Home > Uncategorized > Two kinds of inflation chart

Two kinds of inflation chart

This chart shows the cumulative gain in the traditional inflation metric used by the Fed called the personal consumption deflator, in red, and a modified metric which equally weights the PCE and the S&P 500 in blue.

“This chart shows the cumulative gain in the traditional inflation metric used by the Fed called the personal consumption deflator, in red, and a modified metric which equally weights the PCE and the S&P 500 in blue.”

source: https://www.forbes.com/sites/vineerbhansali/2021/02/23/why-paying-attention-to-asset-price-inflation-is-important-for-investors/?sh=4f1909944399

  1. Ken Zimmerman
    June 2, 2021 at 11:20 am

    Acording to a 2003 paper from the Bureau of Labor Statistics, the world’s first known inflation-indexed bonds were issued by the Commonwealth of Massachusetts in 1780 during the Revolutionary War. These bonds were invented to deal with severe wartime inflation and with angry discontent among soldiers in the U.S. Army with the decline in purchasing power of their pay. Although the bonds were successful, the concept of indexed bonds was abandoned after the immediate extreme inflationary environment passed, and largely forgotten until the twentieth century. In 1780, the bonds were viewed as at best only an irregular expedient, since there was no formulated economic theory to justify indexation.

    When concerns about high inflation returned to the USA in the 1970s, the debated followed a familiar path. The response of the federal government was to question whether inflation was as severe as it had appeared. Economists and government statisticians were concerned that the measure of prices using a fixed basket of goods was overstating inflation, even as most people in their daily lives were certain that official statistics were understating it. The response of the BLS was to experiment with new ways to calculate the index. The Bureau of Economic Analysis also joined the fray and developed a chain-weighted analysis of prices. The desire to jigger the numbers was not some dark plot. It stemmed from the impulse to improve; the indicators were devised in the twenties, thirties, and forties based on available information and keyed to a particular economy. But nothing is static, and as the economic system evolved, the people compiling the numbers understood the need for those to evolve as well. Some change was embedded in the numbers themselves: the composition of the basket of goods used to determine surveys of purchases. Other changes, however, wouldn’t be reflected unless there was an effort to integrate new forces.

    As Janet Norwood, the commissioner of the BLS, testified in the late 1970s, inflation was a number no one liked. “Some people would like an index that doesn’t go up so much, and other people would like an index that goes up more. And when they don’t have that which they want, they feel there must be something wrong with the indicator itself.” The same could have been said for almost any number, any indicator, but the consumer price index was notably controversial. An index well suited to the emerging era of super partisan politics in America. An index that seemed custom make for campaigning.

  2. Gerald Holtham
    June 3, 2021 at 12:35 pm

    You can certainly debate whether the PCE deflator is a good measure of the cost of living for most people. You can also worry about asset price inflation for its effect on inequality and the risk it creates of a financial crash with damaging consequences for the economy. But combining the PCE deflator and the S&P index measures nothing of interest. What is it supposed to show?

  3. John Jensen
    June 9, 2021 at 8:57 pm

    All it shows is that capital inflates in value a lot faster than labour (it’s as if there are now two economies) and perhaps it may form one or more bubbles – fairly quickly too. But, I’m not sure of the trigger. But, I’m sure there is a “fat tail” lurking somewhere to correct this and nobody will see it until it happens and then everyone will say they knew it all along.

  1. No trackbacks yet.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.