Darin, yes, equities and real estate. there is also a sort of stealth inflation in goods and service, as the prices of goods would normally be expected to actually DROP when productivity increases. however, every time such a happy state of affairs is on the horizon, the CB's react by inflating it away, because they fear deflation (for no good reason as it were).
how does BLS obscure the real inflation rate? simply by means of a highly dubious methodology. the simpler part of it is geometric weighting, i.e., things that rise in price are given a lesser weight than things that do not, on the theory that consumers will migrate from high priced to lower priced items. unfortunately perfect substitution as assumed by the BLS doesn't exist in the real world. while you may migrate to chicken if beef gets too dear, you won't feed your car turnips when gas prices rise.
the second, and more insidious and non-objective part of the methodology is hedonic pricing (which btw. is also used to INFLATE GDP and productivity statistics). hedonic pricing presumes to capture changes in the quality of goods. e.g. if your PC has a 500mhz. CPU instead of a 250 mhz. CPU and it costs now 10% more, the price will actually be deemed to have fallen, as the computer is now 'twice as good' as its predecessor.
there are numerous problems with this methodology, and the computer hardware sector is in fact used for the biggest distortions in calculating productivity, inflation and GDP. presumably a 500 mhz. CPU makes you twice as productive too - common sense will tell you that this is bunk.
to show you the degree of the distortion, PC prices have fallen by 24% over the last year according to BLS. in '98, growth of approximately $8,5 bn. in computer hardware investments were restated as a hedonically weighted $145 bn. for purposes of calculating GDP growth. the $8,5bn. were simply multiplied with processor speeds and memory capacity.
this methodology has in fact made it impossible to make any informed judgment on the true state of affairs. btw, the BLS also plays around with the shelter component of the CPI, without going into too much detail, without it, CPI would have grown much faster last year. everybody knows from anecdotal evidence that both house prices and rents are on a tear in many regions - not according to BLS.
also, a tripling of energy prices in the real world has registered as a slightly over 20% advance with BLS - since we can actually follow these prices in the futures markets, their BS is nowhere as visible as in this sector. achieved via another device - the 'seasonal adjustment'. |
