i agree with you that tax benefit is overblown. in any case, i have read that the 2004 cut is skewed toward savings-prone higher-income groups compared to the 2003 cuts.
the consumer doesn't eat and use fuel (not correct as at least 18% of spending is for these items
obviously they eat and use fuel and these are real inflationary expenses in and of themselves. but there are several reasons to consider a core CPI, none of which relies on the idea of foodless, energyless consumers:
1. the volatility in these prices in both directions is much greater than the rest of the prices in the series. relying on short-term food and energy price trends, one would be led to believe that the world is highly inflationary one week and deflationary the next. the core indices provide clearer trends.
2. food and energy price trends, if persistent, should eventually be reflected in overall prices. thus there will be a delayed impact on the core indices.
3. because food and energy are necessities, rises in their prices are a consumption tax which reduces demand in nondiscretionary areas. secular food/energy price increases, in an environment where the broader market lacks pricing power, are deflationary.
to take an extreme example, if oil goes to $100 (a price it has already achieved in constant dollars, during the oil shocks of the 1970s), demand for transportation (55% of oil consumption) will be reduced. this reduces the need for vehicles and all their material inputs, which is deflationary on extracted commodities.
at the same time, industrial agriculture-based food will become more expensive due to higher-cost fossil-fuel inputs (and higher NG making fertilizer more expensive). eventually, there is a price for petroleum at which the entire industrial agribusiness is no longer sustainable. in that event, communities must fall back to localized production.
this reduces food availability, and will result in loss of life. as life is lost, the number of people per remaining unit of infrastructure is reduced, which is deflationary. also, the value of capital stock is reduced, which is deflationary. the need to produce more capital stock declines due to the decline in demand (due to the decline in population due to lack of food).
in sum, the end of civilization as we know it is a deflationary event, which is actually forecast by sustained food/energy price increases. |
