Friday, March 09, 2012

Inflation Worse than Government Admits

                   Source: American Institute for Economic Research

Americans for a long time have felt what they are being told about inflation doesn't fit with their own experiences in paying monthly bills. Over the years the government has made a variety of “adjustments” in the Consumer Price Index (CPI), which minimize inflation. At a House Subcommittee on Domestic Monetary Policy, chaired by Congressman Ron Paul, on March 17, 2011, one of the experts who testified was Lewis Lehrman. He pointed out that if the CPI were calculated the way it was in 1980, it would show inflation at 8 percent.

The Fed likes to talk about “core inflation,” which omits the cost of food and energy from the Consumer Price Index—but those are costs of things people need every day. How can a measure of inflation be accurate without including them?

The American Institute for Economic Research is an independent nonprofit scientific and educational organization. It was founded in 1933, and I have known about it for more than forty years. Over the years I have bought a number of its books and other publications, which I have found accurate and useful. It has done considerable research to provide a better measure of inflation than the Bureau of Labor Statistics' CPI. It has devised an Everyday Price Index (EPI) based on things Americans purchase at least once a month, rather than big-ticket items that are featured in the CPI. AIER believes this is a more accurate measure of inflation. I think they are right.

It is also worth noting, I believe, that as families' everyday expenses rise, they are less likely to buy big-ticket items: they are likely to postpone buying new furniture or to repair an old refrigerator or stove rather than buy a new one. The drop in sales of these larger expenditures would hold down the CPI and give a false reading minimizing inflation.

From February 2011 to February 2012, the EPI shows inflation at 8 percent, compared to 3.2 percent for the CPI. The above graph shows a comparison of the two price indices since 1987