CSM: If Inflation is So Low, Then Why am I So Broke?

from the Christian Science Monitor, via MSN:



Is inflation index out of touch?
The government's Consumer Price Index is up only 4% over the last year -- but for most Americans, the pinch feels much worse. Here's why.


By Christian Science Monitor

Between the gas pump and the grocery checkout, Americans have plenty of reasons to list inflation as Economic Enemy No. 1. But how bad is it, really?

The short answer: Bad enough, but don't judge the problem only by what it costs to fill a fuel tank.

It's not surprising that many people feel as if inflation is running hotter than the government's Consumer Price Index (CPI) suggests: just under 4% over the past year. Many Americans are paying more, especially if they commute long distances or are putting kids through college.

A perception factor is also at work.

The prices now rising fastest are the ones people see the most. Gas prices hit a record $3.78 a gallon on May 15, according to AAA, up 38 cents in the past month. Food prices in April notched the biggest monthly jump since 1990.

So while the prices of some important items bought less frequently -– cell-phone service, clothing, a house -- have fallen or remained flat, the view at the checkout counter is grim.

Another cause for worry: Wages are not keeping up with inflation.

"It's all bad," says Paul Trapani, referring to his living expenses. The Boston resident says all his costs seem to be rising by at least 5%, while pay raises don't match the increase.

"You actually get a pay cut," thanks to the inflation, Trapani says. "We just had Chinese food. I took out half the rice so I can put it into my gas tank."

Fuel prices hit some hard

Jokes aside, he has hit on a central problem for households across the nation. It's not that the government's inflation rate is understating the problem, many economists say. It's that inflation was higher in 2007 than in any year since 1990, and wages didn't keep up.

That may explain why 47% of adults in a recent CNN/Opinion Research poll cited inflation as the biggest economic concern. None of the other concerns, from mortgages to unemployment, scored even half that high.

"The CPI is a fine, reliable price index as far as it goes," says Jared Bernstein of the Economic Policy Institute in Washington. Yet "it absolutely doesn't reflect the true set of costs that everybody faces." ......(more)

The complete piece is at: http://articles.moneycentral.msn.com/SmartSpending/ConsumerActionGuide/IsInflationIndexOutofTouch.aspx

...if "it absolutely doesn't reflect the true set of costs that everybody faces"?

You know, they can cook these numbers and defend it as reasonable all they like...just as they did the evidence to invade Iraq. It isn't going to change reality. You don't need to believe in gravity to know you're going to die if you jump off the top of a 40-storey building.

Isn't it time we take those who insist they create reality to the edge of the roof?

In the summer of 2002, after I had written an article in Esquire that the White House didn't like about Bush's former communications director, Karen Hughes, I had a meeting with a senior adviser to Bush. He expressed the White House's displeasure, and then he told me something that at the time I didn't fully comprehend -- but which I now believe gets to the very heart of the Bush presidency.

The aide said that guys like me were "in what we call the reality-based community," which he defined as people who "believe that solutions emerge from your judicious study of discernible reality." I nodded and murmured something about enlightenment principles and empiricism. He cut me off. "That's not the way the world really works anymore," he continued. "We're an empire now, and when we act, we create our own reality. And while you're studying that reality -- judiciously, as you will -- we'll act again, creating other new realities, which you can study too, and that's how things will sort out. We're history's actors . . . and you, all of you, will be left to just study what we do." - Ron Suskind, NY Times, Oct 2004

the things we HAVE to buy aren't included in inflation figures. :(

Why it's practically magic!

was this a dubya admin trick or does it go back further than that?

they are taken out of CORE cpi, but not the overall cpi

the idea is that food and energy prices are normally so volatile that random movements in those sectors would obscure what's really going on with prices overall. so "core" cpi usually gives a more accurate picture.

the problem is that this is only the case when food and energy prices increase, on average over the course of several months or longer, the same amount as everything else. recently, though, food and energy prices have gone up a LOT more than most other things, so "core" cpi is chronically lower than overall cpi.

so, there's nothing inherently wrong with the statistics (well, not because of this, anyway). the problem is in the continued emphasis on "core" cpi in the media when the average of overall cpi over sevearal months would be a much better indicator of overall inflation.


as for the timing, as far as i know, they've always published both overall and "core" cpi.

I never understood that

Classically, economists would say it is find to ignore food and energy for core inflation because any sustained increase in the price of these commodities would eventually have to trickle into higher wage demands and product costs. i.e. increased food and energy prices would eventually have to impact core inflation.

With globalization, I think these effects are muted. The American worker has a hard time demanding higher wages to offset higher food prices, because his employer can always just shift labor to China where the workers don't bitch so much about fairness and equality.

I think every president since Nixon has seen changes to the CPI made to reduce stated inflation. The biggest changes were made in the mid-1990s.

Substitution and Hedonics are the two biggest ways the government tells CPI lies:

Hedonics: Say the average price of a computer was $800 in 1998, and say the average price is still $800 today. But computers are better now than they were ten years ago, you are getting more for your money, so there has actually been negative inflation in computers that can be used to average out positive inflation somewhere else.

Substitution: Say the price of steak goes to $100/lb, and the price of hamburger goes to $40/lb, and everybody switched to eating cat food to survive. In the old system, this increase in the price of steak and hamburger would be included in inflation. In the new system, since consumers have substituted cat food for steak and hamburger, steak and hamburger are taken out of the inflation calculations.

the hedonics thing makes some sense but is subject to abuse, as with computers. by every technical metric, we get massively more for our money today than however many years ago you care to look. computers are 10 times faster, store 10 times as much, etc., all for the same dollars.

the problem is, all that speed and memory doesn't translate into 10 times as much utility. it's still just a damn home computer and you only use it for word processing and playing games and surfing the net. another way of looking at it is that if you want to say there's been massive deflation in hardware due to hedonic advances there, then you ALSO have to say there's been massive INflation in software because of the increased bloat there. software expands to consume all available resources. so that 10 times faster computer with 10 times more memory can just barely keep up with the latest monstrosity from microswift. but of course, they conveniently forget about this when they look at software costs. in fact, they claim there's deflation there, too, because there are so many more features. as if an either cup holder in your internet browser is really of such great utility.

the substitution thing is almost comical. somehow a coping mechanism to deal with inflation magically reduces inflation?
they've now got it rigged so that you can only have inflation is you SPEND more. and what if you don't have more money to spend? why, then, you've got deflation, even if the price of EVERYTHING has gone up! if you assume that people always spend a fixed percentage of their income, then in fact cpi is measuring changes in INCOME, not prices!