Experiencing inflation...

Similar to an economic "wind-chill" calculation the effect of inflation may not be simply encompassed in a set of CPI numbers. Inflation is experienced personally and emotionally. This has importance for the food industry for reasons you will see below.

I don't know much psychology, but I do know that people carry grudges. We are all much more likely to remember slights than compliments. And when it comes to price changes, we have very selective memories, too. Ask nearly anyone about inflation and they are likely recall price increases. Recently, the list will include food and gasoline. They somehow take them as personal affronts. Probe further, and people might admit that the price of clothes has fallen, or that their phone service is cheaper; but that's not what they remember first. Looking at the Consumer Price Index (CPI) data for January 2008 through this lens of consumer psychology suggests brewing trouble.*

This morning the Bureau of Labor Statistics reported that the all-items CPI rose 4.8 percent at an annual rate (a.r.) for the month. Lower than last November's level of 10 percent, but still high. And core measures are up, too. The traditional core CPI that excludes food and energy rose 3.8 percent (a.r.) for the month, while the Median CPI computed by the Federal Reserve Bank of Cleveland increased at a rate of 4.2 percent. All of these monthly readings are well above their 12-month averages of between 2.5 percent (for the traditional core) and 4.3 percent (for the headline measure).

The detail in this month's report confirms some of last falls more ominous suggestion that inflation is rising across the board. In an average month last year, over 20 percent of prices in the CPI fell and slightly more than 60 percent rose by more than 2 percent. This month, you have to look with a microscope to find falling prices. At the level of detail normally reported, prices fell in only five categories, accounting for 14.5 percent of the index. Meanwhile more than three-quarters of prices rose by more than 2 percent. If people tell you that inflation is a problem, it is a not result of selective memory. They are just accurately reporting their experience with rising inflation. [More]

Adding to the problem is the uncomfortable thought of a flashback to the '70's. While the memories of the clothes, hair and the music are unpleasant enough, don't forget stagflation.

But in putting its emphasis above all on reviving growth, America’s central bank, according to some economists and even a few Fed officials, may face a bigger inflation problem down the road.

“They are cutting rates with a bill to be paid later," said John Ryding, chief United States economist at Bear Stearns. “The question is not, will we get inflation, but how much will it cost to stuff the genie back in the bottle. This has the feel of 1970s stagflation.”

Over the last 12 months, consumer prices are up 4.3 percent on average, according to the Labor Department. The core index of consumer price inflation, which excludes food and oil, was 2.5 percent higher in January than a year earlier, significantly above the Fed’s unofficial comfort zone of a 1 to 2 percent underlying inflation rate. That’s a far cry from the double-digit inflation rates that battered the economy at times in the 1970s, but still worrisome.

Analysts like Mr. Ryding say that by tolerating such price rises and maybe even allowing them to escalate, the Federal Reserve is risking its hard-won credibility as an inflation fighter, which will ultimately require it to push up interest rates higher than otherwise to contain the damage. [More]

I don't believe history repeats itself. I believe historians repeat each other. So the inevitable comparisons to the 1970's may just be starting.

Just don't get the photos album or the disco ball out.