The Washington PostDemocracy Dies in Darkness

The intellectual cesspool of the inflation truthers

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Conservatives want to believe.

They want to believe they were right that the Fed's bond-buying would bring us back to 1970s America, if not 1920s Germany—that it would spark runaway inflation. But the people who want to believe this aren't just the usual suspects of charlatans and cranks. They're famous economists, too. Harvard professor Marty Feldstein, for one, has been trumpeting the alarm about high inflation, despite it being historically low, for five years now. And a who's who of top investors and economists—along with Bill Kristol and Niall Ferguson—have stood by their incorrect warning that QE2 risked "currency debasement and inflation."

As a reminder, personal consumption expenditures inflation is still just 1.8 percent.

So what do you do when your model of how the world works doesn't, well, work? Easy: you make excuses. You say that inflation is still right around the corner—and would've been here by now if it weren't for Obamacare!—or that it already is here and the government is just hiding it.

Amity Shlaes is the latest to seek solace in this conspiratorial rabbit hole. After lamenting the fact that wages haven't kept up with movie ticket prices, she tells us that "other numbers suggest that inflation is higher than what the official data suggest." Specifically, the numbers that Shadow Stats, which purportedly calculates inflation the way the government used to, has come up with.

There are only three problems with this theory.

1. Shadow Stats is just "unskewing" the numbers. Inflation is harder to measure than you might think. It's not just a matter of how much prices have increased. It's a matter of how much prices have increased for the same quality of goods. And this is where things get tricky. You have to adjust for the way people substitute between similar goods when the price of just one of them goes up, because, in that case, the same amount of money still buys the same quality, though not quantity, of goods. But you also have to adjust for the way the quality of goods themselves—for example, smartphones—improves from year to year.

This isn't easy to do, and the government has tweaked it over time. It's increased how much it assumes people substitute between goods, and that's decreased the official inflation rate.

Shadow Stats says that it applies the old methods to the new data to get the "real" inflation rate, which is supposedly in the double digits. But that's not true. It quietly admits that it's not recalculating anything. It's just taking the official inflation numbers and adding a semi-arbitrary constant to them.

That's not a method. It's a punchline.

2. Private inflation estimates match the government's. Since 2008, MIT's Billion Prices Project has been sucking in data from hundreds of online retailers to try to calculate inflation on its own. And, as you can see below, its numbers have mirrored the official CPI ones throughout.

If the government really is covering up all the secret inflation, the private sector appears to be in on it, too.

The only time the two have really diverged was at the start of this year, when the extreme winter weather kept shoppers indoors, but not offline. That matters, as Josh Zumbrun points out, because brick-and-mortar stores probably had to offer discounts to lure people out of the comfort of their heated homes—which created disinflation that the online-only Billion Prices index wouldn't have picked up. In any case, the two are moving back towards each other now, as Roberto Rigobon, one of the economists behind the project, emphasizes.

3. The Shadow Stats numbers would mean we've been in a depression since 1988. The total size of the economy—real GDP plus inflation—has been growing about 4 percent a year recently. So if Shadow Stats is right, and inflation is really 10 percent, that means real GDP must be falling by 6 percent.

And that's impossible. You can see just how much in the chart below. It plots the change in GDP against the change in unemployment for the past 30 years. There's usually a strong relationship between the two, so much so that economists have dubbed it Okun's Law. Now take another look at how far away the inflation truther's world is from our own. There's just no basis in reality for the economy to be contracting—let alone by 6 percent—when it's adding as many jobs as it is now.

Even worse, Shadow Stat's numbers show so much inflation the past 25 years that, as Jim Pethokoukis points out, it implies the economy hasn't grown at all during that time. So which seems likelier: that we're no better off than we were a quarter century ago, or that Shadow Stats is total bunk?


Okay, that's an easy question. Though the best evidence that we shouldn't take Shadow Stats' numbers seriously is that it doesn't either. Cullen Roche cleverly notices that, despite repeatedly predicting imminent hyperinflation, Shadow Stats hasn't increased its subscription price—a bargain at just 175 worthless fiat dollars!—in eight years.

So why do conservatives keep falling for this obvious fraud? Well, because there's always demand for an excuse to keep your zombie ideas undead. Shlaes herself almost admits as much. "The world," she says, "just doesn't make sense" to Rick Santelli, whose own bad inflation predictions were mocked on CNBC, "or maybe me either." It's an admission that her ideas have failed, and she doesn't understand why. But rather than try to understand—and maybe come up with some new ideas—she soothes herself with the illusion that she's been right all along. No need to rethink anything.

All it costs is $175 a year for your Shadow Stats subscription—and, of course, any credibility you had left.