Oh yes, we have no inflation Part Deux

By Fester

The story of the economy is that the hard to avoid or substitute away from items are massively increasing in price while everything else is holding steady or dropping a little bit.  The basic problem is that incomes are flat and the hard to substitute items constitute a significant portion of personal expenditures. This means people are getting squeezed and squeezed hard as they have to downshift on anything that is remotely discretionary in the short term. 

I'm shameless stealing a chart from Barry Ritzholtz at the Big Picture which shows where the inflation in the economy is:

The red line is the 2.0% per year target inflation rate.  Medicine, Food and Transportion (which includes fuel costs) are significantly above the all items rate.  Housing is above the target level but below the weighted average but due to how housing is constructed it is probably overstating inflation as it measures rent equivilants and not actual housing costs for home owners. 

People have to move, people have to eat and people have to go to the doctors --- everything else is somewhat flexible.  This is most pronounced in the recreational and apparrel sectors as fun is a discretionary activity and a new pair of jeans can be delayed for another month.   

Comments

[Turkey Turkey Turkey]

I wonder how much of this non-inflation inflation can be attributed to the FED's policy of inflation targeting. Monetary policy is really effective at preventing wage increases (aka wage inflation) and keeping down costs of non-essential goods. In contrast, national monetary policy is far less effective at managing the price of energy in a global energy market, the price of health care, and likely has an inverse relation to the costs of housing (rates down, prices up). Since the FED has decided to target inflation as its long-term policy priority, the result has just been to prevent wage growth in concert with price increases in markets monetary policy cannot control.