Two Percent Inflation Is A Lot Worse Than You Think

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With June 2021 CPI growth being at a thirteen-year high, inflation has been on a lot of people’s minds lately. You can’t blame them, seeing as over 23 percent of all dollars in existence were created in 2020 alone. Although future inflation is certainly an important concern, in this article I instead focus on the chronic inflation this country has faced for over a century.

Under normal circumstances, when most people think about inflation, they likely think of a gradual rise in prices averaging out to 2 percent per year. Most people think nothing of this inflation and simply consider it a part of life, or a necessary part of a growing economy. I am here to argue that not only is this 2 percent inflation number a lie, but also that a more harmful aspect of inflation is often ignored: the price deflation that never comes to be.

For the past few decades, the Fed has historically sought to achieve a 2 percent yearly inflation target. They measure this target through the Consumer Price Index (CPI), a weighted basket of consumer goods used to estimate overall price levels for the “average” consumer. There are several problems with using CPI as a metric. 

First, the items composing CPI are by nature subjective and arbitrary, as there is no objective way to measure a single value of money since money is necessarily expressed in terms of other goods. Additionally, the components of CPI comprise consumer goods people can afford, so if a good becomes too expensive for consumers to purchase, it will no longer be included in the CPI. This is called substitution bias. When the price of a good rises, people will find substitutes, meaning it is likely this good will be phased out of the CPI basket. This means the goods that are increasing in price at a substantial rate (and would indicate a higher inflation rate) are taken out of the weighting. Additionally, monetary expansion often leads to shrinkflation in goods, whereby the quantity or quality of a good is reduced in lieu of a price increase, rather than outright price increases. It is much harder for CPI to incorporate discrete changes in quality or quantity of a good compared with simply an increase in price.

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