It’s Time to Stop Paying Attention to Inflation

by Fred Siegmund

The October report of the Consumer Price Index (CPI), published by the Bureau of Labor Statistics, showed an increase of one tenth of one percent in the general price level from August to September.

Publishing a monthly index provides several ways to look at price changes and inflation. The monthly CPI can be compared with the previous month or with the CPI for the 12 months just ended. Comparing the current index with the index from 12 months ago allows a monthly update for annual inflation.

Prices in the composite CPI for all items are down 1.3 percent for the 12 months ending in September 2009. It is the seventh month of decline beginning in March 2009.

Inflation vs. Deflation

When Americans think of price changes they usually think of inflation. They want to know what percentage prices are rising because millions of Americans have lived their entire lives without a single month of deflation; that is until March 2009.

The current drop in the general price level disguises price changes by expenditure categories. Even though the general price level has dropped, relative price changes suggest the CPI for all items is not as relevant as it was in the 1960’s and 1970’s.

In the current deflation, a drop in housing prices has dragged the index down since last spring. Housing makes up the biggest component in the index, reflecting the importance of housing in family and household budgets.

Moderating gasoline prices from their 2008 highs and a leveling off of food prices also worked to turn the index down. Food prices, which were increasing at 5 to 6 percent annual rates through 2008, show a zero annual inflation rate for the 12 months ending in September.

In contrast, education and health care continue to have price increases well above general inflation rates of the last two decades. Annual inflation in education remains over 5 percent through 2009, but July 2001 was the last month for education to have 12 months of price increases below 5 percent.

Even though the recent inflation rates in medical care are 2 to 3 percent, inflation rates were 8 and 9 percent during the 1990’s and continue to be two to three times general inflation rates.

The New Look of Inflation

The new look of inflation creates new problems for policy.

Normally, inflation calls for restricting credit and cuts in spending, especially government spending, but a recession like the current one calls for expansion in credit and new government spending to restore housing and consumer markets.

In an often quoted statement, former Vice President Dick Cheney told his colleagues that “deficits don’t matter.” It is an odd statement for a Republican, since federal deficits have always been associated with inflation and policies of expansion, especially expanding federal spending.

There is a kernel of truth in his statement, but I would revise it to say that deficits don’t necessarily mean inflation. It is time to manage the economy for full employment and pay less attention to inflation.

Since Mr. Cheney believes deficits don’t matter maybe, he could be the one to get the word out.

About the author: Fred Siegmund covers America's jobs as part of work doing labor market analysis and projections for a client base of recruiters, trainers and counselors. Visit him at

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