HILLARY CLINTON COULD HAVE STAYED HOME AND BAKED COOKIES.

She'd pay more for the privilege this year.

The inflationary mechanism of more dollars chasing the same number of goods is too simple (and inconvenient) to be worthy of intellectual objectification. Unfortunately, too simple doesn’t mean wrong.

This year saw inflation escape into the common narrative. Money given to non-elites as part of COVID recovery chased the same goods—notably, labor—and, predictably, prices went up, dramatically in many instances.

Let’s start with the Christmas Cookie Inflation Index, a basket of 10 ingredients I use to bake cookies. These are the same ingredients my grandmothers used for decades baking the same cookies. In other words, this basket is comparable over time without needing substitution or hedonic adjustments, two mechanisms used to suppress inflation during the first two phases of the inflation story.

If we're doing serious work on cost of living studies, we have to pay attention to substitutions and to changes in the quality of goods.  That, dear reader, is why you cringe whenever somebody says rising prices put people in the position of having to choose between heating and eating (or whatever other choice you want to get outraged about.)  In reality people do cut back, and they replace more costly with less costly items, and they, demonstrably, are worse off even after having made substitutions.  Also in reality, when improved items become available at lower prices (there was no such thing as a personal computer in 1965 or a farm tractor in 1885) people are demonstrably even better off for having made those substitutions. Thus, it's not quite gaslighting to suggest that substitution and improvement are present.  "The way you know that substitution and hedonic adjustments are a gimmick is that they only work in one direction."

It is, however, not comforting to learn that you might have to work additional hours (or is it minutes these days?) to procure the ingredients for a party-sized batch of Christmas cookies.

The Christmas Cookie Inflation Index conveniently avoids substitution effects (don’t you dare substitute these ingredients) and also hedonic adjustments, since it is the same base ingredients year after year. This year, it is up 10.6% over last year, including some items that are up more than 20%, such as almond bark (27%), coconut flakes (23%), and molasses (20%).

It might be prudent to lay in a supply of whiskey to spike the egg nog as well, because, substitution to cheaper ingredients or not, hedonic improvements or not, the 1970s are calling and they want their stagflation back.  "Early, painful feedback on our hubris is necessary to avoid the long-term pain and suffering wrought by our folly."