Defining Inflation Down

Is Uncle Sam cooking the books on inflation? Critics are pouncing after what the Times calls “an obscure methodological change” in how the Bureau of Economic Analysis calculates price moves. The change lowered an inflation gauge and raised fears that the federales are “moving to more of a vague, uncertain, cloudy data environment,” reckons economist Courtney Shupert. If economists are looking for an objective yardstick of value, we say feature gold. The statistical sticking-point emerged in the inflation data for January, the Times reports, after the economic bureau “changed the source of its data on legal prices.” An adjustment in the calculation of that category of costs, comprising less than 1 percent of consumer spending, “would ordinarily draw little notice,” per the Times. Yet in this instance, it was enough to reduce — by a tenth of a percentage point — a closely-watched measure of inflation.That gauge, said to be of particular interest among the economic PhDs of the Federal Reserve, is the Personal Consumption Expenditures price index. That makes the difference “meaningful,” too, the Times cautioned, for “investors” who “track even tiny moves in the index” because it gives “hints of when and how” the central bank “will next adjust interest rates.” That gives the P.C.E. more weight than the more ubiquitous Consumer Price Index.The bureau told the Times that the change in measuring legal fees — switching to wholesale rather than consumer prices — was a “one-off” and “not considered a change in our methodology.” Yet critics groused that the switch was made without public notification. “Optically, it’s just not a good look in an environment when people are worried about political interference,” said the founder of Inflation Insights, Omair Sharif.Ms. Shupert reckons that tinkering with the inflation statistics “is going to make market participants less confident in the data that we do receive.” If economists are so all-fired keen on getting an accurate read on prices, though, there’s one readily available statistic. That’s the value of the dollar in terms of gold. Since the end of the gold standard, under which the dollar was set by law as a fixed weight of specie, the greenback’s gyrations are the best guide to inflation.Back when the dollar was defined in gold, the logic of convertibility held prices steady and inflation low. Between 1790 and 1913, when the Fed was formed, inflation ran, on average, but 0.2 percent a year. During the heyday of the gold standard in the three decades before World War I, inflation was even lower — 0.1 percent a year, and the dollar was set by law as a 20.67th of a gold ounce. Since then, it’s more that the dollar’s value has plunged than prices have soared.It’s no coincidence that 1913, too, was when Uncle Sam started to measure inflation via the CPI. In a way, it is superfluous for the government to calculate price statistics when the free market already provides that information in the form of gold’s price. By that measure, the dollar’s value plunging to less than a 5,000th of a gold ounce is more illuminating to economists and consumers than any statistical price index produced by federal bureaucrats.

Defining Inflation Down

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