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Amity Shlaes: Inflation Vacation

Things are more expensive than government statistics say they should be. A lot of people who watched Rick Santelli blow up on CNBC the other day thought the same thing: “That guy needs a vacation — and so do I. The world just doesn’t make sense to him, or maybe me, either.” So you head up to the cabin. Maybe it’s the same cabin you rented back in 2000, before your kids. You just want a quiet reality check, a chance to think it all through. You swear you’ll turn off your phone. You and your family need time to remind yourselves how good you have it.

But there’s one nuisance that can interrupt your seven-day idyll just as surely as a blackfly or a mosquito. That nuisance is the price zap.

The first zap comes even before you get in the car. Your daughter wants a haircut so she can feel the sun on her neck. Great. But then she reports she needs $45 for the cut. What? A haircut used to be $20. You fork out, hiding your irritation. You expected haircuts to be high, but not this high.

The next zap comes on the road. A gallon of gas is $4.00, when it was $1.30 back in 2000. You expected gas to be high. But not this high.

The cottage you rented is nice, but the rent is more than you expected. It’s hot in the cabin, and your other daughter wants to see The Fault in Our Stars one more time. So you head over to the theater. The ticket is $10.00, not $5.00, like it was when you went to see Gladiator back in 2000. Your spouse asks you to pick up some coffee. A pound is $5.20, not $3.40, like back in the old days. You expected movies and coffee to be high, but not this high.

Maybe you have a child in camp. They still write real postal letters, so you stop at the post office to send her some stamps. Stamps are 49 cents each, rather than 33 cents, as in the old days. You hope that your daughter can save her stamps and use them next year. You tell the lady you’ll take the “Forevers.”

The lake is blue. You go for a swim with a buddy. You two went to the same state school. You believe in public education, and are wondering if your kids will also go to State. His son is starting as a freshman in your old dorm in just four weeks. Celebrate! But then he lets you know that the cost all in is going to be $38,000 and change. Back in 2000, it was $18,400. And when you went, in 1995, tuition and board were only $16,000. And that’s a state school. You knew the price would be high. But not this high. Private school for your kids? Time to forget about it.

About three days in, you do just what you wanted not to. You snap at your daughter. You take a call from a client. Suddenly those little mosquito bites have you itching all over. You feel like maybe you have to get back to the city.

In other words, you’re beginning to realize that maybe you don’t have it so good. Your pay isn’t high enough to let you ignore these prices. Wage growth overall is slower than it should be; your pay certainly hasn’t doubled since 2000, like the price of the movie ticket.

Have you lost out entirely? Not really. The realtors name a price for your house that’s more than you expected. Too bad you can’t sell right now. Your pension is up, but you have a squishy feeling that money won’t be able to keep up with these prices. The money you have in the Roth IRA is adding up, but it’s clear politicians may zap your stash later by turning the Roth into a taxable vehicle. They’ll probably do that right around when you retire.

You’re on vacation. Other people are water skiing, so you have a few hours to think about this. When you wake up from your sofa snooze, you see there is another way to look at the discomfort you’re experiencing: The price zap is an inflation zap. The reason you thought you could afford this vacation in the first place was that you know a little about money. All the official numbers, especially the Consumer Price Index, say that inflation is reasonable. Economists you respect tell you the wages are low because of “misallocation of resources.” Janet Yellen, the new Fed chairman, says she’s not worried. Maybe she will have a good vacation.

But other numbers suggest that inflation is higher than what the official data suggest. One set, from which some of the price bites above were taken, is here. For a more thorough review of why official numbers err, have a look at the work of John Williams, a consultant who has tracked data over the years.

Boiled down, Willi ams’s contention is that several alterations in the way we measure inflation have caused distortion. The Consumer Price Index used to be simple: The government measured the same basket of goods every year. If the price went up, the index captured that. Decades ago, authorities pointed out that people substitute a cheaper item when what they originally bought was too expensive. They altered the index to capture substitution. If steak is expensive, you buy chicken. The result of their fiddle is that inflation looks lower than it would otherwise. That’s disappointing. No vacation is a true vacation without a really good tenderloin.

The Bureau of Labor Statistics or the Fed also argued that the quality of some items (camera, movie) had improved over the years. The technology it took to make X-Men: Days of Future Past is leagues ahead of the technology used for Gladiator. The movie theater itself has better seats. Therefore, the ticket price should be higher. The economists at the BLS say they discount for that: “The hedonic quality adjustment method removes any price differential attributed to change in quality,” they write. But perhaps they use such indexes to hide true price increases.

In any case, you are not feeling especially hedonic. And that takes you back to the reason you needed this vacation in the first place: The rate of change. Some change is good — that’s what modernity is about. But what monetary authorities don’t recognize is that too much change in money’s value, up or down, can be enervating to the average person. An old money that keeps its old value sustains a mood of trust in society. This summer Jerry Jordan, the former president of the Cleveland Fed, penned a blistering notice of the change in central-banking culture on his website, Sound Money Project: “Clearly I was wrong a few years ago when I asserted ‘there were no central bankers or ministers of finance who would publicly argue that the prevailing inflation rate was too low.’ It now seems they all do.”

Go back farther, and you find central bankers who pointedly tolerated no inflation. President Calvin Coolidge put it simply: “Inflation is repudiation.” Today, because of our national “repudiation” — or plain denial — of inflation, we tend to find that kind of trust only among good friends or family — and there only if you all can avoid talking about prices. People begin to doubt themselves when personal inflation experience does not align with official inflation data. Writers trying to describe the German hyperinflation of the 1920s often wrote of the “blow” of seeing currency go to nothing. Such blows were their own dramatic version of those little zaps.

Which takes us back to Rick Santelli. What Santelli is really talking about is getting the Fed back to a point where it cares about inflation. If you study the last part of the video, where the CNBC host gets bullied into silence by Steve Liesman, you’ll see the problem. The price today for talking about inflation is itself too high.

Santelli doesn’t really need a vacation, but he sure deserves one. Then he and maybe some others can return to argue again. It’s time for a real debate on inflation to commence. And knowing that such a debate was out there sure would make it easier to come back to work.

Amity Shlaes is the author of three national bestsellers, Coolidge, The Forgotten Man, and The Greedy Hand.

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Posted: July 16, 2014 Wednesday 04:00 AM