It’s possible that the ’70s have already come and gone. The economic outlook now appears brighter than it did a couple of months ago. Gold is off 15% from its recent high. The stock market is recovering. Intrade’s 2008-recession odds have collapsed.

I am not quite this optimistic.

Ralf – You may want to look at what has happened to house prices over the last year, before you come to any conclusions. (They are, as I understand it, a bigger part of most people’s budgets than potash.)

There are more homes being foreclosed on than are being bought and sold. As long as the bottom for house prices has not yet been reached, there are and will be too few buyers and therefore too few regular market transactions for new market prices for homes to emerge – catch 22, at least for the immediate future. Even in the long run, there will be less buyers than there used to be, for a lot of people wil be judged to be too risky to lend to.

By the time the price of houses has reached bottom and they are available cheaply or the solvent and creditworthy, that higher price for potash will long since have translated itself into much higher food prices. Not much relief there.

If the ’70s come back, as they appear to be doing, stagflation will be bad enough. Let’s hope we also don’t get leisure suits.

Well, I for one never stopped wearing tracksuits. Of course, nowadays they are in better color schemes than back then. Mauve with silver stripes is much more tasteful than the fir tree green I used to prefer.

There are a lot of issues with how CPI is calculated, and not all of them are in the direction of pushing the number down. Suppose that a Wal-Mart or a Costco moves into your area. Groceries are now available for prices that may be 10-20% lower than the equivalent items at traditional grocery stores. You might think this would push down the local CPI, based on the weighted mix of how much is bought in which stores, but in fact the effect on the CPI will be zero. BLS assumes that the negatives of being a Wal-Mart shopper (longer driving distances, ugly stores, whatever) precisely balance out the lower prices.

On the other hand, there are so-called hedonic improvements. If a product costs more than it used to, but has some features that allegedly represent improvements, it will be rated as not having gone up in price, or at least by much less as the higher Dollar indicates. This method is fine if you really want those improvements and have the additional cash, but if the improvements are meaningless to you, you are stuck with a higher price, i.e. inflation.

As to inflation measures, CPI does understate inflation, and arguably has done so ever since the Boskin comminion´s findings:

aggressive estimates put the non-Boskinized actual inflation rate north of 7%. (The We’re All Gonna Die estimate is more like 10%, but let’s not push it.)

(Read the article on money.cnn about the problems with the alleged biases by which the pre-Boskin CPI allegedly overstated inflation).

Core inflation is even worse, for it doesn´t even take price increases in food and energy into account.

So, I don´t think that the people who do the actual measuring work are cheating, but IMHO they are working within a predefined framework that automatically leads to way too low measurements.

Ralf – You may want to look at what has happened to house prices over the last year, before you come to any conclusions. (They are, as I understand it, a bigger part of most people’s budgets than potash.)

There are more homes being foreclosed on than are being bought and sold. As long as the bottom for house prices has not yet been reached, there are and will be too few buyers and therefore too few regular market transactions for new market prices for homes to emerge – catch 22, at least for the immediate future. Even in the long run, there will be less buyers than there used to be, for a lot of people wil be judged to be too risky to lend to.

By the time the price of houses has reached bottom and they are available cheaply or the solvent and creditworthy, that higher price for potash will long since have translated itself into much higher food prices. Not much relief there.

The government does not help itself by using “cost of living” interchangeably with “inflation.” To me, they are different things. We are comfortable saying that the cost of living is higher in Massachusetts than in North Carolina, but those costs of living are paid in the same currency.

Economic events may happen faster now than they used to. They are certainly anticipated (correctly or not) sooner in the media, and reported quicker, than used to be the case. The economy may yet get worse, but it seems increasingly likely that either the worst has passed or that the worst won’t be very bad.

One thing is almost certain. If a Democrat wins the presidential election the media will soon thereafter notice a remarkable economic recovery.

If the ’70s come back, as they appear to be doing, stagflation will be bad enough. Let’s hope we also don’t get leisure suits.

There are a lot of issues with how CPI is calculated, and not all of them are in the direction of pushing the number down. Suppose that a Wal-Mart or a Costco moves into your area. Groceries are now available for prices that may be 10-20% lower than the equivalent items at traditional grocery stores. You might think this would push down the local CPI, based on the weighted mix of how much is bought in which stores, but in fact the effect on the CPI will be zero. BLS assumes that the negatives of being a Wal-Mart shopper (longer driving distances, ugly stores, whatever) precisely balance out the lower prices.

I doubt that the BLS statisticians are conspiring to make the CPI lower than it should be–the measurement problem is a hard one, and, the more you think about it, the less trivial it seems. I do think that the index probably does understates the “true” rate of inflation.