Where is the US economy headed?

Cycloptichorn wrote:

Can anyone explain to me why 'core' inflation leaves out energy and food prices? As these are the sectors which have risen in price so much lately, it would seem false to leave them out of the calculation.

As often in statistics, the "right" index by which to measure inflation depends on what you want to know about it. If you want to know how much it stings the average citizen, you look at plain vanilla inflation. The reason is just the one you give: food and energy are important expenses for the typical consumer, so it's silly to use an index that leaves them out..

Core inflation becomes important when you're a central bank trying to set an interest rate. Then it makes sense for you to ignore food and energy prices. The reason is that they are both very volatile, zigging one month and zagging the next, in ways that have nothing to do with interest rates. A central bank needs a more stable measure of inflation to set the right interest rate, so it rightly looks at core inflation.

When you watch pundits on TV, and they use core inflation to describe the sting to the consumer, you are probably watching ignorants at best, and think tank crooks at worst. Confounding the proper measure of inflation for ones topic is a popular weasel pundit trick.

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Thomas wrote:

Cycloptichorn wrote:
Can anyone explain to me why 'core' inflation leaves out energy and food prices? As these are the sectors which have risen in price so much lately, it would seem false to leave them out of the calculation.

As often in statistics, the "right" index by which to measure inflation depends on what you want to know about it. If you want to know how much it stings the average citizen, you look at plain vanilla inflation. The reason is just the one you give: food and energy are important expenses for the typical consumer, so it's silly to use an index that leaves them out..

Core inflation becomes important when you're a central bank trying to set an interest rate. Then it makes sense for you to ignore food and energy prices. The reason is that they are both very volatile, zigging one month and zagging the next, in ways that have nothing to do with interest rates. A central bank needs a more stable measure of inflation to set the right interest rate, so it rightly looks at core inflation.

When you watch pundits on TV, and they use core inflation to describe the sting to the consumer, you are probably watching ignorants at best, and think tank crooks at worst. Confounding the proper measure of inflation for ones topic is a popular weasel pundit trick.

Thanks. Anyone have a link off of the top of their head, to a graph showing the 'plain vanilla' inflation rate over the last decade?

Cycloptichorn

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Go to http://www.bls.gov , click on the dinosaur below "CPI", and choose whatever formatting options gives the picture you're interested in. The Bureau of Labor Statistics is a cornucopia of solid data. Go bookmark its homepage!

-- Your uncle Thomas.

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Cyclo, Try this: http://macroblog.typepad.com/macroblog/2006/04/why_we_focus_on.html

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The BLS website shows month-to-month inflation by default, which looks basically like noise. For a better picture, you want to click "more formatting options" and check the box "12-month percent change".

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What may be the "trend" in inflation depends a great deal on the time scale you are considering. Inflation in the current decade in the United States is relatively low. On a (say) 15 year time scale the inflation trend is down, not up. On a shorter time scale (say) about five years, the trend is up, from a little over two percent towards three percent. On a still shorter scale the trend is down - based on BLS data for 2007.

Despite all the overinflated rhetoric, unemployment rates in the US are low, both by our historical standards and compared to those of other G8 economies.

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georgeob1 wrote:

What may be the "trend" in inflation depends a great deal on the time scale you are considering. Inflation in the current decade in the United States is relatively low. On a (say) 15 year time scale the inflation trend is down, not up. On a shorter time scale (say) about five years, the trend is up, from a little over two percent towards three percent. On a still shorter scale the trend is down - based on BLS data for 2007.

Despite all the overinflated rhetoric, unemployment rates in the US are low, both by our historical standards and compared to those of other G8 economies.

When compared to other economies, I agree with you. However, the biggest problem I see in our economy is the divide that continues to increase between the rich and the poor.

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Here's your picture, Cycloptichorn:

[img]http://data.bls.gov/PDQ/graphics/CUSR0000SA0_66313_1190222794192.gif[/img]

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Cicerone, your dour pessimism is all too evident. When one confounds your suggestions that joblessness is increasing, you switch to inflation. When that too is confounded, you switch again to income inequity.

