WSJ's 'Question of the Day' Misunderstands Inflation

Where is Jesse Jackson when you really need him? His performance on Saturday Night Live in 1984 included a hilarious skit titled "The Question is Moot!" As a game show host, Jackson dismissed the questions of the contest, instead pontificating on whatever political issue struck his fancy. I thought of this yesterday when I happened upon the WSJ.com's Question of the Day: In which area has inflation hurt your finances the most? Energy, food, health care, housing, something else, or I can't tell.

The question is moot but is typical of the misunderstanding (or misrepresentation) of inflation common in the media today. The question focuses on prices of various consumer goods, but consumer goods prices fluctuate for many reasons, only one of which is inflation. At any point in time, under any economic condition, some consumer prices will be rising, some falling, and some changing. The media (and government statisticians) typically identify inflation when a majority of consumer prices are rising. Incredibly, most never address the causes behind those price changes. This is where market-based prices can be informative. For example the price of gold, which is driven primarily by the change in the value of the currency used to price it, provides a market-based measure of the devaluation of the currency in a timely manner.

In a recent conference call on the public website for H.C. Wainwright Economics, David Ranson discussed the true inflation picture based on his proprietary index of 8 market-clearing consumer prices. He also reviews the strong statistically significant correlation between the prices of gold and precious metals and consumer prices. Most observers miss this correlation because the lag time ranges up to six years. Both of these indicators suggest higher inflation lies ahead.

The only answer to the WSJ poll question is that inflation reduces your real standard of living. Positive nominal financial gains are truly stagnant or negative in real terms, yet they are subject to capital gains taxes. It is not the higher cost of energy or food that hurts a consumer, it is the reduction in the value of his net worth.