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Dissecting inflation

This chart shows the rate of inflation according to the Personal Consumption Deflator (green line), as compared to two of its three components: services and durable goods. (The third component, nondurable goods, is for some reason not available to me at the moment.)

The next chart shows the behavior of the price indices for services and durable goods since they began to part ways in 1994 (prior to that they both moved only in an upward direction). This price divergence has now grown to sizeable proportions. Put it this way: over the past 16 years, the average price of services has risen almost 60%, while the average price of durable goods has fallen almost 25%. Service sector prices therefore have doubled relative to durable goods prices in just 16 years. You might say we have had a whole lot of inflation in the service sector which has been offset to a significant degree by a lot of deflation in the durable goods sector. That might explain why there is so much disagreement these days about how much inflation there is. It all depends on what sector of the economy you're talking about.

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