Sayre's Law

| May 31, 2024

The inflation debate reminds me a lot of Sayre’s Law. The Wall Street Journal in 1973 attributed to former Columbia University Professor of Political Science Wallace Sayre the observation that “academic politics is the most vicious and bitter form of politics, because the stakes are so low.”

Inflation is serious, but the stridency with which economists argue over it seems to discount the fact that two things can be true at the same time. Take the following charts as an example. The first shows inflation as economists tend to see it.

The economist perspective can be summarized as inflation is down significantly, jobs are plentiful, most people are better off on average, and returning prices to pre-pandemic levels would be catastrophic or the result of a catastrophic recession. All of these points are true. What drives some economists over the edge is that while most people assess their personal situation as good, they rate the economy as bad.

The next chart is how consumers perceive inflation.

The argument comes down to the difference between the rate of inflation, displayed in the first chart, and the price of a basket of goods, which is illustrated in the second chart. In my experience, consumers are concerned with the price of things. Telling them that they are better off on average is like telling them that if their heads are in the oven and their feet are in the refrigerator, they are comfortable on average. Even though most people do rate their personal situations as good, many also have friends and family members who are struggling.

I have no problem reconciling that both perspectives are equally valid. I am not an academic though. I am a financial planner who strives to dispassionately help clients achieve their goals. The stakes are too high for me to do otherwise.

* The Consumer Price Index (CPI), as provided by the Bureau of Labor Statistics, measures price fluctuations in a basket of goods and services purchased by American households. The year over year change of the CPI, is the most popular way of determining the rate of inflation. It is published monthly and sometimes referred to as the cost-of-living index.