Friday, December 3, 2010

Long-Term Historical Inflation And Implications

My thought on the matter is that the overall topic of inflation and its effects is a complex one.  Adding to the complexity is the definition of inflation.  Most people define inflation in terms of CPI, but there are many different ways of defining the concept.  On this blog, to avoid confusion, I try to specify what type of inflation measure I am referring to, e.g. "inflation as measured by CPI."

Many people are skeptical of the CPI as a measure of inflation as the figures belie that of practical experience.  I'm sure everyone can list innumerable items that have increased in price at a level far above the CPI's increases.

The following chart of historical long-term inflation (as measured by CPI) was seen on Doug Short's blog November 17:

(click on image to enlarge)


As one can see, CPI is depicted in red and blue (deflation and inflation respectively).  Doug has also superimposed (in gray) an alternate measure of inflation, that of the SGS Alternate CPI.  This measure is seen post-1982.

For those unfamiliar with the SGS Alternate CPI (explained here), it is a measure derived by John Williams, as seen on his Shadow Governement Statistics site,

As one can see, the current value of SGS Alternate CPI, at 8.51%, is considerably higher than that of CPI, at 1.17%.  As seen on the chart, this large disparity has existed for years.

The need for an accurate understanding of the rate of inflation (or deflation) can hardly be overstated.  Everything ranging from policy decisions to standard of living issues is impacted.  Needless to say, inflation at roughly 5-10% (a range seen in the SGS Alternate CPI since the early 90's) is much different than that seen in the CPI figures.  This difference is really magnified once one compounds these annual rates.

I like to think of the inflation / deflation issue in a different light than that seen in the CPI or SGS Alternate CPI terms; and as such, do not "endorse" either.  However, I think it is important to recognize and follow both the CPI and SGS Alternate CPI trends.

A Special Note concerning our economic situation is found here
SPX at 1217.90 as this post is written

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