Perceived vs. Real Inflation

I've argued here that real inflation is quite low, and that all the screeching about inflation nowadays is just "perceived inflation". That oil and wheat and corn prices are high is true. But the cause is NOT a general increase in the price levels, but specific supply-demand imbalances. And the high prices in areas like NYC and DC are caused by the rich and powerful bidding up prices for real estate and most services. In Florida, Arizona, Nevada and California the weather choice drives up prices for property and services. In both types of areas, service providers can't afford to move there to keep costs low. Demand by geezers distorts those weather markets, too, and in Florida, hurricane costs drive prices up. All those factors are unrelated to real inflation.

Here is another example how consumer choices create perceived inflation, not real inflation. Food can be really cheap IF one is willing to prepare it. Of course, thirty years ago, people did prepare food for home consumption. Women then did know how to cook and men knew how to carve a roast. Nowadays, people prefer to buy the fried chicken already cooked in the store and buy expensive, but convenient, prepared foods. So they pay a lot for those extra services and then proceed to gripe about "inflation."

Here's an example. Last evening I - the man of the house - made a roast chicken. My choice in the store was buying either a 4 lb. turkey breast for $20 or a 7 lb. whole chicken for $7. I know how to roast & carve a bird, so the choice for the chicken was easy. Then Mrs. B made some boiled turnips and parsnips. Those are really cheap tubers [aka root vegetables] and have a sweet, delicate flavors, far superior to potatoes. No sour cream or butter is needed - just skin, slice & boil for 20 minutes. With a salad, we had a tasty, nutritious and cheap dinner and have enough leftover for another dinner tonight. Doing the preparation oneself saves a lot of money and avoids sources of perceived inflation.

Here's another example. Mrs. B makes really tasty pumpkin pies. Ingredients are 1 can Libby's pumpkin, some sour cream, stevia for sweetening, some spices and a prepared graham cracker or shortening pie crust. Total cost of ingredients is about $4-5. Mix & bake - very easy. This can be a dessert or a yellow vegetable for breakfast or lunch. [btw, I know pumpkin is scientifically a fruit.]

Here's a different example of non-inflation. In the 1980s, the price of VHS tapes was uniformly about $20 each. I just bought some DVDs, which provide a superior picture and sound. I paid about $13-14 each for The Music Man and Blade Runner, among others, on Amazon. That's down 33% over 20+ years. I used to rent VHS tapes at a local store for about $4/day. Now I can get 4 DVDs a week from Netflix - so over a month I can get 16 DVDs delivered to my house for $25/month, about $1.50 per movie. So the price of home entertainment has gone down hugely while the quality has gone up. No inflation.

So with dinner, the pumpkin pie dessert and a fine Fred Astaire+Ginger Rogers movie from Netflix, Mrs. B and I had an enjoyable evening at home ... and experienced no inflation.

Real inflation today is nearly zero. Most of today's "inflation" is either in perception only or caused by specific supply-demand imbalances or stupid government programs [ref ethanol here].

The Fed is very wrong is thinking inflation is a risk. And the stagflation pundits are completely wrong, too. Both are fighting the battle of 1980 over - fighting the last war. It's 2008 - get back to reality. Cut rates to 3.25% NOW!