Inflation
remains quite low: Over the 12 months ending in December, prices for
all the goods and services purchased by households increased by only 1.2 percent.
He did mention the pesky problem of inflation in some of those “non core” things that we spend money on:
We have
recently seen significant increases in some highly visible prices,
notably for gasoline. Indeed, prices of many commodities have risen
lately.
Ben made it clear to me (and the market) that he was not going to slow
down QE2. The monetary pedal will remain stuck to the metal:
We will review the asset purchase program regularly in light of incoming information and will adjust it as needed to promote maximum employment and stable prices.
Bernanke continues to sell QE on the basis that inflation is too low. He
was very specific in his definition of inflation. I’ll repeat his words
from above:
Prices for all the goods and services purchased by households increased by only 1.2 percent.
Bernanke is using the CPI to defend QE. The CPI is the wrong measure for many reasons. Not the least of them is hedonics pricing.
The definition for hedonic is “relating to pleasure”. That sounds
good, but when it comes to the CPI hedonics creates big distortions.
The most common example is with technology. Consider an Apple computer.
In 2006 it cost $2,499 to buy a 15-inch Mac Book Pro with a 2.0 GHz
processor. Five years later you can buy a 15-inch Mac Book Pro with a
2.53GHz processor for only $1,999. Adjusted for inflation and
considering the increased capacity of the newer Apple the actual cost of
“pleasure” has fallen by more than 30%.
When you add in one component of the index that is “falling” in value at
a rapid pace and add it to another item that is actually rising you get
an index that says that prices aren’t going up. Absolute hogwash.
Ben actually understands that weird things like hedonic pricing models
distort CPI as a measure of inflation. He chooses to use this statistic
as it supports his QE policy. He’s wrong and he knows he’s wrong. But
the head of the globe’s central bank keeps blowing smoke at the press
and lying to the public.
The good news is that the bond market is not buying into Bernanke's spin. At the moment that is the only crowd that counts:
Articles on this topic:
Qp
Quadruple penetration?
sounds like some new ZH porn thing, maybe WBanzai's working up an example...
Qp
Yes i am married and go to the.club occasionally. Usually with the wife!
How do you say it? Septuple post...sp
I didnt want to broadcast it that loud.
Dp
Time to teach the kiddies in school that there's only 12 oz. in a pound.
Ya know, that's so true, and there's only one chip in each Lay's potato chip bags.
Time to teach the kiddies in school that there's only 12 oz. in a pound.
Biflation Ben. You better start feeding the people.
Your example is why the BLS adopted hedonics as part of their modeling for CPI. So this is real. I'm not disputing that.
But get back to real life. Should this phenomenon offset the rise in bread, eggs, milk, gas in terms of what people actually experience? No is my answer.
That a $2,000 computer sells for the same money and is much faster is not an offset to the fact that a potato has doubled in price.
But if you don't see that you're in good company. Ben doesn't see it either. I think you're both wrong. The potato will trump the MHz. Watch.
so gadgets are cheaper & better but what about sports and concert tickets?? movies? can they itemize that CPI?
Thanks for the article Bruce...spot on.The actual necessities of life are precisely those most impacted.See food riots overseas and fun with food assistance here for concrete examples of why the bernank should be called the Father of Financial Lies.
Hope you found good gas for your chainsaw BTW.Gas here in Asheville, NC is currently 15 to 20 percent alcohol....which is a nightmare.
Thanks again.
The object of everyone's hedonism seems to be the old Apple story. For real, though? You flew to Paris. Why did you have to fly? True hedonics would have you not have to leave your house.
Cars? Same deal. Oh, they've gotten better and smarter and all that but you can still only drive seventy miles an hour on four wheels. In the meantime, the price of a car has tripled, at least. You could call that hedonics if you wanted to but the cost has skyrocketed, not the other way around.
Where is the new and improved chicken breast? Cooks itself or something? Still, it would only feed one person. No hedonics necessary.
I read a post the other day that was interesting in that the argument was the Fed removes the cost of food, energy and shelter because they are trying to get a measure of the inflation that they can stop quickly and that inflation which they know they will have a hard time stopping, such as wage inflation.
I can understand that to an extent, yet the government issues COLA guidelines based on their low-ball numbers and that is hardly fair at all. This way, they can have their cake and eat it, too, I suppose.
I think it's despicable, myself.
