Quercus Rubra
Tom Magliozzi - R.I.P.

Trickle-down Inflation

By Jonathan B. Wight

From Matt O’Brien at WaPo we learn that billionaire Paul Singer thinks the Commerce Department is underestimating inflation—because the things that billionaires buy are rapidly rising in price!

Yes, by Singer’s account, billionaire spending is a leading indicator of general economic trends.  Singer is quoted as saying:

“Inflation is also distorted by the increasing gap between the spending basket of the well-off and that of the middle class (check out London, Manhattan, Aspen and East Hampton real estate prices, as well as high-end art prices, to see what the leading edge of hyperinflation could look like).”

If prices of rare art, exotic mansions in the Hamptons, and gorgeous homes in London are booming, how far behind can the rest of the market be? 

After all, Beluga caviar (at $3,100 per pound) is a close substitute—isn’t it?—for Walmart hummus Caviar (at $2.99 per pound)?  Inflation will trickle-down!  If Beluga caviar is getting pricier, surely the Fed should look at this indicator with great concern!

But markets are actually quite segmented. One reason is because of vastly different income elasticities of demand. 

Also, while billionaires earn a huge fraction of income, they do not spend a huge fraction of income on the kinds of things that average people do. So whereas GDP calculations give a disproportionate weight to the income gains at the top (the larger the share of income, the larger the weight given), this is not true for calculating inflation.

As O’Brien says to Singer: “Tough luck.”


Feed You can follow this conversation by subscribing to the comment feed for this post.

Jonathan: The Commerce Department can't underestimate inflation because they don't measure inflation. We in the Labor Department do that. It fits the Unified Field Theory of Government Statistical Paranoia, since we also measure unemployment. That way the Singers and the Welches of the world have one agency at which to aim their crazy.

To Conscience Warrior:

Of course! My slip. Thanks for catching that and for introducing me to the UFTGSP, which has been flying under my radar! JW

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