Friday, April 1, 2011

Setting CPI silliness straight ... again

Sorry for the long lull in posting, and I'm a bit late on this story too, but it's very telling. We have on our hands a new modern day Marie Antoinette (or at least the popular image of her): William Dudley of the New York Fed deigned to talk to a working-class audience in Queens, New York on March 11.

He tried to promote the tired line about inflation being low, a story this crowd, well, didn't find plausible:

"When was the last time, sir, that you went grocery shopping?" one audience member asked.

Then, for his "Let them eat cake" moment, Dudley brilliantly replied to these concerns of higher grocery prices with,

"Today you can buy an iPad 2 that costs the same as an iPad 1 [sic] that is twice as powerful," he said referring to Apple Inc's latest handheld tablet computer hitting stories on Friday.


No, Mr. Dudley. An equal-price, technologically-better iPad really doesn't cancel out my more expensive food, energy, tuition, rent, and health care costs. It just doesn't.

Now, some folks have tried sheepish defenses of this line: "Sure, that might not be the best way to say it, but he's ultimately right that you have to look at all prices, and not just narrowly focus on stuff you'd actually buy."

But even saying that much would be wrong. Remember, when central bankers want to promote the idea of how dreadful deflation is, they dismiss that pesky trend of computer hardware getting cheaper, a trend most people, for some reason, regard as a good thing -- not with the rabid hatred they're supposed to hold for deflation.

But central bank acolytes will always trivialize this phenomenon, saying that, no, that's not the kind of inflation we're worried about -- we only want to count the kind that's affected by money supply, money velocity, liquidity preference, that kind of thing -- not these technology-driven improvements!

And in a way, it makes sense. But at the same time, it certainly means you don't get to turn right around, abandoning the long history of deeming cheaper computer hardware irrelevant to inflation, and count higher iPad performance as somehow canceling out the inflation you do care about. It doesn't work that way. If technology-driven hardware performance isn't relevant to measuring inflation for purposes of monetary policy, you don't get to selectively invoke it at the specific times when you "need the numbers to be lower".

It's good to see some people calling the Fed on this.


Bob Murphy said...

Ah, I get your point much more clearly now. I vaguely understood what you were saying on my blog about this inconsistency, but I think you spelled it out very cleanly here.

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