Inflation is rising faster than anyone thinks – here’s the proof

Yesterday’s most interesting newspaper titbit came courtesy of the FT. Turns out that State Street has started publishing real-time inflation data based on prices tracked on the internet.

That’s a big deal. Mostly our inflation numbers track a sample of prices and check in with them every month or so. This makes them both limited and undynamic, to say nothing of hugely imprecise.

However, the State Street numbers aren’t any of those things. The Billion Prices Project which comes from MIT university, tracks a huge number of prices (around five million) across the internet in real time.

That doesn’t make it perfect but it could be giving us what Bill Bonner (who noticed the article as well) calls the “most reliable measure of consumer price inflation developed so far”.

So what is this reliable measure telling us? In the US it is telling us that inflation has gone up around 3.2% in the last year. That’s a bit higher than the 2% or so the Fed claims.

But there is more to the story. If you look at only the last three months and annualise the number, you get 7.4%, says Bill. That is a lot higher than the 2% or so the Fed claims. If true, that means that the US economy is shrinking fast in real terms.

Also of interest is the fact that the BPP doesn’t just track the US, it looks at prices all over the world – and these are running much higher than official estimates too.

Ben Bernanke still tells us that he thinks the “increase in inflation will be transitory”. It is hard to be convinced. Note that the BPP started to show falling prices only two days after the collapse of Lehmans. It also showed prices beginning to rise again in early January 2009. That, say its compilers, was “well before a trend could be seen in official CPI announcements”.

For more on why inflation is rising as fast as it is – and why it probably isn’t transitory – see Tim Price’s latest piece for PFP, Better Dead than Fed. As far as Tim is concerned, everything the Fed says about inflation is not just “debatable but downright surreal”.