Tuesday, February 26, 2008

Causality and inflation

This AP article reports a large spike in inflation:

The Labor Department said Tuesday that wholesale prices rose 1 percent last month, more than double the 0.4 percent increase that economists had been expecting.

The January surge left wholesale prices rising by 7.5 percent over the past 12 months, the fastest pace in more than 26 years, since prices had risen at a 7.5 percent pace in the 12 months ending in October 1981.

The worse-than-expected performance was certain to capture attention at the Federal Reserve, which has chosen to combat a threatened recession by aggressively cutting interest rates in the belief that weaker economic growth will keep a lid on prices.

But the combination of rising inflation and weaker growth raises the threat of "stagflation," the economic malady that plagued the country through the 1970s, when a series of oil shocks left households battered by the twin problems of stagnant growth and rising inflation. [Martin Crutsinger, AP Economics Writer]
So let's get this right: the cause of inflation is alleged to be too much growth and "shocking" increases in the price of oil. In response, the government has taken a policy that retards growth in order to reduce inflation, yet now we risk weak growth and inflation.

Why is the government let off the hook so easily? Why aren't its policies indicted for causing inflation? This Reuters article chronicles the recent actions of the Federal Reserve:

The Fed has cut interest rates aggressively to counter a deep housing slump and a credit crunch linked to worries about delinquent mortgage payments. The Fed's benchmark fed funds rate stands at 3 percent, down from 5.25 percent in September, and the central bank is widely expected to cut short-term U.S. interest rates again at its March 18 meeting.
And yet again, government policy is let completely off the hook:

In the meantime, inflation has climbed on the back of record oil and commodity prices, pushing the Consumer Price Index up 4.3 percent in the 12 months through January.
In a free market, interest rates are set by supply and demand and adjust accordingly. Today however we do not enjoy the benefits of a free market; today we have a government agency that has the power to artificially lower interest rates (and at the same time the rest of the government engages in an unbridled spending orgy). Nevertheless, it is uncritically reported that an increase in oil prices is one of the primary causes of the current inflationary spike.

Doesn't due diligence demand that a reporter test the premise that oil prices are the cause of today's inflation (rather than just a sign)? For example, I've read several reports in the past few months that state that the price of oil has remained relatively flat when measured in gold. Isn't that information deeply relevant? One could also measure the cost of oil against other currencies to see if there is something unique about the purchasing power of American dollars when compared to other currencies. If an increase in oil prices causes inflation, shouldn't we see it reflected in all the currencies of the world?

One would expect a certain degree of curiosity on the part of a reporter and a willingness to test the various economic claims that pass for conventional wisdom (and government policy). Yet here (and in just about every other mainstream news source that I have observed) we see no interest in evidencing the causal chain that leads to inflation. The facts are merely asserted; the reporters don't even attempt to offer any empirical evidence for the various claims presented.

In short, the reporters have no interest in establishing causality as part of their reporting; their articles are little more than a repetition of the bald-faced claims of others. And I can't help but think that this is one of the root causes of inflation.


Anonymous said...

This is the best post I've seen on Rule of Reason in a while, and quite in line with your Center's mission. I hope to see more of them.

Grant said...

The mainstream media has read the tea leaves. It's sees an Orwellian future just as clearly as anyone else. There's always room for a "Ministry of Information"; they're all trying out for the part.