Monday, May 16, 2011

St. Louis Fed Inflation Charts

If you've never played with FRED at the St. Louis Fed website, you are really missing out. Let me explain because I know that sounds a little strange. FRED allows you to look at economic data from the Federal Reserve. They have all kinds of data, like consumer price index, wages, GDP, etc. It is all very interesting. So today, as an example of the great things you can do with this program, I will post some intriguing graphs that I made with the program.

So then, it looks like inflation and unemployment are related. The red graph is CPI showing the percent change, and the blue line is total nonfarm employment percent change. So then, it looks like whenever CPI falls that unemployment rises and when CPI rises employment rises. I just have a few issues: 1991 and 2008. In these times we see the opposite being true. In 1991 when CPI rose unemployment fell anyway, and in 2008 when CPI fell unemployment did not really experience a change. In fact, rising CPI right after shows decreasing employment.

So there are a few flaws, but it generally looks pretty good, right? Well, if you have been following this blog you know that CPI understates inflationary changes and so I am not a fan of it.

This graph, I believe, is much more informative. It shows the percent change of M1 (a money stock) and percent change of total employment. Notice a trend? I see huge spikes in M1 during recessions and tremendous falls in employment anyway. Furthermore, look at the period between 1900 and 2000. When M1 was rising employment was rising. However, when M1 was decreasing, unemployment did not change. Is that a big problem? You bet, as the same problem is evident between 2000 and 2005.

Finally, a very simple graph. It shows inflation in food prices each quarter. Notice how food has rarely bee cheaper, and how the rise in food prices today is relatively high? And this is still using a CPI method that understates inflation. Should we be concerned? I think the graph shows that this is very worrisome.

Now I know that I presented some controversial conclusions, but my main point was to show what you can look up with these graphs and how useful they can be. They are fun, but just remember that correlation does not prove causation, the post hoc fallacy, and that government measures are seriously flawed and able to be tampered with. The only good conclusions in economics can come from a priori reasoning, so while this is enjoyable, remember that the basis of truth in economics comes from good reasoning, and empiricism can never show you causation, only theory can.

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  1. Interesting information you presented. I can't wait for the inflation!

  2. The monetary inflation is already here, but the price inflation is debatable. But monetary inflation is a pretty bad problem, just see my article I linked to in the post entitled: "Why is Inflation so Bad?"