Inflation

Why Inflation Seems To Have Sharper Teeth Than the CPI Suggests
By DAVID WESSEL
THE WALL STREET JOURNAL
March 16, 2006
[Many Americans are convinced that the inflation statistics released by the US government understate the true rate of inflation. Economists, on the other hand, think that the government statistics exaggerate the true rate of inflation. Here's why.]

How Home Prices Can Be Hot but Inflation Cool
By DANIEL GROSS
The New York Times
June 26, 2005
[Home prices have been rising rapidly. And, yet, the US Bureau of Labor Statistics, which measures the Consumer Price Index, says that housing costs have been rising at a moderate pace. How come? Because, since 1983, the Bureau has been counting not home prices but home rental rates in the CPI and these rents have not been rising as fast as home prices. Over time, however, rents keep pace very closely with home prices; it's just that rents bounce around a lot less than home prices do.]

New and Improved: An Inflation Debate Brews Over Intangibles at the Mall; Critics Say U.S. Plays Down CPI Through Adjustments For Quality, Not Just Price; Value of a TV's Flat Screen
By TIMOTHY AEPPEL
THE WALL STREET JOURNAL
May 9, 2005
[A brilliant discussion of how the Bureau of Labor Statistics tries to incorporate improvements in product quality into the Consumer Price Index, its measure of our cost of living, and the reasons why it is important to get it right.]

Wall Street Pushes Inflation Protection: Securities Keyed to Consumer Prices Gain Favor, But Returns, High Markups Are Issues
By JANE J. KIM
THE WALL STREET JOURNAL
May 5, 2005
[The US Treasury Department began selling inflation-protected savings bonds -- for which the interest payments rises when inflation rises and falls when inflation falls -- in the 1990s. Since then, state governments, municipal governments, and major corporations have all begun to raise money by selling inflation-protected bonds. Banks now sell inflation-protected Certificates of Deposit (CDs) that pay an interest rate that varies with the rate of inflation. As a result, people can now save for retirement without worrying that inflation might reduce the purchasing power of their savings. Over the short run, however, buying inflation-protected savings bonds has some risks.]

ECONOMIC SCENE: How Changing the Sheets Can Make a Hotel Room 'New'
By VIRGINIA POSTREL
The New York Times
March 24, 2005
[Aesthetic improvements in a product represent hard-to-measure improvements in quality. Ideally, the Consumer Price Index should not increase when price increases are commensurate with quality improvements; for example, a somewhat higher price for a computer with a larger hard disk and a faster microprocessor might not represent an actual increase in the cost of living. Unfortunately, stylistic or aesthetic improvements in product quality are not as easy to measure as the increase in the size of a computer's hard drive. So, the Bureau of Labor Statistics ends up ignoring such aesthetic improvements. Therefore, the CPI ends up making the cost of living appear worse than it really is.]

Popular Inflation Bonds Gain a Global Presence: Investors Look Overseas To Counter Weak Dollar And Risk of Higher Prices
By JEFF D. OPDYKE
THE WALL STREET JOURNAL
January 19, 2005
[Savers interested in inflation-protected bonds do not necessarily have to buy them from the US government, dozens of foreign governments sell them too. However, if you buy these bonds you will need to think about what might happen to the value of the dollar in the future. Say you buy an inflation-protected bond sold by the Japanese government. There will come a time when you might wish to sell the bond and bring the money home. The Japanese government will give you yen when you sell the bond back. If a yen trades for a lot of dollars at that time, you are in luck. However, if at the time of repatriation yes are not worth much in dollars -- that is if each dollar is worth a lot of yen -- then you would be in trouble. In short, if you expect the exchange value of the dollar to rise, stay away from inflation-protected bonds sold in foreign countries.]

Birds and Dancing Ladies Skew the '12 Days' Index
By ELIZABETH OLSON
The New York Times
December 25, 2004
[An update on the PNC Financial Services Group's wacky price index based on the commodities listed in well-known Christmas carol.]

