Thursday, November 08, 2007

The Way to Look at Inflation

Lew Rockwell, touting the gold standard, plots the cumulative consumer price index on an arithmetic scale, thus making it seem as if inflation is rampant. It's not.

The best way to depict the change of a cumulative quantity over time is to depict the quantity logarithmically. On a logarithmic scale, a change of "x" percent covers the same vertical distance, regardless of the base from which the change occurs. That is not so for an arithmetic scale, where a change of, say, 10 percent from 100 (10) looks much smaller than a change of 10 percent from 1,000 (100). If the figure of interest is the percentage change (as it is in the case of inflation), the use of an arithmetic scale is bound to overstate recent inflation, relative to inflation in earlier years.

Here's a more realistic picture of inflation from 1913 to the present:

Source: U.S. Department of Commerce, Bureau of Labor Statistics, Consumer Price Index, All Urban Consumers (CPI-U) (U.S. city average, all items, 1982-84 = 100), available here.
Compared with the 1910s, 1940, and 1970s, inflation has been rather tame for the past 25 years.

UPDATE: Rockwell's blogging colleague, Jeffrey Tucker, plots a measure of the money supply in the same, dishonest way: arithmetically.