The great inflation cover-up

[flashl]

If the price of dinner is pinching us, why don't the CPI numbers acknowledge it?

(Fortune Magazine) -- My friend Dana, a former real estate investment banker who got out of investment banking comfortably before subprime mortgages hit the fan, has a personal inflation index. It's pegged entirely to the price of filet mignon at the Palm Too, his favorite steak house on the East Side of Manhattan.

...

To be fair, Dana's professional background lends itself to price scrutiny of nearly everything, and being able to afford high-end steak at all puts you in that segment of the population that isn't relying on inflation-sensitive Social Security checks.

...

So how do we account for the discrepancy between the Federal Reserve's recent assurances that inflation is under control and the 91% of the population that's worried it isn't?

There are several possibilities: The first is that we're all paranoid. We simply need reassurance from the authorities: Inflation rates are fine, nothing to see here, move along quietly. The second is that the Fed's insistence on focusing on "core" inflation - a measure that strips energy and food from the consumer price index (CPI) because they're theoretically subject to short-term volatility - makes inflation seem smaller than it is, or than we feel it to be when our gallon of milk that was 12% cheaper last year gets swiped across the grocery store scanner, beeping ominously like a tiny alarm bell. (While core inflation was just 2.3% in February, the CPI was 4%.) The third and most disconcerting possibility is that the CPI systemically understates inflation, in which case we're paying for it taxwise, and the government is underpaying Social Security recipients. In the words of many a UFO spotter, it isn't paranoia if they're really out to get you.

Fortune

[WCGreen]

1. They should have, instead of Core and a regular inflation index,

an index based on income strata...

It would be easy to say break out the rate for those with incomes less than 35,000...

An index such as that would be heavy on the basic needs of life because that is about all you can satisfy with 35 grand...

That index would be a lot higher and have more impact and relativity on the lives of those living with income restraints vs. those who ponder the increase of food which effects barely 5% of a families income when you hit the upper income strata...

[spooky3]

6. good idea

[Xipe Totec]

2. I've been having this argument with a friend for 8 years

I don't give a flip what the official inflation rate is. If everything I buy costs more, and my salary isn't going up, I'm screwed.

We're all screwed.

[snot]

3. My grocery bills have doubled in the last three years --

That's over 33%. Other necessities: gas, medical care -- can't say for sure, but it ain't under 10%. the only other serious necessity is rent. I can't generalize about that, since it depends a lot where you live . . .

[unblock]

4. the way to address food & energy volatility is not the simply ignore them

you handle volatility by smoothing, e.g., use a several-month moving average. that way the large and persistent inflation in food and energy isn't ignored, it just has to prove itself consistent, which at this stage it most clearly is.

there are other defects with the official inflation numbers, most notably that they use the goods substitution that people use as a way to COPE with inflation as a way to UNDERSTATE inflation. for instance, consider what happens if the price of butter and margarine both go up. people will tend to cope by switching from butter to margarine to save money. in fact, they might spend the same total on oily yellow sticks, thereby showing NO inflation, when obviously there was.

another way is that they give too much credit to improvement in products, which they consider deflationary when in practice they're not. for instance, computers nominally appear to be massively deflationary because the horsepower in today's $3,000 computer would have cost $300,000 20 years ago. have prices dropped 99% since then? hardly. in practice, the cpu being 100 times faster is not a 100 times improvement. for most people, it's merely a slight upgrade for a few most convenient but not essential features. the fact that a nicer home computer has consistently cost about $3,000 since the first ibm pc came out really points out that there has not been any real deflation from a practical point of view. put another way, virtually no one is saving money because they're buying less computer than they did 20 years ago.

[mrdmk]

5. Here is the real kicker, anything that is subject to short-term volatility

is not included in the CPI. That means is if your rent suddenly goes up because a lot of people are losing their houses, or vet bills are also going up because the price of getting supplies to the place of business is more expensive. Those two increases will not be included in the CPI. This is because the CPI cannot reflect anything that has a spike attached to it.

Now all of those cheap imports from China getting more expensive because of the sudden drop of the dollar, well that is a different story to us, not the CPI.