Deflation v. Inflation argument makes NYTimes.com homepage

[FRED]

Re: Deflation v. Inflation argument makes NYTimes.com homepage

I was talking about the consensus of the contributors in that particular NY Times piece that Jim Nickerson posted. Clearly, that is not the consensus of the posters on this site. I personally agree with those contributors, but there's obviously room for disagreement.

I appreciate that rampant inflation is your experience. It is not mine, but I won't bore you with my experience. If what you're saying is true, it sounds like times are tough. Good luck.

The difficulty is that most people do not understand what inflation is. They think rising prices is inflation. In fact rising prices are but one symptom of inflation. There are other inflation symptoms that are less obvious, such as we are seeing today as producers struggle to meet the demands of more thrifty consumers even though input costs remain high. One strategy we predicted in 2008 when we foresaw this development was the substitution of low quality goods that consumers can afford for high quality goods that they cannot afford. We see this today in, or example, the proliferation of gourmet pizza and tapas style tasting menu restaurants. To see the inflation you have to think like a producer trying to keep customers, or like a consumer observing how producers are adapting to the environment. The data are everywhere for anyone who is truly curious.

[Chomsky]

Re: Deflation v. Inflation argument makes NYTimes.com homepage

The difficulty is that most people do not understand what inflation is. They think rising prices is inflation. In fact rising prices are but one symptom of inflation. There are other inflation symptoms that are less obvious, such as we are seeing today as producers struggle to meet the demands of more thrifty consumers even though input costs remain high. One strategy we predicted in 2008 when we foresaw this development was the substitution of low quality goods that consumers can afford for high quality goods that they cannot afford. We see this today in, or example, the proliferation of gourmet pizza and tapas style tasting menu restaurants. To see the inflation you have to think like a producer trying to keep customers, or like a consumer observing how producers are adapting to the environment. The data are everywhere for anyone who is truly curious.

Great find, thanks.

[jk]

Re: Deflation v. Inflation argument makes NYTimes.com homepage

The difficulty is that most people do not understand what inflation is. They think rising prices is inflation. In fact rising prices are but one symptom of inflation. There are other inflation symptoms that are less obvious, such as we are seeing today as producers struggle to meet the demands of more thrifty consumers even though input costs remain high. One strategy we predicted in 2008 when we foresaw this development was the substitution of low quality goods that consumers can afford for high quality goods that they cannot afford. We see this today in, or example, the proliferation of gourmet pizza and tapas style tasting menu restaurants. To see the inflation you have to think like a producer trying to keep customers, or like a consumer observing how producers are adapting to the environment. The data are everywhere for anyone who is truly curious.

the lower-quality-for-the-unlowered-price is an example of [negative] hedonic change, and theoretically should be adjusted for in the cpi. somehow, it doesn't happen. the other part of the cpi calculation that escapes me, is why the substitution effect they factor in [steak too expensive? switch to chicken!] isn't cancelled out by and equal and opposite negative hedonic adjustment.

[FRED]

Re: Deflation v. Inflation argument makes NYTimes.com homepage

the lower-quality-for-the-unlowered-price is an example of [negative] hedonic change, and theoretically should be adjusted for in the cpi. somehow, it doesn't happen. the other part of the cpi calculation that escapes me, is why the substitution effect they factor in [steak too expensive? switch to chicken!] isn't cancelled out by and equal and opposite negative hedonic adjustment.

It's all quite clever, isn't it? The entrepreneurs keep coming up with inventive ways around government largess as fast as government figures out how to turn it into votes. It's a race.

[rdrees]

Re: Deflation v. Inflation argument makes NYTimes.com homepage

The CPI's hedonic adjustments do not substitute steak for chicken. Nor, indeed, do they even substitute steak for hamburger:

"When the cost of food rises, does the CPI assume that consumers switch to less desired foods, such as substituting hamburger for steak?

No. In January 1999, the BLS began using a geometric mean formula in the CPI that reflects the fact that consumers shift their purchases toward products that have fallen in relative price. Some critics charge that by reflecting consumer substitution the BLS is subtracting from the CPI a certain amount of inflation that consumers can "live with" by reducing their standard of living. This is incorrect: the CPI's objective is to calculate the change in the amount consumers need to spend to maintain a constant level of satisfaction.
Specifically, in constructing the "headline" CPI-U and CPI-W, the BLS is not assuming that consumers substitute hamburgers for steak. Substitution is only assumed to occur within basic CPI index categories, such as among types of ground beef in Chicago. Hamburger and steak are in different CPI item categories, so no substitution between them is built into the CPI-U or CPI-W.
Furthermore, the CPI doesn't implicitly assume that consumers always substitute toward the less desirable good. Within the beef steaks item category, for example, the assumption is that consumers on average would move up from flank steak to filet mignon if the price of flank steak rose by a greater amount (or fell by less) than filet mignon prices. If both types of beef steak rose in price by the same amount, the geometric mean would assume no substitution.
In using the geometric mean the BLS is following a recognized best practice for statistical agencies. The formula is widely used by statistical agencies around the world and is recommended by, for example, the International Monetary Fund and the Statistical Office of the European Communities."

http://www.bls.gov/cpi/cpiqa.htm

There may be other valid criticisms of the CPI, but that is not one of them.

[rdrees]

Re: Deflation v. Inflation argument makes NYTimes.com homepage

I think of inflation as a fall in the value of any given dollar. So I agree with you that rising prices are a symptom of inflation and not its cause. At the same time, higher prices are a symptom that should necessarily be present to some extent if the value of the dollar falls. If I bought the exact same three things today and paid the same price for them as I did three months ago, I think that's pretty good evidence that the value of my dollar is generally holding steady. Red spots on your body is merely a symptom of the virus that causes chickent pox, but an absence of those red spots--of that symptom--suggests that whatever you are suffering from may not be chicken pox after all.

I dont go out to eat all that often, but I was struck by something in the article you linked to: while more consumers expect to eat out this coming year, they expect to pay 21% less for those meals, with 16% expecting to pay on average $5 per meal, up from 12% last year. More meals in restaurants for less money is evidence of inflation? And maybe I'm wrong on this, but I think of eating out as a "higher quality" substitution for eating at home, and if more people think they can eat out this year than last year, it's not clear to me that we're seeing a one-way-street toward the subsitution of lower quality goods/services.

[Starving Steve]

Re: Deflation v. Inflation argument makes NYTimes.com homepage

"Chicken"? Did you say "chicken"?

Chicken to take home and re-heat went up from $5.49 per chicken last year to $6.99 per chicken this year. Check Costco and Superstore in Langford, BC to verify what I am writing. And the taxes on the take-out dinner, the re-heat, have also gone up, and now include the new BC Harmonized tax, instead of GST + PST. The magic of the harmonized tax is that somehow it is greater than the sum of its pieces because the harmonized tax applies more often than the GST and PST applied.

Before taxes, whatever the new harmonized game works-out to, ($6.99/$5.49) = 1.27+ = about a 27% hike in one basic item, chicken, in one year.

Shall we talk about the cost of re-heating the chicken in the oven, after BC Hydro's new price hikes for electricity? How about the new higher cost for water to wash the dishes after the dinner?

Rents up. Home prices up. Heating costs up. Gasoline up. House taxes up. Insurance costs up..... And that is just the beginning.

Zero interest rates have pushed inflation thru-the-roof in my neck of the woods: Victoria, BC Canada.