United States (and elsewhere): Understated Inflation Statistics?
A recent article discusses the issue of whether reported inflation (and other reported statistics including economic growth, and unemployment rates) in the United States (and with reference to the United Kingdom) hold any semblance of reasonableness. The author suggests that
reported inflation has been, and is, fundamental to central bank and government decision making (my words);
with respect to inflation, the author suggests that statistic is distorted because of what he calls 'hedonic adjustments'. These are subjective adjustments to the price of products resulting from assessments of changes in 'product value'. Thus if the cost of a car goes up in price year/year but there are continuous improvements made to the car, the increase in price may be assumed to be offset by the value of the improvements, resulting in a zero inflation adjustment or perhaps even a deflation adjustment for that car;
also with respect to inflation, the author raises the issue of 'substitution'. Thus, in his example, if 'steak goes up in price such the consumer purchases cheaper 'chicken' inflation does not get adjusted - or ends up being adjusted less than it ought to be. In the author's words substitution "breaks the link with actual prices"; and,
U.S. inflation data has also been distorted by application of what the author calls 'geometric weighting'. Geometric weighting results in application of different weighting in inflation calculations than is proportionally represented in consumer spending. For example, the author says that in 2011 medical care accounted for 16% of consumer spending but was weighted at only 7.1% in CPI-U (the U.S. inflation measure for 'all urban consumers').
The author concludes that for the United States:
had realistic inflation rates been reported in the past at least 25 years, that would almost certainly have resulted in different monetary policy decisions than have been made; and,
reported inflation statistics have far understated the loss in consumer purchasing power during the past 25 years.
In the end, the author says that had U.S. inflation been properly reported, that U.S. wage rates would have been higher than they have been, and that indexed pensions would pay out more than they do.
This, of course, leads to the obvious conclusion that if indeed U.S. actual inflation has been materially higher than reported, that has resulted in but one more form of 'failure to act' by the U.S. Federal Government over many years as it may well have been misled by its own inflation statistics - in turn resulting in postponement of 'economic problem solving'.
It also lends support to the view that eventually postponement catches up with those who postpone - which it increasingly appears from an economic point of view that all of us who live in the developed countries have been 'postponers' to a greater or lesser degree.
I suggest you take the time to read The High Price of Understated Inflation, and give serious thought to what its author says.