... even if it can only ever be an approximate correction:

This also ties GDP closely to 'growth', because a lot of apparent growth will come from increased prices - and this has a worrying circularity about it, as a notion.

GDP deflator = [Actual GDP/"Real" GDP]x100

so:

GDP deflator inflation rate approximately equals
 % growth in Actual GDP minus % growth in "Real" GDP.

I put the "Real" in ironic quotes, because the number is constructed by supposing that prices had not changed but that the precise same quantities of goods had been sold anyway.

So, here I am in Ravenna. Where exactly was the Rubicon, again?

I think I have argued along the following lines before in a comment thread, but let's do it again...

The nominal GDP is easily understood: the price of all goods and services purchased in a year:

G = sum_i p_i q_i

where i labels the products, p is price (or the average average for similar products/services) and q is quantity. (Price here is properly replaced by value added, but for the purposes of this argument that's a nitpick)

Then, approximately from one time period to the next...

dG = sum_i dp_i q_i + sum_i p_i dq_i + O(dt²)

The first term is inflation, the second term is real GDP growth, and the third term is an error term that becomes negligible when the time periods are small enough.

We have met the enemy, and it is us — Pogo

Have you checked the Wikipedia article on Price Indices?

Some notable price indexes include:

• Consumer price index
  
• Producer price index
  
• Personal consumption expenditures price index
  

And to that one must add at least the GDP Deflator.

So, there are at least four indices one can call "inflation", and for each of them one can ank the methodological question of how it is calculated.

We have met the enemy, and it is us — Pogo

... are different ... that is the point of doing them, to view the impact of price changes on the typical consumer, or a typical low-income consumer, or a typical producer (or heavy industry producer, or light industry producer), etc.

For the GDP deflators, I believe that the differences between the overall inflation rate and the "core" rate excluding food and fuel are more important than the difference between using a single base year and using a chain index, but that is an off the cuff reaction ... I haven't checked that out.

Anytime the inflation rate is reported, it is a lie ... but the lie is in "the". There is no such thing as "the" inflation rate ...

... the only precise rate of price inflation is the price inflation of a particular product over time, which means that there are as many exact inflation rates as there are products, with a new series coming into existence every time a new product is introduced or a substantial change is made, and an old series extinguished every time an existing product is withdrawn from production or substantially changed.

SO, for example, to compare gas prices in the US today with prices at the peak of the second OPEC oil price shock, to get at any kind of detail at all, I should use:

• The overall CPI to look at it in terms of a typical consumer
  
• The low-income CPI to look at it in terms of the most vulnerable consumers
  
• The PPI to look at it in terms of impacts on producers (and likely employment)

However, if I am making a sweeping statement, I will likely reach for the GDP deflator, since it includes all newly produced goods and services for all final customers ... households, government, business ... and net impact on trade.


So, here I am in Ravenna. Where exactly was the Rubicon, again?

But at least Nominal GDP is a well-defined concept, in principle, even if it is hard to quantify.

For the thermodynamics buffs, this makes Nominal GDP Growth an exact differential, but Real GDP Growth and Inflation are inexact differentials. This means Nominal GDP is a "state variable" and path-independent, but Real GDP and the GDP Deflator are path-dependent and not state variables.

We have met the enemy, and it is us — Pogo

The wages in the Baltics were indeed very stagnant till now. Hence, many people immigrated, especially youth.

But the relation between wages and inflations seems to be too straight to be true - just when the wages started to raise, inflation kicks in. It may look that the Baltic states are more ruthless to regular folks than Bernanke's rate cuts. What does the asset inflation then mean? Does it accumulate wide inflation in the future, or does not play a role at all?

Poor Socrates!  Excellent discussion, though.

_Our knowledge has surpassed our wisdom. --Charu Saxena._

Sorry about the length, but I can't make the link work correctly.

Thu Jun 21, 2007 at 02:18:05 PM PDT

The federal government claims that inflation is low and fairly stable at present.  Do you believe that?  If inflation rises, this is supposed to be an indication that money is too available relative to the products, services, and property that are available for sale, so prices are bid up by eager buyers.  So the Federal Reserve System raises a key interest rate that starts a chain of interest rate increases, choking the money supply somewhat by making credit more expensive.  If credit is more expensive, businesses (and consumers) that depend on credit for expansion, or even for operation, (or for consumption) have to restrict purchases - and business in general starts to contract.  This contraction alleviates the pressure on prices, and the inflation rate stabilizes again.