Orly,
Now or at some point over the next 10 years, I probably would not have had to fly to Paris. In the late '80s my physical presence was required. The internet was a dial up connection and a Lynx text browser, good for looking at library holdings and email which very few were using.
A good argument could be made for the trip, not necessarily by hedonics but hedonism, since Paris is a remarkable place and I enjoyed being there immensely.
The FED has a dual mandate of employment and price stability and is in this sense stuck between a rock and a hard place. It's a good metaphor because the only way out it is to create another fiction or said otherwise, a lie. Odysseus, also stuck between Scylla and Charybdis, was the master of deception.
Well, I've never been to Spain.
Never been to Paris. I've heard mixed reviews.
Great museums and transpo, but you'll be treated MUCH better if you at least attempt to speak French while there. Ordering in English is an invitation to rude treatment.
I've also heard that it is somewhat grimy and smells bad. Can't be as bad as Times Square when I was there in the mid- to late-'80's. But I can't say that I would want to go back to that time and place.
That a $2,000 computer sells for the same money and is much faster is not an offset to the fact that a potato has doubled in price.
Actually, it very much is an offset, and explains a large portion of the discrepancy between a rise in raw food costs and the price we pay in the grocery store or at a restaurant. If I can use highly efficient (and cheaper every year) systems and software to offset other input costs, then the higher cost components simply will not show up in the price of my product. Say I run a small food service distributor. From the computer controlled EFI in my trucks to the routing software to the algorithm which schedules my drivers, technology tools allow me to continuously do more with less. I've been able to offset food cost increases several times over as a result of these efficiencies, and they don't stop coming.
One big problem is the food that is so "efficiently produced" is often utter garbage. And quite often poisonous garbage. Ask Monsanto, the merchant of death, how concerned they are about your health being enhanced. A classic case of more being less.
The toughest question is do Malthusian limitations ever kick in to blunt the effects of all that technology?
There is a physics-constrained limit to whether Moore's law continues ad infinitum, likewise at some point you are no longer using computers to do things more quickly and efficiently, you're merely improving the audio and video output, and in any case there's only so much the user can actually do with all that computing power.
I'd hate to be the one to make the modern equivalent of Bill Gates's infamous statement that there is no reason for a computer to have more than 640k of memory, but the bottom line is what happens when all the available increases in efficiency have been wrung from our silicon--either because the silicon can't get any better, or the world can't be made any better?
We have seen a lot of misuses of technology over the millennia, but never a point of diminishing returns. Is it possible that there indeed is one?
are you forgetting how lazy and bloated current computer programming has become?? so many 'programmers' are just lego builders with all the prefab crap they use
The Moore's law was essentially ad hoc, named after Gordon E. Moore. They guessed right but they didn't take into account the exponential growth of science and technology with the equation, which in turn would effect the equation itself. They will do away with silicon soon, because the are close to the limit. The only thing left is either optical computing and/or nanotechnology.
"There is a physics-constrained limit to whether Moore's law continues ad infinitum, likewise at some point you are no longer using computers to do things more quickly and efficiently, you're merely improving the audio and video output, and in any case there's only so much the user can actually do with all that computing power."
humans can type 30 to 70 WPM so that is an obvious limit
speech recognition is getting better but still has limits
Clif High (halfpasthuman.com) always points out the imprecision of human speech (what we say isn't really what we mean) so speech recognition would be limited even if the technology were perfect
More like 20 to 200 WPM. If we redesigned keyboards with any kind of intelligence at all, that range could be bumped up a bit. QWERTY was designed to slow down typists who were breaking typewriters.
Anybody here know this - How much of the bond market is controlled by the big banks/hedge funds ? Are they playing the Fed especially in the 30 yr area ?
The other question is: is "deflation" due to technology improvements bad, and necessary to combat with money printing?
That's the core of the issue. I would argue such "deflation" is not bad. With a non-fiat currency, the price would drop (or stay the same for higher quality), and everyone's wealth would increase in real terms.
Except the bankers and the politicians. A fixed currency would eliminate their ability to steal from the rest of the population through inflation.
In fact, technology demonstrates the stupidity of one argument for man-made inflation, that being that in a deflationary environment, people would not invest/spend their saved wealth. Clearly that is not the case. I know the laptop I am buying today will be obsolete in a couple of years, but that time of ownership has utility, so I will buy the soon-to-be obsolete laptop now because I want it now. The whole inflationist argument that everyone will save now to buy stuff cheaper later always ignore the utility of time. It is one of their great lies.