Strength of TIPS vs. Treasurys Is Likely to Get Fed's Attention: Surge in Performance Shows Concern of Some Investors That Inflation Will Rise
By MICHAEL MACKENZIE
DOW JONES NEWSWIRES
THE WALL STREET JOURNAL
November 10, 2004
[The US Treasury sells both plain-vanilla bonds and inflation-protected bonds. If the interest rate on the traditional bonds is 3.25% and the interest rate on the inflation-protected bonds is 2.00%, how should we interpret the difference? The logical interpretation is that savers expect inflation the near future to be 1.25%: why else would they take 1.25 percentage points less for the safety of inflation protection? So, we see that one advantage of having bonds that offer inflation protection and bonds that do not is that we can use the difference in their interest rates to calculate what most people expect inflation to be in the near future. This is important to know because expectations of future inflation can affect today's actual inflation.]

Social Security Benefits to Rise 2.7%: Cost-of-Living Increase Will Be Offset for Some; Inflation Gauge Climbs 0.2%
By MICHAEL SCHROEDER
THE WALL STREET JOURNAL
October 20, 2004
[The US government pays pensions to retirees and these pensions increase in step with increases in the CPI. Therefore, it is very important that the CPI be an accurate measure of the cost of living: if the CPI overstates the true cost of living -- as many economists believe -- the government will end up paying more to retirees than is necessary to maintain their standard of living, and if the CPI understates the true cost of living the retirees will end up worse off.]

Economics focus: Costs of living
The Economist
Jun 3rd 2004
[Official inflation rates suit nobody perfectly. After all, the CPI is an average measure.]

Economists put the skids under theory linking oil and inflation
By Alan Beattie
The New York Times
October 17, 2003
[The idea that prices rise when the price of imported oil rises is bogus. What matters in the long run is (a) whether too much of the country's currency is being printed and, to a lesser extent, (b) whether the economy's productivity is falling. That's it. All that an increase in the price of imported oil can do is make oil more expensive relative to other goods, such as as shoes. It cannot cause an increase in the overall cost of living.]

Dealing With Deflation
By HAL R. VARIAN
The New York Times
June 5, 2003
[Prices can fall if there is too much supply or too little demand (for goods). The overall effect is good in the former case and bad in the latter case. The current deflation -- actually not falling prices, strictly speaking, but only a period of low inflation -- was caused by a combination of both effects. US businesses invested very heavily in the 1990s and this led to rapid productivity growth (too much supply). But the realization of excessive prior investment has lead businesses to cut back on their investment purchases of new machines, etc. (too little demand). But not to worry: a country's central bank can reverse the fall in demand -- and, thereby, the slide in prices -- by printing money and driving down interest rates by lending the newly printed money to banks and, through banks, to the man in the street, who can then go shopping for cars, stereos, etc., with the borrowed money.]

Demon Deflation: Not Here, Now
By VIRGINIA POSREL
The New York Times
May 22, 2003
[This article explains why deflation caused by falling demand for goods is to be feared. When the prices of, say, cars fall -- caused, perhaps, by a fall in the demand for cars -- the car companies will not have enough money to pay their workers the wages they have promised -- in labor contracts signed in the past -- and will, as a result, be forced to lay off many workers and, thereby, contribute to rising unemployment. The real problem lies in the fact that the car companies may not be legally able to reduce the wages that they must pay. Had car prices fallen, say, 10% and had the car companies been able to reduce the wages they pay their workers by the same 10%, the car companies would probably not have had to fire any of their workers. In that case, deflation would not have been something to fear.]

Fed Starts to Fret Over Falling Prices
By DANIEL ALTMAN
The New York Times
May 9, 2003
[An excellent summary of the dark side of falling prices and a discussion of the difficulties that a country's central bank -- such as the US Fed -- may face in attempting to stop prices from falling.]

Despite Fed's Concern, Consumers Are Paying More for Many Items
By JEFF D. OPDYKE and MICHELLE HIGGINS
THE WALL STREET JOURNAL
May 8, 2003
[This report marks the beginning of a brief period during which US policymakers were worrying about deflation, or falling prices! Even when prices are -- on average -- rising at a moderate pace or even falling, it is in our nature to complain endlessly about the prices that are rising without simultaneously rejoicing about the prices that are falling. This asymmetry gets worse when prices rise for goods that we can't do without -- such as college education and healthcare -- and fall for goods -- such as storage devices for computers -- that are not that indispensable. (Here's a thought: Perhaps the Bureau of Labor Statistics should calculate a measure of inflation that weights the price change of each commodity according to how low its price elasticity of demand is. This might serve as a measure of how helpless people feel about inflation.)]

