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Saturday, January 12, 2008

Inflation scaling is everything.

At a time when prices for gasoline, milk, eggs and some other items are kicking up, the following chart of the U.S. Consumer Price Index seems scary, as if prices are accelerating out of control:

But since this is an index, we really should use a logarithmic scale. This captures the fact that a change from 50 to 55 (10% increase in prices) is the same as from 500 to 550 (10% increase in prices). The same data, graphed this way, is below:

This may not be reassuring, but it at least isn't as panicky.

1913 prices were 29.7% of 1967's, (54 years later) or less than a third as high.

2006 prices were 603.9% of 1967's (39 years later), or 6 times as high.

You can see the deflation in the Great Depression clearly, along with the
inflation in the Nixon (wage-price controls), Ford (Whip Inflation Now),
Carter (malaise) and early Reagan years. (1981: I got a 16.5% mortgage with
5 year balloon. 1982: First year I opened an IRA, with a 14% CD rate).