If I were to rewrite the economics textbooks the first idea that I would throw into the dustbin is the idea of a standardised rate of inflation. Why? Because in every economy, different money, coming from different individuals and different strata of society chase different products, causing every price over time to inflate or deflate at a unique level, and every consumer and producer — depending on their wants and needs — to experience a separate and unique rate of inflation of deflation.

When an economist like Paul Krugman suggests that the Fed needs to print more money to raise inflation because inflation has fallen to “historic lows” — he is referring to the totalised rate of inflation for urban consumers, or CPI-U:

But does that mean that the prices of goods and services are falling uniformly because there is not enough liquidity sloshing around in the economy? No. Goods and services are not even falling uniformly. As a reader noted on this morning’s post:

I disagree with you that there is no inflation (despite what stats the government provides us). There is food inflation, and there has been substantial energy inflation.

According to the USDA, food inflation has hit 3% from 2010. And fuel inflation on 2010 has been as high as 5.6%. Yet so-called “core” inflation — which ignores food and fuel for their “volatility” — is persistently low, less than 1% on 2010. However the notion that food and fuel inflation is higher because of “volatility” is simplistic. But what is more simplistic still is the idea that the prices in which we are seeing deflation are somehow non-“volatile”. From Wikipedia:

With biflation on the one hand, the economy is fueled by an over-abundance of money injected into the economy by central banks. Since most essential commodity-based assets (food, energy, clothing) remain in high demand, the price for them rises due to the increased volume of money chasing them. The increasing costs to purchase these essential assets is the price-inflationary arm of biflation.

With biflation on the other hand, the economy is tempered by increasing unemployment and decreasing purchasing power. As a result, a greater amount of money is directed toward buying essential items and directed away from buying non-essential items. Debt-based assets (mega-houses, automobiles, [consumer electronics] and other typically debt based assets) become less essential and increasingly fall into lower demand. As a result, the prices for them fall due to the decreased volume of money chasing them. The decreasing costs to purchase these non-essential assets is the price-deflationary arm of biflation.

While there are obviously other non-monetary factors — specifically population growth, peak oil, global tensions, global weather patterns, and so forth — that partly account for shifts in the prices of food and fuel, the phenomenon of biflation accounts quite well for the overall trend of sluggish inflation that we see in BLS statistics. So, what is the problem with biflation?

Well, it’s a vicegrip on the poor and lower middle, and those on fixed incomes. The poor and lower middle spend a great deal more of their income on food and fuel, and a great deal less on iPads, designer clothing and McMansions — the parts of the economy where we see deflation. They aren’t helped by monetary easing, which tends to help the highly-leveraged and debt-heavy upper-middle and rich the most by inflating away some of their debt obligations and boosting stock prices.

Biflation is also dangerous because it can focus policy on the wrong area. A biflating economy — particularly the contemporary American ones — often has deep problems in manufacturing, and in overall productivity. American manufacturing has now slumped for three months in a row. And where is policy focused? On combating superficial “deflation”, rather than tackling underlying structural problems, and increasing output