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Opinion from a Libertarian ViewPoint

Posts Tagged ‘Consumer Price Index’

To Attack the Root of Evil, Fix the Money | The Libertarian Institute

Posted by M. C. on January 14, 2022

https://libertarianinstitute.org/articles/to-attack-the-root-of-evil-fix-the-money/

by Jp Cortez

After the Consumer Price Index surged last year to its highest level since 1982, politicians are feeling pressure from constituents to do something about it.

Last Monday, President Joe Biden announced $1 billion in grants, loans, and other assistance for small meat producers. Another costly government program will, supposedly, help tame rapidly rising beef and poultry costs.

Four giant companies control 85% of the market for meat—raking in massive profits while families pay higher prices. I’m glad @POTUS is taking steps to create a more competitive beef and poultry industry. We need to break up Big Ag and lower prices. https://t.co/EHQZWaD2du

— Elizabeth Warren (@SenWarren) January 3, 2022

Massachusetts Senator Elizabeth Warren has been on a tear lately, and there is a startling commonality between all these ideas:

Prices at the pump have gone up. Why? Because giant oil companies like @Chevron and @ExxonMobil enjoy doubling their profits. This isn’t about inflation. This is about price gouging for these guys & we need to call them out. pic.twitter.com/kxiQkC2tYa

— Elizabeth Warren (@SenWarren) November 20, 2021

Consolidation in the semiconductor industry is causing shortages and supply chain bottlenecks that increase consumer prices and hurt workers. I’m urging @SecRaimondo to act swiftly to increase competition. https://t.co/Y7Izd6X0Fl

— Elizabeth Warren (@SenWarren) December 17, 2021

This is your brain on fiat monetary systems and central banking: price inflation is caused by everything except for printing loads of new money.

If Senator Warren believes that prices increase because of the greed of price gouging companies, does she believe that when prices fall, it is the result of corporate benevolence?

See the rest here

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And Just Like That, Inflation Is About To Disappear? | ZeroHedge

Posted by M. C. on December 12, 2021

In any case, what we though this summer was just a joke appears to be coming true, because as the BLS has reported, starting next month it will adjust the weights for its Consumer Price Index basket, which will be calculated “based on consumer expenditure data from 2019-2020.” Alas, there is no further detail on this critical topic, although we will take any bet that post-revision reported inflation will drop because, well, “adjustments.”

https://www.zerohedge.com/markets/and-just-inflation-about-disappear

Tyler Durden's Photoby Tyler Durden

Earlier this year, when inflation was still “transitory” two Fed chairs, Powell and Bernanke, made comments which we joked only make sense if the definition of inflation is changed:

*POWELL:FOMC PREPARED TO ADJUST POLICY IF EXPECTATIONS GO BEYOND

by changing definition of PCE and CPI — zerohedge (@zerohedge) July 28, 2021

BERNANKE: COMMODITY PRICES WON’T ADD TO INFLATION GOING FORWARD

Why? Are we changing the definition of CPI again — zerohedge (@zerohedge) August 25, 2021

Sadly, our feeble attempts at humor were not unjustified, and as any economic history buff knows the US dramatically changed how it calculates consumer inflation back in the 1980s, an event extensively covered by AllianceBernstein former chief economist Joseph Carson on this website in the past (see “Consumer Price Inflation: Facts vs. Fiction“) with the most important difference being that while the CPI of the 1970s included house price inflation, the current measure does not. Instead, home price pressures have been swept in the purposefully nebulous Owner-Equivalent Rent which can be whatever politicians wants it to be (there have been other definitional changes, see here, here, here and here for more). Bottom line, however, is that if today’s CPI did include house prices in its measurement, the currently reported inflation numbers for house price inflation would push CPI (and core CPI) to double-digit gains.

Of course, it is politically inconvenient to report true inflation is – just see what happens in any banana republic where society is fed up with runaway inflation. It’s also why politicians on both sides of the aisle are always eager to tweak the definition of inflation ever so slightly (or not so slightly) so it appears to be less than it truly is. After all, for them masking reality is a matter of political survival.

In any case, what we though this summer was just a joke appears to be coming true, because as the BLS has reported, starting next month it will adjust the weights for its Consumer Price Index basket, which will be calculated “based on consumer expenditure data from 2019-2020.” Alas, there is no further detail on this critical topic, although we will take any bet that post-revision reported inflation will drop because, well, “adjustments.”

In the same press release, we also read that “the BLS considered interventions, but decided to maintain normal procedures”… whatever those are. Said otherwise, the BLS may not be “intervening” for now, but when the inflationary rubber hits the road next year with the midterms coming up fast and Dems ratings still in the dumps, we doubt that the BLS will have any qualms to “intervene.”

Incidentally, this “update” may explain the conviction behind Biden’s statement today: in a statement after the blistering hot CPI report came out…

… Joe Biden said that despite experiencing the most rapid inflation in almost 40 years in November, U.S. price increases are slowing, in particular for gasoline and cars.

“Today’s numbers reflect the pressures that economies around the world are facing as we emerge from a global pandemic — prices are rising… But developments in the weeks after these data were collected last month show that price and cost increase are slowing, although not as quickly as we’d like,” he said. Biden’s chief of staff Ronald Klain chimed in too:

We’ve made progress, but we’ve got to get prices down, and people have to feel the progress at their kitchen tables.https://t.co/YH102YVlQp — Ronald Klain (@WHCOS) December 10, 2021

Well, all that prices needs to slow “as quickly as we’d like” at least in government reports such as the CPI, is for the BLS to give them a gentle nudge lower.

