Inflation isn’t so bad

David Leonhardt thinks inflation isn’t so bad. He says we’re only focusing on the things going up in price, and not the things going down:

There is also something particular to inflation that aggravates loss aversion. Price increases are obvious. But price declines are often hidden. The cost of an item stays about the same for years, while everything else gets more expensive and nominal incomes rise.

When you dig into the Consumer Price Index, you start to realize just how many things fall into this category. The price of major appliances has been flat over the last year. Furniture is 1 percent less expensive. A decade ago, a basic four-door Toyota Corolla LE cost $16,018, according to the company. The 2009 basic model costs $16,650, and it’s a safer, more powerful, more fuel-efficient car than its predecessor.

That said, there is one way in which the official numbers were clearly understating inflation. To track housing costs, the Consumer Price Index analyzes rents, not home prices. (Why? Long story.) And rents didn’t go up anywhere near as much as house prices during the real estate boom. So the index missed the huge run-up in home values that made life harder on anyone trying to buy a first home.

Since 2006, of course, home prices have been falling. But rents have kept rising slowly, which means that, as far as the Consumer Price Index is concerned, housing has somehow gotten more expensive during the real estate crash.

So when the new inflation numbers come out next week, they will indeed be misleading. They will be artificially high.

I disagree with almost everything in this article. A few thoughts:

Sure, there will always be some things which go up in price and others that go down; there is a constant battle between inflation and deflation. Pointing to the few items in the CPI that are going down – furniture, clothing, and electronics – does not lead to overstated CPI. The point of the CPI is to track the cost of living for the average person.

Housing Costs: true, housing prices are going down and rents are going up. This is referred to as “Owners Equivalent Rent” in the CPI. Perhaps that is leading to a slightly higher CPI now, but it had the reverse effect for all those years housing prices were going up. Besides, for many people in this country, housing costs are still going higher even though home values are down. With higher interest rates, property taxes, and maintenance costs, the cost of owning a home is not going down much.

The items in the CPI which are going up the most – food, energy, and healthcare – disproportionately affect poor people. Thus, another subversive effect of this inflation is that it will lead to a widening wealth gap.

2 Responses to Inflation isn’t so bad

  1. Steven says:

    I disagree with the article as well. Just take every day groceries for example. Bread, rice, vegetables, dairies, you name it, the prices have gone up. To say that inflation isn’t that bad or prevalent is like saying prices are going up in proportion of rise in income level and appreciation of the dollar. Which we all know that isn’t true.

  2. Mallory says:

    Mallory says : I absolutely agree with this !

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