Thursday, July 21, 2005

Rashomon inflation

For years, nearly all objective measures have shown inflation in the U.S. to be minimal. Despite this, a persistent chorus of economists have fretted about its supposedly imminent return. Writing in Slate, Daniel Gross suggests:
Economists are supposed to be rational creatures, coolly examining numbers. Intuitively, they know that anecdotal evidence is just that. But Goldman Sachs economist Avinash Kaza suggests economists are being influenced on where they stand on inflation by where they sit - geographically, professionally, and on the income ladder. It's a variant of what Spy magazine once dubbed "personal-injury journalism," the process by which stories that directly affect editors become trend stories. Call it personal-injury economics.
Kaza set out his theory in a June 2 market comment that Barron's mentioned last weekend. The document isn't accessible to non-Goldman clients, although Kaza was kind enough to share it with Slate. In it, Kaza attributes the perception that inflation is being undermeasured to groupthink. The economists who make forecasts on inflation tend to be concentrated in and around New York; Washington, D.C.; Boston; Los Angeles; and San Francisco. They tend to be well-off and associate and work with other well-off people.
In summary, rich, urban people are seeing more inflation that others. There's something to this - I've seen a similar dynamic at work with people I know. New Yorkers and Long Islanders swear the official inflation numbers underestimate reality; others seem to agree with the prognosis.

Hat tip: Paul Boutin
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