.
Interesting. So if the actual value of the computer is ammortized over its productive life, and that life is getting shorter through Moore's law and the "future shock" doctrine (i.e., tech productivity increases exponentially over time), then the cost-per-usable-year of computers may be going UP even AFTER considering all hedonic adjustments. In other words, that 1984 Apple was competitive 10 years or $250 a year, but the 2006 Apple remained competitive only four years or $500 a year. Ergo, the price doubled.
Easier to benchmark relative productivities in the first case than in the second.
Technological items revolve for the sake of revolving. A number of people do not buy a new phone because they plan to do more with it. They buy it for other causes.
The rise in productivity is misportrayed.
Yeah! What he said!
I'm not disputing the Potato and would say that your read is spot on. Inflation is present and rising in things that we need, like bread and heating oil. If the bond market calls the bluff, unwanted consequences will soon follow.
I am thinking about the terminal effects in an abjectly materialistic society such as ours. In the 1970s when stagflation combined powerfully with the Arab Oil Embargo, people were not nearly so "wealthy" in many ways as they are today. If you could spend the dime you had a pair of Converse sneakers that were made out of canvas. Not very good in the rain and snow. In the winter, your feet would freeze. Now, Gortex lined light hiking boots that could be used to trek in the Himalyas are abundant. Same with clothing. North Face parkas that were originally designed to scale peaks in the very same Himalyas are abundant on the streets of the five boroughs. Or contrast this to the 30s, men in woolen suits waiting on bread lines, with newspaper stuffed into their sleeves as insulation.
We have a lot more stuff and the stuff is generally much higher quality. Remember your car in the 70s? Detroit was best exemplified by the opening scene of the Blues Brothers movie.
Terminal effects of food inflation could be regime change or strong pressure in that direction, as in Tunisia and Egypt for starters. The US has a layer of blubber directly under the skin that will serve as insulation for quite some time, which is why the Bernank's mad plan may continue for at least the intermediate term.
I for one think that this has more to do with geopolitical brinksmanship than anything else, but that assertion would be difficult to prove other than post hoc.
That's true DBH. Most Americans these days have the caloric intake of a Roman emperor too. But people will freak out the minute that becomes a hardship to sustain.
I guess the flip side of hedonics (hey! look how much better all this stuff is) is the tendency that people have for shifting stuff from the want to the need category. Yesterday's aspiration becomes today's necessity.
Which is why I think only a fraction of the TS need HTF today to create the kind of crisis and unrest last seen during the 1930's. It's fun to laugh at French kids rioting in the streets because they might not get guaranteed jobs for life right out of school but the fact is Americans have gotten used to fancy goodies too. They're just different goodies.
Productivity enhancements should result in falling prices. What you're seeing in the tech arena with falling prices is the result if productivity improvements.
Productivity improvements increase the general standard of living in the economy where they take place.
Inflation is a monetary issue: the government wishing to tax the economy, without the players in that economy noticing. Productivity improvements make it easier for the government to tax the economy and slow standard of living increases.
Using the CPI and productivity improvements, the government is able to extract the maximum amount of cash out of each and every one of us without most of us being aware.
Remember all of the utopia predictions with the advance of technology in the last century? Those predictions were the natual extension of the improved standard of living created by productivity enhancements.
That future was stolen by inflation - a tax on the economy by the governments of the world.
The bottom line - don't confuse inflation with prices.
+1 watchingdogma
over time the price of everything should go down
inflation is just a misnomer for monetary debasement
Don't you mean Baboonics?
Big B likes da ebonics biotchez.
While the bond market does not buy into it and hedonics can be used to manipulate inflation figures -- it still contains a level of truth.
In the late 80s I flew to France carrying a Mac SE, with no hard drive, a whopping one meg of RAM, and a bag with a shoulder strap that weighed about 30 pounds. I lugged this thru the streets of Paris from the airport. It basically did word processing. $2000 w/ a student discount.
An iPhone in your pocket or an iPad will cost 1/4 to 1/3 of that and do quite a bit more.
So in the case of tech, it's not simply the pleasure, but the productivity of the device which has increased dramatically what with wireless Internet, etc. At a lower cost. This process is inherently disinflationary.
