Unfortunately, Mark Twain’s aphorism, “lies, damn lies, and statistics”, has been used so many times that it’s become trite. But, as I say repeatedly around these parts, you have to understand your data. A key economic statistic is core inflation, which is estimated by the Federal Reserve’s Open Market Committee (FOMC). Basically, if the Fed believes that inflation is about to rise*, it clamps down on the money supply and slows down the economy (you didn’t really want to be employed, did you?). So that estimate of inflation is really important. By way of Paul Krugman, we discover a very interesting tidbit about how the Fed estimates the future rate of inflation:
The econ team at Goldman Sachs (not online) makes the interesting point that FOMC inflation forecasts are pulled up by a small group that keeps forecasting much higher inflation than anyone else; this in turn helps limit the Fed’s willingness to support the economy.
In other words, a bunch of anti-inflation radicals are pushing inflation estimates in the direction they want, and thereby shifting the terms of the debate. What the FOMC should do (but won’t) is release each of the estimates and their assumptions, just as the Social Security Trustees do.
*I would argue with record numbers of people in hock up to their eyeballs, not to mention the massive amount of underwater mortgages, modest inflation (2.5 – 4%) would be a good thing. Inflation rates, in an economy, that hasn’t hit maximum employment, are a political battle between creditors and debtors–and, right now, debtors are getting creamed. This is nothing new: after all, that’s what Bryan’s Cross of Gold speech was all about…