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Ted Cruz is wrong about inflation

Justin Sullivan/Getty Images

In Wednesday's debate, CNBC moderators asked Sen. Ted Cruz about one of the most underdiscussed topics around: monetary policy. Cruz argued that loose-money policies by the Federal Reserve were pushing up the cost of living.

"A single mom buying groceries, she sees hamburger prices going up nearly 40 percent," Cruz said. "She sees her costs of electricity going up. She sees her health insurance going up, and loose money is one of the major problems."

Cruz's comments represent a widespread but mistaken perception that prices have been rising rapidly in recent years.

It's true that hamburger prices have risen dramatically since the Fed cut interest rates to zero in 2008. But hamburger prices are an anomaly driven by droughts in Texas and other major beef-producing states. According to the statisticians at the Bureau of Labor Statistics, overall food prices have risen about 14 percent since 2008 — or about 2 percent per year, which is right in line with the Fed's target. Similarly, BLS says that electricity prices have only risen 8 percent since 2008, or about 1 percent per year. And health care costs — which have been growing faster than inflation for decades — have been growing more slowly than usual since the Great Recession.

Overall, BLS data shows that the average inflation rate for all goods and services since the fall of 2008 has been about 1.4 percent per year. That's below the Fed's longstanding target of 2 percent annual growth, and the least inflationary period in the past half-century.

So after seven years of historically low inflation, why are so many politicians and voters still convinced inflation is out of control? Cruz's focus on hamburger suggests one answer: People naturally focus on a few highly visible prices, like groceries and gasoline, that tend to fluctuate a lot. And they're more likely to notice prices that are going up (like hamburger since 2008) than prices that are going down (like gasoline during the same period).

This matters because misplaced fears of inflation have been a major obstacle to the Fed doing more to support the economy. After the financial crisis, most of the political pressure on Fed Chair Ben Bernanke came from monetary hawks on the political right. So the Fed did less than it could have, leading to an unnecessarily slow recovery from the recession.