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Shrinkflation, Inflation’s Sneaky Cousin, Is on the Rise | Mises Wire

Posted by M. C. on July 29, 2021

What is causing this increase in shrinkflation? Well, since shrinkflation is in fact a form of inflation, the short answer is that the same factors have caused inflation. As you may already be aware, many are blaming shortages and disruptions in the supply chain for the recent increases in inflation, but that hardly explains the whole story.

https://mises.org/wire/shrinkflation-inflations-sneaky-cousin-rise

Inflation has been on the rise for the past year and in the last few months it has accelerated. In June 2021, inflation, measured by the Consumer Price Index (CPI), hit the highest level since 2008. By inflation, economists refer to the increase in the general level of prices, which means that prices on average are increasing. The Bureau of Labor and Statistics (BLS) has a basket of goods and services that it tracks and uses to create a measure of the CPI. While inflation is the topic of the day in the news media and everyday conversations, many have not heard about its sneaky cousin, shrinkflation.

The term shrinkflation, is credited to British economist Pippa Malmgren, and refers to the shrinking weight of the products while the price for the package remains the same. This is in effect another form of inflation, since the per unit price of goods increases when products shrink. However, shrinkflation is trickier, since most consumers do not notice it (see here for a few examples of shrinkflation). Shrinkflation is an ongoing process, but we are seeing more of it in the past year, and especially the first half of 2021, as businesses scramble to catch up with increasing costs of production. Shrinkflation is so widespread today that there is a dedicated Reddit page for it.

Many complain about businesses resorting to shrinkflation and regard it as a sneaky way to increase prices. Yet many of the critics do not realize that businesses have no choice but to increase prices. Anyone who is paying attention to prices in the first half of 2021 will know that it is not only the price of consumer goods that it is increasing but also the prices of producer goods. In other words, the inputs used in the production of the goods we consume, including labor, have been getting more expensive. Consequently, businesses in a fight to maintain their profit margins have resorted to increasing prices or shrinking the size or weight of their products.

Normally, the BLS accounts for the weight of the products it tracks, which would allow them to account for shrinkflation, but as the Washington Post reports, the BLS has not been able to do this very well during the pandemic. This means that the current inflation measure, as measured by CPI, is most likely underreporting the extent of current inflation.

What is causing this increase in shrinkflation? Well, since shrinkflation is in fact a form of inflation, the short answer is that the same factors have caused inflation. As you may already be aware, many are blaming shortages and disruptions in the supply chain for the recent increases in inflation, but that hardly explains the whole story.

The two main candidates to blame are the Fed and the government. The Fed has printed tremendous amounts of money, which has led to the doubling of its balance sheet since March 2020. This is in fact what inflation is, and this is the cause of what we normally refer to as inflation, which, to be more accurate, is price inflation. In general, we know that the more money we print, holding all else equal, the more inflation we will get, and that is part of what we are seeing now. On the other hand, we have had the federal government spend money at record levels for a peacetime period. This also has led to an increase of demand beyond what one would expect in the circumstances we have been in since spring of 2020. For example, retail sales have increased rapidly and have been above trend since late 2020. While some of this can be seen as catching up after the decrease we saw in the second quarter of 2020, it is definitely gone beyond catching up, as is clear from the graph below. Government spending has become a topic of concern even for mainstream economists like Larry Summers, who is now worried about the economy overheating because of it.

Retail Sales

Lastly, while the supply chain disruptions are blamed on covid-19, it is the lockdowns instituted by governments, in the US and other countries, that are the main culprit behind these supply chain disruptions. The problem with the lockdowns was that they completely ignored the cost-benefit analysis by arbitrarily determining what constituted an essential business and what did not. As you may well know, one can ignore the laws of economics, but not their consequences, and we are now suffering the consequences of these arbitrary lockdowns. The million-dollar question today is, How long will this rising inflation and shrinkflation last? The Fed insists that this inflation is transitory, but many, including BlackRock’s CEO, are concerned that this may not be the case. With the inflation data from June, we have some evidence that inflation may be more than transitory. As can be seen from the graph below, the transitory portion of inflation (base effects) was expected to retreat for June (the bar after the dashed line), but CPI advanced beyond the increase in May (reflected in the green portion of the bar added to the predicted June CPI by Oxford Economics).

US Headline CPI Inflation
  (The graph is modified to show the actual CPI change for June, by adding the green portion of the bar.)

Hence, with all the money that the Fed has printed and is continuing to print, and the increased spending by the federal government, we may well end up seeing higher inflation over the next few years. Whether this will happen or not remains to be seen, but one thing is for sure: the shrinking size and weight of the products is here to stay and it will only get worse as inflation pressures continue to worsen. Author:

Klajdi Bregu

Dr. Klajdi Bregu is an assistant professor of economics at IU South Bend’s Judd Leighton School of Business and Economics and a fellow at the Center for Market Education. Prior to his appointment to the Leighton School faculty, Dr. Bregu taught at the University of Arkansas. He has published research in the Journal of Economic Dynamics and Control and the Southern Economic Journal.

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