Looking For Demons In Consumer Price Inflation

Headline consumer price inflation (CPI) rose 0.4% last month on a seasonally adjusted basis, or slightly lower than March’s 0.5% increase, the Labor Department reports. That translates into a 3.1% rise over the past year. Inflationary pressures, at least by the government’s reckoning, remain modest. Ditto for the outlook on economic growth, which suggests that inflation isn’t likely to be a major problem for the foreseeable future. The usual suspects will nonetheless scream otherwise, but it’s hard to make that case based on the Labor Department’s numbers.

Arguing that inflation isn’t an imminent threat looks even more persausive when we review core CPI data. Yes, the annual pace of core CPI inched higher last month to 1.3%, the highest rate since February 2010. But that’s still middling to low relative to the past decade. If core CPI rising by 1.3% is somehow viewed as dangerous, why were there so few cries of alarm in September 2006, when core CPI was advancing on the year at a much higher level: nearly 3% at the time?

Some critics will argue anew that core CPI is misleading because it strips out food and energy prices. No matter that the economic logic for doing so is compelling to avoid getting whipsawed with price signals via volatile commodity prices. Indeed, as the chart above reminds, headline inflation was soaring in mid-2008 while core inflation remained modest. Which measure was the better indicator? The chart above offers an unambiguous answer.
A number of skeptics simply reject the government’s statistics outright, arguing that inflation is much, much higher. For instance, by one accounting consumer price inflation is advancing by 10% a year if we use an older methodology for calculating CPI. That view stokes the fires of populist politics and sounds reasonable to the casual observer on Main Street, but as Ramesh Ponnuru points out: If CPI is increasing by 10% a year, the the annual, real (i.e., inflation-adjusted) growth rate for the U.S. economy in this year’s first quarter would be deeply negative by 7%-8% vs. the 1.8% real positive growth reported by the Bureau of Labor Statistics.
In other words, if you think inflation is really soaring by 10%, that implies that the U.S. economy is virtually imploding on a real basis. A reality check via various statistics suggests otherwise. Sure, the recovery is weak to modest these days, but no reasonable analysis of the trend for the broad economy of late suggests that we’re suffering something comparable to the economic tsunami that hit in late-2008/early 2009.