The Dean's List: Top Five Things You Need to Know About Inflation
Sandeep Mazumder, dean at Baylor University's Hankamer School of Business, is an expert on all aspects of inflation and the macro-economy. He shared a list of the top five things you need to know about inflation, busting a few myths in the process.
- Inflation expectations drive inflation.
This sounds like a self-fulfilling prophecy, and it partly is. What the public thinks inflation will be drives the actual, observed inflation rate today. - Most common measures of inflation are not the best.
The Consumer Price Index (CPI) is widely used to report inflation numbers. However, the CPI includes extremely volatile components, such as fuel prices, so it is actually not the best measure of inflation. A "weighted median" or "trimmed mean" CPI measure is much better. - Zero percent is not the optimal inflation target.
It might sound good to have no inflation, i.e., inflation at zero percent. However, history shows that negative inflation rates—called "deflation"—are actually very damaging to an economy, particularly as people start delaying spending decisions. This is one reason—although it's not the only reason—why having some low, stable, positive inflation is actually a good thing. - Inflation does not necessarily make us poorer.
It is easy to assume that if the prices of the goods and services rise by four percent, I am now four percent poorer. But if my income also rose by four percent, then my purchasing power actually remained the same. Here's another way to see it: Suppose a candy bar is priced at $1 and there is a 10 percent rise in its price to $1.10. The buyer has to pay 10 cents more, but the seller receives 10 cents more. While prices rose by 10 percent, so did incomes. - High gas prices do not necessarily mean inflation is high.
It is common for us to see high gas prices and assume inflation is also high. After all, there are few prices that are so publicly and visibly displayed as gas prices are. But gas prices tend to be volatile and do not necessarily indicate where general prices are. Indeed, the weight that the Bureau of Labor Statistics assigns to gasoline in price index calculations is only about 3.7 percent.
About Dean Sandeep Mazumder
Sandeep Mazumder was appointed as the William E. Crenshaw Endowed Dean of Baylor University's Hankamer School of Business in 2021. He previously served as professor and chair of the Department of Economics at Wake Forest University. Mazumder's research and teaching interests include macroeconomics, monetary economics, international monetary economics and time-series econometrics. He has focused much of his research on U.S. inflation dynamics and the Phillips Curve, and has published more than 30 articles in prestigious economics and finance journals.
