How to Measure Inflation

The controversy over inflation and how it's measured seems global now, as I've heard persons from Singapore to New York to Paris comment that government measures of "inflation" are out of date, not relevant or a conspiracy to rob the poor. Screeds calling for "new definitions" are broadcast weekly.

It's inarguable that simple supply and demand for specific goods can affect those prices singularly with huge shifts in level and volatility.

So what is such a broadly available item that nothing can unduly affect it's price on short term or even intermediate time scales - except inflation ? Labor.

This thought came to me while reading "Lapham's Quarterly", volume 1, issue 2, about "Money". This new quarterly is a superb read which I highly recommend. The quarterly provides one with the thoughts of the great thinkers, writers and even "common man" about a single topic. It's colorful with sources cited and my current issue has 200 pages of great reading in easily digestible 1-3 pages bites.

Page 41 has an excerpt from Adam Smith on the development and meaning of "money". The core concept is that the value of labor really determines the value of money. Exchanging money replaces barter and lets one more easily value goods and services. How much labor can one save by exchanging money for a good/service desired - buying something instead of making/doing it yourself ? That is the critical concept in understanding "money". This is why even on a gold standard, there can be considerable inflation when new mines or sources are found, such as the discovery of the South American gold stolen from the Aztecs and Incas or later mined there in the 16th century and later.

By the way, this very broad measure of inflation via labor costs even works for inflation caused by plagues or wars that substantially reduce the labor force. Data from the era of the "Black Death" in Europe prove this.

Roll forward to now. What does the price of labor tell us about inflation ?

The cost of employment in the US increased 3.3% for the year ended March 2008. For the prior year, the cost increased 3.5%. I suppose I could further say that productivity improvement means "real" inflation is about 2% less than that measure, but golly, 3.3% is pretty low already.

Inflation is decelerating. Inflation is low. Facts are facts.

Whether the great increases in some commodity prices are caused completely by emerging market supply-demand and weather, or those prices have moved to the "asset bubble" phase from investment money, time will tell. But labor prices prove that inflation is low.

Markets

Good move up yesterday as nibbling real buyers pushed up a broad range of stocks. Buy good stocks on dips. Time diversify. Diversify by asset classes and re-balance as needed. The trend is up. Hold until something changes. Be patient.

Word of the Day

"Cacoethes" - noun [$10] - that "oe" is the German dipthong "oe" with the dots on top of the e, pronounced oi-e, sort of swallowing the combined sound.
Cacoethes means an urge to do something inadvisable; also an irresistable urge; mania
Sentence: Investors must control their cacoethes to sell to take small profits, or they'll miss the really big 100%+ gains on holding a good stock for a year or two. That's where the big money is made.