Weekly Updates
Weekly Updates
- Anyone aspiring to the noble profession of economist starts by learning that prices are determined by supply and demand in a market. Unfortunately, this is not always true for consumer price measures. Some prices are controlled, set by governments, or just invented—far from the reality of market forces.
- In the US, the personal consumer expenditure deflator has a measure that just uses prices determined by market forces. Since the mid-2022 inflation highs, market-determined price inflation has slowed more than the headline. A crude approximation of market-determined prices in the UK also slowed from its highs much more than headline inflation. Excluding “administered” prices, German consumer inflation has followed the same pattern.
- Of course, consumers pay at least some of the non-market prices. Property taxes, a non-market price, are supposed to be paid. If those taxes increase, then consumers face a higher cost of living. However, some non-market prices are not paid—the housing measure ”owner’s equivalent rent” being an infamous example.
- Focusing on market prices tells us something about inflation pressures in an economy. Fears of sticky inflation, wage price spirals, or ongoing profit expansion seem overdone. When prices are left to market forces, the world’s developed economies are experiencing even more disinflation than the headline numbers suggest.
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