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How much do you know about inflation?

Economics has been called the dismal science. But a better moniker might be the murky science – or perhaps the dark art.

According to a contrarian piece by Bloomberg Businessweek economics editor Peter Coy, when it comes to inflation, U.S. central bankers are all but clueless. They don’t know how to measure inflation, nor what the ideal rate of inflation is, nor how to control inflation, nor the causes or effects of inflation.

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“The Fed, in other words, is flying blind.”

It’s a sobering assessment, considering the source – Bloomberg Businessweek is a measured, authoritative source of financial news, one that often quotes economists and central bankers speaking with great assurance about economic indicators. But Coy makes a compelling case that not even the top experts in the field of measuring and managing inflation don’t know quite what they’re doing.

One challenge is measuring inflation. A veneer of accuracy shrouds government statistics about the economy, but behind that patina lies no shortage of uncertainty.

“What the Fed calls ‘inflation’ is just a weighted average of the ups and downs of the prices of all goods and services in a basket that reflects the spending of all American consumers,” Coy writes.

However, Coy questions the validity of that weighted average. Different demographic groups are affected differently by inflation, Coy writes. As evidence, he points to research that says older and poorer Americans felt inflation more acutely than the overall population from 2004 to 2013.

Coy doesn’t offer a fix for the Fed’s faulty work on inflation, but he does raise an important warning: When trying to control inflation, he alleges, the Fed isn’t sure what it’s doing – a reality that could lead central bankers to do more harm than good.

For more articles on inflation, visit the getAbstract library.

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