There’s been a lot of talk about inflation in the past few months, and it provides a perfect example of how mass media can take a complex subject and feed it to the public like cheeseburgers. And it’s all based on ginned-up urgency. The latest “headline” CPI figure over the last 12 months is 7 percent. The index minus food and energy, benchmarked separately thanks to their volatility, is 5.5 percent.
About those indexes: They’re based on a basket of products that are intended to mirror an average family’s expenses, but that’s hard to pin down. Components within the indexes are weighted as well, so if used car prices are up 37 percent over last year, as reported for December, the index doesn’t reflect the full heft of that increase when it’s factored in the mix.
Of course, if you’re not in the market for a used car, it doesn‘t matter anyway.
Air fares are included in the index, but again not something you buy every day. What else is up sharply? Hotel stays, but here prices are picking themselves up from last year’s washout, so on a year-over-year basis, you’re looking at a 23 percent hike. But this isn’t inflationary, it’s simply a reversion to normalized pricing.
Gasoline prices are up around 50 percent from last year. But look closer. Gas prices are benchmarked from the low base rate seen in December 2020 and miles traveled are up over 30 percent this year since people are driving more and avoiding mass transit thanks to Covid. That “demand pull” influences pricing, aside from other factors like OPEC’s manipulation to achieve their own ends.
Gas prices are politically treacherous, but Americans have no one to blame but themselves. The top three selling vehicles in this country are full-sized pickups, and even though these behemoths get better mileage than they did 10 years ago, they serve to spike demand well beyond an appropriate level. America also has the cheapest gasoline prices in the developed world by far. Prices are over two to three times higher in Europe as they are in the U.S.
To show how the media can amp up the story, “Meet the Press” displayed an infographic on price hikes. It showed egg prices were up 11 percent over last year from $1.48 per dozen. However, as recently as 2015, the price was $2.75, down to $1.82 in 2017, trickling down to the $1.48 level last year. So the correct observation is that the price of eggs has been on a deflationary tangent for six years up until now. Even so, on a weighted basis in the index, eggs are not a big factor.
What is? Housing costs. CPI only covers rents, not purchases of homes, because a home is considered a capital investment and not a consumable. But Covid has triggered accelerated migration patterns and some smaller cities are experiencing explosive population growth. The Tampa-St. Pete area is a prime example. Median rents have soared by 34 percent over last year and housing costs are VERY heavily weighted in the index, so that one lone factor can drag the aggregated CPI number sharply upward.
Rents had also plummeted to low levels due to Covid, so again we are looking at price rebounds from low base rates. The housing price index is a national read, so a few outliers can swing those numbers to an outsized degree. Given our wretched zoning policies and selfish NIMBYism, decades of underbuilding serve to fuel prices even sharply higher.
But again if you haven’t moved anywhere, you’re untouched by this. For most people, inflation hasn’t affected them as hard as the media narrative repeatedly tells them it has.
And yet they can’t stop pumping the story.
“Inflation,” as the media is calling it, is not a monetary phenomenon, and we’re not headed to a Weimar-like state any time soon. The repeated stop and start phases of supply chain disruptions fueling these price swings will, at one point, dissipate.
Markets are wonderful things. In the coming months, supply and demand will find their equilibrium, and it will be onto the next manufactured crisis.