@Sam_Stone pretty much covered Treasury Securities and the Fed.
One thing I didn’t see covered was that the government can increase the money supply by setting interest rates and reserve requirements with the banks. I don’t want to give a lecture on “fractional reserve banking”, but suffice to say, when you deposit money in a bank, it doesn’t just sit in some big Scrooge McDuck vault waiting for you to pick it up. Most of that money is lent out so it can be used somewhere else in the economy. But you are still entitled to take your money out if you want it. Your money still exists, but it’s also being used by Joe Blow down the street to borrow it to pay for a new extension on his home.
The only problem with this is if enough Joe Blows don’t pay back their loans and too many people suddenly want their money back. This is what is known as a “run on the bank” and can lead to a bank collapsing if it doesn’t obtain additional funds.
Lowering the interest rate makes money cheaper to borrow and lowering the reserve requirements allows banks to lend out more of their deposits, increasing the overall supply of money. It’s a lot easier than physically printing more physical currency and dropping them out of airships.
Is this thread really a question? I think you’re starting with a conclusion and trying to find some basis for it.
The official CPI is 3.2%, the rate minus food and energy is 4.0%. Any particular reason for wanting to use the higher rate?
And in terms of the old calculation from 1980, can you show your working, and also explain why the calculation used back then is superior / more accurate to the one used today?
In addition to that, there have been a few benchmarks mentioned in this thread, like what the target inflation rate should be, what the rate has historically been, and how the rate in the U.S. compares to other countries. If we use the old calculation for our current rate, then all the numbers we’re comparing it to should be figured in the same way.
“Superior” or better has nothing to do with it. The national government has a bias, at minimizing the inflation figures because cash welfare, COLAS and social security outlays (among other things) are directly tied to the official published figures. It’s doubtful anybody actually believes official government statistics, least of all the people publishing them.
It’s also important to remember that inflation is felt differently by different people. For example, if you are a poor renter, you may be facing large grocery bills and skyrocketing rent, and rent and food are your two biggest expenses.
Anyone who had to refinance a mortgage in the last year, or who tries to buy large durable goods like cars or major appliances is getting slammed by interest. It’s not ‘inflation’ (it’s actually a fix for it), but it still results in price hikes.
If you are a reasonably well off professional who got to work at home during Covid and who owns a house or condo already, you’re probably not feeling much pain. But if you are a small business owner, or someone who had their finances crushed in the lockdowns, or you are poor and your soending is dominated by food, lodging and transportation, you are probably hurting a lot, and the economy doesn’t look fine to you.
Like most complex things, you can find good news and bad in the economy, and partisans on both sides will focus on the data they like and downplay or ignore the other data.
No, superior, or more accurate, is everything, because the prices of goods are public, as are the methods used to calculate the inflation rate. A government that consistently and wildly exaggerated the numbers would quickly lose the confidence of banks, creditors, foreign investors etc. What do you think the US’ borrowing rate would be?
Anyway, let’s talk turkey (so to speak).
What goods cost significantly more than the values used in the CPI? Is it oil, housing or food? Something else?
Let’s hear what data has made you so confident that you can ignore all the data and presumably choose to believe Trumpian talking points of the terrible American economy.
Yeesh. Sorry, I’m not your enemy here. Projection ain’t just for theaters!
Anyway. There is a reason the national government has been able to run massive budget deficits every year since ~1958, and it is not due to generally accepted accounting principles. The answer or course has to do with global financial conventions agreed upon long before most of us were even born.
The problem with domestic CPI figures (or any discussion of modern money) most generally is insofar that it does relate to accounting principles in the sense there has to be a defined unit of account. This is where all the financial quackery, sleight of hand, and outright fairy tales come in.
It is very difficult for economists to make meaningful price comparisons over any significant period of time, but it is completely impossible when we’re not even comparing the same things. How could it be otherwise?
So if they were tracking the price of steak, and it becomes significantly more expensive in a short period of time, the numbers look a lot better if it is now assumed “the consumer” has switched to hamburger. It I may put my tinfoil hat on for the moment at a rakish angle, in recent years it has struck me at just how perfectly timed the “Low Fat cholesterol-is-the-devil, eggs will kill you margarine is healthier than butter” dietary nonsense that swept the US was. The early 1970s was the first monetary inflation that Americans had experienced in living memory. Meat and dairy were particularly hard hit, and virtually overnight prices did a moon shot.
Even the very notion that “targeted” monetary inflation rates are beneficial is a bit of a stretch. It is the natural order for things to become less expensive over time. Not more. Looked at in the proper context, even 2% annual is fairly criminal to savers and investors over time. It is a “hidden” tax, affects the poor hardest, and only benefits those who have access to the less-inflated currency first
You know, you cant just order a bunch of underpaid bureaucrats to pump out fake figures, Someone will spill the beans and blow the whistle- and they havent.
Those figures are honest. Believing elsewise is a deep conspiracy theory, back by zero facts.
Not to mention cash welfare has been dead since the Clinton Administration.
The numbers are honest, but the choice of what goes into the ‘basket of goods’ used to calculate the CPI is somewhat arbitrary. Some things are left out because they are volatile and would add too much noise to the numbers. Things get added and removed based on changes in technology or preferences. Even in a category like ‘food’ there are numerous sub-categories and the exact foods in them subject to change.
For that matter, there are multiple indices used to measure inflation. Core CPI, All-items CPI, all-items excluding food and energy, PPI (Producer Price Index), etc.
If the prices that matter to you are not in the CPI basket, you may personally be experiencing more or less inflation than the CPI indicates. That leads people to think it’s ‘rigged’.
Sure, there is no perfect measure of inflation, it’s just the best that we can do based on a reasonable basket of goods.
It’s important though that we are consistent here. That we don’t suddenly become dismissive and claim the methodology is flawed only when the CPI is low.
Or only when a democrat is in the white house.
There was also quite a bit of demand-pull inflation during the 1970s, resulting from loose monetary policy by the Federal Reserve and other central banks. Interest rates, after adjusting for inflation, were often negative. Generals fight the last war and central bankers of the 1970s were haunted by the Great Depression (while today’s central bankers worry about the 1970s inflation).
Distinguishing between cost-push and demand pull inflation is useful, but they can be difficult to disentangle in real time. The extent to which the burst of inflation in 2021 was due to transient supply chain snafus or more permanent shifts in inflationary expectations has been a matter of controversy. Research will be interesting over the next couple of years.