Saturday, August 13, 2005

A story for Krugman?

I heard an interesting tale about Bush Administration numbers fakery today, actually from my parents (who certainly have no inside information). They noticed that lately, whenever you hear about the Administration's inflation figures, for example on news radio, it is always about something called "core inflation."

Core inflation is an inflation calculation minus information about food and energy.prices. These are excluded from the measure on the view that they are more volatile, presumably because they are subject to such shocks as a hurricane or drought that destroys crops, or an international oil market disruption. This may distinguish them from structural factors in price movements that might be considered more likely to just keep going on a particular path.

Anyway, core inflation has been around as a measure since 1957. But it was not until now being treated by a U.S. Administration as the main inflation measure to discuss publicly.

Especially with this Administration's track record on - well, just about everything - it is natural to be more than a bit cynical about its reasons for emphasizing core inflation. I am reminded of their totally shifting attention from the on-budget deficit, which excludes the Social Security surplus, to the unified budget deficit, which is smaller by reason of including it.

In short, the obvious reason that comes to mind for their emphasizing core inflation, rather than the CPI, is that it gives a lower number.

I have an even better measure to propose - the "sample consumer product inflation measure." For short, we could call this the SCPIM, to be pronounced Sick-Pim. This new measure determines the inflation rate based on a single consumer product that has been picked to stand for the rest. (Kind of like polling.) The product we will use first is televisions, or maybe flat screen TVs or some such thing. And don't whine about the need (as with polling) for a broader sample - heck, there are hundreds of thousands if not millions of TVs being sold each year.

Given how TV prices have been going in real terms (adjusting for features and quality) for at least 20 years, basing the Sickpim on TV prices is likely to show that what we really have is a deflation problem. Meaning that we need lots more tax cuts in order to stop it from getting out of hand.

On a more serious note, this shift to using core inflation, if sufficiently demonstrable, looks like a story that Paul Krugman ought to consider covering.

34 comments:

Mark Witte said...

I understand that this entry is somewhat in jest, but I also hear this complaint a lot.

Concern about the core rate of inflation is not a new thing in terms of monetary policy. The thought is that the core rate is a better measure of the endogenous (and thus long run) growth of prices in the country, and so is a better focus for monetary policy than the actual inflation rate, which may be strongly affected by exogenous temporary shocks to the prices of such items as fuel and food.

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