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Stephen Dunphy / Times staff columnist
Economic Memo: The inflation conundrum

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The message from a reader was one of those complaints hard to avoid. How can you report that inflation is low when everyday costs were going up? "Does no one consider fuel oil, medical premiums, food items and drugs?" the reader said. "It is simply not true that we have low to nothing in inflation — try real, ordinary life."

It's true. Real, ordinary life is more expensive.

For example, the reader will get a Social Security cost-of-living adjustment of only 2.1 percent this year, based on the consumer price index. But much of the inflation protection the adjustment is supposed to provide will be eroded by Medicare's Part B premium increase of 13.5 percent for 2004. The monthly premium for Medicare Part B is voluntary supplemental insurance covering most outpatient services.

The monthly premium was $45.50 as recently as 2000 and is $66.60 a month now. Not only is the payment rising, but it is consuming a larger part of the average retiree's benefit. In 2000, it represented 5.7 percent of a typical monthly Social Security benefit payment, rising to 7.2 percent this year.

The problem with many economic statistics is that the ordinary person is lost in the size of the U.S. economy. When prices are measured across 135 million workers in a $10 trillion economy, individual circumstances are drowned in a sea of data.

The 40,000 or so people who attend a Mariners baseball game probably represent a cross section of the region. The crowd probably reflects the per capita income of a Seattle-area resident, about $39,000. They own homes or rent apartments. They are kids, grandparents, young adults on a date.

Counting homes and other assets, the crowd might have an average net worth of $250,000 a person. But you have to be careful with averages. If Bill Gates walks into Safeco Field to watch the game, suddenly things change. With his Microsoft stock alone worth more than $30 billion, average — keep that in mind — average net worth per Mariners fan that night jumps to $1 million.

The same thing happens to overall economic statistics. When you count so many people, a couple living in the family home on a fixed income paying medical bills finds their own situation misrepresented by economic figures. Inflation reported by the government also is a basket of goods and services, not just what we specifically consume.
 
So health care and energy prices can rise sharply. But computer and apparel prices decline. Grocery stores may raise prices to reflect seasonal availability, but restaurants hard-pressed to keep tables full hold prices steady or offer bargain specials. Housing prices rise, but a high apartment-vacancy rate keeps monthly rental payments low. Add it all together and it spells an inflation rate of slightly less than 2 percent annually.

That's the number reported. Social Security increases are based on the consumer price index from third quarter to third quarter. That's the 2.1 percent increase that recipients like the reader got this year.

Why isn't inflation reflecting the experience of my reader?

Lots of things go into creating inflation. In the U.S., there is still plenty of unused capacity in the economy, productivity is high, labor costs remain reasonable and imports from China are cheap.

There are some who argue inflation is really a monetary measure, period. Monetarists argue there is a crucial difference in confusing price changes resulting from fluctuations in supply-and-demand and productivity with price changes due to action of the Federal Reserve.

Is the Fed causing inflation or setting the stage for more? The amount of money being created by the Fed is higher now than in the past few years. An increasing supply of money can eventually cause inflation because there would be too much money chasing too few goods. Commodity prices have soared. The price of oil is running above $30 a barrel, and OPEC is talking about manipulating prices.

Then there's gold, the last refuge against inflation. Its average price in the last decade was about $330 an ounce. Now it's more than $400 an ounce.

What's the answer for my reader? How can we square our own experience with the numbers that are published every day about the economy?

The simple answer is that you can't. We are all our own little economies. We all have various levels of income, debt, age and experience. We all have personal circumstances that can be quite different from the average. Ask a young person of color about trying a find a job versus the experience of a white male of the same age.

Economics essentially has split into two parts, each looking at the economy from a different viewpoint.

Macroeconomics uses broad strokes to report the big things — unemployment, inflation and the business cycle. Microeconomics looks at how the interactions of individuals produce market outcomes.

Inflation is part of the macro world. My reader is part of the micro world. Too bad it's not just a little bigger so some of today's politicians might be able to see it.

Stephen H. Dunphy's columns appear Tuesdays-Fridays and Sundays. Phone: 206-464-2365. Fax: 206-382-8879. E-mail: sdunphy@seattletimes.com. More columns at www.seattletimes.com/columnists

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