Is Hanke’s Inflation Dashboard Pseudoscience?

Steve H. Hanke is a renowned professor of applied economics at the Johns Hopkins University in Baltimore. Hanke’s claim to fame came when he counseled President Suharto of Indonesia on the mechanics of setting up a currency board to control Indonesia’s volatile currency. While Suharto never deployed the ideas, this consultation garnered Hanke’s global attention.

Most economists tend to view that currency boards cause more problems than good. The economic problems in Argentina, for instance, were sometimes blamed on its currency board system, which pegs the peso to the dollar, thus making Argentine exports less competitive. Professor Hanke, who previously advised Argentina’s government, maintains that its economic troubles have nothing to do with the currency board.

Professor Hanke is also well renowned for his regularly published inflation dashboard which is often received with either praise or criticism. The philosophy behind his dashboard departs from traditional measures of inflation as it is heavily influenced by the effect of exchange rate and stock markets on inflation.

The model has been reporting inflation rates for more than twenty developing countries including: Ghana, Iran, Turkey, Nigeria, Lebanon, Egypt, Zimbabwe, Lebanon, Pakistan, Sri Lanka, Argentina, Venezuela and others. Hanke continuously claims that the official inflation rates of these countries have been deliberately understated by their statistical agencies.

While there are some scientific discrepancies in the model, it is Hanke’s tendency to dismiss official data from countries followed by his dashboard as rubbish that is perplexing.

Let us start by explaining how Inflation is traditionally calculated; inflation calculation by Governments uses a locally allocated basket based on previous consumption patterns and data on household income and expenditure.

In case of Egypt for instance, Consumer Price Index (CPI) is published by the Central Agency for Public Mobilization and Statistics (CAPMAS) which compiles the prices of goods and services and processes them by assigning weights to each commodity and group.

At the same time, Core inflation is published by the Central Bank of Egypt. It is a variant of the headline CPI that excludes the impact of temporary price shocks on inflation

In contrast, Dr. Hanke’s Purchasing Power Parity (PPP) model relies on exchange‐ rate data and price‐ level differentials between two countries, claiming that PPP avoids the measurement errors and weighting problems associated with official price indices; this practice on its own presents a scientific problem.

The Economist magazine uses a similar PPP methodology for its famous Big Mac index. The Economist does not however claim that its extrapolated exchange rate is more accurate than the market exchange rates and calls anything that does not conform as rubbish.

Following the same logic, we can take inflation rates in Eurozone and USA, plug these rates in Hanke’s model, and conclude that if resulting USD / Euro rate is not the same as market rate, then the Forex markets rates are rubbish

In fact, very few contemporary economists would hold that PPP holds continuously in the real world. We can attempt some variant of PPP as an anchor for long-run real exchange rates. However, basing a fully blown inflation model on PPP teeters on pseudoscience

Professor Hanke’s Inflation method was reviewed by Professor J. Atsu Amegashie who concluded that Hanke does not follow the scientific literature by not testing the PPP theory. Instead, Hanke assumes that PPP is a valid theory and then concludes that a country’s statistical agency is lying if his computed inflation rate is different from the official inflation rate.

At the end of the day, scholarly work is based on research & modeling and should withstand scrutiny. Name calling based on assumptions tends to be classified as more of Pseudoscience than actual research.

Dr.Mohamed A. Fouad
Dr.Mohamed A. Fouad
Mohamed A. Fouad serves as an MP at the Egyptian House of Representatives and a member of the Economic Committee