Wednesday, January 21, 2009

Bad News in Advance

Inflation will be worse in 2009 than it was in 2008. At least, it will almost certainly be reported that way:
A mathematical oddity in Friday’s consumer price index means you can claim with some statistical backing that inflation last year was either 0.1% or 3.8%.

Measured on a December to December - or calendar year - basis, the consumer price index only grew 0.1% in 2008, according to Labor Department figures, the smallest gain in over 50 years and well below the 4.1% gain in 2007.

But when the annual average of the CPI for all of 2008 is compared to the average for 2007, the increase was much higher, 3.8%. That was actually up from 2007’s rate.

“It’s unusual for there to be this big of a difference,” said Labor Department analyst Stephen Reed. The two series sometimes line up exactly, and usually when there’s a gap it’s only a few tenths of a percentage point.

But when there’s a lot of volatility, like in 2007 and 2008, they can diverge a lot. Think of it this way: if the price of gasoline stays at $1 all year, then there’s obviously no inflation there. If it rises quickly from $1 to $2 per gallon and stays there for the first 10 months of the year and then falls quickly back to $1 in December, then on an average annual basis inflation would be higher than on a calendar year basis, where it would still be flat.

When it comes to assessing near-term trends, economists prefer calendar-year changes, which is why Wall Street research notes universally mentioned the 0.1% figure, and not the 3.8% one*.

The two series should even out over time, and in 2009 the calendar-year increase will probably be much higher than the average annual increase given the low base that the CPI index is starting at this year.

Bear that in mind when you read Larry Kudlow's latest bit of hackery:
And there’s a good chance Reagan was dealt a much tougher hand than the one Obama is holding today.

For one thing inflation today is zero. Back in Reagan’s time it was double-digits. Interest rates today are historically low. In Reagan’s day they were 15 to 20 percent. We have suffered a tremendous oil shock, as did Reagan. But today’s shock has completely reversed. And while today’s recession is over a year old, Reagan inherited a recession that began in 1979 and didn’t end until late 1982.
Rising to these challenges, Reagan gave his Fed chairman, Paul Volcker, the political ground to stand on to slay inflation with tough monetary restraint and a strong dollar

I'll explain why the "dishonest or stupid" question applies to that passage in a future post, but I think I know what Kudlow will be writing about a year from now.

Since the election, I've told anyone who will listen that liberals need to talk about the fact that Bush's guns and butter policy and debasement of the currency could potentially give us inflation as bad as any we've seen since the seventies. If Obama's stimulus is only successful enough to give us stagflation instead of depression, conservatives may claim that their prayers have been answered, but we'll know that it's a matter of Bush's bills coming due.

H/T to oyster for a couple of the links above. Added bonus link. since I've never heard of "Men's News Daily," I can't say with any degree of certainty whether that's serious or parody.

*If those numbers seem too low to you, you need to familiarize yourself with inflation and Pollyanna creep.

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