What is a low inflation rate?  The FED seems to like 1 to 3% at the consumer level.  And nowadays, the federal government reports inflation rates that typically fall in or near that range.  My take is very different, and, from what I've read from other diarists here, this article should raise a hackle or two.  If you would like to discuss, please read on:

paul spencer's diary :: ::
In 1953 postage stamps for First Class mail cost $ 0.03 each. Recently, the price went up to $ 0.41.  
In Texas Regular gasoline averaged about $ 0.22 per gallon.  Currently, it's running about $3.20.
A 10-ounce Coke was a nickel in a metal refrigerator box (where the bottles were held in a metal
labyrinth, at the end of which was a gate that allowed the bottle to be lifted out when activated by
the coin.  You could defeat the gate by jamming something narrow into it, so that you could pull the
next bottle out, too.)  Today a 12-ounce Coke goes from $ 0.75 to $1.25 in a coin-operated machine.
(And there may be a camera taking your picture if you try to defeat the system.)  So - let's take the
average and call it $1.00 per can.  Figuring the amount difference, 10 ounces costs about $ 0.83.  
The upshot is that the average price increase of these three examples is over 1400% since 1953.

That's how I figure inflation.  Given a base year of 1953, the average price increase per year is 26%
from that base.  That may not be a useful comparison, so let's look at it from a compound interest
point-of-view.  This works out to about 5.5% per year, compounded annually.  The federal government figures inflation, too.  For many years their average numbers would not have been too different from mine, even though they use a "market basket" of items to compare prices, in contrast to my smaller sample.  Nowadays, though, their numbers are substantially smaller than mine.

W. John Williams goes much deeper into the subject at www.shadowstats.com, but his preferred
numbers are, again, close to my simplistic estimates.  Also, because he pays close attention to such abstruse esoterica, he can explain why the recent federal government's inflation numbers are stable, while the real rate of inflation is now rising rather quickly.  By the way - did you doubt that this is the case?  Of course, this is part of the point of this diary.  The inflation monster is hungry, and it has its eye on our tender parts.  Please see the chart on Williams' web site; then, if you like, you can read about the details, too.

One side-effect that Williams raises is that, where Consumer Price Indices are used to inform Cost of Living Adjustments to wage contracts, or, more importantly, to Social Security Insurance payments; the recipients - us - are being systematically short-changed.  His estimate is that SSI payments would be about double the current levels, if the CPI had been calculated in the old and standard manner for the past 20-some years.  Of course, the system cannot pay that amount, but that's a separate story.

Background - in 1953, when stamps cost 3 cents, the U.S. was truly the leading economy in the world. Our industrial rivals were digging out of the rubble of World War II and rebuilding almost by hand and wheelbarrow.  Everyone needed our products.  Overall, U.S. industry had to placate labor; the government supported research and education; banks invested and made loans for construction. Then businesses figured out that, in an empty market and via oligopoly, they could raise prices whenever costs were increased - due to, for instance, wage increases.  Their partisans in Academia even thought up a name to justify their non-free-market scheme: the Wage-Price Spiral.  (Do I need to point out that they didn't call it the Price-Wage Spiral?)

You probably know that the federal government also puts out data on wage trends.  Median and average wages show very similar trends, as you might expect, although there is more divergence lately due to the fast rise on the super-rich end of the data set.  Thus, average wage is rising more quickly than the median wage - which is probably one reason that they like to publish the average wage.  Even taking the average wage, however, the increase from 1953 is a little over 1100%.  If you take my number of 1400% inflation to be close to meaningful, then the average wage-earner is losing ground - but not if you take the government's numbers.  Their numbers show inflation at less than 800% from 1953 to 2007.  What do you think?  Are you and your friends and your family 40% better in purchasing power than your and their parents were then?

Not too long ago (for old guy's like me), most of us might have said "Yes" to that question.  Of course, for some of us the answer is still affirmative, but how many trends, such as outsourcing, foreclosures, foreign slave-wage competition, and sociopathic federal government policies and officials, are required to start another kind of economic spiral?  Or trap-door might be a better analogy.  Then there is inflation.  Currently, this factor is fueled - literally - by the cost of petroleum.  The associated costs of power and transport are, of course, being passed on to the customer in the prices of every item in the "market basket".  Even electronics - the signature items of the economic optimists' bandwagon - are increasing in price now.

(I won't go into "hedonics" or quality improvement as a justification for underestimating inflation, as Williams' site covers this type of "substitution", as well as the other types.  IMO, though, these types of actions only occur when consumers are fairly confident of solvency, if not of personal wealth.)

