I remember a funny episode from college. It’s actually funny and telling on multiple levels, and I expect most of them will occur to most readers. It was a wild spring day in an advanced course on statistical analysis (required for my Econ major), and as wind and rain whipped at the windows and students huddled over thermoses of coffee (this was back when what you did was fill up a thermos in the student union cafeteria between classes), our professor asked us for a simple definition of inflation.
I have never seen anything so hard to extract from a group of people. (And I’ve been witness to some seriously impacted wisdom teeth.) The professor was very patient, but at fifteen minutes and counting he was beginning to get a twinkle of unholy amusement in his eye. I think he originally expected us to come up with that simple answer in about 30 seconds. But we didn’t. I’d say almost half the class (which had about 30 people in it) had earnestly weighed in with some variant of “too much money chasing too few goods” or “monetary policy that devalues the currency” before he finally blew the whistle, metaphorically speaking, and gave us the definition he had in mind.
“People. Inflation. Inflation. Prices go up. That’s it! That’s all I’m looking for.”
I don’t even remember what point he went on to illustrate with that idea. But I do remember the collective burble of laughter among the students, at our solemn inability to give a simple, common-sense response.
This episode occurs to me as I follow the little drama of the Wall Street Journal, Sarah Palin, and Paul Krugman. Inflation – no surprise – is their topic too. WSJ’s Real Time Economics section fired the first salvo, taking Palin to task for warning of current inflation in her criticism of “QE2” – the Fed’s unwise “quantitative easing” of the dollar by buying up its own debt – in a trade association speech. Palin fired back, pointing out that WSJ itself had run a recent article on grocers having to pass along cost increases to consumers. Prices, she observed, are going up.
The RTE crew lobbed one back yesterday, asserting (again) that the Labor Department’s tracking of inflation in food prices showed only a 0.6% (annualized) rise in prices over the first 9 months of 2010, while the Commerce Department’s figure was 1.3%. These rates are low by historical standards.
Paul Krugman felt the need to join the fray with a blog entry today, which reads, in its entirety, as follows:
The Journal’s Real Time Economics, having had the audacity to point out that Sarah Palin’s attack on quantitative easing was factually challenged, gets a blast from the barracuda. As I read it, they seem somewhat shocked — it sounds as if they’re deeply surprised at being accused of villainy simply because they pointed out that the facts are somewhat at variance with what politicians on the right are saying.
Welcome to my world, guys.
But here’s the deal. As interesting as federal department statistics and monetary management theory are, they’re not where the rubber meets the road in the economy. The rubber meets the road at the same place every time: where the consumer decides what to buy. And at that decision point, which occurs in the trillions of instances every day, the prices consumers see are going up, and that’s what matters.
Consumers don’t have more money today than they had a year ago. A very large percentage of them have less. Many people today are seeing amounts as small as 50 cents matter to them, in a way they haven’t for 30 years or more. I doubt that most Americans are very different from me and my family and friends; and what we are doing is effectively keeping inflation from being higher than it is by buying less of the essentials (and practically nothing else). I stocked up on groceries this morning – an outing I am consciously stretching the intervals between – and can vouch that the price of almost everything I normally buy has gone up since I last bought it. Some of the increases were substantial (e.g., a half-gallon of milk from $1.56 to $1.92).
The store has stopped carrying some brands – especially of locally-produced items like milk and bread – either because the supplier is no longer selling in this area, or because the store can’t charge enough to make that vendor’s product worth carrying. Shelves are more likely now than ever before to have empty spots where stock hasn’t been replaced. For most of my life, that has literally never been a problem unless there’s been a hurricane or other natural disaster. Even Wal-Mart carries less stock than it used to. Aisles that used to be impassable because of big, imposing center-aisle displays are wide and clear. On two subsequent trips there, spanning a period of more than a month, I found the stock of Scotch-Brite sponges unreplenished, something I have never encountered before.
People are buying less, even of the things we can’t do without. And still the prices are going up. When the Scotch-Brite sponges finally showed up, they were priced at almost twice what I last paid for a 3-pack. Now, smelly, disgusting old sponges have to be replaced – but these days that extra $1.50 in the price means not buying something else.
Of course, we can’t draw a straight line from the national debt and the Fed’s “quantitative easing” actions to the rise of 2010 prices for food and household items. Many other factors come into play, like weather and crops and global demand for the energy inputs that go into our own production and retail industries. But when people know they themselves are buying less, or not buying at all, price increases are clearly being driven by things other than demand.
If I had to offer a theory, it would be that inflation, as measured by the consumer price index, has been kept low by falling demand over the last two years. This downward pressure on prices works against monetary inflation, and up to now has been strong enough to discourage the price inflation we would otherwise be seeing, not just because of the Fed’s current policies but because of decades of debt accumulation by the federal government.
Inflation figures may well be higher for the last couple of months than they were for the first 9 months of this year. We’ll know that soon enough. But two points are paramount. First, it’s not at all clear that Sarah Palin was wrong to discuss current inflation in relation to the Fed’s inflationary monetary policy. The Fed’s policy has been inflationary for several years now; the fact that food-price inflation was low through September 2010 doesn’t mean there’s no inflation, or that it’s nothing to worry about.
Second, common sense is what matters here. Paul Krugman can’t make the economy improve by squeezing his eyes shut and wanting it really, really badly. It takes the decisions of millions of people each day to make an economy improve. Whatever he or the RTE analysts see through their stacks of statistics, what grocery shoppers – people who’ve lost jobs, who are upside-down on their mortgages, whose investment portfolios have been gutted, who are seeing no raises and no COLA adjustments, but who are facing higher taxes next year and higher premiums for health insurance – what these shoppers see is higher prices for meat and eggs each time they push a cart into the store.
Analyzing that reality out of consideration is like a bunch of students being unable to give a common-sense definition of inflation. Shoppers don’t stand in the grocery store, holding a tray of chicken breasts priced 15% higher than they were a month ago, and think, “Well, the Bureau of Labor Statistics says that the annualized average rise in prices is only 0.6%, so the price on this package of chicken doesn’t really matter to me.” In the end, the supreme economic tiebreaker is the human being, confronted with the price marked on the item on the shelf. You can only ignore that factor for so long before there has to be a reckoning. Sarah Palin has that right.