As Bob Dylan said, "you're an idiot babe---", and if you really believe your dollars buy what they did in 1985, you're living in some kind of dream world. Wake up. Wake up, now; it's late, really late.
You posted a story of comfort, not one of rising productivity.
Hedonics has nothing to do with productivity. It is a method of adjusting price in the cost of living.
Half the people in this thread have no idea what they are talking about.
How, then, does hedonics adjust the cost of living with no value added? Just because a relatively identical item in 1975 cost 10 million and now I can carry it in my pocket does nothing at all to the "cost of living." How many people even get the full use out of their hedonically-altered products? I know I use my smart-phone as a telephone and messenger. That's it. The rest of that stuff gets on my nerves; the phone is doing whatever it wants to do.
Now, if you mean that instead of measuring productivity increases we are measuring a specific "quality of life," then I would have to agree that a similar lifestyle to mine now in 1975 would have been exorbitant, to say the least, even though I would describe my social status now as lower middle-class. Just the power in my phone alone would have cost hundreds of thousands.
So instead of berating us because we don't understand it, please enlighten us further.
:D
"How, then, does hedonics adjust the cost of living with no value added? Just because a relatively identical item in 1975 cost 10 million and now I can carry it in my pocket does nothing at all to the "cost of living.""
Agreed, and that is precisely my point. We no longer have the option of purchasing a 1973 pontiac new, so the Boskin commission's adjustment to the CPI for the fact that the new car we must buy that costs $24,000 is so much better than the 1973 model is completely irrelevant, since I still have to pay $24,000 for a new car. It is the dollar price of the new car that determines my cost of living.
"the phone is doing whatever it wants to do."
Maybe you better check on your phone- it's probably playing with itself right now. I don't claim to know much about the iphone culture but there's probably an 'app for that', if you get my drift.
Everyone loves to use the example of the pc, but the hedonics problem is pervasive and results in the cost of a new automobile priced and sold at $24,000 being held on the books in the CPI as costing only $7000 because of all the "improvements" over the past 20 years.
The problem is that if you want a new car you will have to pay $24,000. Thus, the CPI no longer represents the cost of living.
Further, the adjustments for hedonics are not run honestly.
Tuition should be marked up due to the declining quality of a college education. Back when I was a kid, a chicken bought at the grocery store was a wonderful lean tasty bird. Now that they are force fed and have not seen the sunlight for 75 generations, they are fatty and nasty tasting. To get real chicken you have to pay double for the "free range" variety. And what about the third world McDonalds experience? 40 years ago I never had to check the bag to make sure that my order was correct. Now the order screwups happen all the time. I even had a clerk at Wendys who could not count the change and asked me to do it for him. The "pleasure" of buying fast food is in a cliff dive that is nowhere reflected in the CPI.
Finally, don't get me started on owner's equivalent rent! The survey teams go around and ask homeowners what they think they would charge to rent their house. Most don't have a clue, so the bls employee doing the survey suggests a number - an unrealistically low number, often lower than the per square foot rentals charged in the neighborhood by the most optimistic housing speculators - those who hold on to their houses rather than sell and just ask for rent that will cover their mortgage and taxes while they wait until the "inevitable" surge in housing prices begins once again.
The CPI is a fraud. The "core" CPI is a bigger fraud.
"productivity of the device which has increased dramatically what with wireless Internet, etc"
and as George Ure points out at urbansurvival.com, humans can type about 30 to 70 WPM so we have probably reached the point where new computer technology has limited value
CTRL+C, CTRL+V. Much faster than 70 WPM. Can't do it on a typewriter. Computers initially reduced the need for paper, and automated some of the otherwise manual, even dangerous, processes within the physical realm.
Bigger picture? Exactly what words we are "processing", and why? What do these words produce? Whom do they feed, cloth, and shelter? Some of it is productive. Some is not. Sure, I may be able to do my taxes faster, but what is the result? What is produced? What new revolutionary idea does it convey?
How much information is really necessary? How much is redundant? How much will be available, when/if the lights ever go out, and the Oracle of Google is no longer? Who will know how to use the information, when all we know how to do is punch the button when we are told, without knowing why?
True. I think on the "productivity" side however that humans have become generally less productive, less aware, and certainly less conscious, during the period of price declines in technology.
Perhaps it is a counter-balance? Ben certainly hasn't given thought to this.