hey, the quality of the NG will be much greater...i'm sure a way will be found to transform the 100% price rise into a decline for the govt. stats...
in Brazil virtually all of the entrepreneurial energy was wasted on dealing with inflation for years.
they should have geometrically weighted it away....would have saved them a lot of grief...
July 28, 2000
BEING STREET SMART
by Sy Harding
THERE'S INFLATION - THEN THERE ARE INFLATION STATISTICS.
The Federal Reserve began raising interest rates in June of last year,
concerned that the booming economy and tight labor markets would have
inflation rising dangerously if it did not get the economy slowed down. The
latest economic numbers are mixed but seem to indicate they may be having
some success - in slowing the economy. But, is inflation rearing its ugly
mug anyway?
The Bureau of Labor Statistics, keeper of the numbers, says not unduly so.
After bottoming just above 1% last year the overall Consumer Price Index,
the Bureau's measurement of inflation at the consumer level, has risen to a
3.5% annualized rate, its highest level since 1991. But the so-called 'core
rate' remains quite benign, hardly budging from last year's level. So there
is nothing to worry about.
And what is the core rate? It is the cost of living when the cost of food
and energy is removed from the numbers.
That might explain why consumers themselves seem to get quite a different
read on the situation. After all, most of us seem to need food several times
a day, cannot get to work without filling the car's tank fairly often, and
fear the parakeet would perish if we did't heat our homes. So obviously it's
the overall CPI, not the core rate, that measures our actual cost of living.
What's the point of an inflation indicator that does not count the cost of
food and energy? They tell us they take the cost of food and energy out to
arrive at the core rate of inflation, not because food and energy are not
core to our cost of survival, but because food and energy costs jump around
month-to-month, so might be misleading. They are so good to us.
However, the Bureau's own charts of inflation with food and energy costs
left in, show a sharply rising, year-long upside trend, not monthly
gyrations that go nowhere. Oil prices have risen steadily for a year and a
half, more than doubling in the process. Any homemaker is well aware of the
steadily rising cost of putting food on the table.
Even the way they calculate the inflation numbers raises questions. To
calculate the Consumer Price Index, each month the Bureau of Labor
Statistics (BSL) compares the cost of a list of consumer items to the cost
of that same list a month ago, and a year ago. Sounds foolproof. However,
the prices are then adjusted by a process called hedonic regression, to
reflect any changes the statisticians believe may have taken place in the
quality of the items. In other words, you may be forced to pay more for an
item this year, but if they determine that the quality of what your buying
has improved, they figure you're getting more for your money, so may not
count the price increase.
For instance, when the cost of automobiles increased because the
manufacturers had to include catalytic converters, the BSL actually factored
in lower prices because you were getting an extra benefit for your money -
cleaner air. If you've seen the cost of 'sneakers' sky-rocket as they became
'running shoes', the BSL statisticians may say you're now getting sewed-on
patches of leather, a logo, maybe even flashing lights on the heals. More
for your money, not rising prices. Had to pay more for your new TV because
the manufacturer added surround-sound and three more speakers, which you
didn't want because you run it through your surround-sound stereo system?
Too bad. You may have been forced to pay more than you would have last year,
but don't count that higher price as inflation. You got more TV for your
money.
But if I cannot buy a car without a catalytic converter, or sneakers without
leather patterns and a logo, a particular brand of TV without
surround-sound, how can it be said that I'm not seeing inflation in my
automobile, sneaker, and TV costs?
What's the purpose of monkeying with the process so we don't get a true
picture of inflation? They don't say. But since Social Security payments are
indexed to inflation the government sure saves tons of money they'd be
paying out in increased payments to senior citizens.
It also significantly benefits the economy if it prevents the record level
of foreign money in U.S. investments from being spooked out of the U.S.
dollar, stocks and bonds by inflation fears.
But let's not us be fooled. It's not our imaginations that the long
beneficial down-trend in inflation, from double-digit levels in the 1980s to
last year's record low 1.5%, has significantly reversed to the upside, even
though the turnaround is being hidden by the way inflation is now measured.
Sy Harding is president of Asset Management Research Corp., in Meredith, NH,
publisher of The Street Smart Report and The Street Smart Report Online at
www.streetsmartreport.com |
