Regardless of what Fed says, prices are rising

Prices for many kinds of goods and services have suddenly begun to rise. Some price hikes are more visible, like food prices and healthcare, while others are not so noticeable, like insurance and phone and cable services. Methods used for price hikes range from slipping in or raising fees to reducing services or package sizes.

By Irwin Kellner
July 30, 2013, 8:02 a.m. EDT
Market Watch

PORT WASHINGTON, N.Y. (MarketWatch) — How about giving us three cheers if you really believe that inflation has been vanquished? I can’t hear you!

These days, prices for many kinds of goods and services have suddenly begun to rise. Some are obvious, some are not.

Among the more visible items riding the up-elevator are prices of food, energy and health care. However, there are many others for which the price increases are less visible but are pinching your pocketbook just the same.

Stealthy, but painful nonetheless, are price hikes posted for insurance, magazines, newspapers, phone and cable service, and those from the airlines, utilities and local governments.

The methods that are used vary widely. They range from slipping in or raising fees and surcharges on the one hand, to reducing services or package sizes on the other.

Even that venerable publication, the Economist magazine, is getting into the act. This week’s issue tells business it has to get better at charging more, all the while planning to raise its own prices.

This plethora of price hikes began a few months ago. It does not yet show up in year-to-year comparisons, especially those that exclude food and energy.

But year-to-year comparisons can be misleading. When push comes to shove, what have you done to me lately usually takes precedence — in other words, month-to-month changes.

That said, you might be just a trifle curious about how the use of the core rate of inflation (leaving out food and energy) came into being. Not to worry — I will recount its origins for your information and edification.

The core rate of inflation was the brainstorm of Arthur F. Burns, chairman of the Federal Reserve during the early 1970s. The object of this exercise was to take people’s eyes off what was really happening to prices so that the Fed of that era could run an ultra-easy monetary policy.

Burns reasoned that the Fed had no control over the availability of food or energy. He asserted that their prices related mainly to exogenous factors such as the weather and geopolitics. As such, they have nothing to do with the state of the economy.

The professorial Burns managed to convince the Congress, the government’s statistical agencies, the press and his fellow economists that excluding food and energy was the right way to look at prices.

Today’s Fed is focusing on core inflation (which is low) so it can place more emphasis on trying to reduce unemployment as opposed to worrying about inflation. As you might imagine, this gambit also appeals to the politicians.

But excluding food and energy is misleading.

For one thing, all of us consume food and energy daily. Second, what happens to these prices can and does influence other prices, not to mention our feelings about inflation in general.

The final reason comes from Arthur Burns’ star pupil, Milton Friedman, who said time and again that inflation is always and everywhere a monetary phenomenon. Simply put, too much money chasing too few goods always results in rising prices — the only question is which ones.

The canary in the coal mine is the bond market, which senses that something is amiss. After falling almost nonstop from March until June, the Treasury-TIPS spread, which measures the difference between government bonds that are adjusted for inflation with those that are not, has since shot up to its highest level in about two months.

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