It may be the case that the current trend will stabilize (or equilibrate at some new "normal" level), if the price of petroleum stabilizes, but don't count on such an event.  If Jerome a Paris' diaries concerning Peak Oil are correct, we are just getting started on that spiral (might look more like an F-16 taking off than a spiral).  What's more, there is no - I repeat, NO - plan or program or proposal to do anything meaningful about the situation.  There are a few things that could be proposed, but, instead, we have "free trade" agreements and an almost feckless `Energy Bill' and the god-awful waste spending of a god-awful occupation on the opposite side of the globe.

Now - an alleged bright spot is the current - and historical - performance of the U.S. stock markets. For you and I, it's only a bright spot, if we have 401Ks, or some stocks of our own, or the corporation that employs us seems securely financed via stock value.  Need I relate the events of the early 2000s? Well, we may be looking at déjà vu all over again.  The inflation rate data (remember inflation?) provided by the government is part of the justification for many stock owners and fund managers to stay in that market, as opposed to leave it for bonds or gold or real estate or cash or foreign stock markets.  If inflation is low and stable, then interest rates will be stable (according to stock-trader CW), which decreases the incentive for moving funds out of stocks either into protection (gold) or into higher yields (high interest rates = higher returns on bonds).  However, in reality inflation is not low and is trending upward quickly.  And the smart money is both cognizent and realistic.  

Your broker or fund manager probably does not know that, due to the true history of inflation, the true "real dollar" increase of the stock market is much lower than his/her propaganda states.  He/she probably does not know that inflation is trending upward.  (He/she may have a gut feeling about price increases, but he/she does not distrust the federal government's data.)  So - I won't try to cut in on your broker's territory, but I will say that I have moved 100% into bonds and cash.  This is not advice, just my personal strategy.  No experts involved here; nothing to see; move along, please.

OK - my personal market move is not the main point of this paper.  This is the place to recommend some solutions at the root-causes level.  The best one would be to liquidate every non-essential asset that you have, buy some land, build a simple and energy-efficient house with geothermal heating and solar panels, grow your own, and work to create a community of this sort around you.  Easier said than done, as many such communities from the late 60s and early 70s will attest.

More practical - really - more practical - is to work and organize for political solutions.  First and foremost is to end the occupation of Iraq.  Military spending is waste spending.  The lifetime of military hardware and ammunition is short, and there is no residual value, no used-bullet market.  Pulling money out of the "civilian" economy for such use is an automatic boost for inflation in the classic market sense.  There are fewer dollars recirculating in the economy, chasing items of real value, so things become relatively more dear.  A military budget is a "social welfare" decision based on the perception of need (fear of invasion) in a given international context.  It is not an economic pump-primer, despite what the war-mongers say.

From another angle - as ASiegel promotes, we need major incentives and programs for manufacture, installation, and coordination of solar-based technology.  As many diarists state, we need major promotion of energy conservation methods and devices.  As NNadir insists, we need a major program for a renaissance in nuclear power generation plants - plus nuclear fuel recycling plants.  What do conservation and non-petroleum-based energy production have to do with inflation?  The obvious connection is the present effect of the price of petroleum on inflation.  Beyond that, husbanding energy and material means lower market pressure on scarce (increasingly) resources.

Finally, we need to create a moderate level of socialism.  The true salient factor behind inflation, and concomitant economic issues for the vast majority of us, is the corporate oligopoly.  The simple facts are that capital has been concentrated to such an extent that: 1) almost all transactions are now cost-plus-profit for their products because of their market dominance; and 2) no large-scale changes in any aspect of economic - or political - direction can occur without the intention or the acquiescence of the big corporations and of their masters.  These are not new facts, but they are somewhat exacerbated today, compared to, say, 1953.

A return to regulation of corporations, at a level similar to the pre-Reagan era, would probably prove useful, but it is not sufficient.  If the railroad companies still control the right-of-ways, which "we" gave them 140 years ago, we will not get to high-speed passenger service nor efficient freight service.  If the nuclear industry remains "private", then there will be security issues that will demand redundant control and protection systems - the company and the federal government will run parallel services - and the government will still be stuck with the nuclear waste issue anyway.  If insurance is not nationalized - like Social Security - then the insurance companies will continue to siphon off the profits in a stable cost-plus-profit (actuarial) system for no value-added reason; and these profits will continue to go to the same investors who own/run the rest of the corporations "who" own/run the country.  In other words there will be no substantial change that will drive economic justice for the vast majority of us - which is why I brought up inflation in the first place.

paul spencer