What does our low inflation environment mean for investors?
Core Personal Consumption Expenditure Deflator. Source: Department of Commerce
Inflation is an average. Prices in some areas are growing quickly, while others fall. That’s the way it has to be in a broadly diversified economy. The broadest measure of inflation—the personal consumption deflator—measures everything that consumers buy, and weights it by how much then spend on those items. It measures substitution effects. So if the cost of cotton shirts doubles, and everyone switches to synthetics, inflation wouldn’t change.
By contrast, the consumer price index measures the prices for a basket of goods—40 thousand different items. That’s why I’m a little skeptical of folks who say that our low inflation numbers are wrong or manipulated. It would take a lot of skill to adjust that many inputs without everyone knowing about it. And outside analysis, like MIT’s Billion Prices Project, confirms the government’s data.