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Yesterday’s Union-Tribune featured an excellent article on price inflation. I highly recommend that folks read the piece for an introduction to the idea that the federal government’s primary inflation metric, the Consumer Price Index, has been understating inflation for years.
The nature of the incredibly ill-understood beast called inflation is a topic that’s near and dear to me. I have steered clear of it here at Nerd’s Eye View because it is not a local topic as such; however, a homegrown article in the big local daily gives me an excuse to talk about it a bit.
The Consumer Price Index, know for short as the CPI, is put together by the Bureau of Labor Statistics. As you might guess, it is intended to track the changing cost of goods and services purchased by a typical American consumer.
There are two broad problems with the CPI. The first is that it isn’t particularly accurate in its measurement of inflation in consumer goods and services. The U-T article does a good job of detailing why that is, so I won’t rehash it here.
The second problem is that inflation is not necessarily confined to consumer items at all. Inflation can show up in consumer goods or services, to be sure, but it can also show up in the prices of houses, industrial materials, and even financial assets. If inflation represents a loss in our currency’s purchasing power, then it stands to reason that inflation can take place in any item that can be bought with that currency. Those who use the CPI or similar consumer price metrics as their only barometer of inflation — a group that includes our government and the Federal Reserve — ignore this reality.
To me, that’s the bigger of the two problems. Regardless of the CPI’s effectiveness as a measure of consumer price inflation, the policymakers and monetary authorities who rely solely on the CPI are oblivious to many of the inflationary effects of their policies. To cite one notable example, the federal government touted a core CPI rate of just over 1 percent even as home prices were rising over 20 percent per year here in San Diego. Something’s very wrong with that picture, and I’m gratified to see that the issue is starting to get its due at the U-T and elsewhere in the mainstream media.
— RICH TOSCANO