The New Economy Inflation

Every blog needs a first post to work out the template wrinkles, and the new economy seems like a fair target for a new blog. The WSJ carried an Op Ed this morning by Richard W. Fisher and W. Michael Cox, the president and vice president of the Dallas Fed, respectively. That piece was titled "The New Inflation Equation" and it made the point that "central bankers can no longer afford to contemplate inflation without regard to worldwide output." Not being an economist myself, I didn't realize central bankers were in the habit of ignoring worldwide output, but I'll defer to the experts on this point.

I believe the article was really written for other economists and academics, pointing out that a widely used technical approach to calculating inflation was in need of updating. However, it seems to me that economists should be looking closer to home for flaws in inflation calculations. If housing costs in the US collapse in the near future, then perhaps the current inflation index isn't as far off as it feels, but if housing holds up and the dollar loses value, it would be an indication that the inflation rate has been reported at an artificially low level for years.

Taking world productivity into account would seem to make a lot of sense in a global economy, but I don't see somebody living in Bejing or New Delhi paying $250,000 for a single family home in middle America, or $750,000 on the right or left coasts. Imported deflation has been used for years to offset our home grown inflation, and it seems to me we need a new inflation equation that accounts for and eliminates the effect of those imports on our inflation rate. We aren't paying the bill for that imported inflation, we're just running it up on credit. It reminds one of the New Economy, where manufacturing doesn't count for anything. The new economy and the new inflation are all about doctors and hospitals selling expensive services to unproductive people in the last months of their lives, and the government footing nearly half the bill out of general funds (the other half from payroll taxes). If we could apply a payroll tax those workers in China and India, maybe then it would make sense to include their productivity in our inflation index:-)

Inflation and how the CPI is constructed are two of the issues I hope to demystify for myself and readers in the coming months. My guiding principle for economics will be, if I can't understand the explanation myself, than neither can anybody else, including the author.