While it is undeniably true that income and wealth disttribution in the U.S is a good deal more variable than in other modern countrioes, it is also true that we accept and assimilate far more immigrants (both relatively and absolutely) than do any of them. Moreover we enjoy a much different, and healthier, demographic distribution than do they. Both factors are associated with greater income "inequality".

I'm not suggesting that this makes us in any sense "better" than others. However, it does suggest that the differences between us in this area represent - at least in major part - our natural adaptation to different objective conditions. In addition these different conditions tend to improve our long-term social and economic prospects relative to others.

I do believe we have underinvested in many important areas of technical, engineering and scientific education. That IS something to worry about.

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george, We cannot discuss our "economy" without discussing what impacts it. It "is" about unemployment, inflation, and the degradation of our middle class. As for immigration, our country has been active throughout good times and bad.

My "pessimism" is real for those families who continue to lose their health insurance (seven million in the past six years) or those losing their homes. It has to do with inflation and our salaries not keeping up and/or companies dropping or reducing those benefits.

I also agree that our schools are failing in producing enough math and science students which represents the future for the world economy. A recent study shows that those of color are dropping out of school at almost 40 percent under NCLB. Those students should be provided with the necessary support to finish their education; they are the future of this country.

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Sorry for this dud of an image. Let's try Image Shack.

http://img146.imageshack.us/img146/2749/inflation19972007fh1.gif

Does this work for you guys?

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yes - but the last one did as well at first, though now it isn't. Odd

Cycloptichorn

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Thomas, How do you interpret the graph in layman's terms?

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There isn't much to interpret, except to say that inflation is neither unusually high nor unusually low at the moment.

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In other words, the average consumer doesn't have much to worry about?

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cicerone imposter wrote:

In other words, the average consumer doesn't have much to worry about?

I can't say that, because the average consumer today would worry about inflation in the future, which isn't in the graph. What I would say is that inflation hasn't been a major problem for the average consumer over the last 10 years. (But of course, not all consumers are average.)

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Precisely! The poor who earns minimum wage hurts much more than the "average" earner. They see any increase in cost as an impact on their "standard" of living. Even with the somewhat low inflation rate for the past five - six years, many middle class families have lost their health insurance, so it does impact many - like seven million more Americans. Rich people have no worry except that the economy must remain strong for them to enjoy their fruits. Without the choice to choose among a wider range of products and services, they wealth means much less.

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Is inflation honestly an unstoppable force? I don't really understand why.

Cycloptichorn

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It is certainly true that our legal minimum wage has not kept pace with inflation over the past few decades. However, that fact should not be used to suggest that the poor would necessarily be better off if the minimum wage were higher. Over regulated labor markets can discourage enterprise and job creation, and all of the downstream economic benefits they entail.

In general the growth of U.S. wages over the same period has indeed kept pace with inflation - on average. That means there have been some winners and some losers in this process.

Most measures of income disparity have grown over the past two decades. However these statistics are easily capable of wide distortion because of the relatively small number of people at the top and the variability that results from just where you draw the lines.

In my company we have consistently budgeted for 4% average annual pay increases over each of the last seven years. That is a bit more than 1% above the consumer inflation rate for each of those years. In doing this we have been guided by competitive factors for the industries we serve. We have, over that period, transferred a larger share of the cost of medical insurance to the employees to limit the growth of company costs, but that amounts to a good deal less than the 1% margin over inflation for salary increases, even for entry level employees. The doleful situation Cicerone describes certainly does not apply to this population.

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Cycloptichorn wrote:

Is inflation honestly an unstoppable force? I don't really understand why.

Cycloptichorn

Think about the different processes (both government and individual) that, in effect, create 'money' (these range from printing the stuff to central bank actions and even lending by commercial banks and credit institutions). Think also about the the very different processes involved in the creation of goods and services. Inflation and deflation in part result from changes in the relationship of the amount of money chasing goods & services to the available quantity of them.

The dynamic between these two tends to favor some level of inflation on average. History, over a long period of time in disparate economies confirms this. Deflation can have particularly destructive economic and social dynamic effects - not a particularly desirable risk when one contemplates reducing inflation.

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Where is the US economy headed?

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