I prefer to use the growth rate in the monetary base, also known as M0. By this measure, price inflation is much worse than you thought if you use some version of the CPI.
I use the growth rate of the monetary base for three main reasons. First, it is a very accurate measure of the inflation in bank notes of the Federal Reserve (FED). Second, the FED’s bank note inflation is a major cause of changes in prices in the economy. Third, the CPI has major flaws and difficulties.
The inflation measurement problem is something like measuring the changes in average weight of all the fish in the ocean. The FED’s note inflation is like fish food. As it is dropped by helicopters into the ocean, I assume it produces weight gain that otherwise would not have occurred. Measuring the CPI is like measuring how much weight the fish in the ocean have gained. Measuring the change in the monetary base is like measuring how much fish food has been dumped into the ocean.
It’s easy to measure the amount of food the FED drops. It’s very hard to measure the weights of all the different fish.
Friday, November 13, 2009
Inflation is worse than you thought
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