In the article below, Epstein is right to note that as long as the world supply of labor holds down wages, we won’t get cost push inflation and higher CPI numbers. However, he neglects to note that the Great Moderation was marked by increased volatility in various asset markets – specifically, technology stocks, commodities, precious metals, and real estate–wherever excess Fed liquidity found a home. Because of the enormous debt leverage in the mortgage market, the real estate bubble is the one that clobbered the real world economy. We should recognize that the Great Moderation was only great for some people. Certainly not for savers or home buyers at the wrong time. Or citizens of those countries that suffered financial crises through the 1980s and 90s. Thus, I would rephrase his sentence: the Great Mod, in many respects, helped cause the Great Recession.
Epstein hints at another major political problem with CPI and inflation: the CPI is a political instrument that has been distorted to facilitate political management of the economy. In other words, if real measured price inflation is unacceptably high, merely revise the CPI formula to make it look less. Same with unemployment figures. So we are misguided by inaccurate headline government statistics. None of this helps stabilize the national economy, nor helps our individual economic well-being. It only increases the uncertainty involved in making long term investments, depressing economic growth potential.
For the inflation measure, this might as well still be the halcyon days of the 1990s.
By GENE EPSTEIN
The Great Moderation refers roughly to the two decades between 1985 and 2005, when the ups-and-downs of the broad economy greatly moderated. Needless to say, the Great Mod became a victim of the Great Recession of 2008-09.
But if greatness is what we seek, then this sort of moderation does appear to live on for at least one key economic indicator: the consumer-price index. For the CPI, this might as well still be the halcyon days of the 1990s.
We got further confirmation of this Friday, with the release of the March CPI. The index was up 2.7% from March of the previous year, down from a 12-month rise through February of 2.9%—and from a three-year high of 3.9% in September.
THOSE TRENDS ARE A REFLECTION of a slower rise in food and energy prices. If we exclude food and energy, and track what is somewhat misleadingly called the “core” CPI, we find a reverse trend. The 12-month rise in the core CPI ran 2.3% in March, up from 2.2% through February—and noticeably higher than 1.9% in September. The trends in both the headline and core CPI look comparable to those in the 1990s. Both are a far cry from the early 1980s, when they could often run higher than 8% and 9% on a 12-month basis.
Barring war in the Middle East, it looks likely that CPI inflation will remain below 3% through this year and next. And the tame performance of price inflation through March of this year should at least be somewhat chastening to those who’ve been predicting that it would heat up in response to the Federal Reserve’s aggressive policies.
My own view has been that, so long as the jobless rate stays above 7%, which it almost certainly will through this year and next, the price of labor will not rise by very much. And when you consider further that productivity gains have been fairly strong, increases in the cost of labor, technically known as unit labor costs, should continue to look even tamer.
One powerful disinflationary factor still applies: The end of the Cold War opened up trade with economies that offered access to cheap labor forces, running in the hundreds of millions of human beings. That is one key reason why, when it comes to inflation, we are still living though the Great Moderation.
ALONE AMONG THE ECONOMIC INDICATORS, the consumer-price index serves as both thermometer and thermostat. What it says about the cost of things helps regulate what things cost—from union contracts, to escalator clauses in child-support settlements, to Social Security checks, to brackets on the personal-income tax, not to mention payouts on bonds known as TIPS (Treasury Inflation-Protected Securities).
That is why, when the CPI was downwardly revised starting in the 1990s, there were understandable howls of protest. I believe it’s also why the Bureau of Labor Statistics, the agency in charge of this index, doesn’t revise the historical series in accordance with current methods, as it normally would. The BLS probably figures a downwardly revised series could provoke lawsuits from disgruntled parties.
But buried in the Website, you can find a series called “RS” (for Research Series), which does revise the index back to the late-1970s according to current methods. That’s the series I used for the historical trends just cited.