Comments (28)

• TGGP

  I posted this in another thread, but no one responded. Here is Does the CPI Overstate Inflation?

  Published: September 1, 2006 8:51 AM

• Berenson

  ...well, OK -- so the government's stated inflation rate is incorrect.

  What then is the correct & accurate inflation rate now {???}

  Published: September 1, 2006 9:03 AM

• Ulrich Hobelmann

  Hard to say, Berenson. You might want to check the prices for your own basket of goods.

  One thing we know (or used to know, as the Fed will no longer report those numbers) is the amount of M3 money expansion. It's hard to say where that money ends up, i.e. what prices it increases due to over-supply of money. Maybe goods, maybe real-estate prices, maybe the stock market.

  But with money inflation at such high rates, it's sure to influence our lives sooner or later. Best to take protective measures (don't keep all savings in US$, for instance) and keep watching those prices...

  Published: September 1, 2006 9:09 AM

• Roger M

  Productivity increases cause a real problem with determining CPI because it can mask the problem. For example, electronics and computer prices continue to fall at fantastic rates. We saw this problem with oil and metals throughout the 90's as the Fed flooded the world with excess dollars, but increased productivity kept prices of both at historically low price levels. Of course, low interest rates (a sign of easy money) can encourage productivity increases because manufacturing and mining/oil is so capital intensive and those industries are where major productivity increase happen.

  You might think of price increases as money - demand for money - productivity increases. The last two are very difficult to estimate.

  Published: September 1, 2006 9:26 AM

• Berenson

  []
  []

  quote:

  "Hard to say, Berenson.." & "...very difficult to estimate"

  _______________

  Hmmm... if accurately determining the inflation rate is indeed so hard to do, maybe we shouldn't so quickly condemn the government's efforts to estimate it.

  Further, if we can't determine the real inflation rate -- how can we objectively know that the government's numbers are 'wrong' ??

  Can we at least compute the margin-of-error in government inflation pronouncements ?

  Can the mighty economics profession & professors only calculate inflation rates after-the-fact (historically) ??

  ==================

  Published: September 1, 2006 9:50 AM

• Matthew

  Berenson,

  If "we" can't determine the real inflation rate, then how is the government supposed to? The government is nothing more than a bunch of bureaucrats with the same knowledge you and I have. The point isn't that Austrian insight will allow you to accurately compute an inflation rate, the point is that this is an impossible task!

  Any price index calculation is nothing more than a simple accounting trick. Conceivably, inflation measures the puchasing power (or loss thereof) of a monetary unit. As with all other commodities, the price of a dollar is determined by supply and demand conditions. When the Fed pumps money into the economy they are doing nothing more than increasing the supply of dollars and lowering the price of the dollar. Which is precisely what inflation is.

  Published: September 1, 2006 10:15 AM

• Francisco Torres

  Hmmm... if accurately determining the inflation rate is indeed so hard to do, maybe we shouldn't so quickly condemn the government's efforts to estimate it.

  The "condemnation" of the government's efforts stem from the fact that the basic concept of a price index is suspect - you cannot determine an accurate price index because it is impossible to account for all goods and services - one would have to be omniscient to do so. Choosing a "basket" of goods would immediately generate a bias problem, which takes away any vestige of objectivity from the metric - each basket would be a function of the analyst's preference or prejudice. In the case of the government, such basket (as indicated in the article) would be biased in order to obtain a political advantage.

  Further, if we can't determine the real inflation rate -- how can we objectively know that the government's numbers are 'wrong' ??

  We can know this because of the concepts behind the CPI are suspect. If your basic premise is invalid, then it does not matter if your numbers seem accurate - you are still reporting incorrect information.

  Published: September 1, 2006 11:28 AM

• quasibill

  TGGP,

  The problem with that article is readily explained by reference to any of a number of articles on this site. It's a problem with definitions. Short version - the author attempts to make inflation into a two variable measurement. As he recognizes, this makes it essentially a guess. Worse, his desire to use it to measure productivity drops him into the governments trap - as long as you accept that productivity is included in inflation, the state bank gets to steal your savings.

  Money is always and everywhere a monetary phenomenon. Someone much smarter than me said that, and if you follow that to the articles on this site, you'll see how mistaken that article is.

  Published: September 1, 2006 11:31 AM

• Curt Howland

  Since "inflation" is an increase in the currency supply, and rising prices a side-effect of this dilution of the currency, trying to measure inflation by looking at prices is like trying to measure the moon by examining individual tidal pools.
  

  Published: September 1, 2006 11:48 AM

• billwald

  "Since "inflation" is an increase in the currency supply" it is meaningless as a stand alone number. The only that should matter to the wage worker is how many hours he must work to obtain his consumables.

  Under the existing electronic economic system the only use of "money" is as a conversion factor between labor and consumption. One wouldn't need a conversion factor if people were paid in "work hours" and goods were priced in "work hours."

  I propose that there is a universal labor standard - the amount of work produced by one healthy adult using a shovel. I propose that labor be compensated in multiples and fractions of "univerasl work hour," (uwh) and that goods and services be billed in multiples and fractions of uwh. This would "eliminate the middle man" and would permit a person to easily compute his personal inflation rate.