A Christmas List for a Song This Year
By ELIZABETH OLSON
The New York Times
December 25, 2002
[The US Bureau of Labor Statistics looks at the changes in the market value of the basket of goods bought by the typical American to calculate the Consumer Price Index. The PNC Financial Services Group had another idea: they look at the changes in the market value of the commodities mentioned in the well-known carol "The 12 Days of Christmas."]

Labor Department to Publish A New Consumer Price Index: New Measure Will Address Concerns That the CPI Is Overstating Inflation
By GREG IP
THE WALL STREET JOURNAL
February 21, 2002
[Economists believe that the traditional formula for the Consumer Price Index exaggerates the true cost of living; the sources of this overstatement lie in how the CPI incorporates (a) the emergence of new goods (such as the HD DVD player/recorder), (b) the unending improvements in the quality of goods (such as bigger hard drives for PCs), and (c) consumers' habit of switching to low-price substitutes when a product becomes more expensive. Now the Bureau of Labor Statistics has begun issuing a new "superlative" or "chain-type" measure of CPI that continuously updates the data on how consumers switch back and forth between regularly priced goods and their cut-price substitutes. This new measure is, therefore, expected to be free of the traditional CPI's substitution-effect bias; see (c) two sentences back.]

How Much Does Anyone Really Know About the Real Rate of Inflation
By JEFF MADRICK
The New York Times
December 27, 2001
[A skeptical view of the conclusion of the Boskin Commission -- see article below -- that the CPI exaggerates the true cost of living. Madrick does not dispute that the CPI has certain biases, he only questions the Boskin Commission's estimate that the CPI exaggerates inflation by 1.1 percentage points.]

An Economic Speedometer Gets an Overhaul
By JOLIE SOLOMON
The New York Times
December 23, 2001
[An excellent discussion of the meaning of the Consumer Price Index, its importance, its flaws as a measure of the cost of living, and how the Bureau of Labor Statistics has corrected some of those flaws.]

Social Security Checks to Rise 2.6%
By JOHN SCHWARTZ
The New York Times
October 20, 2001
[The US government pays pensions to retirees and these pensions increase in step with increases in the CPI. Therefore, it is very important that the CPI be an accurate measure of the cost of living: if the CPI overstates the true cost of living -- as many economists believe -- the government will end up paying more to retirees than is necessary to maintain their standard of living, and if the CPI understates the true cost of living the retirees will end up worse off.]

How Japan can recover
By Lars Svensson
The Financial Times
September 24 2001
[The key to economic stability is for consumers to anticipate price rises rather than deflation. Inflation can get an economy out of a recession caused by a shortage of demand: if people expect that prices would soon rise, they would rush to buy stuff right away while they are still cheap. This surge in demand will kick start a stalled economy.]

Who Needs Razzle-Dazzle?
By Robert Barker
BusinessWeek
September 4, 2000
[Another primer on I-Bonds; see above. See this also.]

ECONOMIC VIEW: Inflation Just Doesn't Add Up
By SYLVIA NASAR
The New York Times
August 22, 1999
[Usually, when unemployment is low, businesses scramble to hire the few remaining unemployed workers and, thereby, cause wages to rise. This then leads to inflation. But changes in the labor market -- such as a decline in the bargaining power of labor unions, fierce competition for customers from foreign producers, etc. -- can keep inflation low even when unemployment is low. Expectations are also an important part of the story. If workers expect inflation to be low, they would be less afraid of the future, and less eager to fight hard for higher wages. As a result, the expectation of moderate future inflation can lead to moderate current inflation -- in a self-fulfilling manner.]

