[2516] Inflation is the change in price level, not the price level

I think economists have some kind of pseudo-responsibility in helping the public understand economic issues. They need to translate jargon into simple language. This can be hard because not many have the gift of clarity, in and out of the field of economics. I do not claim to have that gift, but I can say I try.

I wrote pseudo-responsibility because nobody can compel any economist to be a teacher but they are somewhat encumbered only because of their relatively superior economic knowledge compared to laypersons. I also emphasize pseudo-responsibility because I am a libertarian. Positive rights and I do not mix well. What I am trying to relay is that it is not obligatory but it is recommended.

I know some may contest an economist’s supposedly superior knowledge but in most cases, one can expect an economist to know more and kept abreast about developments in the domestic and the global economy better than a non-economist. This is especially so at the very conceptual level of basic things, like inflation. In things like inflation, I think an economist earns the relevant intellectual arrogance although preferably, that does not translate into being actually arrogant.

I am writing this because first of all, I am a practicing economist and second of all, I have noted that most laypersons understand the concept of inflation very differently from what an economist understands. Different is just a polite way of stating the layperson view is wrong.

I get this through casual conversations with either friends, some professionals within the investment banking circle or strangers whom are not an economist or a serious student of economics. I would usually lose interest in such casual conversations partly because it is my line of work and I really do not want to talk about work when I am off work. So when laypersons start to opine about inflation, I would just nod my head even while I notice something is wrong about the opinion.

Yet I could not say what exactly is wrong because when laypersons discuss about inflation, they immediately discuss about the consequences of inflation and not about the concept itself. This jump to consequences is reasonable, if one understands the concept but it becomes problematic when the concept is misunderstood and discussion on its implications goes on as if everything is fine.

The jump makes it hard to assess what exactly is wrong with the layperson view on inflation. When the implications are all wrong, it can be hard to trace its source especially when communication is embarked verbally and casually. In such casual conversations before I realized what I realized just weeks ago, I would typically dismiss the layperson view as divorced from reality or that they lack data to back their opinion up or they are just stubborn. I did not actually realize it was their concept that was wrong.

I realize the conceptual flaw in the layperson view on inflation only some weeks ago when I wrote an article for The Malaysian Insider, where I made a passing remark that inflation from the implementation of GST will only be transient. In the comment section, a person disagreed and said while in theory inflation can go up and down, in reality it has always gone up. The person insisted that inflation of the past is stuck with us.

If this was yet another casual verbal conversation, I would just give it a nod and dismiss it. But having it written clears up the root cause of the misunderstanding. What I see in those written words immediately answer all those quirky layperson statements on inflation that I have heard over the years.

The person essentially took inflation as price level. This rationalizes his insistence that past inflation is stuck with us. And this also rationalizes his belief that in theory, inflation goes up and down but in reality, it goes only up. That is true for (general) price level, but not for inflation.

An economist understands inflation as change in price level, not price level itself. In fact, inflation is defined as change in price level, not price level itself.

Note carefully the difference between the economist and layperson views on inflation.

Once one understands that inflation describes price level change, then one can begin to understand why the layperson view of inflation is wrong. A change makes inflation and a level does not.

This, of course, does not include the opinion (fact!) that inflation in the long run does not matter. Laypersons unfamiliar with economics on the other hand will one way or another say, “10 years ago, a sweet caused 1 cent. These days, you can hardly buy anything with a dollar.” When an economist hears that, the economist will deep inside his heart cry in pain. Inflation, in economic jargon, is only an illusion. Laypersons fall for that illusion.