An entire generation has never experienced the relentless destruction of purchasing power wrought by systemic inflation. After all, it has been more than 30 years since the scourge of double-digit price hikes was routine. Now, after a long period of quiescence, fears of resurgent inflation are roiling markets and commanding the attention of central bankers.
Seems like a good time to consider a few pertinent questions: what is inflation, how do we measure it, and is it really a boogeyman lurking under the bed?
Christopher A. HopkinsInflation is defined as the rate at which the general level of prices in the economy rises over time. Alternatively, one can think of it as the rate of decline in the buying power of the dollar. In a normal, growing economy, some modest inflation is typical and even beneficial. Excessive price appreciation, on the other hand, is destructive and ultimately destabilizing if allowed to get out of control. As with porridge, so also with inflation: not too hot, not too cold, but just right.
In order for policymakers to control inflation, they must first measure it. Several metrics exist that variously lend themselves to particular uses. The most familiar and widely reported number is called the Consumer Price Index or CPI, a broad indicator produced by the U.S. Bureau of Labor Statistics that measures price changes affecting most consumers. This index is computed by tracking monthly prices of a “market basket” containing more than 200 categories of items typically purchased by average Americans. CPI provides a general estimate of the average level of consumer inflation in the economy, and is used in indexing everything from Social Security payments to 401(k) contributions to tax rates.
BLS reported January’s CPI rose a moderate 2.1 percent for the previous 12 months, but exceeded expectations at 0.5 percent from the previous month. This hotter-than-expected result sent a chill through the equity markets as investors pondered the potential impact on stock prices.