  Published: September 1, 2006 12:00 PM

• mark

  It seems to me that the only question one has to ascertain with whether the government understates or overstates inflation is what would benefit the government more.

  Understating the inflation rate would result in less pay outs in real terms with respect to government programs linked to inflation ,particularly inflation adjusted social security. While at the same time resulting in so called “ real� bracket creep with respect to income tax and phoney capital gains.

  While overstating inflation would result in larger pay outs and reduced income via taxation due to indexation.

  What seems more likely over the long term?
  

  Published: September 1, 2006 12:22 PM

• M E Hoffer

  "...since the government's expansionary monetary policy creates the inflation..."

  "Federal Reserve policies pump up the money supply creating the inflation."

  Which is it?

  While I agree with the aim of this article, I wonder why the conflation in regard to the cause of inflation.

  Published: September 1, 2006 2:02 PM

• M E Hoffer

  "...since the government's expansionary monetary policy creates the inflation..."

  "Federal Reserve policies pump up the money supply creating the inflation."

  Which is it?

  While I agree with the aim of this article, I wonder why the conflation in regard to the cause of inflation.

  Published: September 1, 2006 2:03 PM

• Curt Howland

  I'm sorry, M.E., but I don't understand your question. "Pump up the money supply" and "expansionary monetary policy" are, to me, the same thing.
  

  So, there is no "which".

  Published: September 1, 2006 2:46 PM

• M E Hoffer

  CH,

  "the government's" or "Federal Reserve"

  Sorry if I wasn't clear.

  
  P.S.
  Obviously, the above, was an accidental 2X post.

  Published: September 1, 2006 3:34 PM

• Bill jones

  
  For a good overview of the problem of Government statistics I like John Williams' Site
  Shadow Government Statistics Here:

  http://www.shadowstats.com/cgi-bin/sgs

  Published: September 1, 2006 4:15 PM

• F L Light

  Four couplets on statistics

  The numbers dazzling in your brain
  Are not from sunlight nor to sight pertain.

  
  Statistic nebulae yet stand
  In obfuscation or expand.

  Leaders with numerical rhetoric
  Come to degenerate arithmetic.

  
  Statistic monuments the state maintains
  On soft foundations where the debt remains.
  

  Published: September 1, 2006 4:23 PM

• Nick Bradley

  Although the article mentioned that the goods picked in the co-called backet of goods is completely arbitrary, the author did not mention that the backet of goods changes over time. So the gov't is arbitrarily picking the goods, then chaning them over time as well.
  

  
  The only sure-fire way to track inflation is to look at the growth in the money supply (which is difficult as well) then subract gains in output (which is also difficult). So if the money supply grows 10% in 2006, and output grows, 5%, inflation is 5%. Pretty simple.
  

  
  On another point, the gov't DOES NOT track inflation in assets, which has been rampant in the past 10 years. For some reason (if anybody can explain it, please let me know), the extra cash is being pushed into assets instead of goods and services. One explaination for the housing market is this:
  

  
  1. The the short-lived budget surplus, which itself was a result of windfall tax revenues from the previous bubble, caused the Gov't to stop selling treasury bonds.
  

  
  2. As a result investors, especially international investors, who would normally be buying US T-bills, put their money into the next-"safe" investment, government-subsidized fannie mae funds.
  

  
  3. All the money pouring into fannie mae propped up the bottom of the market and a boom started.
  

  
  Thoughts?

  Published: September 1, 2006 4:33 PM

• Vladellis

  First, let me say I agree and completely accept that there is no right answer to the question what is inflation rate.

  But you do a disservice to your reader to omit the notions of 1) hedonic, or quality-adjusted, prices and 2) statistical sampling:

  2) is easier to grasp - you don't need to be omniscient to estimate accurately. Admittedly, there is a circularity to this - the true "population" of prices can never be measured so the number is just an estimate. 1) Recognises that there is

  1) Quality adjusted indices attempt to make sense of the obvious changes in quality AND price over time. A video player comparable with a DVD player? How would you track that? Its recordable entertainment but watch the price change over time - explain that one without reference to quality! Some tricky choices, leading to bias regardless of choice.

  It isn't incompetence or a conspiracy, its limited resources (time, money and labour) and a complex topic.

  Published: September 1, 2006 6:20 PM

• Berenson

  []
  []

  ...the key point of Mr Brandly's essay above is that the government is 'under-reporting' the U.S. inflation rate for various reasons.

  To rightly state that the inflation rate is not only misreported -- but 'under-reported' ... requires some knowledge of the 'true' inflation rate.

  But comments by others here stress that the inflation rate is difficult, if not impossible to ascertain. No one could offer even a general estimate of the current U.S. inflation rate.

  Quite confusing to us non-economists.

  Of what value is the concept of "inflation" if it cannot be sensed or measured in any practical form ??

  How does one reasonably organize his business & economic affairs if the inflation (...or deflation) rate is beyond practical perception ?

