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Extra Credit, Tuesday Bonus Edition   Turning Around Legg Mason
May 7 2008 4:41AM EDT

Why Inflation is Lower Than You Think

In one of the smartest pieces of linkbait I've seen in a very long time, David Leonhardt today not only defends the CPI, but even says it's overstating inflation:

When the new inflation numbers come out next week, they will indeed be misleading. They will be artificially high.

I hope Barry Ritholtz, for one, is sitting down when he reads it. But Leonhardt makes some really good points. We're much more likely to notice that the price of bananas has gone up, he says, than we are to notice that the price of oranges has gone down. And prices of things we buy a lot, like gasoline, are more obvious to us than things we buy infrequently, like cars or appliances.

Still, the biggest problem with inflation is that it is a tax on the poor, and the poor don't really need lots of new women's clothes or new cars. What they do need is rent, food, and energy. No one's going to mind if the price of Hamptons mansions or Andy Warhols or bottles of 1982 Le Pin goes up a lot. But everybody needs to eat, and, in the US, a majority of people need to drive, if they're going to be economically productive. So some kinds of inflation are much more harmful than others.

That said, if you look at where the CPI is now, and then you ask where economists thought it would be if oil reached $120 a barrel, I think we're probably doing pretty well. Although maybe that just means there's more food and energy inflation to come.

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