With the current mix of a sluggish economy and high inflation, there is persistent fear that we’ll return to the ghastly stagflation of the 1970s–when inflation soared over 10%. The idea that we’ll “return” to this environment is understandably scary, but what’s more alarming is that we’re already there.
Academics disagree about the best way to calcute inflation, but since the late 70s, the government has made at least two changes to the CPI calculation that have severely reduced the level of reported reflation in today’s numbers. These include a shift from using actual home prices to owner’s equivalent rent (OER) and switching to controversial “hedonic” pricing in categories including computers. There’s no “right” way to calculate inflation (although most consumers certainly wouldn’t use hedonic pricing), but, in any event, as John Mauldin and others observe, using the 1983 methodology, inflation would be 11.6% today:
The changes make today’s “4%” inflation rate look a lot less scary than the 12% would, thus making the Fed’s job a lot easier. But it shows just how close our current inflation environment is to that of the 70s. Which is one reason former Fed chief Volcker is telling everyone who will listen that the current Fed is headed down the wrong road.
More on this from John Mauldin >