Finance
Can we talk meaningfully about bubble gum inflation?
![A Martian puzzled by the Eartlings](https://blogaid.org/wp-content/uploads/2024/07/Can-we-talk-meaningfully-about-bubble-gum-inflation.jpeg)
The Wall Street Journal‘s report on the reduced increase in the consumer price index is confused. At least, that’s what an economist who understands the difference between changes in relative prices and a change in the general price level, of all prices together, would think. (To see “Milder inflation opens the door further to an interest rate cut in September”, July 11, 2024.)
Reading the story, the proverbial landing of Mars on Earth would think that on this strange planet all prices are the product of inflation (or deflation), that there is no difference between inflation (or deflation) and changes in relative prices, and that the increase in the CPI is inflation. Quote from the story quoted above:
Housing inflation, which measures rental costs and makes up about a third of the CPI, has kept overall prices high.
If there is such a thing as “housing inflation,” we have a puzzle. What happened to other ‘product Did that part also keep general prices high? Or did the rest of the CPI show ‘product deflation’ (the opposite of inflation, as we see during economic depressions)? Is the economy witnessing an ongoing battle between two evils: inflation at some prices and deflation at others? Or it may be that some prices have risen or fallen relatively with each other, no matter what happens with inflation (or deflation)? But then a contrarian economist would ask – as economists began asking a few centuries ago – what causes all prices to rise together, apart from changes in relative prices? So what does it mean to talk about housing inflation or gasoline deflation?
An easy way to think about relative prices is as follows. Suppose only one price changes in the economy, while all other prices remain constant. (This would, of course, imply the absence of inflation.) The price that changed has changed relative to all other prices (although in a different ratio of different prices). Arithmetically speaking, if one relative price changes, all other prices also change relative to that price. All prices are relative prices to other prices. Relative prices are constantly changing, whether there is inflation, deflation, or neither. Clearly, a distinction must be made between these two phenomena: inflation or deflation on the one hand, and specific relative price changes on the other.
Ryan Bourne’s recent book The war on prices (Cato Institute, 2024) contains many discussions about prices in addition to your humble blogger’s chapter, “A Rising Product Price Doesn’t Cause Inflation”). Throughout the history of economic analysis, there has been much theory and much evidence supporting the hypothesis that inflation – an increase in all prices together, as opposed to relative changes between them – results from an increase in the money supply that continues beyond what economic actors can expect. ask about their transactions. The price of any good or service as observed and included in the CPI consists of a change in its relative price And, when there is inflation (or deflation), a change in the general price level. Below is a diagram published in one of Ryan’s contributions to the book. The correlation between changes in the money supply and estimated inflation supports the hypothesis that inflation is a monetary phenomenon.
We should not be too hard on journalists and journalists WJ is not the only one who makes mistakes. Most journalists just repeat the sounds they hear, including those of many economists. Perhaps some economists try so hard to suppress what they know to journalists and pundits that the latter, in a numbed economy, end up thinking: ‘inflation is the sum of all price increases’, they seem to think (while inflation, if any, is only part of a price change). Other economists seem eager to forget the economic mindset when they leave graduate school and become accountants with large databases and sophisticated statistical software. Still other economists mainly have political comments, which usually mean that the government has things under control and takes good care of its ‘citizens’.
It is as if in today’s economic newspeak the words for relative prices are erased. Then there is nothing conceivable other than housing market inflation, supermarket inflation and chewing gum inflation, which together cause (total) inflation. Mutantis mutandis for deflation
******************************
![A Martian who is puzzled by the Eartlings' theories about bubblegum inflation](https://www.econlib.org/wp-content/uploads/2024/07/Bubblegum-inflation-planet-1024x585.jpeg)
A Martian who is puzzled by Earthlings’ theories about chewing gum inflation