Fearing Deflation, China Orders a Ban on New Factories
By SETH FAISON
The New York Times
August 19, 1999
[Deflation means falling prices. It occurs when there is a sharp fall in the demand for goods -- caused in this case by consumers suddenly turning pessimistic and cutting back on their shopping plans. These cutbacks cause a slowdown  of production and a rise in unemployment, which is why a period of deflation is "feared" even though falling prices themselves may seem welcome. Typically, a country's central bank can reverse the fall in demand -- and, thereby, the slide in prices -- by printing money and driving down interest rates by lending the newly printed money to banks and, through banks, to the man in the street, who can then go shopping for cars, stereos, etc., with the borrowed money. But in this case, the Chinese government is trying to push prices back up by forcing some factories to shut down and, thereby, creating an artificial scarcity.]

ECONOMIC SCENE: U.S. Deflation Is Frightening but Toothless
By MICHAEL M. WEINSTEIN
The New York Times
November 5, 1998
[There's no reason to fear deflation! Why? Because any country's central bank knows an easy way to turn deflation into inflation: just print loads of currency! Imagine what would happen if more dollars are printed by the US Federal Reserve and these new dollars were loaned through commercial banks to the average citizen. He/she would take the money and go shopping. The consequent increase in demand would push prices up: deflation no more! Because it is so easy to create inflation, there is little reason to fear deflation.]

Wages, Benefits Rise 3.7 Percent
By The Associated Press
The New York Times
October 29, 1998
[Here's a case in where wages, salaries and benefits paid to American workers rose by 3.7 over a year and prices rose just 1.5 percent. This is possible when workers become more productive.]

Japan: Newfangled Econ 101 -- Throw Caution to the Wind
By MICHAEL M. WEINSTEIN
The New York Times
September 20, 1998
[At this point, the Japanese economy had been doing badly for almost a decade: people had become pessimistic, overall demand for goods had been falling, and economic growth had been almost zero. None of the cures that economists typically suggest -- tax cuts, increased government spending, lower interest rates -- were working. What to do? Prof. Paul Krugman, then of MIT, suggested that the Bank of Japan should announce that it would print new yen at such a furious pace that Japan's deflation would turn into inflation. (Imagine the Bank of Japan printing lots of new yen and dropping them all over Japan from helicopters. People would pick up the dropped currency and go shopping. This sudden surge in demand would soon start to push prices up.) Krugman argued that if people were convinced that prices would start rising, they would rush to the malls to snap up stuff while they were still cheap. In this way, the fear of impending inflation would solve Japan's problem of insufficient demand for goods. Moral of the story: Ideas that appear weird at first glance may in the end turn out to be the only logical answer. See this also.]

Economic Scene: Some Experts Say Inflation Is Understated
By PETER PASSELL
The New York Times
November 6, 1997
[This was an exceptionally wonderful period of both low inflation and low unemployment. Usually economists think of low unemployment as being inconsistent with low inflation because low unemployment, which is another way of saying that labor is scarce, is thought to lead to rapid wage increases and, therefore, to inflation. But in the 1990s, a combination of factors kept wages and prices stable even though unemployment was low.]

Trading in Inflation-Indexed Bonds Is Brisk
By ROBERT HURTADO
The New York Times
January 22, 1997
[Report on the birth of inflation-protected US Treasury bonds.]

Analysis: Fixing Scales for Measuring Inflation Won't Be Easy
By DAVID E. ROSENBAUM
The New York Times
December 4, 1996
[The government should pay less in Social Security pensions than it does--see next article. But retirees form a powerful political pressure group and it will not be easy to cut their pensions, even if it is the logical thing to do.]

Panel Says Errors in Inflation Data Drain U.S. Budget
By RICHARD W. STEVENSON
The New York Times
December 4, 1996
[According to an independent commission of experts appointed by the US government -- also known as the Boskin Commission -- the Consumer Price Index suffers from several flaws that make it exaggerate the true level of the cost of living. This has important effects on the health of the government's budget. The US government pays Social Security pensions to retired people. These pensions automatically increase when the CPI increases, to compensate pensioners for increases in the cost of living. However, because the CPI exaggerates the true cost of living, the government ends up paying far more in pensions than is necessary.]

Maintained by Udayan Roy for use by students as supplementary material.