Moneybeat: Are we at the end of the inflation cycle? | WORLD
Sound journalism, grounded in facts and Biblical truth | Donate

Moneybeat: Are we at the end of the inflation cycle?


WORLD Radio - Moneybeat: Are we at the end of the inflation cycle?

Plus, shrinkflation and Milton Friedman’s definition of inflation

Milton Friedman during a White House event, May 9, 2002 Getty Images/Photo by Alex Wong

MARY REICHARD, HOST: Coming up next on The World and Everything in It: The Monday Moneybeat.

NICK EICHER, HOST: It’s time to talk business, markets, and the economy with financial analyst and adviser David Bahnsen. He’s head of the wealth management firm The Bahnsen Group and he’s here now.

David, good morning!

DAVID BAHNSEN: Good morning, Nick. Good to be with you.

EICHER: All right, David, we’ve been watching inflation closely for a few years now. It’s important not only to the individual consumer paying the higher prices, but also to our central bank that uses interest rates to try to manage inflation. So the Federal Reserve is looking for the magic number 2. Two percent inflation is the hoped-for sign that the Fed will start cutting interest rates.

All that as preface to the news that the Fed’s preferred gauge of inflation came in with a two-handle on it 2-point-4 percent year-on-year.

Personal Consumption Expenditures kind of a companion to the Consumer Price Index, the PCE versus the CPI. We got a new PCE report last week. So aren’t we in the end zone, as far as the inflation narrative is concerned?

BAHNSEN: Yes. And only thing I would say is: I've been saying this for some time, because I believe the CPI is actually at a two handle if the shelter component was not so distortive. So yes, I think the PCE, let's call it two and a half percent, blending the core and the headline, shows that they're, if they're not at the end zone, they're at the one yard line.

I also believe it's absolutely inevitable that the CPI is going there, too. And the reason being that 34% of the CPI, shelter, is still showing over 6% inflation. That’s not accurate. I think things like food, a lot of people are still seeing the price inflation and food prices when they go to a fast-food restaurant or certain grocery items. And yet, food as a percentage of what a typical household spends total money on has not really increased a lot, even though food prices have.

And that's the challenge, Nick, of some of these methodologies: to try to keep up with what percentage of a typical household’s spending goes to different things like apparel and insurance and utilities and housing and food. I don't think they can do that perfectly. But I also think they have to try. So that's what these indexes are for.

EICHER: You’ve heard these stories of so-called shrinkflation. There are a lot of these in the news, and we can see it with our own two eyes in the stores: fewer ounces of product in the packages kind of as a way to cloak higher prices. Not 12 ounces, but 11. Does any of that stuff matter when analyzing the bigger picture, the macroeconomic questions?

BAHNSEN: Not even a little bit!

It is one of the strangest conversations that I've studied over the years. Remember what you're trying to do: you're trying to measure the total aggregate price level, across an economy. It's already something that simply cannot be done. Prices are changing constantly. They're different in Wisconsin than they are in Idaho than they are in New York City. You have a quality of goods that changes—so how do you measure for TV; used to be this and now a TV is that, but the other TV has a different high-def quality—and so there is a very difficult process here.

Shrinkflation is dealing with the fact that you could have certain package sizes that change. But this all gets blended together over time. It all gets aggregated. And so I've read a lot of shrinkflation theories that it is conspiratorial, it's a way to hide the overall level as if a consumer doesn't know when they're buying a smaller bag of chips or something like that.

And as if there isn't another product in which there is some unmeasured increase in the value, maybe not in the size, but in the quality of the product.

So it's a very complicated issue that can't be perfectly solved for. But I have never found a shrinkflation article that made me a conspiracy theorist about this stuff.

EICHER: All right defining terms, David. Sometimes I think it’s good to define the big terms we think we understand, but that we certainly use all the time. So we talk about inflation as higher prices, but how do we square that with what the late, great Milton Friedman said about inflation, that it’s always and everywhere a monetary phenomenon?

BAHNSEN: Well, Milton gave the best definition of inflation in history when he said, in his even more famous statement, that inflation is too much money chasing too few goods. So in referring to it as a monetary phenomenon, he's referring to the too-much-money part.

Now, the money supply has declined rapidly over the last year. We do not have a lot of periods of time in our country when money supply goes negative. That has happened and yet price increases have grown.

So was Milton wrong? No, but the way people interpreted Milton is wrong. The mere increase of money supply, Nick, is never inflationary. It is the increase of money supply above the level of new goods and services. You cannot have the same level of money supply and an economy that is growing without getting deflation. And so what really is the right Milton Friedman approach is a money supply that grows in concert with the economy. When money supply grows more than the economy, that's inflationary. And when the money supply grows less than the economy, that's deflationary.

Which is why Milton said inflation is too much money chasing too few goods. And I have always added too few goods and services. (He did not say “and services.”) But because we are such a service-oriented economy, we recognize that the total supply is where we believe wealth is measured and created is in the production of goods and services.

So this, to me, is the entire point of economics. And it captures the most important monetary lesson as well, that when the government creates more money than the economy is growing, you do get inflation—and that was Milton’s statement, and Milton has never been proven wrong.

So is it easy to create a money supply that grows perfectly with the level of economy? It is not. And do governments through government spending and borrowing and other interventions do things on purpose to mess up this process? They certainly do. Milton famously said that in the 1970s, when they were really quite determined to do a lot of really bad things.

But I think that's a good overview for how to think about inflation. It is not the mere increase of money supply, nor did Milton say that. It is monetary to the extent that what we're talking about is the money supply exceeding the growth of the economy.

EICHER: Ok, David Bahnsen is founder, managing partner, and chief investment officer of The Bahnsen Group.

David’s latest book is Full Time: Work and the Meaning of Life, and you can find out more about it by visiting

David, I hope you have a great week and we’ll talk to you next time.

BAHNSEN: Thanks so much, Nick.

WORLD Radio transcripts are created on a rush deadline. This text may not be in its final form and may be updated or revised in the future. Accuracy and availability may vary. The authoritative record of WORLD Radio programming is the audio record.


Please wait while we load the latest comments...