Inflation Predictions

Revolution

Never make a politician grant you a favor (Doo-doo-doo-doo)
They will always want to control you forever, eh! (Forever, forever)
So if a fire make it burn (make it burn, make it burn)
And if a blood make ya run (make ya run, run, run)
Rasta de 'pon top, can't you see? (Doo-doo-doo-doo)
So you can't predict the flop eh-eh! (Doo-doo-doo-doo)

What can you predict?

NPR’s Planet Money recently aired an episode titled Predictions: Inflation.  These predictions might have been easier if it was recognized that the Consumer Price Index is a combination of long term inflation, which is related to the US  money supply, (the medium of exchange between buyers and suppliers), and short term inflation, which is related to changes in the demand (buyer) and supply curves. If the proposed equations of long term inflation is removed, the changes in inflation (as measured by the Consumer Price Index) show a much different picture.

Viewed in this manner, changes in price appear much more stable than would otherwise be expected.  Taking a deep breath when viewing year to year changes in prices would appear to be warranted.  Most of what is called inflation may be long term inflation caused by the money supply, not by changes in the supply and demand curves. Making predictions about the short term changes in CPI could  be a lot easier if we realize that there is also a long term component.