I think we're already experiencing significant inflation (because of extra dollars being printed), and the government is under-reporting CPI (see the end of this article for a graph with real inflation numbers).
This has been going on for quite a while - for about 25 years now, the government has penalized savers and retirees by inflating the currency away - the only reason the middle class hasn't noticed it yet is because stocks and real-estate have continued to out-perform inflation and have made the American middle-class seem richer. But that game is now coming to an end.
You don't have to listen to me say it - I'll quote Bill Gross of PIMCO, which is the largest bond fund in the world. Bill Gross is one of the most successful mutual fund managers (read his biography here). You can read his original analysis on this topic here.
Bill mentions three tricks used by the government to under-report inflation (some of these tricks have been in use since 1983!).
Imputed Rent
Starting 1983, during the Reagan era, the government does not count your mortgage payment towards CPI. It tracks the rent that you would get were you to put the house up for rent - and that's your supposed "expenditure on housing". As I write this (June 2009), rental market has softened enough to bring down rents by 25% in my area. However, I have not had similar luck with my mortgage payment :-). This is 40% of the CPI, and leads to significant under-reporting of inflation.
In Bill Gross's words:
It was claimed that a measure based on what an owner might get for renting his house would more accurately reflect the real world – a dubious assumption belied by the experience of the past 10 years during which the average cost of homes has appreciated at 3x the annual pace of the substituted owners’ equivalent rent (OER), and which would have raised the total CPI by approximately 1% annually if the switch had not been made.
Hedonistic Improvements
Let's say 10 years ago, a particular textbook costed $100. Let's say, today, the same textbook has a new edition that costs $200. The government does not look at this as 100% inflation. They look to see if the new edition has more pictures, more examples, more exercises - and if so, they presume that the textbook "adds more value" to you. The government puts a cost on this "added value", and then calculates inflation.
This is worst when it comes to technology. Let's say a laptop needed to run Windows and Office reasonably well costed $1000 10 years ago. Let's say a laptop to run the latest version of Windows and Office costs $1200 today. The government does not look at it as 20% inflation. If the speed of the processor has doubled, it assumes you're getting twice the value from that laptop! According to the government, you've experienced deflation.
Product Substitutions
Prior to 1990s, the basket of goods used to calculate CPI was fixed. So if the basket had one pound of chicken in it, the cost of that one pound of chicken would be calculated month over month. However, today, the government evaluates how the american consumer reacts to the price of chicken going up - if the consumer cuts back and starts consuming only half-a-pound of chicken a month - then the basket is updated to have only half-pound of chicken.
The problem with this approach is that while the cost of living as measured by a changing basket does not go up much, the quality of life has gone down. Some analysts actually call this methodology as not measuring "cost of living" as much as "cost of survival" :-)
Conclusion
So what's the true rate of inflation? Some analysts say that it is 7% higher than whatever the CPI says. Here's a chart showing true inflation rates using pre-1983 methodology (click on the link). For the up-to-date chart, click on http://www.shadowstats.com/.
No comments:
Post a Comment