2010-05-18

Prices vs. Inflation

If the word inflation ever had a coherent economic definition at any time in history, which is doubtful, that defintion has been completely obscured. Now, the word is utterly meaningless. I don't want to bore you with economic jargon, nor do I wish to pontificate. In this case, a simple case study of the pharmaceuticals market will suffice.

PharmaTimes reports:
US prices rises for brand-name prescription drugs rose 9.7% in the 12 months ending March 2010, against general inflation which was nearly flat (0.3%), says a leading advocacy group.

It does not take a rocket scientist to understand what the AARP is getting at here. They view the prices for branded pharmaceuticals as having increased "too much," because the rate of price increases in that market significantly out-paced one of the official inflation metrics.

But if 0.3% is the rate of general inflation, then it stands to reason that this 9.7% increase in the prices of branded pharmaceutical products was off-set by a corresponding decrease in some other segment of the economy. Indeed, just a couple of paragraphs later in the article, we learn (emphasis added):
Price increases for specialty drugs were almost as high, at 9.2% over the period, while the prices of generics fell 9.7%, the group adds.
Clearly prices within industries and across industries all rise and fall at varying rates. General inflation is simply an estimate of the weighted-average change in all prices within an economy. No economist with a head on his/her shoulders would ever claim that a 0.3% rate of general inflation "will" or "should" correspond to a 0.3% increase in absolutely, positively every segment of the economy, according to the breakdowns conducted by all advocacy groups at large.

The "issue" of inflation has always been political as opposed to economic. "Advocacy groups" such as the AARP understand that if any one price increase exceeds the rate of general inflation, they can make the businesses who took the price increase look scary, mean, and bad. They want you to forget that metrics like the Consumer Price Index seek to estimate, and not define, general inflation.

It is important to remember that the natural state of the economy is such that prices are rising and falling constantly. You can see this easily by tracking the price of common stocks on the New York Stock Exchange over the course of one hour (nevermind one day, one week, one month, etc.). Prices are neither static nor do all prices rise and fall by the same rate in unison.

I would say that it is stupid and childish to believe that all prices move the same way at all times, but no one really believes that. These things are just political issues drummed-up by advocacy groups to scare us and to demonize those of us who produce medicine, oil, Chinese imports, or whatever the evil business du jour is.

Don't be fooled.