it because it is far more stable than the CPI: month to month and year to year. I want to see the trend of price inflation. Wild fluctuations makes this difficult to see.
This year offers evidence of why I prefer the Median CPI. Here are the data: January (0.2%), February (0.2%), March (0.2%) April (0.2%). They were 0.2% for November and December.
In stark contrast, here are the figures for the CPI: January (-0.7%), February (0.2%), March (0.2%), April (0.1%). November and December were both deflationary (-0.3%).
What the Median CPI reveals is this: no change in the trend in 2015.
What about the previous 12 months, month by month? The Median CPI shows no change: 2.2% in every month, November through April. What about the CPI? November (1.3%), December (0.8%), January (-0.1%), February (0%), March (-0.1%), April (-0.2%). These were reported on May 22.
The standard response to this by people who really do not understand the problem of assembling price indexes is this: “The indexes are being jiggered by the government.” The correct answer to this is simple: “So what?” The indexes are not jiggered with often. Maybe once a decade there are alterations, but this is necessary in every price index. This is inherent in the very theory of a price index. If somebody doesn’t jigger with the index, then we would still have buggy whips as a component of the modern price index.
Because certain consumption goods fall out of favor, they have to be dropped. Every index in history has this problem, whether we’re talking about the Dow Jones Industrial Average, the Standard & Poor’s 500, or any other index. History changes, and the indexes have to change with it, or else they become irrelevant. But this obvious fact is never discussed by the people who have this knee-jerk response: “The government is jiggering with the statistics.” The question is this: “Is this jiggering justified by changes in the economy?” The critics of price indexes never bother to discuss this problem. It is a fundamental problem of epistemology in economics. It is not easily solved.
(For the rest of my article, click the link.)