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Forget the Official Numbers: Inflation Is Much Higher

Forget the Official Numbers: Inflation Is Much Higher

Unless the government puts a stop on spending and the Fed retires the printing press, continuous inflation is on the horizon.

Usually preceded by a crisis, every so often, inflation becomes a hot topic. Soon, the stories about the double-digit inflation of the 1970s and the stagflation that followed are dug out of their graves, especially when the inflation rate hits its highest level in 40 years, as is the case with the 7.9% rate of January 2022. Thanks to the most recent extravagances in Venezuela and Zimbabwe, even hyperinflation is no longer a foreign concept from the past.

Depending on the monetary theory you are advocating, in different times of the economic cycle, different, sometimes higher levels of inflation are not only accepted, but even encouraged. But what is inflation? Inflation can be seen as an increase in the general level of prices across wide sectors of the economy. Or, as Milton Friedman has famously put it, inflation “is always and everywhere a monetary phenomenon.”

Combining these two definitions, that is, the supply of money and supply of goods and services, their relationship is a rather ‘simple’ concept – you print more money while the stock of goods and services remains unchanged and you end up with higher prices; you push the stop button on the printing press, but for some reason, the stock of goods and services drops (think of an earthquake, a global supply chain disruption, or a war for example) and you end up with higher prices. Having said that, higher inflation rates destroy the structure of production and the long-term economic growth rates. What is not often appreciated in discussions on inflation are a couple of phenomena that suggest that inflation rates are higher than what the official figures suggest: “shrinkflation” and “skimpflation.”

Shrinkflation

It is perfectly all right for companies trying to gain a competitive edge to shrink the size or the quantity of the products they are selling, while the prices remain unchanged. In rare cases. Downsizing done this way is indeed a sneaky price increase strategy. Then again, companies might be the ones being ‘forced’ to do so because it is the consumers who tend to be more price conscious. And yet, in normal times, especially with the potential of social media blowing the lid on the story, companies seldom shrink the size of the products they are selling. But when faced with some type of pricing pressure, as has been the case during the pandemic, companies opt for this route.

On the surface, there is nothing wrong with shrinking the size of the products you sell. After all, just as the consumer is sovereign, so is the producer. In the end, it us up to each of us not to be duped by miracle products or marketing campaigns. However, when it comes to inflation, the problem arises from the fact that the shrinkage is not taken into account in the price indexes that measure the inflation level. A slightly smaller milk carton is not counted in the official statistics, thus understating the already high 7.9% inflation rate. And when this shrinkage permeates to a whole range of the products from the basket of goods measured by the CPI, inflation is indeed understated.

Skimpflation

Just like shrinkflation, when we are paying the same price or more for services whose quality has declined on an economy-wide scale, we end up with what Greg Posalsky has coined as ”skimpflation.“ Think of both the rising costs and the shortage of labor a firm can sometimes face (as has been the case during the pandemic, for example). In the attempt not to increase the price of their products, the quality suffers. As a result, what you end up with are longer queues at the movie theater, it takes forever to get through when you call the call center, fast food places are not fast anymore, or economy class airfare is worse than economy due to the lack of service provided, and so on. Thus, although “the customer is always right”, when said customer complains to the manager, he doesn’t understand that he is paying a skimpflation masked price (which he might prefer if he knew this upfront). As with shrinkflation, this skimping on the services we all receive is not calculated in the official inflation numbers.

Inflation has arrived, but is it here to stay?

Inflation is not a necessary evil. We only think of it in such a way because we haven’t known anything different for a long time. During the gold standard era inflation was practically nonexistent. The inflation levels we are experiencing today have not been seen in more than four decades. If we were measuring inflation the same way we measured it back in the 1980s the CPI would have been even more frightening.

As Daniel J. Mitchell and Robert O’Quinn explain, a lavish and “bad fiscal policy is not necessarily inflationary.” However, when your lavish spending is followed by even more lavish spending, the government ends up crowding out not only private borrowing and investment, but private spending as well. So yes, although a one-time spending spree might not cause lasting, significant inflation, constant government spending does, Mr. President. Thus not only is everybody hit by inflation, but the private sector also doesn’t have much left to spend. Combine this government spending with the ever-expanding money supply, courtesy of the Fed’s policies since the early days of the pandemic, and inflation is here to stay.

At the start of the pandemic, we were told – for reasons beyond my comprehension – that we would not see any inflation. Soon inflation became “transitory” and some still are placing their bets on “team transitory.” Then inflation even became ”good“ for everyday people. Or not… Now inflation is blamed on the Russian invasion of Ukraine (and yes, sanctions and destruction play a role, going both ways) as if the war has been going on for the past two years, rather than less than a month. So, if someone has to be blamed, it is Washington.

With inflation rising every month while the official numbers are understated, will inflation stay with us longer? I don’t know, but unless the government puts a stop on spending and the Fed retires the printing press, continuous inflation is on the horizon. Seeing as how I have little confidence in the government and the Fed doing that, all I’m left with is hope!

Author

The views expressed on austriancenter.com are not necessarily those of the Austrian Economics Center.

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