  It seems somewhat like the physical concept of "Gravity" -- a great invisible force that cannot be directly perceived/measured. But at least gravity can be quite accurately measured indirectly... by its effects.

  However, inflation seems immune to any confident measurement (??)

  =================

  Published: September 1, 2006 9:21 PM

• Mark Anderson

  Let's not forget the other big reason why trying to use prices to measure inflation is fallacious. With government has big as it is, the price system is several disturbed. Government intervention in the marketplace can cause some prices to settle above equilibrium, or below equilibrium.

  And excellent example to illustrate this is looking at roads. Pursuant to the CPI's methodology, the price of roads has never gone up. In the CPI sense, roads are "free." But they aren't, really. Roads are taxpayer subsidized. Taxpayer spending displaces consumer spending. The same situation arises with measuring prices of other goods. Are stores that receive government subsidies, such as Wal-Mart, included in CPI data? If so, we aren't being told the truth about the price we are really paying, as the cost of government is excluded.

  Instead, the cost of government is placed into the GDP. I noticed the author of this latest commentary said that there is "some" inflation in the GDP. I would suggest that ALL GDP growth is nominal. No GDP growth is "real." If the Should economic growth need to be discounted for inflation? If the GDP actually measures economic growth, then why would some rises in the GDP be good, but other rises in the GDP bad? If the GDP needs to be discounted for inflation, then it must measure something OTHER than economic growth.

  Government spending should not only not be in the GDP, it should be, if anywhere, in the CPI.

  Published: September 2, 2006 12:35 AM

• adi

  Economists who say that the inflation is always a monetary phenomena must first define what money is; 1) What M-aggregates should be part of the money supply 2) How money is channeled from the money supply to asset and commodity prices.

  Situation in the 100% gold standard would be much simpler since physical gold and its 100% packed money subsitutes (notes) would be money. For example if a citizen of South Africa could find new gold deposits and dig them up he would necesserily increase the money supply when using this new money.

  Would it be correct to say that you only know the direction of the inflation not its magnitude?

  Published: September 2, 2006 1:35 AM

• D Saul Weiner

  Minimizing the reported rate of inflation has additional indirect benefits to government, related to the perceptions of workers/employers.

  1) It tricks owners of stocks, houses, and so forth, into thinking that they are becoming wealthier than they really are, which will make them more tolerant of all sorts of government shenanigans (than they would otherwise be).

  2) It makes workers more tolerant of measly wage increases than they would otherwise be, since they think that their salaries are "keeping up with inflation" (or nearly so).

  3) It enables employers who can rationalize the measly wage increases cited in 2) to increase their profits. Such employers must indeed be grateful to the government and anxious to give it their support. In this sense, the minimization of the CPI can serve as an indirect government subsidy.

  Published: September 2, 2006 8:39 AM

• RogerM

  Some of the confusion in the posts above comes from changing definitions. Technically, inflation has to do with money, not prices, but the popular media and many economists use "inflation" for both. So we have to distinquish between monetary inflation and price inflation.

  Any increase in the amount of money is monetary inflation. You can have monetary inflation under a gold standard, as Europe discovered in the 16th century.

  Monetary inflation may or may not lead to price inflation. It depends on ouput. If the money supply doesn't change, but output grows, prices will fall, or as mainstream economists say, deflation occurs. If money and output grow at the same rate, prices will remain unchanged. But if money grows faster than output, prices will rise.

  Determining money inflation is fairly straight forward: look at the money supply growth. In order to determine if money inflation will cause price inflation, subtract output (Gross Output, not GDP) growth and you have the excess monetary inflation. Since Austrian theory says that new money goes into financial assets first, we should look there for price changes caused by excess monetary inflation.

  Published: September 2, 2006 10:26 AM

• RogerM

  Nick:"All the money pouring into fannie mae propped up the bottom of the market and a boom started."

  I think you're probably right. The supply of savings from foreigners has been huge because most foreigners felt that no place but the US was safe for their money. The nature of property insecurity in most foreign countries causes investors to put most of their money in real estate at home, so naturally they would prefer real estate in the US.

  Published: September 2, 2006 10:30 AM

• Nick Bradley

  RogerM: "he nature of property insecurity in most foreign countries causes investors to put most of their money in real estate at home, so naturally they would prefer real estate in the US."
  

  
  I think that it's far bigger than that. The largest foreign investors in the US are foreign governments, most notably East Asian states. They like the full faith and backing of the most powerful nation on earth, and thus buy our debt. But when they cannot buy US-secured, US gov't debt, they buy US-secured, federally-backed private american debt.
  

  
  It's not real estate per se. Foreigners like our government-backed securities. When their #1 choice, T-bills, are no longer available, they will move on to the next option.

  Published: September 2, 2006 3:34 PM

• TGGP

  Here's a cafehayek post on foreign governments versus private foreigners investing in america. A poster there has some more graphs looking at the long term trend here.

  Published: September 3, 2006 11:01 AM

• DS

  I found an intriguing way to define inflation.

  Published: December 5, 2006 6:06 PM