What is the True Level of U.S. Inflation? Is it as High as 8%?
Wednesday March 12, 2008
I have been hearing from a number of people that inflation 'feels' higher than the reported statistics. While I do not believe there is a "true" value of inflation (because inflation is somewhat of an arbitrary construct), I do have the same gut feeling. Perhaps it is because the inflation figures often reported are of "core" inflation, that is inflation for people who neither eat nor heat, and this inflation is running lower than economy-wide inflation.
Anyhow, I stumbled upon Is US inflation at 8%? - it makes some interesting points, including the following:
Anyhow, I stumbled upon Is US inflation at 8%? - it makes some interesting points, including the following:
The first thing to notice is that inflation is not an observable real world variable, such as the number of widgets produced by a factory. Inflation is a statistic - technically a mapping from a probability space of random events into the positive real numbers. To arrive at a statistic, i.e. a number, we have to take multiple decisions, such as which sample of goods to include in our basket, since we cannot measure the universe of prices. We also have to choose a method how to weigh the results mathematically. You might remember the Paasche or Laspeyres price indices taught in Economics 101. In particular, we have to choose what to put into the basket, and what not.
...The RPI, the retail price index, is still used today by ordinary people as their favourite measure of inflation (and also by wage negotiators). It has been significantly higher than the CPI, the index targeted by the Bank of England.
The reason for this discrepancy is, of course, related to what we put into the basket and to the adjustments we choose to make. We make lots of adjustments. If the price of a family computer at your local hardware costs €1000 today, and €1000 in one year's time, we calculate this as a fall in prices, because the quality of the computer has presumably increased. I have problems with this now ubiquitous concept of hedonistic pricing because we are double-counting. The improvement in quality is the result of a rise productivity - which is a real variable. So the improvement in quality raises nominal growth in the numerator, and it lowers the price in the denominator, in other words, we double-count the effect. It may well be that we have been consistently underestimating the rate of inflation, and overestimating the rate of real productivity growth. Since the US uses the hedonic pricing more consistently than the Europeans (I think, please correct me if I am wrong on this one), the problem would be worse in the US than in Europe.
Comments
I assume you’ve looked at Shadowstats?
How is the inflation an “arbitrary” construct? I assume there is a real value of inflation, similar to the way that there is a true population mean or standard deviation. It measures the amount that prices have increased YOY (or whatever).
Inflation is arbitrary because the total basket of goods produced by a country are never identical from year to year. Changes in quality and relative quantity mean that there are confounding variables within the calculation of “real” GDP. For instance, technological improvements and new ideas add new and better goods to the marketplace. These goods are an integral part of overall prices, but do not have a well-defined price in previous years’ currency, so they can’t be used in price indices.
MY PENSION INCREASE AT RATE OF INFLATION ANNUALY
And the increase in the capacity of the CPU, memory, and hard drives are necessary because the new operating system won’t run under the old hardware setups. This brings one to the point of how does one measure technical obsolescence in the cost of goods. You’re paying for a product which wears out in faster time than in the past. Shouldn’t faster product depreciation be added to the cost…
GOVERNMENT CONTROL OF INFLATION IS DEFENSIVE
FINANCIAL DEVELOPMENT PROGRESS INDEPENDANTLY OF INFLATION
It ’s true that US economy is in real bad shape right now
and obviously, it is going to get very, very bad and it may get
worse. Interest rates are going up regardless. That’s what happens
when you have inflation. So, interest rates are not the issue. Gold
went up along with interest rates during the 70s. Now, whether we have
inflation or deflation, I truly don’t know. However, it’s safe to
assume that if we do get deflation, that it’s not going to be some
minor thing. As far as your money goes, the kind of inflation we’re
experiencing can be a real killer. It drives up interest rates. It
destroy purchasing power. It can destroy your nest egg. It can affect
wages, housing, etc.