Remember the Misery Index

June 22, 2022

The misery index, a fabricated summary economic statistic that gained fame during the late 1970s and early 1980s but pre-existed that era, simply adds the U.S. 12-month rate of CPI inflation to the unemployment rate for any given month. The misery index peaked at 22.0 in June 1980 and registered a record low of 3.0 in July 1953. The average misery index during the presidency of Gerald Ford averaged 16.0, almost as much at the 16.3 mean during the Carter years. Ronald Reagan’s popular reputation for handling the economy has stayed more favorable than the average 12.2 misery index of his stewardship would suggest. To be sure, he inherited an elevated misery index, but such was in double-digit territory for 73% of his eight-year tenure. Nixon (10.6%), G.H.W. Bush (10.7), and Eisenhower (9.3) experienced higher average misery indices on their watches than did Clinton (7.8), Obama (8.8), G.W. Bush (8.1) and Trump (6.9).

The misery index can also be used for comparing the United States to other industrial economies, both at the same moment in time and the evolution of misery of different economies over a period of time. The current 12.2 U.S. misery index is composed of an 8.6% CPI inflation rate and a 3.6% jobless rate. The U.S. misery index a year ago was just 1.4 points lower than now. Inflation has risen 3.6 percentage points, but unemployment has dropped by 2.2 percentage points. The current misery index is also presently 2.8 percentage points lower than in April 2020. In the early days of the pandemic, unemployment shot up to 14.7%, but CPI inflation was just 0.3%.

The current U.S. misery index of 12.2 is actually less than the misery indices now in Euroland (14.9), Great Britain (12.9), and Canada (12.8), but it is more than double Japan’s score of 5.0.

  • Euroland’s misery index has climbed from 9.9 a year ago and 7.6 in April 2020. The jobless rate compared to April 2020 has fallen only a half percentage point, while CPI inflation has soared to 8.1% from 0.3%. Euroland’s misery index stood at 9.9 a year ago.
  • ¬†Great Britain’s misery index, which rose from 4.7 in April 2020 to 6.9 a year ago, reflects a steepening rate of deterioration during the past 12 months as a two-percentage point decline of unemployment was overwhelmed by a 7-percentage point acceleration of inflation from 2.1% to 9.1%.
  • At 16.0, Canada had a higher misery index in April 2020 than those in the U.S., Euroland, the U.K. or Japan. Canada also topped this infamous leader board a year ago with a misery index then of 11.1. Over the past year, CPI inflation more than doubled from 3.6% to 7.7%, while unemployment fell to 5.1% from 7.5%.

Japan’s good-standing in misery index comparisons exposes a major problem with the measure, which is that the desirability of one inflation rate over another does not always improve as that rate diminishes. Movements away from the sweet spot of 2.0% is frowned upon in either direction. Zero percent inflation is far worse than +4% inflation, and the disparity between inflation of -1% and +5% increases exponentially. From a policy rectification standpoint, negative inflation, aka deflation, acts like a black hole, defying monetary and non-monetary fixes, and Japan’s experience since the late 1990s has been a showcase of this dilemma. Japan’s misery index was at 2.7 both in April 2020 and a year ago. It is now at 5.0 because CPI inflation has risen from -0.1% to 2.3%. Eliminating the 19% on-year rise of energy and 4% on-year food price increase yields a conventional core inflation rate that remains lower than 1.0% (note that Japanese officials rather uniquely include energy in their measure of underlying inflation).

So what is to be made of this wide array of data. For me, the chief takeaway is that the current bout of inflation has been a globally shared phenomenon, caused by unforeseen real shocks like the pandemic, the quick development of vaccines, supply-side shortages, and commodity price explosions aggravated by Russia’s attempt to obliterate neighboring Ukraine. The pandemic and on-again/off-again pattern of lockdowns has produced erratic swings in aggregate demand, and exposed potential supply-side shortcomings created by just-in-time inventory management and globalization. Inflation ultimately is a monetary phenomenon, but no central bank has monopoly control over the stock of money and other stores of value. America’s fiscal stimulus enabled the jobless rate to drop back quickly and prevented a long-term labor market disaster that could have rivaled the Great Depression. With hindsight, the Fed was late to realize that the spike of inflation wasn’t going to be short-lived, but it’s delayed understanding can be measured in months. It took 15 years from the mid-1960s when inflation first started to accelerate before serious quantitative monetary tightening was launched late in 1980.¬† The current inflationary episode needn’t replicate the past when commodity prices and war were also key drivers, nor is that the likeliest outcome of the present episode.

There are much bigger existential risks than inflation now facing the United States and the world. Don’t look up.

Copyright 2022, Larry Greenberg. All rights reserved. No secondary distribution without express permission.




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