OT: Inflation

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The Official Inflation Numbers Are Wrong! Ryan Troup Monday January 24, 2000

Much has been said about how we are living in a low inflation, yet fast expanding economy. But does anyone really know what the real inflation rate is? Our government admits (albeit in fine print) that it has no clue. But it continues to spew out low inflation statistics anyway. We use these statistics to make spending decisions that we might not otherwise make. The Bureau of Labor Statistics states, "the CPI (consumer price index) cannot be used as a measure of total change in living costs, because changes in these costs are affected by factors (such as social and environmental changes and changes in income taxes) that are beyond the definitional scope of the CPI and so are excluded.

In a recent column, John Crudele points out that many inflationary forces, such as real estate values, are not even included in our governments official calculations. The column goes on to point out that our government uses a process called "geometric weighting which constantly adjusts the influence certain items have on the overall index. For example, anything that is going up in price gets a lower weighting in the index over time. This has the effect of minimizing that inflationary items influence on the index.

You have to ask yourself why the government understates inflation this way. One immediate reason that comes to mind is the Treasury's increasing reliance on inflation indexed bonds and other debt securities to fund our government's operations. They want to keep their borrowing costs as low as possible in order to show a balanced budget!

If you would like to conduct your own informal calculation based on your own experience, take a look at the following to determine inflations impact on your life:

Major groups and examples of categories used in calculating the CPI:

- FOOD AND BEVERAGES (breakfast cereal, milk, coffee, chicken, wine, full service meals and snacks) - HOUSING (rent of primary residence, owners' equivalent rent, fuel oil, bedroom furniture) - APPAREL (men's shirts and sweaters, women's dresses, jewelry) - TRANSPORTATION (new vehicles, airline fares, gasoline, motor vehicle insurance) - MEDICAL CARE (prescription drugs and medical supplies, physicians' services, eyeglasses and eye care, hospital services) - RECREATION (televisions, cable television, pets and pet products, sports equipment, admissions) - EDUCATION AND COMMUNICATION (college tuition, postage, telephone services, com- puter software and accessories) - OTHER GOODS AND SERVICES (tobacco and smoking products, haircuts and other personal services, funeral expenses) The CPI does not include investment items, such as stocks, bonds, real estate, and life insurance. The Bureau of Labor Statistics says that these items relate to savings and not to day-to-day consumption expenses.

They are saying that while you may have bought your house for $150,000 a couple of years ago and you sold it today for $200,000, that has no inflationary impact on the economy! Add to this the fact that Alan Greenspan has stated that the stock market may be responsible for as much as 25% of the increase in Gross Domestic Product last year.

This mis-information is leading investors to have false confidence in higher and higher stock market prices. However, the bond market is no longer being fooled. Bond yields are now approaching multi-year highs of close to 7%. Its only a matter of time before the stock market comes to the same conclusion.

-- James (brkthru@cableone.net), January 25, 2000


that cause fed board is just like the fed gov in its master at spin, the question is when does that spin, spin out of countrol. pun intended

-- I Know (greenspan@greenspun.NOT), January 25, 2000.

James, this false confidence in the economy causes my telemarketing kid brother to have more on charge cards than I have in student loans, the world HAS gone mad. To top it off, VA braga of low unemployment (near or under 4% last I heard) yet a PhD that works for the Virginia Employment Commission told me the stats are doctored by legislator's criteria, and in reality one in 3 Virginians are outta work each year. Funny, that sounds like 33% unemployment, huh? Not to worry, they'll just all lay around the house driving their kids crazy so they can live off the kid's disability benefits, heh.

-- Hokie (Hokie_@hotmail.com), January 25, 2000.

should read: brags, not braga

-- Hokie (Hokie_@hotmail.com), January 25, 2000.


-- James (brkthru@cableone.net), January 25, 2000.

I THINK that list is old. i UNDERTOOD that energy and food had been removed the last time they tinkered with it to show the "New True" inflation rate of about 1/3 of what the calc had shown before.


-- Chuck, a night driver (rienzoo@en.com), January 25, 2000.

Argh -

there is no way to produce a price index that is truly accurate and reflects everyone's experience. The Dept of Labor does a reasonable job. But you should not try to read more into it than is there. It's a weighted average.

I remember from my days as an economics student (when Nixon was president) that Milton Freedman and the conservative Chicago economists argued that the CPI overstated the rate of inflation because it did not take quality improvements and product substitution into effect. There political point of view was obvious - a built in cost of living increase interfered with the market, and tended to give more money to workers, retirees, and people who voted Democratic.

Now that the conservative-libertarian economists are influential, the Dept of Labor is giving their theories more weight. So if you think there is more inflation than is being reported, don't blame the liberals.

-- kermit (colourmegreen@hotmail.com), January 25, 2000.

Once the Feds started issuing inflation indexed savings bonds, why did anyone think that inflation numbers would be accurately calculated and reported?

-- Chris Tisone (c_tisone@hotmail.com), January 25, 2000.

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