Is Inflation About To Make A Comeback?

We may well at present be seeing the first stirrings of an increase in the inflation rate — something that we would like to happen.

Stanley Fischer

Fed Vice-Chair in a speech before the National Association for Business Economics

Anyone renting an apartment over the last few years might well wonder what rock Mr. Fischer has been residing beneath – and whether it was rent controlled. Certainly not all prices have been as reluctant to rise as the CPI itself which has been running quite a bit beneath the Fed’s target the last few years. But relative price changes, where the price of one good or service rises as another falls are not inflation by any definition. And so despite the rapid increase in rents the even more dramatic drop in the price of oil and other commodities means that the CPI and the other measures of official inflation have not risen as fast as our monetary minders would like. They would like us to be impoverished at a more rapid clip apparently. I’ve never really understood the economic profession’s fear of deflation. It is, after all, the very evidence that capitalism is all it’s cracked up to be. Improving productivity, the very definition of economic growth, is deflationary.

In any case, when I speak of inflation I don’t really care much about the CPI or the other government sponsored price measures. Price indexes are nothing more than attempts – inevitably flawed – at measuring the value of the currency, the US dollar in the case of America. What the CPI or the GDP deflator or the PCE deflator attempt to measure is the purchasing power of the dollar. I prefer to observe the value of the dollar more directly. The various dollar indexes provide us with information about the dollar’s value versus other currencies. Gold provides an indication of the value of the dollar as do general commodity indexes. So when I ask if inflation is about to make a comeback, what I’m really wondering is if the value of the dollar is about to fall. I prefer these measures not because they are more accurate – although I think they generally are – but because they are more timely. Prices will follow the value of the dollar eventually but the impact on investments is much quicker.