What Is the Root of Inflation?

After the Federal Reserve's decision to raise interest rates yesterday a rather obvious misunderstanding and difference of opinion became evident. You may have noticed it. The issue that had economists, financial reporters and politicians in disagreement was inflation. Some said and wrote that the Federal Reserve was justified in raising interest rates because according to their worldview or statistical measure, inflation was on the rise or certainly beginning to reemerge as a threat to U.S. economic growth. Others argued in the total opposite direction, stating with confidence that the Federal Reserve was totally out of line in raising interest rates and that the U.S. economy has actually been undergoing a deflation and that there was no indication according to their worldview or statistical measure that inflation was a genuine threat to the U.S. Economy.

How could there be such stark difference of opinion among policy-makers, economists and supposed "experts" in financial and economic sectors? Why does it appear that no individual living in the United States of America can wake up every morning knowing whether their economy is threatened by inflation or not? How can a person in America know for certain whether Federal Reserve Chairman Alan Greenspan and the Federal Reserve Open Market Committee (FOMC) have done the right thing or not by raising interest rates?

At the root over the confusion in U.S. monetary policy is the manner in which various people and groups define inflation. Most people and groups define inflation simply as "rising prices". Under this definition, any time a person went to a store they would measure inflation by whether or not they have paid more or less for a VCR, soda or T- shirt. In a real sense this person would not be wrong.

The U.S. Government measures inflation through its Departments of Commerce and Labor by a variety of measures, chief of which are how much consumers pay for a variety of household goods; how much producers pay for the inputs (goods, services, materials) that are necessary to the production of their products; how much employers are paying employees in terms of wages. Still "rising prices".

The Federal Reserve, according to Alan Greenspan's most recent communication to the U.S. Congress pays attention to commodity prices, wages, the unemployment rate, consumer prices, producer prices and corporate bonds in order to measure inflation. Still generally "rising prices."

But there are so many different prices to measure and it all seems rather complicated and appears to leave consumers, the government, the Fed and businesses operating behind the curve waiting for a combination of prices to rise or inflation to appear before they recognize it, according to the definition that most people operate from when they think of inflation.

If "rising prices" is the definition that most have for inflation or which most accept on face value it may be impossible to ever fully control inflation or effectively monitor it, as different prices move in different directions depending upon various factors. This is why there is so much disagreement today, the morning after the Fed made its decision to raise interest rates.

But is there something basic to inflation, as it is generally defined, that underlies all indications of it, all statistical measures of it, all indices that seek to track it? Even all prices? Yes. And understanding this factor is the root of measuring inflation.

Basic to recognizing inflation is determining the value and function of the U.S. Dollar. The U.S. Dollar is what denominates all transactions, underlies all indications of inflation and is used in all statistical measures of inflation. Yet hardly any economists can tell you what is the best measure of the value of a dollar from day-to-day. Instead of measuring inflation in terms of the dollar price of a VCR, soda or clothes and countless other goods and services why not just measure the value of a dollar?

What is really at the root of the statement "A dollar isn't worth what it used to be?"

Could it be that consumers, the U.S. Government and the Federal Reserve have defined inflation in terms of its effect ("rising price") and not in terms of the cause (" the value of a dollar")? Yes.

So, we'll open this subject of 'What is the Root of Inflation?' by asking all of our web viewers and readers a question - How do you define the value of a U.S. dollar?

Send us your answers. Don't be shy we won't use anybody's name in connection to what they have sent. We'll begin the second part of this subject with your answers next week.

You may be surprised to learn what that one question "How do you define the value of a U.S. dollar?" reveals about the decision the Federal Reserve made yesterday.

Of course BlackElectorate.com would especially welcome Alan Greenspan's answer to this question.

Cedric Muhammad

Wednesday, May 17, 2000