Ramesh Ponnuru Tries To Lead The Right Out Of The Dark Age, Neil Ferguson Tries To Drag Us Deeper In

Alongside complaints about the dark age of economic understanding into which monetary policy cranks like Paul Ryan have led the right, it’s worth hailing the efforts of those like Ramesh Ponnuru who are trying to keep the ship on an even keel. Ponnuru’s target is a column from Niall Ferguson that warns us that “double digit inflation is back”.

Is it? In short, no.

Ferguson starts with the accurate observation that normal people don’t judge inflation by looking at a price index. Normal people judge inflation by watching fluctuations in the price of low-cost, high-frequency purchases. That means that common perceptions of inflation are dominated by things like gasoline and milk that people buy a lot. It also means that those of us who are lactose intolerant and walk to work are perennially out of touch with popular concern. But when discussing this point the next thing you’re supposed to do is observe that people are making a mistake when they reason this way. Cheap, frequently purchased items are a relatively small share of overall consumption so you shouldn’t overweight them in your thinking. This, indeed, is why we have price indexes and don’t just do impressionistic thinking based on our last trip to the dairy aisle.

In support of his view, Ferguson marshalls two arguments. One is to quote a constituent from a town hall meeting who reportedly said that the falling price of iPads doesn’t offset the increased price of food because “I can’t eat an iPad.” Which is true. But you also can’t send email from a banana or watch streaming video on a bag of rice. When electronics, communication technology, and entertainment get cheaper then you have more money left over for bananas. Ferguson also says “The way inflation is calculated by the Bureau of Labor Statistics has been ‘improved’ 24 times since 1978. If the old methods were still used, the CPI would actually be 10 percent.” Ponnuru observes that if this is true that real economic output shrank seven (!) percent in the first quarter, which makes it a bit mysterious why private sector employment is growing.

In more formal terms, the reason the BLS changes its basket of goods over time is that people buy different things. In 1978, people didn’t spend money on cell phones or broadband internet or hybrid cars or disposable contact lenses. Food—and more specifically food consumed at home—has plummeted as a share of household income (see the USDA data) since 1978, which is one reason that increases in food prices don’t have the same statistical impact that they would have had back then.