Measuring Inflation

By: William Cate

The U.S. Department of Labor reports the Consumer Price Index(CPI). The Government wants you to believe that the CPI is the U.S.inflation rate. It isn't. Like many Government and industry statisticalindexes, it is intentionally misleading. The purpose of the CPI is tounder report the U.S. inflation rate. The CPI rate is used to adjustSocial Security payments and the real inflation rate would be very costlyto the Government. Consumers relying on the CPI mistakenly have a morefavorable view of the country's economic future and buy more goods andservices, thus creating more jobs and helping ensure the economic illusionwill continue longer.

The Government's primary statistical method for under reportingthe U.S. inflation rate is to carefully select the components thatmake up the CPI. The Government chooses items that aren'tresponding to inflation. An example would be that single familyresidents were used as the housing component until house pricesstarted to move upward rapidly over a decade ago. Then, theGovernment switched to the cost of a single-family rental unit,which wasn't moving up quickly. The steady rental rates are inpart due to local government rent ceiling ordinances.

Until last year, gasoline prices at the pump were well below theannual CPI rate and were used as the energy component. The reasonthat the gasoline price was low was that our friends in SaudiArabia were willing to sell oil to us without adjusting the priceto the real inflation of the U.S. Dollar.

It's easy to find items whose price hasn't adjusted by theinflation rate. Phone costs have declined in the past decade, duetocompetition and PC prices remain constant, etc. The Government'ssecondary method is to have a statistical formula with a strongdownward bias as the result.

The Rule of Thumb in the American business and financialcommunity is to take the CPI and double it to get an approximate realinflation rate.

Fiscal conservatives argue it should be tripled.

Someone at the Federal Reserve in Minneapolis developed acalculator based upon the CPI.[http://woodrow.mpls.frb.fed.us/research/data/us/calc/] It allows youto determine the factor needed to adjust prices for any year,starting in 1913. If you want to determine the CPI adjusted price foran item in 1913 with the same item in 2005, you'll find that youshould factor the 1913 price by 19.8. As a byproduct of where I dinedduring my college years, I know that a steak dinner in a middle classSt. Louis, Missouri restaurant was $0.25 in 1913. The restaurant hadits original menu on the wall. Based upon the CPI that steak dinnershould cost $4.93 today. I'll bet you can't get a decent steakdinner in St. Louis for less than $10.00 now. I know that I can't getone for less than $20.00 in the San Francisco Bay Area.

You can apply the Fed's calculator to the Government. In 1952, youcould mail a postcard for one cent. If the CPI were accurate it wouldnow costs you about seven and a half cents to mail a penny postcard.On the other hand, you can confirm that oil prices have stayed wellbelow the inflation threshold. In 1957, regular gasoline at the pumpin the San Francisco Bay Area was $0.34/gal. Today, it should be$2.36. It's $2.69 today, but a year ago, it was $1.79/gallon.

If you are in business, take the past price of your twenty mostexpensive overhead items. Note their cost the year that you startedyour business. Using the Federal Reserve calculator, determine whatthey should cost you in 2005. Calculate the percentage differencebetween your current actual costs and the Federal Reserve's calculatorfactored price. Average the percentage difference and you have apercentage adjustment for your business that should be applied to theCPI to get your business's inflation rate.

For your family, take the past price of the twenty most expensivecosts you incur as a family. This usually includes housing, food, funeral,college education for your children, etc. Determine their cost in theyear that you were married. Using the Federal Reserve calculator,determine what they should cost you in 2005. Calculate the percentagedifference between their actual costs today and the Federal Reserve'scalculator factored costs. Average the percentage difference and you havea percentage adjustment for your family that should be applied to the CPIto get your family's inflation rate.

If you still believe the CPI is more or less an accurate index ofAmerican inflation, go to your local library. Borrow some old catalogsfrom 1913 or later. A useful one is the 1916 Sears catalog. Using it withthe Fed's calculator, you can prove to yourself that not everything theGovernment says is true --- or even close to the truth.

I doubt that the folks in Minneapolis wanted to supply proof thatthe Government is lying about the CPI. If this article is wellpublished on the Net, I wonder how long the Fed's calculator will be available to the public?

Money Management
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