APERITIF ANYONE?

 

It is reported that the central banks of most industrialized nations today march to the target drumbeat of two percent inflation. 

It's become the holy grail of central bankers everywhere in these dark and nasty days of threatening deflation.

And that brings up several questions, but let's take the first two first. What makes the numeral two so magical and when, where and how did it gets its magical essence?

Forget my Bonnie wherever the hell she may be, just bring back some inflation is the hue and cry of central bankers and their shills the globe over today.

We all know deep inside that the indexes--irrespective of the boring and sometimes convoluted names attached--that central bankers use to bring us the news are bogus.

We all also know deep inside that, as John Kay in a recent piece in the Financial Times, "The second richest man of all time was poorer than us," writes that: Prices indices are compiled by measuring the changes in the cost of buying a fixed bundle of goods chosen to represent the consumption of the average household.   

But what defines average household and who gets to define it, you or a group of distant, detached economic bureaucrats? Or as Kay notes, But what the average household buys changes with the arrival of new goods; and with changes in relative prices (Think gasoline, beef or credit  here, just for starters.); as well as variations--good and bad--in quality.

But price indices, he continues, are ill equipped to cope with these changes. How well we know this and that answers those first two questions. There is no magic in the numeral two and the same people who get to define household gave it its magical essence.

As Kay puts it, the difference in consumption patterns between the rich of the past and the rich of today "is certainly very different." And that the "...difference in consumption patterns of an average household is more dramatic still."

Kay's point goes to  a recent report by European monetary officials claiming that prices in the EU last  year rose by just 0.3 percent and he concludes it "implies a degree of precision in our estimates to which we cannot lay claim nor realistically aspire."

So don't swallow too hard the next time you hear any of these central bankers, bureaucrats or politicians sobbing in their aperitif.