Inside the Mind of an Inflation Truther

A new think-tank report says inflation is running at 25 percent a year. SPOILER ALERT: It's not.

Yesterday, I got this sort of comical PR pitch in my inbox: I should check out a report from the American Institute for Economic Research that examines "the current state of inflation using their proprietary Everyday Price Index, which heated up significantly in February and shows inflation running at 25% on an annualized basis." 25 percent! And I thought AIER was being bold last year when it said we had 8 percent inflation.

As Matt Yglesias notes, the Everyday Price Index is nonsense. It looks only at "everyday" items the typical household purchases once a month or more. That means the index is heavily weighted toward food and fuel, and ignores major components of consumer spending like housing and durable goods.

Fuel prices are very volatile, and both food and fuel have had faster price growth than most goods and services over the last 10 years, driven in large part by increasing demand from middle-income countries. A methodology that focuses on food and fuel won't tell you about the overall price level, but it will produce an inflation index that is faster-rising and more volatile than the Consumer Price Index, which will make it catnip for hard-money advocates who are perpetually convinced that "real" inflation exceeds what the government claims.

And since the EPI has big monthly swings, you can annualize the data to make attention-grabbing claims like that inflation is "running at 25 percent." If you think this month's annualized figure sounds alarming, you should look back to November 2008, when the EPI implied an annualized deflation rate of 85 percent.

It's rather like if I got on the scale this morning, found I was half a pound lighter than yesterday, and then hired a PR firm to tell the world I was on pace to lose 95 percent of my body weight by next spring. And then next week I could announce that everything had changed, and I was on pace to plump up to 400 pounds.

How does the researcher behind the EPI defend himself? I e-mailed Steven Cunningham, the director of research at AIER, to ask how he could justify the quote from the first paragraph, in which AIER's public-relations firm uses the EPI to raise the specter of 25 percent inflation. And, well, he says he can't:

"I'd say the statement you quote misrepresents our work, much to my concern and discomfort. You can bet that I'll be having a talk with our marketing people and the PR group. I have tried to make clear what the EPI is and is not. It is NOT a measure of the total cost of living, nor does its growth rate represent a broad-based inflation measure. Can't tell you how many times I have explained that in writing, on radio, and on television."

Of course, AIER's report on EPI is headlined "Inflation Poised to Accelerate" and says that "a surge in everyday prices is one of many signs." But Cunningham cautions against drawing that link, too. He told me: "The Everyday Price Index is not a general measure of purchasing power. It was never intended to be. It has no special link to monetary policy. It relates to monetary policy only in the sense that all prices are ultimately related to monetary policy."

Cunningham apparently is not an inflation truther. I just hope someday he can get that memo to the people whose job it is to communicate his research to the press and the public.

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